A Disruptive Innovation in the Energy Supply Chain

Professor Don Sadoway at Crossroads 2015

Professor Don Sadoway at Crossroads 2015

What supply chain must meet rare periods of peak demand with no inventory, and operates in an environment where demand equals supply? The answer is the electricity grid, and a new design for an old concept, the battery, could change the way this supply chain operates.

Don Sadoway, John F. Elliot Professor of Materials Chemistry, MIT, described the battery at MIT CTL’s Crossroads 2015 conference, March 24, 2015. Sadoway and his team invented the new battery, which is due to start field trials in Cape Cod, MA, next year.

The reason why a device that is usually perceived as 19th century technology could revolutionize the way electricity is generated and delivered can be summed up in a single word: storage. It’s the missing piece of the energy puzzle, according to Sadoway.

The grid is designed to meet peak loads, which is typically about 40% greater than the average load and occurs around 1% of the time. As Sadoway points out, an airline based on that business model would have 40% of its planes sitting on the ground except for perhaps five days of the year when the whole fleet would fly to handle peak passenger numbers on special holidays.

Renewable energy sources are not viable as a major contributor to the grid because much of their output varies according to the availability of wind, sun, and tidal power. There is no storage to buffer these fluctuations. “Imagine if every time you took a shower it had to be raining because there is no such thing as a water tank,” says Sadoway. “Without storage they don’t contribute to base load, and if they don’t contribute to base load they are not a solution, they are a headache,” he says.

But even the long established grid powered by traditional energy sources is in desperate need of storage solutions, maintains Sadoway. For example in Manhattan energy demand keeps rising. There is enough generating capacity in the New York region, but transmission lines are needed to bring the electricity to Manhattan. Sadoway estimates that Manhattan’s transmission line capacity will be exhausted in 2016/17, and since they cost billions of dollars apiece and permits to build them are very difficult to obtain, it’s unlikely that a new line will be available any time soon. “That means rolling brownouts and blackouts,” he says.

One solution is the liquid metal battery that Sadoway’s new company, Ambri, has pioneered. It consists of three liquid layers: a light metal on the top, molten salt in the middle that acts as the electrolyte, and a dense metal on the bottom. The substances have different densities so do not mix.

The battery goes against convention. Instead of running cold it runs hot, and the units are large not small; a block of 10 is about the size of a shipping container. It is safe because if the shell is punctured the contents immediately become solid. The device has no moving parts, and retains charge much longer than conventional batteries. Sadoway says that a lithium-ion battery retains about 80% of its charge for some two years, whereas the liquid metal battery can maintain this performance for around 305 years!

Moreover, the battery is constructed of abundant materials, which means that production can be scaled up economically, and the device can be built locally with local materials.

When operated in conjunction with renewable energy generators or conventional power plants, the battery provides the storage capacity that both sources of electricity need. Despite much skepticism in the wider energy community, Sadoway believes that his invention is a game changer. “With enough ingenuity the impossible becomes inevitable,” he says.


Speed Bumps on the Road to Growth for China’s 3PLs

Logistics in China

Good transportation links a logistics strength in China

China’s logistics industry is gaining in importance and developing rapidly to support the nation’s manufacturing sector. This growth is strongly encouraged by the Chinese government, which aims to develop the country into a premium integrated transportation and logistics hub with supply chain management competence to strengthen China’s position in international trade.

In 2014, researchers from China’s Shanghai Jiao Tong University and Lappeenranta University of Technology in Finland conducted a study to identify global trends in the logistics industry, relevant opportunities and challenges, and how logistics companies can better position themselves in China. Currently, there is very limited knowledge about the Chinese 3PL industry, and the study provides unique insights for foreign companies planning to expand their logistics operations in the country. The study was conducted through focus group interviews with senior executives of leading third party logistics (3PL) companies in China, followed by a telephone survey of 70 3PL companies administered by Shanghai Jiao Tong University researchers.

