FORFIRM

SUPPLY CHAIN DESIGN

Product innovation is directly linked to sustainability: both are oriented towards change and the future. Sustainability is concerned with the wellbeing of the future. Product innovation is concerned with creating new products and services that generate value only if they fit in this future.

To be sustainable, product innovation must meet a number of challenges linked to people, planet and profit: social expectations and an equitable distribution of value along the global value chain, and the innovation must work within the carrying capacity of the supporting ecosystems.

Create opportunities to meet social and equity requirements (people):

Developed economies

> Increase urban and minority employment

> Improve safety and wellbeing

> Acceptation and integration of minorities

> Reduce income inequity

Developing economies

> Enhance number of skilled workers

> Reduce income inequity

> Improve working conditions

> Abolish child labour

> Reduce illiteracy

> Basic health services

> Clean drinking water

> Reduce population growth

> Improve status of women

> Abolish large scale dislocation of people Fit within the carrying capacity of supporting ecosystems (planet):

Developed economies

> Reduce fossil energy use (climate change)

> Reduce use of toxics

> Clean contaminated sites

> Improve level of prevention, recycling, and reuse

Developing economies

> Reduce industrial emissions

> Waste water treatment

> Stop overexploitation of renewable resources, water

> Stop deforestation, soil loss, erosion, ecosystem destruction

> Reduce dung and wood burning Create equitable value for customers and stake- holders along the global value chain (profit):

Developed economies

> Profitability

> Value for company, stakeholder

> Value for customer

> Fair business model

Developing economies

> Fair share of and linkage to global value chains

> Linkage of SMEs to large and transnational companies

> Industrialisation of production, economies of scale

> Fair price for commodities and raw materials

> Ownership and credit opportunities for entrepreneurs

Many product innovation ideas would never be implemented if they were required to meet all the above criteria. Therefore, the goals and targeted elements of a FORFIRM project need to be clearly defined.

A carefully prepared FORFIRM project can contribute powerfully to a company’s future. A business that wants to become and/or remain competitive will need to address sustainability issues. Large companies, as well as customers, governments and international organisations, are increasingly building sustainability requirements into their supply chains. Investment in a sustainable product innovation strategy can have immediate and longterm benefits.

During the development of a new product, or the redesign of an existing one, the product development team is confronted with a variety of design criteria like quality, ergonomics, safety, aesthetics etc. With the FORFIRM approach, environmental and social criteria are integrated into the product development process as well, minimizing the impacts of the product throughout its life cycle.

Products and environmental aspects planet implications

In the late 1980s and early 1990s, sustainability largely was an environmental issue. Initially efforts focused on improving end-of-pipe technologies. The focus then shifted towards production improvements via concepts such as clean technology, cleaner production, and eco-efficiency. The next shift was to product impacts, there- by taking into account the whole product life cycle. Concepts like Ecodesign and Design for the Environment (DfE) were developed and put into practice.

Environmental impacts can be divided into three main categories: ecological damage, human health damage and resource depletion. Many of these types of impacts are relevant for SMEs in developing economies, such as eutrophication, land use, ecotoxicity, human health damage, and the depletion of fossil fuels and fresh water.

Another way to classify the different types of environmental impacts is to arrange them according to geographical scale levels – local, regional, fluvial, continental and global. Typically, the higher the scale level, the more sources that contribute to the impact and the longer it will take for the improvements to become visible – depending of course on the reversibility of the problem. Local problems like water pollution, soil pollution, and waste disposal have been dealt with successfully in industrialised countries. Global issues like climate change can only be tackled by agreement of the best solutions at the global level. Irreversible depletion problems, even when occurring locally (topsoil), cannot be easily solved.

