Methodological approach to planning and justifying

technological innovation in manufacturing

A VILLA, S ROSSETTO, M LUCERTINI* and D TELMONt

Abstract: The outline of a preliminary but general model of an innovation process, satisfying a number of previously defined specifications, is the aim of this paper. A model of the innovation process is first formulated, and the paper goes on to formulate the innovation design problem based on this model. Next, the main concepts for approaching the task of designing interventions for plant modification are outlined, and finally the problem of conditioning demands from customers is examined.

Keywords: technological innovation, planning, project man- agement, economic justification

p lanning innovation strategies and the related investments in Advanced Manufacturing Tech- nology (AMT) is perhaps the most difficult, but

also challenging, part of the industrial managers' decision-making activity. The difficulty in deciding to launch innovation programs originates both from the large investments required and from the uncertainty in estimating the investment return 1-3. The challenge of these same decisions comes from their effects on the company involved which, in the case of success, can give a competitive advantage so that it becomes a leader in its market segment 4-5.

However, uncertainty in the effects of innovation still plays the main role, and often makes innovation a

Dipartimento Sistemi di Produzione ed Economia dell'Azienda, Politecnico di Torino, 1-10129 Torino, Italy *Dipartimento di Elettronica, Universit/t di Roma 'Tor Vergata', via O. Raimondo, 1-00198 Roma, Italy tTradeoff, Roma, Italy Paper received: June 1991

hazard, owing to a confusion about the effective goals of an innovation process. In fact, innovation could be planned for improving company performance either in terms of efficiency (i.e. productivity), efficacy (i.e. market satisfaction), or in terms of economy (i.e. cost saving). This E-cube innovation target symbolizes a wide set of often conflicting objectives, from which a careful selection must be made if a 'rational' plan for innovation is being sought.

A new methodology for planning and justifying innovation to help managers in defining clear strategic goals, formulating clear statements of their innovation tasks, and organizing meaningful procedures for evaluating the effects of innovation is necessary. This paper aims to offer a preliminary answer to this problem, founded on a basic concept:

'an innovation strategy project is always driven by the objective of quality assurance'.

In the authors' opinion, the aim of any innovation is (often unconsciously) that of guaranteeing the best possible tracking of the quality level 'required by the customers' through suitable adaptation of the quality level 'offered by the manufacturing plant'. This simple idea originates a set of specifications for representing an innovation process, which must be able to describe:

(1) How innovation could affect and modify the operations of the manufacturing plant.

(2) How the effects of innovation could be measured in terms of an improvement of the quality level offered by the plant.

(3) How innovation could be planned on the basis of the difference between the required and offered quality levels.

0951-5240/91/040221-08 O 1991 Butterworth-Heinemann Ltd

Vol 4 No 4 November 1991 221

In addition, the same basic idea suggests that a useful innovation model must also describe:

(4) How a plant manager could try to condition customers' quality demand.

(5) How management intervention to condition cus- tomers could affect the evolution in time of the demand for quality.

A model of this type shows the 'two-faced nature' of any innovation intervention (as shown in Figure 1) which should act:

inside the plant, in order to modify the 'plant state', i.e. the set of variables specifying the current modes of pe r fo rming those p r o d u c t i o n / o r g a n i z a t i o n / management functions which give rise to the present level of offered quality;

outside the plant (in the market), in order to modify, if possible, the 'market state', i.e. the set of variables specifying the quality demand arising from the market itself.

The two types of intervention are originated by a two-step decision-making process which can be sketched as follows. A manager, for the purposes of innovating a plant in his company, first takes 'decisions directed outside the plant', i.e. political decisions in order to condition the market. These decisions could induce direct effects on the market, and they will surely induce indirect effects inside the plant, and also forcing the manager to take technical decisions to modify the plant itself.

