Innovation continuous Improvement in Supply Chain a Profit Tool

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This research was carried out with a large secondary research for

studying and understanding the continuous improvement practices and

innovation processes adopted by the various firms and how it has

impacted the costs related to the SCM. While most of the companies are

involved today in SCM practices, some have very drastically improved

their SCM practices by introducing many innovative methods &

continuous improvement practices such as KANABAN tools etc, internet

based SCM, innovative suppliers, new cost reduction tools, collaborative

measures between suppliers and manufacturers. This provides a new

frontier for future SCM practices which will involve the collaborative

innovation, next step of continuous improvement. While cost advantage

has been a major outcome of these practices, it has also helped develop

coordination among the various functioning areas across organisations

such as marketing, operations, R&D etc. This research paper focuses on

the study of major innovative and continuous improvement techniques

adopted by the firms to generate a cost advantage.

Introduction

1.1 Background

Organisations can build competitive advantage through superior

manufacturing or service delivery, but sustaining the competitive

advantage over time requires comparable skills in developing a continual

stream of new products and services. The increasing pace of

technological change and the accelerating globalisation of business have

meant that competitive advantage for many corporations now lies in their

ability to effectively implement on-going product, service, and process

innovations. As product innovation cycles become shorter and more

frequent, and innovation becomes a dominant strategic weapon,

companies will be forced to exploit synergies between products, services

and processes. As

product innovation is a knowledge-based process, this requires mastering

the overall process of knowledge creation, dissemination and application.

This progressive accumulation and sharing of knowledge fosters the

process of organisational learning that is the essential engine for the

continuous improvement process. Hence, long term competitiveness is

increasingly dependent on how well a company can continuously improve

its product development capabilities by fostering organisational learning

and utilising individual and group knowledge within the company.

1.2. The continuous improvement concept

The continuous improvement concept is driven by the Deming Cycle

(Evans and Lindsay, 1999) and the Kaizen concept (Imai, 1986). This is a

methodology for continuous improvement, composed of four stages: Plan,

Do, Check, and Act. The Plan stage consists of studying the current

situation, gathering data and planning for improvement. In the Do stage,

the plan is implemented on a trial basis. The Check stage is designed to

determine

if the trial plan is working correctly and if any further problems or

opportunities are found (Imai, 1986). The last stage, Act, is the

implementation of the final plan to ensure that the improvements will be

standardised and practiced continuously. This leads back to the Plan

stage for further diagnosis and improvement. Imai's best selling book,

Kaizen: The Key to Japan's Competitive Success (Imai, 1986) shows how

the original Western concepts have been adapted to the Japanese culture

to provide the key to Japan's post war success.

As a direct consequence of the Total Quality Control (TQC) philosophy

(Feigenbaum, 1983), Kaizen (continuous improvement) strategy has a

large-scale participatory dimension by all employees in an organisation.

This participatory dimension is not entirely new (Merli,

1990). Western authors such as Likert (1967) had already formulated

participatory management before it developed in Japan. However,

Likert's participatory management theory is one example. Kaizen is more

strongly oriented towards continuous improvement than towards

management. Imai (1986) broadly described the Kaizen strategy to

include concepts, systems, and tools within the bigger picture of

leadership involvement and

People culture - all driven by the customer. Imai (1986, p. 3) defined

Kaizen as follows:

The essence of Kaizen is simple and straightforward: Kaizen means

improvement. Moreover, Kaizen means ongoing improvement involving

everyone, including both managers and workers.

The outcome of the Kaizen Strategy is improvement in Quality, Cost, and

Delivery. The underlying principle of the Kaizen strategy is the

recognition that management must seek to satisfy the customer and

serve customer needs if it is to stay in business and make a profit.

Improvements in such areas as quality, cost, and scheduling (meeting

volume and delivery requirements) are essential. Kaizen is a customer-

driven strategy for continuous improvement. Therefore, it is assumed

that all Kaizen activities should eventually lead to increased customer

satisfaction.

