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Why LSPs don't leverage innovations
Innovation is difficult for any organization to control. Even though most innovations involve recombining existing technological components or services in a novel way,1 it can be hard to ensure that these efforts will be aligned with an organization's overall strategic goals.2
This has proved to be especially difficult for logistics service providers (LSPs). Traditionally, innovation at LSPs has just "happened" as field personnel reacted to specific customers' problems. Management or control of these activities has been of secondary concern. As a result, LSPs often struggle to extend unique innovations to a larger customer base. Without some mechanism for channeling innovation activities, LSPs cannot hope to benefit to the fullest extent from the innovations their personnel develop.
[Figure 1] Example of a software platform and service toolkit model Enlarge this image
Other industries have benefited from using a structured review and approval process to control innovation. Yet these standard models have not proved to be of great use to LSPs. The rigid nature of these models and their need for central management does not fit with the distributed structure of the LSP business model. Logistics service providers need a different system for capturing the innovations occurring throughout their organizations. This system needs to provide field personnel with a structure and guidelines for creating innovative solutions so that it is easier for the company to leverage customized innovations on a greater scale.
This article proposes that LSPs can strategically channel their innovation efforts by using formal tools and processes for capturing field-based knowledge and a "platform and toolkit" approach to innovation management. A platform and toolkit approach would require field personnel to focus on those innovations that can be supported by the company's IT platform and use common, standard technology, processes, and procedures that are approved by the company. The early success that one LSP has experienced with this approach demonstrates its potential for leveraging innovation and generating above-average returns.
Why is innovation important?
Any company's long-term market and financial success depends on its "innovativeness," or its capacity to generate innovation and the extent to which a new product provides unique benefits for customers. A well-known example from the logistics service industry is Federal Express' overnight delivery service for documents and parcels. This innovative service created an entirely new market segment that continues to provide significant profits to Federal Express and benefits to customers.
However, the innovation output of most LSPs is generally on a rather low level. For example, in a recent study of different industries in Germany, conducted by one of the authors, transportation and logistics companies ranked last in innovativeness.3 The study defined "innovative firms" or "innovators" as those companies that had successfully completed at least one innovation project and had brought new products and/or services to market or introduced new processes to the firm during the observation period. Sixty percent of the companies in the manufacturing industry and 52 percent of those from the knowledgeintensive services industry (which includes software firms and consultancies) were innovators. The share of innovators in the transportation and logistics industry, however, was only 30 percent.
Why is it important for LSPs to innovate? For one thing, the logistics service industry is no longer an emerging market. Manufacturing, retail, and wholesale firms are now outsourcing up to 65 percent of their logistics activities.4 While there is still potential for growth in certain segments through strategies such as offering more value-added services, market growth is marginal at best. For this reason, LSPs that want to achieve growth alongside profitability typically rely on taking market share away from competitors and strengthening existing relationships with customers. Innovation can have a substantial effect on both of those strategies. Without innovation, LSPs will see their service offerings become commodities and will lose any hope of maintaining long-term, profitable relationships.
The lack of innovation should also be of concern to shippers. If one believes that innovation is the engine that improves efficiency, lowers costs, and generates competitive advantage, then the fact that LSPs generally are not innovative means that a shipper's overall value chain will suffer. For both parties, the lack of innovations originating from the LSP community suboptimizes supply chains and limits their ability to leverage supply chains for competitive advantage.
Characteristics of typical projects
To gain a sense of why LSPs struggle with being innovative, let's look at an example of a logistics service innovation project. A leading global LSP was managing distribution operations for a consumer electronics company, which was concerned about the sellthrough of one of its high-volume telecommunications systems. The electronics company received monthly gross sales and revenue figures from its customers, but these aggregate numbers were of limited use. What the company's product managers needed instead were timely revenue numbers by product type and geographic area.
The telecommunications product managers asked the LSP if it could provide visibility to sell-through data. The LSP's field personnel cast about for an existing internal system that might provide this information. One of the field engineers concluded that the LSP's current vendor-managed inventory (VMI) software, with slight modifications, could provide an appropriate foundation for developing this service. The field operations team quickly modified the VMI application and implemented a solution that was acceptable to the customer.
