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 5point 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 winwin 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, cospecialized, 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 overoptimism 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.