1.3 Implementing Kaizen

The underpinning principle of Kaizen is the use of various problem-

solving tools for the identification and solution of work-based problems.

The aim is for improvement to reach new "benchmarks" with every

problem that is solved. To consolidate the new benchmark, the

improvement must be standardised. In many Australian firms this

standardisation has been attempted via the ISO 9000 quality systems

certification. Kaizen generates process-oriented thinking (P criteria)since

processes must be improved before improved results (R criteria) can be

obtained. Improvement can be broken down between continuous

improvement and innovation. Kaizen signifies small improvements made

in the status quo as a result of ongoing efforts. On the other hand

innovation involves a step-change improvement in the status quo as a

result of a large investment in new technology and/or equipment. There

is one significant difference between Kaizen and Innovation. Kaizen does

not necessarily call for a large investment in capital to implement the

strategy. However, the Kaizen strategy does call for continuous effort

and commitment from all levels of management. Thus Kaizen calls for a

substantial management commitment of time and effort. Investing in

Kaizen means investing in people. According to Imai (1986, p. 217) the

Kaizen initiatives that have been implemented in Japan have had one key

practice in common. That is, overcoming employees' resistance to

change. This was achieved by addressing the following critical issues:

1. Constant effort to improve industrial relations.

2. Emphasis on training and education of employees.

3. Developing informal leaders among the workers.

4. Formation of small-group activities such as QC circles and

improvement teams.

5. Support and recognition for workers' Kaizen efforts (P criteria).

6. Efforts for making the workplace a place where employees can pursue

goals.

7. Bringing social life into the workplace as much as practical.

8. Training supervisors so that they can communicate better with

workers and can create a more positive involvement with workers.

According to Imai (1986, p. 204). "Unless top management is determined

to introduce Kaizen as a top priority, any effort to introduce Kaizen into

the company will be short-lived." This paper investigates the adoption of

Continuous Improvement (CI) strategies and their impact in

manufacturing firms. For reference data has been taken online for a

similar study carried out for Australian firms. Data was collected by

means of a postal questionnaire survey that was mailed to 1200

manufacturing firms. This survey is part of a global study that has

examined CI strategies in over ten countries. The Australian survey

resulted in 385 responses. My analysis focuses on the following six

aspects of CI in Australian manufacturing firms:

1. The development of a set of measures to gauge the effect of CI.

2. Determining the success of CI by identified the structural variables

pertaining to the organisation.

3. Examining how the integration of CI influences the performance of the

organisation.

4. Identifying the motivations for implementing a CI program.

5. Examining the impact of various approaches to CI.

6. Identifying the tools utilised in the CI process and the relationship

between these tools and organisational performance.

Analysis

2.1 Measuring the success of CI Process

Two scales were developed to gauge the success of CI processes. The

first scale related to the overall performance of each organisation.

Specifically, respondents rated the extent to which productivity,

manufacturing quality, delivery performance, lead-time, and product cost

had changed during the past two years. The average of these five ratings

was utilised to measure organisational performance. Cronbach's alpha

was 0.80 (n=184), reflecting an encouraging level of internal

consistency.The second scale corresponded to previous experiences with

CI. Respondents rated past experiences with CI efforts on four aspects:

initiating concrete changes, maintaining activities in on-going efforts,

spreading change efforts to other departments and units, and managing

several projects simultaneously. Each

aspect was rated on a five-point scale, where 1 represented very negative

experiences and 5 represented very positive experiences. The average of

these four items was used to measure past experience. Cronbach's alpha

was 0.76 (n=385), demonstrating an adequate level of internal

consistency.

2.2 The influence of organisational structure on CI success

The extent to which the measures of CI success (organisational

performance and past experiences) are influenced by organisational

structure were examined using the following five structural variables:

1. Annual turnover of the business unit

2. Number of production workers in the business unit

3. Number of non-production workers in the business unit

4. Percentage of products that are entirely unique, that is, designed and

manufactured to customer order.

5. Percentage of products that are modulised, with moderate

customisation to order.