TYPE OF IMPACT	DESCRIPTION
1_ECOLOGICAL DAMAGE
Global warming or climate change	Addition of greenhouse gases to the atmosphere from burning of fossil fuels, agriculture, industrial practices. Effects: temperature change, Increased incidence of storms, desertification, tropical disease, ocean current changes, sea level rise.
Ozone depletion	Stratospheric ozone depletion caused by emissions of CFCs. Effects: increased amount of UV radiation leading to increased cancer occurrence, reduced productivity of plants, marine algae and high altitude biota
Acid rain	Acidification of precipitation by emission of sulphuric and other substances, mainly from fossil fuels. Effects: dissolves metals from the soil which become toxic to plants and aquatic organisms
Water eutrophication	Addition of excess nutrients to water, leading to algae bloom and consequent reduction of available oxygen. Effects: killing of fish and other aquatic organism.
Habitat alteration (land use)	Physical modification or destruction of natural habitats for agriculture, forestry, roads and urban growth. Effects: Primary cause of loss of biodiversity
Ecotoxicity	Exposure of plants, animals and other biota to toxic substances. Wide range of effects.
2_HUMAN HEALTH DAMAGE
Smog and air pollution	Emission of nitrogen oxides and VOCs generates ground level ozone, other air pollutants include dust particles and sulphur dioxide. Effects in humans: increased incidence of Asthma and other health disorders
Health damaging substances	Non-cancer causing substances include skin irritants, growth inhibitors, endocrine disruptors.
Carcinogens	Cancer causing substances, Mutagens that cause genetic mutation (most of them are also carcinogenic). Teratogens cause defects in developing embryos.
3_RESOURCE DEPLETION
Fossil fuels	Current consumption rates of oil, gas, coal convert fuels into materials, energy and CO2 at a rate millions of times faster then nature can replenish the fuel reservoirs
Fresh water	Consumption of fresh surface or groundwater converts theminto forms that are typically nonrecoverable.Access to clean, potable water is a fast growing international problem.
Minerals	Metal ores are cnverted into metals and alloys that are eventually oxidized or dispersed as waste that is often not recycled.
Topsoil	In many places, agriculture and forestry erodes topsoil at a rate much faster then natural processes replenish it

Life cycle and improvement factor thinking

The FORFIRM approach is based on taking a life cycle view of a product. The product life cycle starts with the extraction, processing and supply of the raw materials and energy needed for the product. It then covers the production of the product, its distribution, use (and possibly reuse and recycling), and its ultimate disposal. Environmental impacts of all kinds occur in different phases of the product life cycle and should be accounted for in an integrated way. Key factors are the consumption of input materials (water, nonrenewable resources, energy in each of the life cycle stages) and production of output materials (waste, water, heat, emissions, and waste) and factors like noise, vibration, radiation, and electromagnetic fields.

Example: Life cycle of a shirt

Shirts are often a combination of natural and synthetic fibers. To produce natural fibers (e.g., cotton), energy, fertilizers, water and pesticides are needed. For the synthetic fibers, fossil fuels are needed. In the next step, fibers are combined into cloth or textile. During this process, water, energy and chemicals are used to give cloth its colour and other characteristics. From the cloth, shirts are being produced that are then packaged and distributed to retail shops. After the consumer has purchased the shirt, he or she will discard the packaging and will use the shirt. During the use phase, the shirt might be used about 100 times and washed, dried and maybe even ironed. Each of these steps has environmental impacts resulting from detergent, water and energy use. Finally, perhaps when some parts of the shirt have worn out, it will be disposed. It is not possible to compost it because of the synthetic parts, and it may not be easy to recycle because of the mixed materials. During its life time, components of the shirt may have traveled thousands of kilometers, since cloth production could have been in Asia, the production in North Africa and the retail in Europe.

Raw material provision and factory production are only two stages of the product life cycle. In many cases, the distribution, use and disposal phases have higher environmental impacts than the production itself. The environmental challenge for FORFIRM is to design products that minimize environmental impacts during the entire product life cycle.

Sustainability also requires taking into account the needs of future generations, meaning that current environmental impacts should be reduced as well as those impacts on future generations. Global environmental pressures are directly related to the size of the population which defines the level of consumption of each person, and the materials and energy efficiency that produces each ‘unit’ of consumption. Currently, it has been estimated that environmental pressure should be reduced by about half. Taking into account the growth rates of developing economies, the efficiency of products and processes would need to be improved by a factor of 4. In a world with a population of 9 billion, and a consumption level that is much higher than it is now, this would imply materials and energy improvements by a factor of 10 to 20!