The key strengths of the logistics industry in China that emerged from the study include good transportation connectivity and new infrastructure. One of the industry’s main weaknesses is a shortage of qualified staff and slow adoption of technologies. The research raises a number of concerns and issues, such as oversupply of warehousing space in China, competition from the influx of foreign 3PL companies into the country, and the impact of regulations on free trade zones, seaports and airports. These findings have important policy implications.

While China has gained a reputation as a cost effective place for manufacturing, logistical costs (about 18% of the cost of sales) in the country are still very high compared to other developed countries. For example, intercity toll charges amount to a high percentage of overall transportation costs.

Information technology (IT) expertise, employing the right people, and developing efficient processes, are ranked highly by the respondents as critical success factors for 3PLs operating in China. Most of the IT used in 3PL operations is quite basic transactional software, and there is little opportunity to integrate with supply chain partners. In order for local 3PLs to compete with their foreign counterparts, they will have to upgrade their existing IT systems and infrastructures to support e-commerce and ERP systems. Furthermore, 3PL processes today are silo-centric owing to current regulative constraints. However, as deregulation continues in the industry, 3PLs will need to open up their processes and integrate them with those of their customers’ and suppliers’.

The shortage of talent will take some time to resolve. According to the China Federation of Logistics and Purchasing, 3PLs suffer acute skill shortages in every operational and functional area. In their survey findings, there was a fundamental mismatch between the demands of employers and what the Chinese education system is turning out, with many more vocational jobs available at the bottom and relatively few jobs for managers.

Despite these problems, the Federation pointed out that every year around 400 universities in China will produce 100,000 graduates studying logistics as a major part of their degree, leading to an abundance of prospective candidates looking to enter the sector at the managerial level. In contrast, only 90,000 graduates with relevant qualifications left 800 secondary vocational colleges to fill the far more numerous lower-level roles. This problem gets worse as more and more parents are looking for their only child to go to university and not college.

Supply chain outsourcing is one of the trends identified during the focus group interview. The objectives are to identify the key improvements that 3PL customers are looking for in this area, and to look at the challenges and problems 3PLs face in implementing supply chain outsourcing.    The pace of outsourcing is increasing according to the respondents, as demand for faster delivery services rises, product life cycles become shorter, and there is increased awareness of supply chain management issues.

Customer service, cost reduction, productivity and efficiency emerged as key features that warrant improvement during the interviews. Cost reduction was ranked as the most important factor and considered critical to gaining competitive advantage. China is perceived to offer the lowest costs in production and thus it is logical for companies to control their inbound and outbound logistics costs. When asked which supply chain activities are essential to achieving greater cost reduction, the most common replies pointed out to inventory management.

When queried about 3PL international network, all the respondents unanimously pointed to the need to expand their network to provide greater and better coverage for their clients. An important observation is that most local 3PL companies in China have adopted different expansion plans. In contrast, none of the local 3PL companies was observed to actively consider mergers and acquisitions as a path for expansion. Their preferred choices are to expand organically initially or to form strategic alliances with local or foreign firms.

This article was written by Dr. Albert Tan, Director of Education, Malaysia Institute for Supply Chain Innovation (MISI). For more information on the research described in this article contact the author who was involved in the study.

 The article is published in the winter 2015 issue of Supply Chain Frontiers. See this issue of the newsletter and subscribe for free here.

Will Reverse Factoring Cause the Next Financial Bubble?

Companies in Europe that are still struggling with the high cost of short-term capital and limited access to bank credit are turning to an unlikely financial ally: their customers.

A financial arrangement called reverse factoring (RF) uses the favorable credit rating of large, solid buyers to secure relatively cheap capital for cash-starved suppliers. The method is seen as a win-win for all the parties involved and is being encouraged by national governments, including the US Administration via President Obama’s SupplierPay initiative that encourages companies to use instruments such as RF to free up capital for suppliers.

However, RF can raise the risk profile of supply chains to dangerous levels, and could even cause a systematic financial failure. Research carried out by the MIT-Zaragoza International Logistics Program, Zaragoza, Spain, analyzes the rationale behind RF and the risks involved.

