With escalating pressures to continually provide innovative offerings and demonstrating sustainable, profitable growth, it’s no surprise that product outsourcing success is becoming a strategic topic in Consumer and Retail. For example, Coca-Cola is transforming their traditional fountain machines for consumer engagement. Peapod is taking the store front to where consumers are through mobile commerce technologies. And Rebecca Minkoff is changing the store experience with digital interactivity.
Achieving these innovative product offerings require companies to reach beyond their traditional core competencies and experience set. They must combine cross-disciplinary technologies and capabilities to create compelling value propositions. (see Figure below)
Our experiences working directly with global CPG and retail companies and across industries engaged in complex product innovation outsourcing such as consumer electronics and defense taught us that leading orchestrators consistently outperform their peers.
On average, product outsourcing success in consumer results in 25 to 50 percent faster launch; enjoying 20 to 40 percent cost advantage; and enabling a higher likelihood of first mover sustained differentiation. We also observed several success elements:
Success Driver 1: Creating an Orchestration Organization
Complex product innovation and outsourcing is similar to early-stage start-up efforts, often ill-suited to the management and cultural style of larger hierarchical organizations.
Large cap leaders in industries characterized need to adopt an “incubator” structure as a proven organizational strategy. An incubator organization structure can foster and enable the right mix of rapid decision making; championing of an entrepreneurial mentality; and the development of a risk taking culture required for success. Establishing stand-alone objectives and mandates, backed by strong executive leadership, is key to making an incubator model work.
Incubators also require dedicated resources and budgets to leverage personnel and expertise from multiple functional units with shared metrics and incentives.
An incubator approach opens the door to rapid experimentation, appropriate risk taking and outside the box thinking.
For example, a consumer healthcare client seeks growth through diversifying into home-use health and beauty devices. But the company ends up squashing its R&D team’s most innovative ideas at the concept stage. As a result, poor organizational alignment created a failure cycle. The few prototypes managing to make it to production—such as a promising light-based home-use wrinkle remover—were delivered by managers lacking shared incentives and trapped in traditional metrics. R&D engineers were focused on safety and functional features without involving contract developers early on to ensure cost-effective production. That led contract developers—focused on speed-to-market instead of balanced performance—to deliver a differentiated, but far too costly prototypes.
Success Driver 2: Building and Evolving Effective Partnerships
Outsourced partnerships are defined by their underlying integration activities—a holistic set of interrelated roles, processes and management of upstream supply chain activities. During ideation, these activities include defining consumer-centric platform features and design. During development, they include activities like sub-system prototyping and testing manufacturability.
Leading orchestrators both establish the right partnership structure and then evolve it through changing objectives across innovation lifecycle. In addition, they define correct spans of control in coordinating and managing upstream value chain activities with key partners. Maintaining excessive span of control forces orchestrators to operate in areas beyond their core competency and leads to unfocused execution. Giving up too much control to suppliers can threaten intellectual property (IP) and promotes development of undifferentiated solutions.
Defining the appropriate level of control requires systematic assessment of the underlying risk versus opportunity considerations. (See Figure below). The orchestrator must decide if it has the in-house expertise to actively manage upstream sub-contractors and integration activities. Or if it should delegate to its key partner.
To illustrate, Apple consistently employs a tight span of control of its outsourcing activities even in “non-core” production logistics activities. Rather than relying on external manufacturing partners to turn-key coordinate new product activities, Apple manages key upstream supply chain activity points such as factory-to-port logistics to guarantee end-to-end IP security and zero product leakage. As illustrated on the vertical axis on Figure below, Apple’s need for IP security and launch secrecy demanded a tight span of control across most of its outsourced activities for the iPhone platform.
Establishing the right level of competition
Best-in-class orchestrators systematically manage their key development and integration efforts to enable increased competition across the lifecycle. As depicted along the horizontal axis in Figure below, orchestrators enable competition through ensuring modular design and low asset specificity. They minimize dependency on external partner for specific capital and/or technology know-how.
Increased competition not only ensures optimal costing but also increases capacity flexibility and risk redundancy. Cisco is an example of a leading orchestrator who systematically guides platform development trajectory to enable competition. While early stage prototyping may rely on a key technology partner with specific know-how or capital assets, Cisco aggressively pursues rapid iterations of redesign enabling a more modular design as well as increase sub-component substitutes in moving from prototyping to production. Cisco also employs different strategies to secure critical IP rights—such as paying an upfront premium to secure all IP ownership; or splitting IP ownership by market application and software versus hardware with its key partners to protect core commercial IP.
Evolve the right partnership structures
Savvy orchestrators evolve partnership structures as required to reflect changes in the organization strategy and external industry dynamics.
Let’s say an orchestrator makes a strategic shift to develop deeper in-house bench expertise on up-stream value chain capabilities. Over time, this leads to an increased span of control in upstream value-chain coordination and management to reduce external dependencies.
In an effort to cut cost in the 1990’s, automotive OEMs over indexed on outsourcing to Tier One suppliers in a turnkey model. This led to a loss of development control and increasing costs. In recent years, many OEMs have invested in the in-house expertise required to regain control of upstream activities.
Other orchestrators, like Redbox, delegate increasing scope of activities to external partners as market place alternatives offer better cost and capabilities. The DVD kiosk innovator designed and prototyped its initial platform in-house. They quickly realized that can accelerat lead time and production ramp-up by leveraging the know-how and scale from Flextronics.
Orchestrators can also change the degree of partnership competition by moving from a single turnkey partner to multiple partners. Especially as integration activities and underlying technologies become more commoditized over time.
It is also important to ensure incentives and contract structures align as partnership structures evolve. Defining a fixed fee contract structure with product design firms during the prototyping stage is sub-optimal since it encourages the design firm and its upstream suppliers to cut cost and protect margins, rather than encouraging the desired behavior of rapid design and innovative experimentation. Similarly, employing a cost-plus contract with key partners during production ramp-up stage leads to cost misalignment as the partners are incentivized to over-index on quality and speed over long-term production costs.
Success Driver 3: Managing Value Chain Entropy
Distributed product development environments can be entropic as well as complicated. And unmanaged entropy can create untold issues.
When Sony orchestrated the design and development of its Blu-Ray DVD-enabled PlayStation 3 console, it underestimated the complexity of the increasing pile-on of Blu-Ray design partners, component manufacturers and software integrators involved in rolling out a standardized specification enabling seamless production integration and ramp-up. The resulting systemic entropy delayed the global launch by over a year, giving the competing Microsoft Xbox a unique opening to steal market share.
Checking value-chain entropy requires unique skill sets and aggressive, hands-on management or the resulting process can destroy a product and, over time, the innovation ecosystem. Unchecked value chain entropy leads to an accumulation of extraneous assets and unnecessary capital demands. It increases the likelihood of assigning assets to wrong roles, sub-optimal system performance and slows down and/or impedes decision making as overly complex networks prevent external signals from accurately reaching the orchestrator. Increasing entropy overwhelms commercial ecosystems leading to complete platform failures. The bottom line: entropy creates more points of unpredictable disruption and failure.
Moving forward, digital product outsourcing success is critical for Consumer and retail to achieve long-term market relevancy.
Full version of above article originally published in Supply & Demand Chain Executive
Michael Hu | BCG 