This type of ‘factor thinking’ shows the magnitude of the task of reaching sustainability, and the critical need to improve production processes, product, and systems. For products, short-term incremental redesign of existing products can typically lead to improvements of a factor of 2 to 4. To achieve the long-term factors of 10 to 20, radical product innovation is necessary. This includes developing completely new products, improving the product as well as the services connected to it, and developing entirely new functional systems of products and services. Which illustrates the different degrees of environmental benefit and degrees of innovation required.

This publication focuses on incremental innovation, redesign and the benchmarking of existing products, since these are the prevalent ways SMEs in developing economies currently work. However, the need for more radical product innovation will continue to grow. These and other related approaches are presented in detail in the publication Design for Sustainability: a Global Guide, UNEP 2006.

Products and social aspects people implications

Social and societal aspects of sustainability have increasingly received attention in the last 10 years from the media as exemplified by negative articles on issues of child labour, companies running ‘sweatshops’, workers’ rights and on indigenous peoples. Company strategies increasingly include corporate social responsibility in addition to economic and environmental priorities.

A useful tool to visualise socioeconomic and societal aspects that are relevant to sustainability.

On the vertical axis the social aspects relevant to the product supply chain are presented.The following issues are relevant to all stakeholders:

> Human rights

The protection of the basic human rights of employees, such as the right to lead a dignified life, the freedom to express independent beliefs, and the absence of racial, ethnic and gender discrimination.

> Minimisation of child labour

> Health and safety at the workplace/Human Resource Management

The proactive fostering of a high quality work environment, workplace diversity, opportunities for vocational education, and work-life balance for the employees.

> Governance and management

Setting in place systems and processes on accountability for shareholders and government.

> Transparency and engagement of business partners

The degree to which a company involves its business partners in carrying out the company’s sustainability strategy.

> Abolishing of corruption and bribery

On the horizontal axis, the social aspects of the company in its local surroundings are expressed, from micro (within the company itself) to meso-level (the community within which the company exists) to macro-level (the country within which the company exists, or for a transnational corporation, within the global environment.

> Local economic growth

The ways a company shares the benefits from its investments with local businesses or provide tools for economic growth to local communities.

> Community development

Support of the company through provision of health, education, water and sanitation, helping to fight corruption in the community and upholding indigenous and human rights.

> Stakeholder engagement

Consulting with non-business stakeholders on key sustainability issues: this could be in the form of open dialogue with societal partners (NGOs, government, community groups).

> Distributed Economies

DE is a strategy to distribute a selected share of production to regions where in parallel a range of activities are organized to support small scale, flexible units that are connected with each other and prioritize quality production. It can offer sustainability advantages such as social diversity, increased quality of life, focus on regional assets, maximizing social capital and ‘collective spirit’.

Why should a company look into FORFIRM?

Sustainability, corporate social responsibility and related trends are part of the business agenda for an increasing number of companies worldwide. Understanding how to integrate these concepts into business planning can be an important part of a successful business. Pressure to integrate sustainability requirements will come from government, business partners, non-governmental organizations and citizen groups.

Motivation (or pressure) to implement FORFIRM can come from two different directions: from within the business itself (internal drivers) or from outside the company (external drivers). Although there are overlaps amongst the people, planet and profit aspects of sustainability, usually a driver is connected to one of them. Knowing the most influential drivers can provide valuable information on what are the best types of FORFIRM projects and activities to initiate.

In general, the experience with industry in developing economies is that internal drivers are more decisive for the initiation of FORFIRM projects than external drivers because external drivers currently are less developed in many developing economies.

HEALTH & SAFETY HUMAN RESOURCE MANEGEMENT TRANSPARENCY & BUSINESS PARTNER INVOLVEMENT		-		-
	SUPPLIER
			COMMUNITY Local economic growth Community development		REGION/COUNTRY Stakeholder engagement Distributed economies
	COMPANY

	RETAILER

Product innovation

FORFIRM is based on a combination of product innovation and sustainability. Understanding the underlying concept of product innovation can help in implementing FORFIRM projects. Here discusses different (product) innovation approaches and explains the product development process. These insights can assist during the Needs Assessment to identify the appropriate innovation level and FORFIRM approach for the participating companies in demon stration projects.