The outcome was not only better sell-through visibility for the client but also a potential new service offering for the LSP. However, the rapidly developed service was neither scalable nor generic enough to be utilized for other customers. Significant re-engineering would be required to take the service as developed for the original customer and generalize it into an offering for others. As a result, the LSP was not able to capture the full value of the innovation.
This representative example demonstrates several characteristics of the typical LSP innovation process.
First, logistics service innovation often arises not because of formal plans or processes but as an ad hoc response to a customer request. Because of the geographically dispersed nature of the logistics service business, innovative offerings tend to start out as unique solutions developed for a single customer in a single region. Furthermore, the solution development processes used by the LSP's field personnel often vary depending on the background of the response team, the team members' familiarity with formal corporate guidelines and processes, and the nature of the customer's request.
Second, time is of the essence in developing a solution to these perceived problems. Typically customers impose strict schedules on the innovation project. Time pressures force the field team to make rapid decisions about the innovation's design in order to satisfy the customer's immediate need. As a result, the service may only satisfy the specific customer for which it was developed.
Third, innovations are usually composed of existing tools and processes combined in a novel manner. Because these tools and processes were originally developed for other applications, the solution generally is not scalable or usable for other customers with similar problems.
Finally, because these innovations are co-produced with the customer, the tools, processes, and human factors used to create them may include components from the customer or third parties. These external components may not conform to corporate standards.
For all of these reasons, an LSP that wants to extend an innovation to a broader customer base typically must re-engineer the innovation to ensure that it can be supported by the firm and can be applied in a reliable manner to other customers.
The case of the LSP and its consumer electronics client exemplifies why logistics service providers need a better approach for managing innovation. The innovation processes used to develop products such as automobiles or consumer goods, however, would not work in LSPs' highly distributed, dynamic environment. Those product-focused processes assume that innovation can be managed and controlled centrally, and they target broad market segments of customers rather than individual customers.
That type of strategy would be ineffective for LSPs; while some of the services LSPs offer target a general audience (for example, public warehousing and standard freight-forwarding activities), most require modification or customization to meet the unique demands of the contracting shipper. Therefore, attempts to use standard product-development techniques based on a detailed understanding of all customers' requirements quickly degenerates into an effort to design products that meet no customer's needs.
Instead LSPs follow a "democratized innovation" method. By democratized innovation, we mean that innovation occurs in a highly distributed manner and that end users of the products or services are actively involved in the development process.5 The customer draws from its internal knowledge of what is required and then it leverages the LSP's core competency in logistics to arrive at novel services that provide competitive advantage.
The democratized model of innovation assumes that the supplier (in our case, the LSP) can benefit from this cooperative effort by acting as the "commercializer" of the innovation. It assumes that the end user is interested only in solving its particular problem, and therefore the supplier is free to take the unique solution they developed together and generalize it for a broader client base. In effect, by co-developing and then piloting the innovation within its own operations, the end user makes it possible for the supplier to commercialize the product without investing a significant amount of time in analysis and prototyping activities.
However, as our telecommunications example shows, LSPs often fail to commercialize the innovations because of the extensive re-engineering required to generalize these services. A look at how professional service firms (such as management consultancies) capture value from the novel services they generate for their clients may offer a potential solution to this problem.
Professional services firms are similar to LSPs in that they are organized around highly dispersed field teams that operate quasi-independently on customer engagements. Many years ago, these firms realized that independent delivery and local management of their services allowed too much knowledge to be lost and resulted in too little return on their innovation activities. To get that full return, they needed to capture the knowledge that was being acquired by their field teams, identify trends or emerging solutions, and then repackage this information to create new products for their customers.