The suppliers involved in Europe are often small to medium sized companies (SMEs) that continue to suffer from the credit squeeze caused by the 2008 financial crisis. Large corporations with double- or triple-A credit ratings generally have no problem borrowing money. But SMEs in Europe with, say, a BBB rating that need to finance their operations and build working capital still find it difficult to borrow at competitive rates.

The common form of RF, initiated by the buyer, involves a return-oriented approach for a large pool of suppliers. The seller or supplier in need of liquidity sells some of its buyer’s receivables to a financial institution, such as a bank, proposed by the buyer. Since the buyer has an excellent credit rating, the bank offers the supplier competitive priced loans based on the sale of the receivables. In return, the supplier agrees to extend the buyer’s payment terms.

Suppliers win because they have access to affordable capital, and buyers win because they secure extended payment terms (although supplies are paid later, the savings on their borrowings more than compensate for this). The bank wins because the transaction brings new business; banks often on-sell other products to participating suppliers.

Some European governments see RF as a way to overcome the liquidity problems that have plagued their economies, and actively encourage the growth of these programs. Earlier this year President Obama introduced the SupplierPay initiative in the US that gives buyers the option to pay suppliers earlier or use some sort of financial mechanism to ease vendors’ financial issues.

As RF matures it is evolving away from traditional buyer-owned or bank-owned platforms and towards an internet-based service model in the cloud. This new iteration is easily accessible, and reduces the need for software development and lengthy implementations that add cost and time to the process. The introduction of industry standards, and challenging economic conditions, are also driving the growth of RF. Mature programs attract a wider pool of lenders, making them even more attractive.

But the strategy also brings some serious risks that are easily overlooked as a growing number of companies embrace RF. First, the mechanism works well as long as buyers pay on time. It is assumed that large firms with impressive credit ratings are highly unlikely to delay payment or default. However, as the Lehman Brothers debacle in September 2008 underlined, even enterprises that are rated highly by credit agencies can collapse. If a buyer did fail to meet its payment obligations, the financial institution involved would be forced to opt out, and the relatively weak supplier could go under. If RF programs were sufficiently widespread, such a default could trigger a market crisis. As RF vehicles become more established, they could be extended to sub-investment grade buyers, compounding the risk of defaults.

The chances of this happening are increased when banks’ due diligence is not rigorous enough. There is always a temptation to cut corners when a large portfolio of suppliers – each one representing new opportunities for selling financial services – is part of the deal. Moreover, assessing supply chain risk is not a core competency in the banking industry.

Another threat is the level of indebtedness that RF encourages, and the degree of risk this represents for individual companies and economies. Also, using a buyer’s credit rating to secure capital could weaken a supplier’s hand in contract negotiations.

Some of these risks are mitigated by the emergence of networked supply chain financing solutions that connect a wider range of trading partners, increase the efficiency of programs, and improve visibility into transactions. In addition, RF fosters more collaboration between suppliers and buyers, which in turn bolsters competitiveness.

However, as the RF bandwagon continues to gain momentum, companies and governments need to be aware of the downside risks that could ultimately cause another financial meltdown

This article was written by Professor Alejandro Serrano, Professor of Supply Chain Management, MIT-Zaragoza International Logistics Program, and Spyros Lekkakos, PhD candidate, MIT-Zaragoza International Logistics Program. The article is published in the winter 2015 issue of Supply Chain Frontiers. See this issue of the newsletter and subscribe for free here. For more information on the article contact Alejandro Serrano at: aserrano@zlc.edu.es

Lessons to Glean From the West Coast Port Dispute

It is now possible for cybercriminals to take control of a vessel's GPS system

Limited options on the West Coast without new thinking?

It appears that ports on the US West Coast are back in full swing after a protracted labor dispute delayed cargo worth billions of dollars and caused untold reputational damage to the companies caught in the crossfire.

But the implications of this standoff between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association go beyond idle ships and stranded freight containers.

On the company side of the divide, the dispute underlines how short termism hobbles the ability of companies to deal with crisis situations.

In 2002, a 10-day lockout on the West Coast cost the US economy an estimated $ 1 billion per day in the first week growing to $2 billion per day in the second week, and required a presidential intervention. Yet with a few notable exceptions, companies forgot or ignored the lessons learned some 13 years ago and were caught flat-footed by the re-run of the contract dispute in 2014/15.