Innovation

Product innovation is essential for a country’s economic growth and for the competitive position of industry. Companies operate in a rapidly changing world in which customers’ needs and wants are not fixed and where they face increasing competition due to open markets and globalization. Companies that effectively integrate innovation in the product development process can gain significant competitive advantage.

Innovation is a broad concept that is used in many different contexts. As a result, there are many definitions of innovation. One useful definition is: “the commercial or industrial application of something new a new product, process or method of production; a new market or source of supply; a new form of commercial, business or financial organization”.

Most definitions of innovation emphasize ‘newness’ and ‘successfulness’. There are distinctions made between product versus process innovation and some- times amongst market, business and management innovation. For example:

> Product innovation is the introduction of new products that have characteristics and/or use applications that differ from existing products on the market.

> Process innovation is the introduction of a new method of production, that has not previously been used and/or a new way of handling a commodity commercially to make production more efficient or to be able to produce new or improved products.

> Market innovation involves entering new markets, new ways of serving customers, and/or market expansion.

> Business and management innovation involves developing new reward systems, organizational structures, ways of handling responsibilities and human resources etc. that positively affects product sales.

Within FORFIRM the focus is on product and market innovation. Process innovation is often more linked to cleaner production and management innovation to environmental management systems like ISO 14000.

Innovation levels

Innovation happens in different degrees and can be categorized into three levels: incremental, radical and fundamental. Each category is progressively more significant and more farreaching.

1> Incremental innovation_ Entails step-by-step improvements of existing products and tends to strengthen market positions of established companies in the industry.

2> Radical innovation_ Drastically changes existing products or processes. The risks and required investments in radical innovation are usually considerably greater than those needed for incremental innovation but they offer more opportunity for new entrants to the market.

3> Fundamental innovation_ Depends on new scientific knowledge and opens up new industries, causing a paradigm shift. In the early stage of fundamental innovation, the contributions of science and technology are important.

The majority of innovation efforts take place in companies that work from the incremental or radical innovation perspective. There is a wide range of innovation possibilities between these two extremes. Fundamental innovation often takes place only in large multinational companies, company clusters or (inter)national research programs because of the large human and capital investment needed. For FORFIRM in developing economies it is less relevant.

Successful incremental or radical innovation requires different kinds of thinking, ways of working, and risk taking. To get more insight and a better understanding of both types of innovation, they are discussed in more detail below.

			INCREMENTAL

INNOVATION			RADICAL

			FUNDAMENTAL

Incremental innovation

As the name suggests, this type of innovation makes small changes at one given time and is sometimes referred to as continuous improvement. A simple product may be improved (in terms of better performance or lower costs) through the use of higher performance components or materials. A complex product that consists of integrated technical subsystems can be improved by partial changes at one level of a subsystem. Incremental innovations do not involve major investments or risk. User experience and feedback is important and may predominate as a source for innovation ideas. As an example, customer wants can be identified and added as features to the existing product.

Incremental innovation and the redesign of existing products are economically and commercially as important as radical innovations. Incremental innovation and design improvement are known as the ‘bread and butter’ of new product development for many firms. Many firms do not even attempt to explore radical innovation for a variety of reasons having to do with their size and resources, the nature of the industry, the level of research and development necessary, or the amount of risk involved. Even firms that successfully introduce radical innovation may not do so very often. Incremental innovation projects, due to the low level of involved risk usually follow a structured and predictable process.

Radical innovation

Radical innovation involves the development of key new design elements such as change in a product component combined with a new architecture for linking components. The result is a distinctively new product that is markedly different from the company’s existing product line.

A high level of uncertainty is associated with radical innovation projects, especially at early stages. Due to high levels of uncertainty, the process cannot be described as an orderly structured process. Radical innovations are confronted with uncertainties on different levels. To be successful, uncertainty must be reduced in the following dimensions:

> Technical uncertainty_ are issues related to the completeness and correctness of the underlying scientific knowledge and the technical specification.

> Market uncertainty_ are issues related to customer needs and wants.

