Process Innovation

Thu, Dec 11, 2008

Process in Business


Stagnant business growth is a common phenomenon today. How do you cope with or fight it? Do you think about acquisitions, aggressive marketing, or new technologies? However, there is a more reliable way to survive competition, i.e. through process innovation.

Creating new ways, not improving existing processes, has proven extraordinarily successful to many corporations. Wal-mart’s cross-docking distribution system, or Dell’s build-to-order model are notable in this regard.

According to Thomas Davenport**, quality initiatives and continuous, incremental process improvement are no longer sufficient for businesses to survive and sustain in today’s global competition. Today firms must seek not fractional but multiplicative levels of performance change. The needed revolutionary approach to business performance excellence is process innovation.

(** author of Process Innovation: Reengineering work through information technology)

What is Process Innovation?

Process innovation is about doing a business’ key processes in radically new ways. It should not be confused with ‘process improvement’ or ‘process excellence’. Those terms refer to achieving high performance by fine tuning existing processes: the focus here is on reducing errors, costs, and delays. ‘Process innovation’ means finding entirely new ways of doing an activity like filling orders, attending to customers, procuring material, etc.

Take, for example, the enormous success of Wal-Mart. Wal-Mart pioneered a great number of innovations in how it purchased and distributed goods. One of the best known of these is cross-docking, in which goods trucked to a distribution center from suppliers are immediately transferred to trucks bound for stores ‘“ without ever being placed for storage. Cross-docking led to lower inventory levels and lower operating costs, which Wal-Mart translated into lower prices.

Shell Lubricants is another company which has benefited enormously through process innovation. In 2002, Shell Lubricants reinvented its order fulfillment process by replacing a group of its workers who handled different parts of an order with one individual who now does it all. As a result, Shell has cut the cycle time of turning an order into cash by 75%, reduced operating expenses by 45%, and boosted customer satisfaction by 105% – all by introducing a new way of handling orders.

Process Innovation Outcomes

The objective of process innovation is to achieve major reductions in process cost or time, or major improvements in quality, flexibility, service levels, or other business objectives. In other words, process innovation helps a business gain competitive edge. Let’s look at following examples and find out how.

  • Time reduction

In home mortgages financing, timely approval of loans, to the extent that it reduces the period of uncertainty for home buyers and sellers, constitutes a competitive edge. Citicorp has reduced process time for some mortgage approvals to fifteen minutes through process innovation.

  • Cost Reduction

Companies that eliminate, costly aspects of their product delivery processes can pass the savings on to the customers. The life insurance firm, USAA, has a process objective of avoiding costs of an agency relationship by relying on telephone-based marketing. USAA’s telephone-customers are consequently paying lower premiums than those offered by other insurers for the same coverage.

  • Finance

Companies that have assumed heavy debt loads as a result of leveraged buyouts or fending off corporate raiders often need to cut expenses substantially to improve profitability. Process innovation can be more effective at removing unnecessary costs than many other alternatives such as business unit sales and early retirement programs.

  • Functional Interdependencies

Better coordination of manufacturing with marketing and sales will allow a company to make only what its customers will buy. In the consumer foods business, this process objective takes the form of reducing the likelihood that goods will become stale; passing information from sales to manufacturing has enabled Frito-Lay and Pepperidge Farm to realize substantial reduction in stales.

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