Many enterprises argued that their options were limited given that West Coast ports dominate the container trades in the US. There is some truth to this claim at this time, however, too many companies failed to take precautionary measures and response strategies well ahead of the stoppages. It’s not as if the disruptions were unexpected.

The general lack of preparedness is testament to short-term thinking. Managers move on and take their experiences with them; companies are forced to march to Wall Street’s quarterly drumbeat.

There is a lack of far-sightedness on the labor side too, but here the problem has more to do with tunnel vision than short-term memory.

Today, global supply chains have to be incredibly agile to stay competitive, which means that companies have become adept at reconfiguring their supply and distribution networks in response to changing market conditions. The uncertainty and high costs caused by the labor unpredictability on the Pacific Coast will (admittedly slowly) cause companies to adapt in two major ways.

First, over the next several years, new shipping options will become available to US companies. These include a wider Panama Canal and possibly the construction of a Nicaragua Canal; Mexican port capacity expansions; port capacity expansions on the US East Coast that will reduce the costs of using the Suez Canal; and even the opening up of Arctic sea routes.

The second way in which shippers could adjust to problematic operations on the Pacific Coast is by moving production to the US (re-shoring) or Mexico and other Latin American countries. This strategy enables shippers to bypass the Pacific ports altogether. California farmers might also reduce their export volumes through ports on the West Coast in response to the loss of market share as competition around the world heats up.

To make matters worse, US ports have fallen behind technologically-advanced cargo handling hubs such as Singapore and Rotterdam in the Netherlands, mainly due to union opposition. And no industry has ever been able to win the struggle against technological development and corporate flexibility. The UAW, for example, is now a shadow of its former self owing to the trade union’s over-reaching tactics. The UAW’s actions were based on the belief that production assets are not moveable and thus employers have to succumb to their demands. The result was the creation of multiple manufacturing plants in the US South, dwindling union clout, and bankruptcies at General Motors and Chrysler.

The lesson for Pacific ports is that they can either modernize or continue to fall behind and suffer the same, predictable outcome.

But that vision seems to be lost on the ILWU.

The union clings to outmoded practices and negotiating tactics, while the rest of the industry moves on. To some extent this is a symptom of an aging leadership that is far more concerned with the needs of the current generation of dock workers than future generations.

Some argue that robots will not buy the goods and services that underpin the US economy and create jobs, and this point of view does have merit. As robotics and advanced information technology replace more and more workers, the percentage of the US workforce that is fully employed will continue to shrink. Add to this the fact that the US educational system is falling further behind other systems in the world, and one can see the need to re-think social policies and the distribution of wealth. Companies – shippers in this case – cannot be expected to remedy this situation. This is Government’s job; but that is a much bigger subject that could fill numerous blog posts.

Meanwhile, the longer the ILWU’s myopic view persists, the more isolated it will become. Ultimately, shippers will find other routes and cargo handling options for their goods, eroding the West Coast’s dominant position in the US.

Let’s hope that both sides use this latest episode in their long-running contractual disputes as an opportunity to take the longer view. For example, strong investments in port modernization will make cargo operations more efficient in the short term and could deter alternatives from developing over the long haul.

One thing is for sure, the next time these issues come to a head the world will be a different place.

This post was originally published on the LinkedIn Influencer site.

How Trucking Rules in Brazil Are Driving Change


Brazilian truckers are adapting to new working hours regulations

Brazilian truckers are adapting to new regulations

Regulatory change is a two-way street for companies: it can be disruptive while forcing a review of accepted practices that sheds new light on operational efficiency. This is what happened to PepsiCo Brazil when the Brazilian government introduced new rules that limit truck driver working hours. A study triggered by the change indicated how the company can adapt to the new rules, and provided fresh insights into the pros and cons of using private fleet versus common carrier transportation options.

The study was carried out by Renato Starling, Transportation Productivity Manager at PepsiCo, for his 2015 capstone project while studying for a Graduate Certificate in Logistics & Supply Chain Management (GCLOG)*. The GCLOG project is titled Choice Between Private Fleet and Common Carrier and the adviser is Edelcio Koitiro Nisiyama.