	INCREMENTAL INNOVATION	RADICAL INNOVATION
EMPHASIS	Cost or feature improvements in existing products, services or processes.	Development of new businesses, products and/or processes that transform the economies of a business
TECHNOLOGY	Exploitation of existing technology	Exploration of new technologies
TRAJECTORY	Linear and continuous: evolutionary	Sporadic and discontinuous; revolutionary
KEY PLAYERS	Formal cross-functional team	Formal and informal cross- functional teams and individuals
TIME FRAME	Short term	Mid- to long-term
RISH & SUCCESS	Predictable	Unpredictable and highly uncertain
PROCESS	Formal, phase-gate model	Informal, flexible model at early stages due to high uncertainty more formal at later stages after uncertainties have been reduced

> Organisational uncertainty_ refers to organizational resistance that stems from conflict between the mainstream organization and the radical innovation team.

> Resource uncertainty_ includes project discontinuities that influence the project’s funding, staffing, and management requirements. Radical innovations need a number of enabling factors such as a high level of technological capability, strong R&D and a pool of multidisciplinary skills whereas the incremental innovation adoption process needs less.

Product innovation

The product innovation process involves a series of sub-processes dominated by the product development process followed by the realization.

Product Innovation = Product Development + Realization

In the following paragraphs a general step-by-step product development process will be outlined.

Product development process

Product development can be defined as “the process that transforms technical ideas or market needs and opportunities into a new product and on to the market”. It includes strategy, organization, concept generation, product and marketing plan creation and evaluation, and the commercialization of a new product.

The product development process is a disciplined and defined set of tasks, steps, and phases that describe how a company repetitively converts ideas into salable products and/or services. The product development process itself can be split up into three phases: policy formulation, idea finding and strict development.

Every step has two different kinds of activities : first a divergent activity, followed by a convergent activity. These approaches identify relevant information in a creative way and then evaluate it. Divergent methods search for ideas and include searching for information, to explore the problem, to redefine it, to generate ideas and to combine concepts. Convergent methods impose value judgments and include methods to make sense of information, to prioritize items, to compare solutions, to assess ideas and to reject or select concepts. The product development process is often presented as a linear process. However, in practice it is often characterized as a linear process with iterative cycles, meaning that design teams often go back to earlier stages and decisions in the product development process to reevaluate previous decisions that have been made.

Policy formulation

The product development process starts with formulating goals and strategies. Developing new or redesigned products without having clear goals and product strategies may lead to unsuccessful products and failures. For this reason, it is essential for a company to define its vision, mission, goals and (product) innovation strategies.

Mission statement

A company’s mission is its reason for being. The mission often is expressed in the form of a mission statement, which conveys a sense of purpose to employees and projects a company image to customers. The mission statement defines the purpose or broader goal for being in existence. It serves as a guide in times of uncertainty or vagueness. It is like a guiding light. It has no time frame and can remain the same for decades if crafted correctly.

	STRATEGY PYRAMID TOP DOWN
	MISSION
	VISION
	GOALS
	STRATEGIES

When defining its mission statement, a company can consider including some or all of the following aspects:

> The moral/ethical position of the enterprise;

> The desired public image;

> The key strategic influence for the business;

> A description of the target market;

> A description of the products/services;

> The geographic domain; and

> Expectations of growth and profitability.

The mission statement of a plastics manufacturer in tanzanIia

> Our mission is to become a world-class provider of proprietary and innovative solutions in the East and Central African market.

> We will double turnover every three years.

> We shall take pride in becoming preferred partners to all our stakeholders and in exceeding their expectations.

Vision statement

The vision statement describes how the company management sees events unfolding over 10 or 20 years if everything goes exactly as hoped. A vision statement is short, succinct, and inspiring about what the organization intends to become and to achieve at some point in the future stated in competitive terms. Vision refers to the category of intentions that are broad, allinclusive and forward-thinking. It is the image a business has of its goals before it sets out to reach them. It describes future aspirations, without specifying the means that will be used to achieve them.