As far as practical implementation is concerned, innovation either inside or ouside the plant can be independent, but at the level of planning either a single

Monitoring the offered quality

Evaluating and comparing

l I Deciding interventions outside plant

Deciding I interventions [ inside plant I If

Plant's I functionality I

Market's functionality

Figure 1. 'Two-faced nature' of an innovation interven- tion, acting both on the plant and the related market

innovation or a complete innovation strategy (i.e. a sequence of interventions coordinated together), this decision must be performed in a unitary and aggregated way, having a 'model of the innovation process' to hand which allows the innovation designer:

(i) to evaluate if plant innovation is necessary, and, in case it is;

(ii) to specify the target, costs and time duration of the innovation; and

(iii) to plan coordinated actions to condition the market.

The outline of a preliminary but general model of an innovation process, satisfying the above-mentioned specifications, is the aim of this paper, which is organized in four parts. The first part aims to formulate a model of the innovation process. Based on this model, the second part formulates the innovation design problem. Then the main concepts for approaching the task of designing interventions for plant modifying are outlined, while the fourth part approaches the problem of conditioning demands from customers.

Quality: the innovation mover

As is widely recognized, the <quality, innovation> binomial appears to be the conditio-sine-qua-non for the survival and growth of companies and, to this extent, Japanese industry is often assumed as such a paradigm 6. Schumpeter 7 had formerly recognized that innovation is the main factor of economic growth, which can only be obtained through dynamic compe- tition, the process by which innovation can be selected and diffused. He had already stated that any industrial policy which aims at profit only through an increase of sales volume keeping unchanged technology, is surely barren.

What has happened has confirmed his theory. One by one, companies which did not innovate were expelled from their markets (they were either absorbed or failed) because new and aggressive competitors were able to furnish what the market was asking for. One example in the Italian automotive market is the progressive concentration of most of the old auto- motive companies in the unique firm FIAT.

Besides the need for sufficient scale, which greatly conditions an oligopolistic market, firms have also concentrated on reaching the minimum financial potentiality which can support innovation processes of effective impact. If it is easy to point to the necessity of innovation it is more difficult to choose a firm's target and the methods for reaching them.

Figure 2 gives an example of the range of interven- tions in AMT, and what the effects of these could be 8. This figure, however, emphasizes that until now, both researchers and technicians have been unable to validate correlations among innovation tools and interventions on the one hand, and their effects on the plant on the other.

222 Computer-Integrated Manufacturing Systems

Effects Values ~ E < 0 5 U- n ~da-

<

i

I

• Machine no. decrease

• Workforce reduction

• Lead time reduction

• Output increase

• WiP reduction

• Cost cut

50 + 80%

50 + 90%

60 + 90%

50 + 6 times

50 + 70%

15 + 30%

Figure 2. Example of effects of AMT and the spread of experienced values

Recently, an increasing polarization of innovation objectives towards satisfying customer expectations has been noted. Firms are becoming convinced that quality can no longer be considered an extra, reserved for the elite, and then a cost, but it is a means for keeping expenditure low and increasing customers. Quality, then becomes not only a tool for survival but the effective goal of the firm, a goal which can only be pursued through innovation. Innovation, on the other hand, is oriented more and more towards making the plant capable of offering products (or more generally, services) of improved quality, and often of 'incom- parable' quality.

This means that understanding how to model the quality concept is the first necessary step for under- taking any innovation.

Modelling the quality concept

Quality (often 'total quality') is intended to be the capability of gathering either expressed expectations or potential ones from market, and of satisfying them to the advantage of the company. This viewpoint implicit- ly states that the market is the prompter of product requirements, while a firm should organize its tech- nologies and management in such a way as to be able to immediately recognize market suggestions and conse- quently to adapt its production to meet these require- ments.

On one side, one can account for an expected quality, Qe, the set of product specifications valued by market, as well as for an offered quality, Qo, the corresponding set of specification values which the firm can furnish. The expected quality Qe is time-varying, being dependent both on the offer, the supplier's conditions, and on the market state (e.g. purchasing power, propensity to consume), and represents the obvious target for any company in the relevant market segment.

The offered qualtiy Qo should be intended as the response of the firm to the market expectations; then it depends on the firm's capability of recognizing customers requirements and anticipating their uncon- scious expectations by designing products which should satisfy these expectations, and making this product available at the right time.

