Random Thoughts on the Impact of Frugal Innovation on the Supply Chain

In this week’s Economist, an article by Schumpeter provides some interesting views on the emerging concept of “frugal innovation”.  He cites the example of the Tata Nano, a $2,000 car  developed in India, which makes a new car within reach of ordinary Indians and Chinese.  He also cites a new book, Jugaad Innovation” by Navi Radjou, Jaideep Prabhu and Simone Ahuja, that develops some radical thinking around this concept.  Jugaad is a Hindi word meaning a clever improvisation. Another book —“Reverse Innovation” by Vijay Govindarajan and Chris Trimble, and co-written by Jeff Immelt, GE’s CEO, also develops the same themes.  The books show that frugal innovation is flourishing across the emerging world, despite the gurus’ failure to agree on a term to describe it. They also argue convincingly that it will change rich countries, too.

One of the most interesting hypotheses advanced by these books is that multinationals will begin to take ideas developed in (and for) the emerging world and deploy them in the West. Schumpeter provides some examples of where this is already happening.  Harman, an American company that makes infotainment systems for cars, developed a new system for emerging markets, dubbed “Saras”, the Sanskrit word for “flexible”, using a simpler design and Indian and Chinese engineers. In 2009 Harman enrolled Toyota as a customer. GE’s Vscan, a portable ultrasound device that allows doctors to “see” inside patients, was developed in China and is now a hit in rich and poor countries alike. (Mr Immelt believes that these devices will become as indispensable as stethoscopes.) Walmart, which created “small mart stores” to compete in Argentina, Brazil and Mexico, is reimporting the idea to the United States

My friend and colleague, Tim Cummins, CEO at IACCM, wonders how this will impact the supply chain.  For instance, will this impact procurement role and behavior and also organizational design? Does it point to the basis for future cost cutting, with suppliers selected for their demonstrated capabilities in ‘frugality’? Or might it mean less outsourcing to overseas markets, but an expansion of captive operations so that a company can draw on ideas from within its own organization? Might it also suggest that supply chains will once again become more localized so that there can be collaborative teams working together on new ideas?

My own thoughts on the subject is that this requirement will require that organizations hone their skills in what I call “Strategic Cost Management”.  This concept, developed largely by the Japanese and described in detail in Robin Cooper’s books “Design of Cost Management Systems” and “When Lean Enterprises Collide”.  These concepts refer to the important concept of developing a “target cost” as an INPUT into the design process, and not as an output.  This requirement means that organizations need to completely re-think the way in which they design products, and define value and functionality very carefully.  Most organizations are not good at this, as it is a highly cross-functional process, which also requires close collaboration with suppliers to drive cost savings innovations.  Collaboration isn’t something that most companies count in their list of strengths.

It will be interesting to see how organizations begin to develop these capabilities for frugal innovation in the future.

Have any thoughts or examples of frugal innovation?  I’d love to hear your views!