Table 1 displays the Pearson product-moment correlation between each

of these structural variables and the two measure of CI success. This

table reveals that organisational performance positively correlated with

the percentage of unique products. In other words, organisations that

frequently design and manufacture products to satisfy specific orders

tended to perform more effectively. However, none of the other

correlations departed significantly from zero. That is, the impact of CI

was independent of annual sales or number of employees.

Table 1

Organisational Performance

Past Experiences

Annual Turnover

Number of production workers

-0.09

0.05

Number of non-production workers

-0.03

0.03

Percentage of unique products

0.17

-0.06

Percentage of modularised product

-0.04

0.01

2.3 Extent of integration of CI

This section examines the extent to which CI has been integrated within

the organisation. That is, the degree to which employees and

management were involved in the CI process. The extent to which

integration influences the impact of CI is also discussed. Eight aspects of

integration were utilised. Table 2 provides the mean and standard

deviation for seven of these aspects. This table provides some

illuminating results. First, the average level of maturity approximated

3.5. According to the scale provided to respondents, this level

corresponds to the learning stage. Second, the percentage of operators

and non-operators actively involved in CI also provided some invaluable

information. To investigate this issue, both of these variables were

subjected to an arcsine transformation (Cohen, 1983). A related t-test

then compared these transformed variables. This procedure revealed

that non- operators are more likely to be involved in the CI process,

t(239)=2.15, P,0.05, albeit to a trivial extent. Finally, only about half of

the registered ideas and suggestions had been implemented by the

respondents' organisations. The final aspect of integration concerned the

breadth of CI. This aspect distinguishes between those organisations in

which CI is used in all areas and those organisations in which CI is used

in a restricted number of areas. Fig. 1 displays a frequency distribution

associated with the responses to this issue. Almost 50% of the

organisations have applied CI to the entire business.

Table 2

Mean

Standard Deviation

Length of time CI has been utilised (years)

5.04

8.82

Level of maturity (out of 10)

3.53

1.86

Percentage of operators actively involved in CI

31.57

28.62

Percentage of non-operators actively involved in CI

33.67

27.64

Percentage of employees trained in problem solving

27.11

26.82

Number of ideas registered in the past two years

131

343

Number of ideas implemented in two years

73

240

2.4 Motivation for Implementing CI

This section explores the motives underlying the adoption of CI.

Respondents were presented with a list of 13 possible motives for CI.

Each motive was rated on a 5-point scale, where 1 represented no

importance and 5 represented critical importance.

These possible motives were -

Because our customers ask for CI (2.33),

Increase production volume (3.23)

Increase manufacturing productivity (4.06),

Improve quality conformance (4.19)

Reduce production lead times (3.40),

Improve delivery reliability (3.83)

Improve safety and physical environment (3.35),

Cost reduction (3.97)

Improve administration routines (2.67),

Increase employee attitude towards change (3.61)

Improve organisation, cooperation and communication (3.70)

Increase employee skills (3.30),

Because CI is a management directive (1.96)

The mean pertaining to each value is given in the bracket towards end of

the motive. The trend specifically showed that the most important factors

which lead to the implementation of CI in the organization were -

Increase manufacturing productivity (4.06), Improve quality conformance

(4.19),

Cost reduction (3.97), improved delivery reliability (3.83)

This trend shows that the continuous improvement techniques are a

complete win-win situation for any organization, be it from the

customer's perspective or be it from employees perspective or be it from

organization perspective.

2.5 Tools for Implementing CI

This research section identified the tools that are currently employed to

undertake CI. In addition, the impact of these tools on CI success was

also explored. These tools were subdivided into three classes: general

tools, such as means of promoting changes and support, problem-solving

tools, and incentive tools.

First, respondents were presented with a list of 16 general tools. Each

tool was rated on a five-point scale, where 1 represented not important to

the CI process and 5 represented critical importance.