It follows that the offered quality does not only depend on careful product design and a high techno- logical level of production, but also on the organization and management of the production operations. These should assure control of the production flows in such a manner that product quality is maintained throughout the production process.

Formally, these considerations state that the offered quality Qo has to be modelled as a transformation of the firm's state X, through an 'operator' T[.] which shows how the firm's state contributes to defining product quality:

Qo = TIXl (1)

The quality concept is clearly assessed by this model. Innovation is then the effective tool for tracking the objective of making the offered quality Qo as close as possible to the expected quality Qe.

Modelling the innovation concept

The innovation problem, already well known in the literature s , has largely received aggregated statements in the past. In effect, aggregated (and then simple) models of a firm could be of relevance to a manager who must estimate first-approximation values of the effects of innovations in his own firm, in terms of the impact on both the firm and its market segment.

A model of this type has to describe how the firm's management can modify:

• on one side the firm's state, by acting on its operation modes in such a way that the offered quality becomes closer to the expected quality;

• on the other side, the market's state, by acting on the propensity to consume in such a way that the expected quality evolves with a dynamic which could be easily followed by the firm's offerings.

With reference to Figure 3, the two-faced innovation process can be identified by two coupled loops between the pair <firm, market> and the firm management. Accounting for the 'firm-control' loop, the innovation process must consist of the evolution of the firm's state driven by an internal innovation strategy. Referring to the 'market-conditioning' loop, the innovation process

0

Figure 3. Pair of loops by which the firm manager functionally controls the firm and conditions the market

Vol 4 No 4 November 1991 223

must imply an evolution of the expected quality, driven by a conditioning action decided by the firm's management. Note that this action can either be relevant for quality target modification or not, but this result (depending on the firm's importance in the market segment) is of no interest for the model statement, in which the expected quality (either partially conditioned or not) always drives the inno- vation process.

Integrated innovation planning

The above considerations concerning the innovation concept introduce the so-called Innovation Process Planning (IPP) problem, i.e. the problem of deciding, for a given plant, what type of innovations are necessary, and how and when suitable interventions should be selected in order to apply these necessary innovations. For the purposes of formulating the IPP problem, even if in simplified terms, we have to introduce some preliminary considerations.

First, it is obvious that the problem of planning a complete strategy for plant innovation is very complex. Then a set of connected sub-problems must be considered, the solution of each one of which gives a sub-set of interventions (here denoted as 'partial strategy'). This decomposition is an important step in solving the IPP problem, since it allows us to recognize sub-problems related either to specific components of the plant to be innovated, or to particular phases in a multi-step solution procedure. This then allows the easy computation of specific interventions.

Second, referring to a specific sub-problem, the partial strategy which is sought must be characterized by proper activation and completion times, as well as by specific activities oriented towards either modifying some plant components, modifying control/manage- ment system policies, or modifying information tech- nology.

Third, in general some partial strategies could be made active during intervals which partially overlap each other. This practically states that more than one sub-problem (for instance concerning plant layout, the plant monitoring system and some control functions) can be progressively modified together. This implies that a clear evaluation of the available resources (personnel, funds, components, tools, etc.) which can be used during the effective implementation of the innovation program must be made. Depending on the resource constraints, a careful selection of the time- sharing of the simultaneous strategies will be necessary.

Finally, at each activation/completion time of a partial strategy, the evolution in time of the states of both the plant to be innovated and its related market can present a 'jump', because either a structural or functional modification occurs. Each 'jump' in the evolution corresponds to an 'event' in the innovation process, i.e. clearly shows the occurrence of inno- vation.

In graphical terms, an innovation strategy is a

discrete multi-valued function, and it can be repre- sented by a Gantt diagram which contains the activation and completion times for all innovation strategies which have been selected (see Figure 4). By analogy with the activity of a designer, let us denote as the 'Session' of the innovation process the interval bounded by two consecutive events, including a certain set of simultaneously operating strategies.