Professional service firms have employed a number of strategies to accomplish this, including using knowledge management systems, team debriefings, and emerging "Web 2.0" tools such as wikis. By collecting, analyzing, and packaging this knowledge into solution frameworks, they are able to deliver solutions that can be customized for individual clients and that also support their own strategic focus.6
How LSPs can capitalize on innovation
Unlike the approach used by professional service firms, most LSPs' commercialization efforts fail to provide a full return on their innovation activities. Because it is simply reacting to innovations from the field, an LSP has no idea which innovation will provide the greatest long-term advantage. Selection of innovations for commercialization, therefore, is at best opportunistic. In certain instances, it may even be strategically and financially damaging as the current commercialization process follows management's overall strategic intent only by happenstance.
A far more effective approach for achieving long-term financial benefit involves strategically planned channeling of field-based initiatives. This approach requires the LSP to use sensing and analysis tools such as project debriefings and online project archives to capture field-based knowledge, understand the key elements of field innovations, and then identify trends and common themes that can be packaged and exploited. For example, at the end of the 1990s, some LSPs noticed an increase in customers' requirements for shipment visibility. LSPs that identified this trend early were able to develop visibility tools and services that could satisfy this need and then use them to lock in customers to their services.
Having identified common trends and themes, the LSP can build strategic service platforms that provide a general purpose foundation for assembling customized logistics solutions. These platforms generally include standard information-processing services (for example, workflow management, security, and message handling); connection interface standards (for example, electronic data interchange [EDI], RosettaNet, and iDoc); and common types of services for the management of logistics operations (for example, financial management, transport planning, and forecasting and reporting).
LSPs should also develop toolkits that help field teams rapidly create customized solutions while conforming to the constraints of the strategic platforms.7 Toolkits, as the term is used here, are standard solution components that can be assembled and configured quickly. For example, a toolkit for receiving pharmaceutical products would include a standard, clearly defined process, any equipment required for carrying out that process, and the documented procedures for implementing it using a standard warehouse management system on top of the LSP's own platform.
By specifying the tools that field personnel can use, LSPs ensure that they can easily apply all innovation activities to other customers. The toolkits continue to allow the field teams and their customers developmental freedom (within the platform framework), yet they also provide a method for channeling and capturing value from innovations that is absent from the current ad hoc model.
A platform and toolkit test case
The platform and toolkit concept is not new.8 Software companies have provided software development kits to developers for years, and modular component designs have allowed users of personal computers, personal music devices, and entertainment and gaming products to customize their systems in highly innovative ways. But would this approach work in the LSP market? Management at one LSP decided to find out.
This LSP's field personnel maintained a significant degree of autonomy over their local activities and were often referred to within the organization as entrepreneurs. Management expected these individuals to proactively address customers' concerns without worrying too much about corporate approvals. Instead of exerting centralized control, the company used a financial control and incentive system to focus entrepreneurial actions on financially promising opportunities.
That freedom to innovate, however, had resulted in a portfolio of overlapping services. For example, the LSP had seven different visibility systems, more than 30 separate warehouse management systems, and at least three vendor-managed inventory services. The overlapping services were difficult to leverage for the benefit of the organization and its many customers.
The platform and toolkit approach was presented to management as one way to gain broader benefits from local entrepreneurial activities. The LSP's management team elected to pilot the model in a new business field it was about to enter, lead logistics services (LLS). The LLS operation would be separated from the LSP's traditional business because it did not actually carry out any physical logistics functions. Rather, its role was to coordinate and manage the third parties that would perform the physical activities. The primary functions of the LLS organization were established as:
- Network design, optimization, and setup;
- Process development and planning;
- Schedule development and management;
- Contracting and contract management;
- Financial auditing and reporting;
- Continuous improvement; and
- General reporting and event management.
Management decided to implement the platform and toolkit approach for its LLS business for two reasons. First, executives thought it would be easier to implement the approach in a new line of business rather than in an established area where history and existing practices might get in the way of any radically different approach to operations. And second, they believed that the platform and toolkit model would be a good approach to managing this complex and highly variable new offering.
