Can Companies Be Both Innovative and Efficient?

By Dr. Rafael Díaz, Professor of Supply Chain Management, MIT-Zaragoza International Logistics Program.

Product innovation often introduces complexity to supply chains that hurts operational efficiency – yet companies must be innovative to survive.
How can these conflicting outcomes be reconciled?

That is the central question of a current research project at the Zaragoza Logistics Center (ZLC), Zaragoza, Spain.

ZLC is working with a Spanish company in the meat products business to help resolve this apparent conflict. The company’s double-digit growth rate owes much to its success in developing product innovations in response to demands from well-known retailer customers in Europe such as Carrefour. It wants to continue this success, but not at the cost of impeding the performance of its supply chain.

The meat products supplied by the manufacturer have a relatively short life cycle, and are shipped to tight delivery windows in high volumes to retail chains. It goes without saying that retailers expect excellent service levels, so the company can’t afford to compromise supply chain efficiency.

One of the challenges is deciding the degree to which an innovation will disrupt everyday operations. Altering a product recipe, for example, can require a change on the factory floor that stresses production processes. Experimenting with new market segments is another potential source of disruption.

Other variables include the type of product involved and the way an innovation is introduced. The company supports six product families, and some are more vulnerable to the adverse effects of innovation than others. Implementing a new idea may or may not add many SKUs to the supply chain or trigger disruptive changes, and the net effect on the business can be minimal or harmful.

Deciding which scenario is likely to occur and how to manage the likely outcome is always important, but especially when an innovation is the direct result of customer feedback. In such cases, there may well be advance orders for the new product which create a financial imperative to proceed as quickly as possible.

The company needs to develop better methods for analysing these variables, evaluating the risk profiles of innovations, and planning to ensure that product changes progress as smoothly as possible.

A first step to achieving these goals is to align departmental agendas. Differences between the way departments perceive and execute innovation can undermine efforts to develop a cohesive strategy for new projects. For example, the marketing department might support more product variants and hence SKUs to meet the demand from ever-smaller customer segments. The supply chain function, on the other hand, prefers to keep the number of SKUs – and hence the level of complexity – to a minimum.

A survey of the company’s personnel identified clear differences between departments on the way innovations are perceived. For instance, production personnel might view the creation of a new SKU as having a detrimental impact on product flows, while other functional units are largely oblivious of such a possibility.

The ZLC researchers are planning a series of company workshops to educate different departments on product innovation. The workshops will provide a platform for aligning functional agendas, and for promoting a more cohesive approach to transitioning new products or changes to existing ones from the design stage to production and distribution.

Another important part of the project is the creation of a framework to help management evaluate innovations. Using well-known metrics such as inventory turns, quality, product mix, and profitability, the tool will be used by executives to prioritize innovations. It also will identify the actions that managers need to take to minimize the disruptions caused by specific innovations. Preparing the ground in this way will smooth the process and eliminate shocks to the system.

The research project is scheduled for completion in the fall of 2018. The value of the knowledge gained will extend beyond this specific project, at a time when companies across industries are grappling with the challenges of managing rapid technological change and market volatility.

For more information on the research project described in this article contact the author at: rdiaz@zlc.edu.es or diazr@mit.edu