All these considerations emphasize that: 'Designing an innovation process means finding:

(1) What is the most convenient decomposition of the complete innovation design problem into sub- problems?

(2) What strategies must be used from among those admissible for solving each sub-problem?

(3) For each selected strategy, at what time it must be activated?

(4) For each session and each strategy belonging to the session, how must the available resources be used to develop the partial strategies?

The IPP problem intuitively appears to be a combina- torial search over the multi-dimensional set of admis- sible partial strategies and their activation times.

In formal terms, the IPP problem can be stated as: let Z(-) -- [X(.), Qe(')] be the state of the complete system under innovation, i.e. the plant and its related market.

An admissible innovation strategy can be modelled by an 'operator' S(.) suitable for activation at a time instant A(k) , acting on the system state Z(.), and conditioned on both the current quality level inadequa- cy (Qe(') - Qo(')) and the best possible quality level Q* which can be expected to be reached at the innovation completion time tf (a priori unknown).

Then, an aggregated model of the dynamics of the system state Z(.) can be implicity written as:

Z( . ) = S(A(k) , Q*, (Z(t) , Qe(t) - Qo(t), A ( k ) < t < A ( k + 1)) (2)

Z(to) = Zo measured,

for S(.) belonging to the S, (3)

where S denotes the set of all admissible innovation strategies, i.e. all combinations of partial strategies

~Strategies

STR. jth

STR. 1 st

[ I I I I I

I I i

i i Activation ' - Completion Time t ime Session time

Figure 4. Set o f innovation strategies which compose the innovation process in terms of a Gantt diagram

224 Computer-Integrated Manufacturing Systems

acting over specific components of the system to be innovated, and (A(k), A(k+l ) ) denotes a generic session of the innovation process.

The selection of the best innovation strategy must be performed on the basis of three specifications:

(a) the innovation strategy must drive the system in such a way that the system state will reach a given target O(.), defined as a function of the best possible quality level Q*:

l(tf) belonging to O(tf, Q*) (4)

(b) each activated strategy cannot absorb more than a given set of resources R*, a priori assumed by the plant manager, i.e. the effort required by the strategy E(S(.)) cannot overcome the resource capability C(R*):

E(S(A(k), Q*, (Z(t), Qe(t) - Qo(t), A(k)<t<A(k+ l))) < C(R*) (5)

(c) the effort/cost spent in applying the innovation strategy, and measured by a given innovation performance index J(.), must be at a minimum when the most convenient innovation strategy is evaluated over the innovation horizon q, i.e.:

J(q, Q*, (Qe(t) - Qo(t), to<t<tf)) tobe minimized. (6)

Practically, the complexity of the above combinatorial problem forces designers to decouple the problem into:

• an innovation design for conditioning the market; and

• an innovation design for controlling the firm's state.

In the general case, the innovation interventions either inside or outside the firm are of a very different nature. This means that in the evolution of the firm (provided that a forecast of market demand is assumed), state X(.) is practically driven by innovation strategies acting inside the firm, whilst the evolution of the market state Q~(.) can mainly be affected (if possible) by innovation strategies acting on the consumers' propension, pro- vided that a scenario of internal innovation is assumed. This realistic assumption corresponds, in formal terms, to the assumption of an operator S(.) which can be composed of two almost independent parts, SI(.) and $2(.), the former denoting the internal strategy and the latter referring to the external one.

Under this assumption, one can state two com- plementary IPP problems:

(1) Designing internal innovation process: Optimize the innovation performance index J(-), conditioned on the given estimation of the future expected quality Oe(t) over the same unknown horizon, and subjected to the model constraints for the plant state X(.);

(2) Designing external innovation process: Optimize the Innovation Performance Index J(-), conditioned on the given scenario for the internal innovation strategies SI(.) which are planned to be

used, and subjected to the model constraints for the market state Qe(').

Internal innovation

In principle, the above problem of internal innovation design formulates the theoretical task to be tackled. In practice, the usefulness of this formulation lies in driving the reasoning by which a designer can specify:

• the innovation target of his own project; • the effects of internal innovation interventions on

the firm; • the effects of external innovation interventions on

the market.