These tools were -

Training of personnel in problem solving skills (3.69)

Monitoring the CI-process (4.18)

Support for managerial staff (4.30)

Incentive systems (2.35)

Supportive leadership (4.37)

Work in teams/work groups (3.74)

A suggestion scheme (2.37)

A general problem solving format (2.88)

Promoting on notice boards (2.57)

Promoting through internal media (2.51)

Promoting through competitions and awards (2.09)

Face to face communication (4.03)

Regular shop floor visits by management (3.81)

Use of ISO 9000 (3.51)

Use of Total Productive Maintenance (2.70)

Use of formal policy deployment (2.81)

Supportive leadership, support for managerial staff, monitoring the CI-

process and face-to-face communication were found to be the most

important tools.

The first components relate to working in teams, suggestion schemes,

and promotions via notice boards and internal media. This factor will

hereafter be called "Group communication".

The second component relates to training in problem-solving, monitoring,

support for management, and supportive leadership. This factor will be

referred to as "Coordinating CI".

The final component pertains to use of ISO 9000, Total Productive

Maintenance, and formal policy deployment and will be called "Formal

systems".

A chi square goodness-of-fit test was conducted between these three

systems and whether there is any relationship between these systems is

not was intended to be found out. The correlation between Group

communication and Co-ordinating CI was 0.38. In contrast, the

correlation between Co-ordinating CI and Formal systems was only 0.19

and the correlation between Group communication and Formal systems

was 0.21.

Taken together, these findings suggest that some organisations primarily

utilise formal systems, whereas other organisations are more concerned

with communication or co-ordination. A series of one-way ANOVAs were

conducted to select a subset of problem-solving tools and incentives that

could potentially enhance CI success. Seven tools and

Incentives were found to significantly improve CI performance at the

0.001 level: the seven new quality tools, FMEA, QFD, creativity tools,

standardisation tools, 5S, and CI rewarded through career development.

More Innovation frontiers

Internal Innovation activities

The high proportion of firms that carry out research and development

within the region corresponds to the large proportion of autonomous

decision making competence of the responding firms within the region:

almost 80% of the R&D activities of the firms take place in and around

Barcelona. What is meant by "innovative activities within firms" is the

substantial improvement of an existing product or the manufacture of a

new product for the firm (product innovation) and an essentially

improved or new production process (process innovation) (OECD, 1994,

p.19 ff.).

Depending on which phase in the innovation process is being described,

a distinction is made between input, throughput and output indicators.

Input indicators, such as employees in R&D, the level of expenditure on

R&D and the continuity of R&D activities, permit initial conclusions to be

drawn concerning the innovative potentials. When the proportion of

employees in R&D is compared with the total number of employees, the

R&D intensity is 7%. The chemical and electro technical industries, as

well as mechanical engineering, are marked by strong above average

R&D activities.

It is a fact that R&D quotas referred to the turnover are meaningful only

to a limited extent. In the course of new production concepts the

production depth in firms is reduced, while, in contrast, the proportion of

components produced outside the firm and of services in the turnover

has increased. This raises the turnover without any associated

expenditure on innovations. The indicator expenditure on R&D as

percentage of the gross profit provides a more accurate picture of the

expenditure actually required for product and process innovation.

Table 3:

Innovation activities & their impact, by industries in Barcelona

Total Industry average

Resources Devoted

R&D expenditure for product innovation

142.0

R&D expenditure for process innovation

49

R&D Personnel intensity (% of total employees)

7

Outcome of innovation activities

Patented innovations (per 100 employees)

5.9

New products (per 100 employees)

22.9

Turnover of new products

1447.9

Improved products (per 100 employees)

37.9

Source: Innovation survey 1997

Average of last three years

In contrast to the input indicators, patents are the result of actual

invention achievements. They are at the end of the invention process and

have not yet been translated into marketable products. 23.8% of the

firms have applied for a patent for at least one invention. The average

number of patented inventions is 10.7. The tendency to apply for patents

varies greatly between the different branches of industry. It can clearly

be seen that not all the inventions of the chemical and electrical

industries, or of mechanical engineering, were patented. This was due to

reasons of cost and procedures. When referred to the size of the firm,

small and medium-sized firms are more active than large firms with

regard to patents.