After considerable analysis and discussion, the LSP adopted the software platform and service toolkit model shown in Figure 1 for its new business. The vertical bars with descriptions of functional modules are elements of the toolkits for field personnel. Each functional module contains a set of processes, procedures, standard software applications, and rules for configuring the various processes and applications. The field team selects from the toolkit those processes, procedures, and software it can use to respond to a customer's identified need. It then configures these items per the rules for the module. This allows the field team to rapidly assemble a service solution that is both "unique" to the customer and sufficiently standardized so that it can be reused by the LSP for other customers or geographies.
The horizontal components shown in Figure 1 represent common platform services. Field personnel are free to create solutions for their customers as long as those solutions can be developed from the toolkits and can be supported by the common information processing services that make up the platform. Through this approach, the LSP's management hoped to channel innovation toward activities that aligns with the company's strategic goals and provide higher returns on the innovations than had been achieved in the past.
Once the software, toolkits, and processes for implementing the service model had been debugged, the LSP tested the service with positive results. Within the design constraints of the toolkits, field personnel were able to rapidly develop customized solutions for customers and implement them on top of the service platform. For example, a paper products company was struggling with costs in its distribution network. It contracted with the LSP's lead logistics organization to rationalize and manage its highly fragmented delivery network. One of its conditions for contracting for the LLS services was that changes be implemented within a 90-day period without disruption to its customers or its service levels. The standard platform and toolkits allowed the LSP to rapidly implement a solution that did not disrupt deliveries and resulted in better service levels at lower overall costs.
After implementing the new model, the LSP found that overall customer satisfaction was high because the services were well-documented and reliable. Service profitability was higher than anticipated because the structured approach reduced implementation costs and errors while improving service quality. Finally, and most importantly for this discussion, the LSP began to see higher economic returns from its field-based innovation efforts.
A promising solution
Globalization and customers' expectations for responsiveness and product availability have increased the strategic importance of logistics. To remain competitive and profitable, therefore, both LSPs and their customers must continually innovate so that competitors do not overtake their positions, turning their products and/or services into commodities or making them obsolete.
Unfortunately, as we have seen, innovation has not been easy for logistics service providers due to the way they are organized and their lack of appropriate innovation frameworks. Without an appropriate framework, any innovation that might occur will remain local, and the LSP will be unable to capture acceptable returns from its investments in the innovation effort.
The platform and toolkit approach to managing innovation described in this paper appears to be a promising means for solving those problems. While allowing field personnel to continue to build customized logistics solutions, it also assures that those solutions are strategically directed and can be reused to capture maximum value for the LSP and its customers. Additional work is needed to determine whether this framework can be applied to LSPs in general. However, the experience of the LSP in our case study suggests that the platform and toolkit framework holds significant value for those LSPs and their customers that are willing to use it to develop solutions that meet their logistics requirements.
1. Seabury C. Gilfillan, Inventing the Ship (Chicago, IL: Follett, 1935).
2. Robert G. Cooper, "New Products: The Factors that Drive Success," International Marketing Review, Vol. 11, No. 1 (1994): pp. 60-76.
3. Stephan M. Wagner, "Innovation Management in the German Transportation Industry," Journal of Business Logistics, Vol. 29, No. 2 (2008).
4. Georgia Institute of Technology, Capgemini, DHL, and SAP, The State of Logistics Outsourcing: 2007 Third-Party Logistics Study—Results and Findings of the 12th Annual Study (Atlanta, GA: Georgia Institute of Technology, 2007).
5. Eric von Hippel, Democratizing Innovation (Cambridge, MA: The MIT Press, 2005).
6. N. Anand, Heidi K. Gardner, and Tim Morris, "Knowledge-Based Innovation: Emergence and Embedding of New Practice Areas in Management Consulting Firms," Academy of Management Journal, Vol. 50, No. 2 (2007): pp. 406-428.
7. Eric von Hippel and Ralph Katz, "Shifting Innovation to Users Via Toolkits," Management Science, Vol. 48, No. 7 (2002): pp. 821-833.
8. Rafael Ramirez, "Value Co-Production: Intellectual Origins and Implications for Practice and Research," Strategic Management Journal, Vol. 20, No. 1 (1999): pp. 49-65.
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