Legislation that took effect in September 2013 imposes a number of restrictions on the working hours of truck drivers in Brazil. For example, they are not allowed to drive for more than 10 hours daily (eight regular hours plus two hours of overtime), must have a break of at least 30 minutes every four hours, and take a weekly rest of 36 hours.

The changes have had a dramatic impact on productivity and costs. At PepsiCo, the number of miles driven has fallen by 7% compared to the previous work regime, and costs have risen 20% due to higher wage payments (not allowing for inflation in 2014). PepsiCo’s labor costs now account for about 37% of total transportation costs compared to 32% before the legislation was implemented.

The company uses a private fleet of trucks in combination with third-party carriers to deliver its products in Brazil. As the new regulations came into force, the challenge was to determine how to comply with the rules while maintaining both the efficiency of the company’s freight network and the quality of its customer service.

“When I joined the company in May 2013 we had created a new discipline that focuses on the productivity and cost management of transportation,” says Starling.

The company initiated a major study of its freight network as part of this new approach to transportation management. A key objective was to develop a methodology for evaluating the cost of private fleet movements in each lane. By comparing these costs to those associated with common carriers, PepsiCo could identify the optimal mix of carriers in each lane.

In addition to analyzing the logistics of PepsiCo’s freight network, the study took a number of industry factors into account. For example, the common carrier sector in Brazil is dominated by self-employed drivers who do not have to follow the new rules. Also, some larger operators initially opted to flout the regulations.

The study found that driver costs at PepsiCo have risen some 40% since the rules were implemented. However, the company’s private fleet is still competitive for shorter hauls, largely because there are fewer opportunities to carry freight on the backhaul. The breakeven for length of haul is about 200 Km.

In light of findings like these, the company introduced some important changes. “We decided to sell seventeen of our older, less efficient trucks, and to do another, more detailed study, that will probably result in us selling more vehicles,” said Starling.

With the benefit of the data from the study, transportation managers are making more informed decisions about carrier usage in each lane. For instance, in an effort to minimize the number of empty miles and fully utilize its private fleet, the company is actively looking for opportunities to capture backhaul cargo. PepsiCo has three main businesses in the country, snack foods, dairy products, and coconut water, and has managed to increase the number of backhaul loads by about 30% by pooling truck space for these businesses.

Undoubtedly there will be further changes as more data becomes available and the regulations are adopted more widely. Some structural changes are already taking place in the trucking industry. “Big carriers are trying to establish partnerships with self-employed drivers, and some carriers are pushing drivers to buy their own trucks,” said Starling.

It will take some time before the new rules are fully integrated into freight networks in Brazil. Meanwhile, “no one knows what the full effects will be,” said Starling.

*The GCLOG program is offered by the Center for Latin-American Logistics Innovation.

For more information on GCLOG contact the program director Dr. Roberto Perez-Franco. Renato Starling can be contacted at renatostarling@gmail.com.

This article was originally published in the winter 2015 issue of the SCALE newsletter Frontiers. Subscribe to Frontiers for free here.

Photo: Wikimedia

A Digital Dispatcher for Trucks


Technology that is helping underwater vehicles to navigate the ocean floor is being used in the development of an in-cab information system for trucks

Technology that is helping underwater vehicles to navigate the ocean floor is being used in the development of an in-cab information system for trucks

There many sources of uncertainty in truck transportation such as inclement weather, traffic congestion, and loading dock delays. Researchers at MIT are developing an automated travel advisor that could ultimately function as a sort of robot dispatcher that helps truck drivers avoid disruptions and choose the optimum routes to their destinations.

The research is being carried out at MIT’s Computer Science and Artificial Intelligence Laboratory (CSAIL), and already has several applications including hybrid car navigation and controlling autonomous underwater vehicles (AUVs).

Planning long trips in a plug-in electric car with a relatively limited range can cause anxiety if the driver is unsure where the vehicle can be refueled. The system helps drivers to minimize the risks by planning routes that allow for the availability of fueling stations as well as a range of other risk factors.

