Risk-Taking, Innovation, and Steve Jobs

The sun has not yet risen, the power has not failed, and we are awaiting Hurricane Irene, which is to hit landfall in our part of the Northeast sometime today. Hurricane Irene and emergency preparedness have been the center of attention with mass transit shutdowns in Philadelphia, NYC, New Jersey, and Boston, and thousands of flights cancelled and even airports closed as the hurricane barrels up the northeast corridor. Manhattan was eerily quiet yesterday as my uncle, who is in his 90s, related to us, after his walk to Lincoln Center and back to his apartment.

During this period of preparing for Hurricane Irene, and, unlike when the tornadoes hit Massachusetts on Jun 1, 2011, there was sufficient warning, the announcement was made, in case you missed it, that Steve Jobs, the CEO of Apple Inc. had stepped down, but had asked to remain on the Apple board as its chairman. He had been fighting pancreatic cancer for two years and had had a liver transplant and the best wishes and accolades streamed from around the globe from leaders, executives, and consumers of Apple's products from the iPod to the iPhone and iPad. Jobs' attention to detail and sense of aesthetics are legendary. He is also the holder of 313 patents according to The New York Times.

Jobs is the consummate innovator and innovation is an elusive talent and quality that has generated much interest in both industry and academia and is essential for economic growth and prosperity. In fact, presently, we at the Isenberg School, are looking to fill a chaired faculty position as the Isenberg Professor, who is to focus on innovation. Innovation has even attracted the attention of nations and, according to John Kao, an innovation expert, and as reported in The Times, the raw materials for innovation, which other nations may be surpassing the US in, include:

• government financing for scientific research,
• national policies to support emerging industries,
• educational achievement, engineers and scientists graduated, and
• even the speeds of Internet broadband service.

What the US does have, however, and what other countries may lack, and which is essential for a climate for innovation, Mr. Kao notes, is a social environment that encourages diversity, experimentation, risk-taking, and combining skills from many fields into products that he calls “recombinant mash-ups,” like the iPhone, which redefined the smartphone category.

To learn how to become a great innovator, we need look no further than Steve Jobs and, as academics have pointed out: the five traits that are common to the disruptive innovators or what makes up The Innovator's DNA: questioning, experimenting, observing, associating, and networking to search for new ideas. Ceaseless curiosity and willingness to take risks make up their genetic code.

Thank you, Steve Jobs, for showing us how it should be done -- even after your firing from Apple, you rose to lead the company to new heights.

Real Generals Talk Logistics and Winning in the Great Restructuring

There is an old military saying, which speaks volumes:

Armchair generals talk strategy. Real generals talk logistics.

Rich Karlgaard, the publisher of Forbes magazine, recalls this saying in his outstanding column on Innovation Rules: Ten Tips: Restructuring Winners, in which he identifies what elements will help corporations in the great restructuring, which necessarily follows a great recession. Frankly, there is a lot of relevance in his excellent advice to other organizations, including universities. He identifies successful companies such as: FedEx, Southwest Airlines, Microsoft, Apple, Genentech, SAS, and Oracle, which were started during the "rotten decade of the 1970s," during which IBM also managed to flourish.

What struck me about his ten tips for winning in the great restructuring, was that half of them I would classify under the heading of analytics, from his emphasis on identifying where costs can be reduced in your operations, to speeding up your deliveries, to providing leadership in service, as well as in design. But my favorite, was his statement:

PICK A LEADER IN ANY FIELD AND YOU'LL FIND SUPERB LOGISTICS AND SUPPLY CHAINS UNDERNEATH. He singles out Wal-Mart and Amazon.com for their superior logistics.

As for the remainder of his tips, they round out what are fundamental to the success of corporations and organizations, alike. He advises to seek out the best talent, and quotes Bill Gates as stating that a great programmer is worth ten thousand times the price of only a good programmer. What really resonated with me, as well, was his emphasis on the importance of both internal and external communications (with IBM being a model for the latter and the military for the former). Excellent communications is one of my "pet peeves," and I wonder how much we have lost in the realization of the full potential of organizations because some of those "in command" did not provide the necessary information and did not get the important news disseminated.

Karlgaard ends by noting that integrity is essential and that everyone should know your purpose (see, it's about communication, here, too). I'll skip one of his tips -- branding, and will leave that to my marketing colleagues.

And, as for logistics, one of my undergrad students, who took my Transportation & Logistics class last term stopped by my office yesterday to seek advice because he wants a job in this industry, since logistics is his passion. I am sure that he will succeed.