Of the innovative firms in Barcelona 15.4% restrict themselves

exclusively to product innovations, and 14.7% exclusively to process

innovations.

Roughly 70% of the firms change both products and processes, and here

the close interconnection between product changes and the change in

production processes is underlined. Of the firms with product innovations

58% have undertaken product differentiation, while the remaining 42%

have introduced completely new developments. The

responding firms stated that the essential precondition for the realisation

of product innovations is experience gained from their own production of

similar products or from previous products. 80% considered this

precondition to be very important. Their own R&D (77%) followed in

second place, so that existing know-how together with their own

research and development work represent the most important bases for

product development. Other important preconditions are market analysis

(65.2%), the training of employees (45%) and parallel process

innovations (47%). Acquisition of licenses (6.1%) and cooperation with

other firms and/or research institutions (24%) only play a subordinate

role. Process innovations are furthered by the firms' own research or

development work (71%), by training employees

(53.5%), acquisition of licences and technological manufacturing

components (41%).

Changing the internal work organisation as well as cooperation with

other firms are relatively unimportant (30% each). Above all, the

customers (85%), information from attending trade fairs and exhibitions

(69%), and direct competitors are important sources of information

concerning product innovations. In contrast, the importance of suppliers

in process innovations is clear. 62% of the firms with process innovation

obtain their information direct from suppliers. Information from visits to

trade fairs and exhibitions is also very important (58%).

Table 4:

Sources of external information for product and process innovation

Source

Product Innovation (%)

Process Innovation (%)

Customers

84.5

28.2

Suppliers/sub contractors

53.5

62.4

Competitors

54.4

25.9

Universities/Research Institutes

20.0

21.2

Producers services

27.0

42.4

Fairs/Exhibitions

69.1

58.3

Scientific Publication

38.6

39.6

Media

18.6

15.3

Internet

9.1

4.7

Source: Innovation Survey (1996-97), percentage of all firms with

product/process innovation

External Innovation Relationships

With the increasing concentration of firms on core competences, the

cooperation between different actors becomes increasingly important in

the realisation of innovation projects.

First of all, it must be stated that more firms which regularly carry out

R&D with other partners (customers, suppliers, producer services,

competitors and research institutions) work together beyond normal

business relations than is the case with firms that seldom or never carry

out R&D.

Where cooperation takes place, it is predominantly with customers (69%

of all firms mentioned cooperation of this kind) and with producer

services (69%), followed by cooperation with suppliers (59%), research

institutions (25%) and competitors (24%). The regional distribution of the

cooperation partners as well as the intensity of the cooperation between

innovative firms permit initial conclusions to be drawn concerning the

range of

cooperation relations and the spatial search range.

In order to get a more detailed insight into the innovative cooperation

relationships the firms were asked in which phase of the innovation

process and with which intensity they collaborate with customers,

suppliers, producer services, competitors and research institutions. In

general, the cooperation is stronger in the early stages of the innovation

process, but significant differences are distinguishable between the

cooperation partners.

The most balanced cooperative relationships occur with customers.

Besides intensive cooperation in early stages like the general exchange

of information, the generation of new ideas and conception/front-end

development, the responding firms collaborate intensively in prototype

development, pilot application and market introduction with their

customers. The regional scope of these relationships is more diverse than

with other innovation partners.

The motives for entering into innovation co-operations vary depending on

the actor. While in the case of cooperation with research institutions it

was, above all, the opportunity to enter new technological fields (68% of

the firms questioned that cooperate with research institutions) and the

know-how takeover (48%) that were most important, in the case of

cooperation with competitors it was risk reduction that was given as the

most important motive. As far as cooperation with producer services is

concerned, it is not possible to detect any clear picture. While risk

reduction, entering new technological fields, financial resources and

acquisition of funds are of relatively equal importance.

When they are questioned about the problems of innovation cooperation,

the firms give different answers depending on the cooperation partner.