What we are trying to outline in this and the following section are some example considerations which should offer suggestions about preliminary applications of the formal approach proposed here.

In the case of innovation desired within a firm, the first step in the design consists of specifying the resources available in the firm, the functions which should characterize the firm's operation modes and, for each <resource, function> pair, the activities which should be performed within the firm itself.

A map such as that shown in Figure 5 clearly shows an aggregated representation of the firm's activities, the definition of which can be progressively detailed by exploding each activity (i.e. specifying all the activities which must be performed by a given resource in order to allow the execution of a given function, as shown in Figure 6).

As a second step, the innovation project committ- ment must be stated by specifying the innovation target and performance index. Assume that the latter consists of the minimum time required for modifying the plant, and the former consists of a given set of requirements for the desired products.

.(3

L~

Personnel

Funds

Technologies

Materials

K n o w - h o w

(3

0..

Process transport control

Verify

b~

cO

Promote Manage

Finance Constrain

Process Data Assemble Management Monitor -- -

Constrain Control Acquire

Supply Store Reorder

Deliver Acquire

Manage Modify Design

Figure 5. Aggregated representations of a firm's activities and the related resources (to be used) and functions (to be performed)

Vol 4 No 4 November 1991 225

\ / \

J

J

Figure 6. How to explode the description of an activity

Given the innovation objectives (target and perform- ance index), the third step in the design aims at performing a preliminary selection of the activities which should be affected by the innovation process, such as to specify the firm's model affected by innovation.

A practical way to perform this step could be to select some <resource, function> pairs in the table of Figure 5, in order to reduce the number of variables (and then firm's activities) involved in the innovation process. An example of this selection, oriented to isolate activities concerned with the technological innovation of a manufacturing plant in the considered firm, is shown in Figure 7.

Once a set of activities, sufficient to represent the plant operation modes involved in the innovation process, have been selected, the fourth step in innovation design consists of defining the set of admissible strategies S, which in general are recognized jointly by the management and the innovation de- signer.

From a theoretical point of view, the next step should be that of approaching the above stated 'internal' optimization problem. In practice, the mathematical optimization (very hard to solve, and time-consuming) is replaced by a logical 'problem-solving' procedure which tries to find the best innovation strategies through a progressive reduction of the admissibility set 9. Then, besides assessing the admissibility set, a designer can also recognize the interactions that exist among the strategies themselves, thus formulating a 'network of admissible strategies' which will give help in choosing the best innovation strategies to be effectively applied. This network defines a graph of strategies, and then of innovation design sub-problems (see Figure 8).

Process transporl

Personnel control

Funds

Process Technologies Assemble

Monitor

Supply Materials Store

Know-how Manage Design

NJ N ii!iliiiiiiiiiiiiiiii z / / /~ iiiiiiiiiiiiii

Deliver Acquire 1~/. i 3 i ~

N Figure 7. Selecting activities of relevance for a specific technical innovation process. (Cost objective and constraints are neglected; reliability specifications are not taken into account; the product market is not modelled)

STR. 2 : Products Trace layout specification Iby experience

STR. 1 : '~ [ STR. 3: sign product ~ Trace layo~ by CAD ] ~ by experl

STR. 5 : Assign item

flows

STR. 6 : Plan

loading

by line programming

STR, 7 : Schedule

Production II plans

Figure 8. Example of a graph of partial strategies when innovation calls for planning-replanning of production loads

The solution of the innovation project will be obtained by finding the path, in the above-mentioned graph, which allows optimization of the innovation performance index (the fifth step).

The search for this path must give rise to a set of strategies:

• 'ordered' according to interactions among the innovation sub-problems to be solved;

• 'optimized' according to the innovation committ- ment specifications;

• 'scheduled in time', according to both the activities involved and the innovation tools to be used.

226 Computer-Integrated Manufacturing Systems

'Concurrent engineering' procedures could offer effec- tive tools for this simplified but practical approach 1°.