“The algorithm will show you the acceleration profile of the car so you can anticipate features such as hills, and adjust the route to meet your deadlines,” says Brian Williams, a professor of aeronautics and astronautics and leader of the Model-Based Embedded and Robotic Systems group at MIT.

The system has speech-recognition technology that enables it to establish a dialogue with the driver. It might ask what the person’s goals are for a trip, and automatically plot the most time- and fuel- efficient route based on the latest traffic information and digital maps. Unexpected changes are also taken into account. For example, if the driver wants to travel to a restaurant and the place has closed, the advisor can be programed to suggest other options.

In the AUV application the algorithm is being used to manage various risks. “Uncertainty is a key issue when these robot vehicle are deployed,” says Peng Yu, a graduate student at CSAIL who is also co-developing the system.

When an AUV is mapping the ocean floor the vehicle can be thrown off track by currents or the underwater terrain, making it difficult to forecast how long it will take to meet the mission’s goals. The algorithm enables operators to respond to these uncertainties by altering the mission plans.

Dealing with uncertainty defines much of the truck driver’s job, so it’s easy to envisage likely applications in the commercial trucking domain. The team is now working on using the algorithm to improve the management of freight transportation.

Yu says that one aim is to help dispatchers figure out the trade-off between demand and the supply of truck capacity for each customer, and to rebuild delivery schedules in response to potential disruptions.

“It’s a decision support tool that not only generates an operational plan, it also does the trade-offs in real time and provides routing solutions,” says Yu. The tool might also indicate that the carrier or shipper needs more capacity or can’t currently meet a delivery window based on current conditions.

The tool could also function as a trip advisor in the truck cab that interacts with drivers in much the same way that it does in passenger car applications, adds Williams.

Support systems that help logistics managers to reroute trucks as conditions change are not new, but “we provide a different family of models” for managing risk in situations where are there many different types of constraints, says Williams.

In the supply chain space “these are well-studied logistics problems,’ acknowledges Yu. However, his initial research suggests that existing methods tend to be deterministic and assume a high level of control, whereas his algorithm is more attuned to situations where there is much uncertainty.

“The ultimate goal is an algorithm that acts like a dispatcher, where a manager has questions and it suggests alternatives” he says.


Photo: Wikimedia



6 Ways to Kill the Ideas That Spark Innovation



How can companies emulate Apple's talent for innovation?

How can companies emulate Apple’s talent for innovation?

Apple CEO Tim Cook recently described the demand for iPhones as “staggering” after divulging that the company sold 74.5 million units in the holiday quarter even though it raised the price of this iconic product. Total sales in the period amount to more than 34,000 phones per hour flying off the shelves around the clock reported the Wall Street Journal.[i]

Staggering indeed, and a powerful launch pad for the company’s next product, the Apple Watch, which it plans to ship this coming April (for more on the Apple Watch see my Influencer post How Will Apple’s Future-Facing Watch Change Your Business?).

How does a company such as Apple create incredibly successful innovations? And perhaps even more important, how can other companies emulate this success?

There are many reasons, of course, and lots of theories about how enterprises can develop an ear for exceptional product ideas.

An interesting one is that companies need to get better at exploiting the ideas that come out of unofficial projects, or skunk works. Peter Gloor, a research scientist at MIT’s Center for Collective Intelligence, has pioneered this concept. Gloor will explain more in a presentation at the MIT Center for Transportation & Logistics’ annual conference, Crossroads 2015, March 24, 2015, at the MIT campus, Cambridge Ma.

The vehicle used to bring these ideas to fruition is the Collaborative Innovation Network (COIN), says Gloor. It’s not a new concept; the famous American thought leader Benjamin Franklin used COINs to develop some of his innovations.

A COIN typically starts with a highly motivated, creative person, who is passionate about an idea. This evangelist recruits a group of like-minded allies – maybe three to 12 people – to carry the project forward. Once the initial, outlandish idea has been translated into a prototype, more like-minded souls are attracted to the project to form a collaborative learning network; the incubator for the COIN.