A vision statement for a new or small firm spells out goals at a high level and should coincide with the founder’s goals for the business. Simply put, the vision should state what the founder ultimately envisions the business to be, in terms of growth, values, employees, and contributions to society. This vision may be as vague as a dream or as precise as a goal. The vision may contain commitment to:

> Developing a new product or service;

> Serving customers through the defined service portfolio;

> Ensuring quality and responsiveness of customer services;

> Providing an enjoyable work environment for employees; or

> Ensuring financial and sustainable growth of the company for the benefit of its stakeholders.

Goals and objectives

After defining (or redefining) the company’s mission and vision, it is time to set practical goals and objectives for the organization based on these statements. The goals often lack specificity. The objectives are aims that are formulated exactly and quantitatively including timeframes and magnitudes. For example, the objectives of an annual earning growth target should be challenging but achievable. They also should be measurable so that the company can monitor its progress and make corrections as needed.

	POSITIVE	NEGATIVE
INTERNAL FACTORS	STRENGTHS	WEAKNESSES
INTERNAL FACTORS	Technological skills Leading Brands Distribuition channels Costumer Loyalty/Relationship Production quality Scale Management	Absence of important skills Weak Brands Poor access to distribution Low costumer retention Unreliable product/service Sub-scale Management

EXTERNAL FACTORS	OPPORTUNITIES	THREATS
EXTERNAL FACTORS	Changing costumer tastes Liberalisation of geographic markets Technological advances Changes in government politics Lower personal taxes Changes in population age-struture New distribution channels	Changing costumer tastes Closing of geographic markets Technological advances Changes in government politics Tax increases Changes in population age-struture New distribution channels

Once the firm has specified its objectives, it can analyze its current situation to devise a strategic plan to reach the objectives. This can be done for example with a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis or by evaluating the product life cycle stage of its product portfolio.

Swot analysis

In order to succeed, businesses need to understand their strengths and where they are vulnerable. Successful businesses build on their strengths, correct weaknesses and protect against vulnerabilities and threats. They also understand the overall business environment and spot new opportunities faster than competitors.

A tool that helps in this process is the SWOT analysis.

Strengths are attributes of the organization that are helpful to achieve the objective. They have to be maintained, built upon, or leveraged.

Weaknesses are attributes of the organization that are harmful to the achievement of the objective. They need to be remedied or stopped.

Opportunities are external conditions that are helpful to the achievement of the objective. They need to be prioritized and optimized.

Threats are external conditions that are harmful to the achievement of the objective. They need to be countered or minimized.

In addition, the company can explore its core competences those capabilities that are unique to it and that provides it with a distinctive competitive advantage and contribute to acquiring and retaining customers.

Product life cycle from a market perspective

A new product progresses through a sequence of stages in the market from introduction to growth, maturity and decline. After a period of development, the product is introduced or launched into the market. It gains more and more customers as it grows. Eventually the market stabilizes and the product becomes mature. Then after a period of time, the product is overtaken by development and the introduction of superior competitors, and it goes into decline and is eventually withdrawn. It is essential for a company to be aware of at which stage the products in its product portfolio are in order to start up new innovation initiatives in a timely manner.

This product life cycle perspective from a marketing point of view should be not be confused with the ‘sustainability’ life cycle approach (from cradle to cradle).

Strategic innovation gap

Product innovation is necessary to survive and grow in a competitive market. Because sales of recent products tend to decline due to competitors development, a ‘strategic innovation gap’ develops, which interferes with growth. The strategic gap of a company can be measured as the difference between expected and desired turnover and profits from currently planned new products and the company objectives (as stated in the vision statement).

If there is a gap between future desired sales and projected sales, a company will have to develop or acquire new businesses and innovation activities to fill this strategic gap.

Product innovation strategy formulation

Once a clear picture of the firm and its environment is in hand, specific product innovation strategy alternatives can be developed. There are different (product) innovation strategies for companies to innovate in order to become more competitive. The competitiveness of companies in the longrun is often directly related to their new product development capabilities.

While firms may develop different alternatives depending on their situation, generic categories of strategies exist that can be applied to a wide range of firms. The innovation models of Ansoff and Porter are two approaches that companies and organizations can apply to analyse their current (and competitors’) product portfolio and can provide direction to new product innovation strategies.

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