While coordination difficulties in cooperation with research institutions

(48% of the firms mentioned problems with research institutions) are

seen as the most important problem, with the producer services it is the

budgeted cost overrun (48%). The lack of schedule effectiveness is seen

as the greatest problem in cooperation with other industrial firms.

Profiting from Innovation & CI

Background

PFI endeavours to explicate how managerial choices, the nature of

knowledge, intellectual property protection, and the asset structure of

the firm impact the business enterprise's ability to capture value from

innovation. It is both a predictive and a normative theory of strategy,

with testable hypotheses. It not only provides a contingency theory with

respect to a key element of strategy - such as whether to license or not to

license - but it also predicts how the profits from innovation are likely to

be distributed as between customer, innovator,

Imitator, suppliers and the owner's of complementary assets. It might be

thought of as a nascent neo Schumpeterian theory of the firm. The

success of the article is in part due to the fact that it was built upon and

around what are now recognized as important conceptual

Building blocks in our understanding of innovation processes and

competitive strategy. I briefly identify these below.

Perhaps the most important contribution of PFI is that it defined and

developed a taxonomy around complementary assets and technologies:

specialized, co-specialized, and generic. The extant literature in

economics and strategy at the time made no mention of complementary

assets. Economic historians had recognized the importance of

complementarities, but their analysis was rather loose. As discussed

earlier, Schumpeter (1950) had a visceral sense that there was

something about the large enterprise that helped it appropriate returns

from innovation, but his explanation was limited to market level

monopoly power issues. The PFI framework zeroed in on the asset

structure of the firm itself, and specialized complementary assets in

particular. Market "power" analysis was done at the asset rather than the

market level, and centered on availability of alternatives and/or ease of

replicability. This in turn is likely to depend on whether the "asset" is

generic (in which it is likely to be available in competitive supply) or

specialized. Clearly, control of an asset does not imply control of a

market, unless the asset somehow defines a "relevant market".8 If the

asset is specialized, it is more likely to be difficult to replicate. This will

affect the distribution of returns from innovation. The services it provides

is likely to face competition, which will hold down the economic returns

on the assets. Owners of such assets cannot expect any special benefit

from innovation, even when innovation increases demand for the services

of the complementary assets. This more granular supply side approach to

assessing competition is what sets the PFI framework apart from the

Schumpeterian framework. Clearly, incumbency is viewed in a

dramatically different manner in PFI than in Schumpeter, and in the

economics literature more generally. The complementary assets notion

has also found applicability in applied frameworks (Sullivan, 2000;

Harrison and Sullivan, 2006)

Capabilities

Part of the simplicity and possibly the elegance of PFI is that it does not

confront the organizational, bureaucratic, or human side of business

decision-making. Its written in the rational choice mode. In this sense,

the paper is not pretending to be descriptive with respect

to decision-making processes in organizations. There is a large literature

on over-optimism in project evaluation. The PFI framework does not

endeavor to prescribe rules, protocols, or procedures to neutralize such

errors. For instance, imposing an "outside view" is likely to

Assist in generating less biased decisions.

Supply chain issues

PFI had a very simple decision rule: if in doubt, outsource. favour

outsourcing and collaboration, unless there were a compelling reasons to

internalize. Such reasons could be grounded in one of two major

circumstances: (a) co-specialization, which would lead to transaction

costs if heavy reliance was made externally; (b) shoring up the

appropriability situation by building or buying complementary assets

which the innovation would likely drive up in value, or that were

otherwise important to getting the job done. Here the decision rules rest

on both (i) capability considerations and (ii) availability considerations,

and (iii) change in asset price considerations. In essence, (iii) reflects real

options type reasoning.

From innovation to PFI

Profiting from innovation has lead to -

Reduced inventories

Reduced wastes

Improved customer relations

Improved work environment

Improved export performances

Speeding up of the innovation process which in turn leads to profits

Higher innovative products, low costs

More advanced methods of Supply Chain like Internet based supply

Chain, Integrated Supply Chain, Market responsive Supply Chain has

lead to gain a niche in the market area.