If you wish to learn more about logistics and supply chains, please come to our Northeast Regional INFORMS conference at UMass Amherst, May 6-7, 2011. Information on a relevant tutorial at this conference is below.

Transforming U.S. Army Supply Chains: Management Innovation in DoD for Improved Efficiency, Productivity, and Cost-Effective Global Operations

Greg H. Parlier, Colonel, U.S. Army (retired)
Former Deputy Commander for Transformation, U.S. Army Aviation and Missile Command
President, INFORMS Military Applications Society.

iPhone 4 Supply Chain, Operational Efficiency, and China

Do you know the value of the parts in your iPhone and what it took to put them all together?

The way to calculate the various costs of the components plus the labor that is needed to manufacturer and assemble them so that consumers can acquire the latest hot product from Apple is to deconstruct the iPhone supply chain.

At a cost of about $600, the iPhone 4, can be deconstructed by tracking its components from the dozen integrated chips and flash memory to the casings to the embedded GPS system. The hardware we can all see and these physical components contribute just under $200 to the price of the iPhone 4.

According to an article in The New York Times, the smallest part of Apple’s costs are those in manufacturing and assembly, which takes place in China, right now in Shenzhen. The Chinese assembly-line workers put together the microchips, which come from Germany and Korea, a touch-screen module from Taiwan, even American-made chips that pull in Wi-Fi or cellphone signals, and more than 100 other components! This is truly a global supply chain with the greatest value to the product coming at the front-end and the back-end. In the iPhone 4, more than a dozen integrated circuit chips account for about two-thirds of the cost of producing a single device, according to iSuppli.

However, soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and other issues such as inflation and rising housing costs are all threatening to sharply increase the cost of making devices such as notebook computers, digital cameras and smartphones.

Desperate factory owners in China are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions, even in China’s mountainous interior.

The world of contract manufacturers is invisible to consumers. According to The New York Times, it is a $250 billion industry, with only a few companies like Foxconn (which has been much in the news lately because of the worker strikes), Flextronics, and Jabil Circuit manufacturing and assembling for all the global electronics brands.

These companies compete on price to earn small profit margins, analysts say. As we who work and conduct research in operations and supply chains know, such firms try to benefit from even minute operational changes to attain competitive advantage. For example, the Chinese companies have very low profit margins and increasingly the Chinese are not favoring low-end assembly work. At the same time, Foxconn is spending heavily on manufacturing many of the parts, molds and metals that are used in computers and handsets, even trying to find larger and cheaper sources of raw material and locating plants closer to mines with sources of necessary raw materials.

So when you look at your smartphone, think about what went into your latest hightech gadget and favorite product, from the knowledge resources that helped to create its design, from the natural resources that enabled the construction of its components to the human resources that put the components together to the transportation services that delivered it to the stores.

And remember, as you hold the product in your hands, which was made possible by the complex global supply chain that enabled its design, its manufacture, assembly, and distribution, the long journey that the product took to you.

High Tech Mergers Are HOT Again

USAToday.com is reporting that high tech mergers, both in number and in value, are on the increase. Especially attractive, as acquisitions, are firms associated with mobile computing, cloud computing, and search engines. In the past year, SAP, IBM, Apple, and Google have acquired firms and Oracle's success may be due, in part, to its earlier wise acquisitions.

Interestingly, the article also notes that the Chinese are eager to acquire firms. One of the major drivers in mergers and acquisitions (M&A) this time around is the desire to obtain access to new global markets, coupled with bigger firms acquiring smaller, agile firms with technological know-how and cutting-edge technological expertise and products. Moreover, many of the leading high tech companies are sitting on a lot of cash and interest rates are lower than a year ago signaling an improved economic climate for such transactions.

Our research on the integration of multiproduct firms, and the quantification of associated synergy, entitled,"Multiproduct Supply Chain Horizontal Network Integration: Models, Theory, and Computational Results," was just published in the International Journal of Operational Research, volume 17 (2010), pp 333-349. The results therein can be applied to assess the synergy of mergers and acquisitions of firms with similar or distinct portfolios of products and with access to different markets.

Another recent M&A study of ours, which is in press, also in a peer-reviewed journal, Computational Management Science, entitled, "Formulation and Analysis of Horizontal Mergers Among Oligopolistic Firms with Insights into the Merger Paradox: A Supply Chain Network Perspective," shows the impacts on profits of different acquisitions in industries in which the firms compete directly and feed the same markets.