Networks like these are increasing in importance, maintains Gloor, and he foresees corporate structures becoming more cellular as employees come together via social media across companies and countries to develop their ideas.

Skunk work projects have produced some spectacular successes, the World Wide Web initially developed by a group of MIT visionaries is a notable example cited by Gloor. But by definition skunk works innovators toil away outside of official channels, and can find it very difficult to get the resources needed to ensure that their ideas see the light of day.

As someone who has created five companies and worked with many firms over the years, I have seen many worthwhile ideas wither on the vine. When originality threatens the status quo or runs counter to an organization’s culture, the individual behind the idea can struggle to gain traction.

Here are six road blocks to innovation that I’ve witnessed over the years.

Corporate (tunnel) vision. Is Nike a sport equipment or a lifestyle company? How about Zappos, is that enterprise a shoe e-tailer or primarily a purveyor of convenience? I would argue the latter in both cases. Nike sells lifestyle choices, while Zappos’ multiple product choice and free return service excel at providing a convenient buying experience. When employees in these companies think about new products and processes, they are not limited to the existing business model of selling sportswear or shoes, making it easier to think beyond the confines of traditional business categories. In contrast, companies that require employees to adhere to a narrow definition of the business model stifle the free thinking that catalyzes innovation.

Dense bureaucracy. Here, the impediment to innovation is a heavy-handed bureaucracy designed to ensure that the company adheres to certain processes and controls cost. This bureaucracy morphs into a system that supports the status quo and resists fresh thinking. The problem is often manifested in the “this is not how we do things around here” syndrome. Even companies that appear to be agile owing to their market dominance can still be lumbering giants when it comes to innovation.

Lack of leadership. Leaders set the tone of an organization, and if top managers are not comfortable with a cutting edge, less familiar working environment then the whole firm is likely to follow suit. These executives worry more about mundane details such as travel expense reports than corporate strategy. They also worry about their jobs, knowing full well that unlike competent managers and executives, no new and exciting jobs await them outside the current organization. Years ago management guru Tom Peters termed the stage that these executives reach as their “incompetence level.” These leaders ensure that there are no good successors waiting in the wings, because high-performing underlings are seen as threats. This is particularly important in young companies that need different leadership skills as the organization evolves beyond the start-up phase.

Lack of incentive. A company can talk up the importance of innovation, but if employees do not have appropriate incentives and rewards built into compensation systems, then the outcome is likely to be earnest words and little action. For example, procurement managers are in close contact with suppliers that, in many cases, bring innovative ideas forward in order to distinguish themselves in the market place (and can be major participants in COINs). Yet these procurement specialists typically focus on quality, capacity, and low cost; innovation tends to be low in their list of priorities.

The “not invented here” syndrome. Some companies find outside ideas almost repugnant. A supplier comes to them with an innovative idea for a new product or process, say, and the organization sets out to discredit the proposal. Often managers worry that their bosses will think less of them because they did no come up with the idea. In other cases this is not intentional. Bringing a supplier’s idea into a company requires a deeper and wider interaction with the vendor company, involving engineering, marketing, legal and other functions. Few companies interact with their suppliers on such a broad level.

Compulsion to clone. This problem becomes apparent during mergers and acquisitions. A buyer might acquire a smaller company because it values the target organization’s spirit and agility. Unfortunately, as the first order of business the buyer instills their own stifling organization on the acquired company, “because we need to have standards around here…” The smaller enterprise jettisons its identity – including those features that spawned the innovations that made the deal attractive in the first place – and becomes a clone of its parent. In effect, the imposed culture quickly extinguishes the spark of innovation in the target company.

There are many more obstacles on the road to innovative products and services. I would welcome your experiences of other idea-busting practices.

[i] ‘Staggering’ iPhone Demand Helps Lift Apple’s Quarterly Profits by 38%, Daisuke Wakabayashi, Wall Street Journal, January 28, 2015

This article was originally published as a LinkedIn Influencer blog post

More information on the Crossroads 2015 conference and registration form is available at: http://ctl.mit.edu/events/crossroads_2015


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