External innovation

The dual aspect of the innovation problem concerns the design of interventions outside the firm, in the related market. All managers today agree in defining quality as customer satisfaction, and in recognizing innovation as a tool for quality assurance. What must now be analysed is how the problem of designing an external innovation process, mathematically stated in the previous section, can practically be approached.

The first concept on which the design of any external innovation process is based, should allow us to decouple the external innovation design task from the internal one, and should make the latter dependent on the former.

To this aim, the basic idea is the following: at the same time in which the product-process innovation is defined, the building process (through which the 'typical customer figure' is defined) must also be designed.

Intuitively, by 'typical customer figure' we intend the specification of the customer expectations which have been assumed to be satisfied by the product-process under design at the same time. Based on the concept of a 'typical customer figure', a useful classification of market typologies, and of the related admissible conditioning actions, can be stated. This classification can be obtained by combining the two possible product types offered by a firm (either capital goods or consumer goods), and the two possible strategies for product delivery (either market-oriented or customer- oriented).

(1) Market of highly-standardized capital goods This is the case of tool machines, industrial vehicles, software for telecommunications, for instance. In this case, the customer is normally a company/institution, deciding on the basis of offers. Then, the conditioning action should aim at building a bridge between product specifications and cost constraints, since the purchase is generally based on analysing catalogues. Moreover, the related internal innovation is essentially oriented to improve the product's efficiency and economy, and to guarantee production process standardization.

(2) Market of individual-customer capital goods This can be the case of large engineering projects such as for industrial plants, air control systems, computer networks. The customer is a big organization with sophisticated technical knowledge, and it contributes to the product specifications, and often to support inspection, testing and certification. In this case, the external and internal innovations can hardly be separated: a unique process including producer and customer must be managed by highly qualified personnel.

(3) Market of highly-standardized consumer goods Situations of this type refer to personal computers, mechanical components and foodstuffs. The customer is often without experience in the field, with approxi- mated visibility of the functional specifications and cost of the product. The external action generally planned by producers consists in suitable advertising strategies, which can play a relevant role even if (as is often the case) they are lacking in technical contents. As far as internal innovation is concerned considerations similar to those in the previous situations can be made, since the producer's aim is to drive consumers' propensity.

(4) Market of individual-customer consumer goods To this class goods in the clothing and footwear sectors, as well as in tourist agencies and belongs in the handicrafts sector. Here, the external action consists in a 'style' of promotion, and drives internal innovation mainly oriented to product design.

Obviously, the four-type classification of external strategies, as summarized in Figure 9, is only a preliminary and simplified sketch of a more complex reality. However, a complete classification of the market sectors will allow the innovation designer to define simplified reasonings for practically solving the external innovation problem.

Discussion and conclusions

The proposed considerations should not deceive the reader about the aims of the proposed approach to the innovation process planning (IPP) problem. It has no intention of being an operative tool, which can be used sic-et-simpliciter in industrial practice. On the contrary, its aim is simply that of outlining (once the assumption of a strict relation between quality assured by a firm and the techno-organizational-economic structure of the firm itself is accepted) the learning-decisional process which must be used to assure to the firm (in the existing time budget constraints) a desired competitive advantage.

The present formulation should be useful not for actual application purposes, but for 'didactics' in industrial groups which aim to approach their inno- vation problem in a rational (not impulsive) way. To

Good e

Highly- Standardized

Capital

Balance product specifications with product cost

Consumer

Plan an advertising strategy

Pay attention to Promote the Individual project target company's style

Figure 9. Example of simple classification of external (market-conditioning) strategies

Vol 4 No 4 November 1991 227

this extent, the examples of internal and external innovation problems should clarify that, even if the complete innovation design problem is a complex task, it can be approached with reasonable logical or formal tools once a global formulation of the same problem allows the visibility of the different innovation actions and their consequent effects on the firm's performance.

Acknowledgements

This work has been partially supported by Consiglio Nazionale delle Ricerche (CNR), Special Research Project MIPPS - Modelling Innovation Processes in Production Systems.

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228 Computer-Integrated Manufacturing Systems