By Steven Nghe, Digital Product Innovation Manager, Kloeckner Metals
The word “innovate” has lost some of its punch in the last decade, victim to buzzword overuse by marketers. Innovation has come to mean everything from incremental improvements in process to sizeable investments in R&D. True innovation is not the first and not just the second, and it’s more necessary now than ever to move steel companies forward and outlast the competition.
We all know innovation to be synonymous with newness, whether it’s new products or new services that bring value to an organization, but innovation with a capital “I” holds itself to a higher standard. According to Mike Shipulski, it’s only innovation if it ”radically” improves the profitability equation.” When we hold innovation to such a high standard, it becomes much harder to pay it empty lip service.
If true innovation is about fundamentally changing the value proposition of the entire steel business, it requires a dedicated budget. And, if we’re going to be honest about our own budget woos, we may not have it. Hence, there’s the need to innovate with a capital “I” on a budget. If your manufacturing organization is like most, it doesn’t have a budget for innovation, but it should. Here are tips to not just start an innovation budget, but maximize it.
1. Separate Improvement and Innovation
Steel companies that don’t have dedicated innovation budgets justify it by claiming to be continuously improving their operations under the guise of innovation. Savvy organizations get around this by separating their budgets into three buckets: operations, maintenance, and innovation. Singling out innovation forces the issue of whether or not organizations are serious about it.
This doesn’t mean continuous improvement isn’t a focus. Any and all forward-moving steel organizations should reducing their operations and maintenance budgets through incremental process improvements. In fact, department heads who struggle to find dollars to allocate to innovation just might be able to persuade upper management to shift budgets by allocating savings from operations and maintenance improvements to innovation.
When we discuss innovation, we’re talking about disruptive innovation. This particularly involves changes that either fundamentally shift the existing operating models or introduce new models, both with the effect of accelerating growth. When there is no distinction, it’s very possible that the innovation budget will be eaten up by projects that wouldn’t qualify as innovative when judged by their impact. For steel businesses, this could mean adding a bay to improve load times rather than implementing RFID tracking to revamp the entire supply chain.
2. The Key to Budgeting: Less is More
The next step to innovating on a budget is making sure to allocate enough resources for projects to reach their full potential. However, less is more; it’s essential that each and every project that receives funding is worth the investment. You can increase efficiency and decrease spending by only green lighting high-priority projects that have the potential to move the needle. Steel companies can approach this the same way they approach warehouse renovations or equipment investments: attach an IRR, NPV, or Payback Period to the project, and remove budget from any that are too low or too long.
For existing initiatives, focus on projects that meet the criteria and identify the major bottlenecks that are hindering forward movement. Give those projects the full measure of available resources and prioritize them before they lose momentum. Protect the integrity of innovation projects even if they’re not yet contributing to the bottom line by making sure resources aren’t being poached in the name of ongoing operational issues.
You can budget using dynamic resource allocation, which involves creating frequent checkpoints for funding decisions, all of which are based on empirical evidence of the initiative. In lieu of revenue, these projects can be graded in terms of market movement, whether it’s new customers or partners, press, or deal size. By evaluating projects at different checkpoints, risk of failure or financial loss is reduced, creating an environment that encourages innovation.
3. Innovation is More Than Just R&D
R&D is expensive and can easily soak up your dedicated innovation budget if you’re not careful. In fact, companies like Amazon and Microsoft spend between 10-12% of their revenue on R&D alone. Instead of investing 100% of your innovation budget into R&D, consider allocating some of the fund to leverage partnerships, acquisitions, scouting technology, vendors, or partners. Kloeckner is on the precipice of offering large-scale PVD capabilities stateside thanks in part to a partnership. Whether you partner, acquire, or scout, each gives you the opportunity to test concepts on a small scale and get to go/no-go decisions quickly. It may ultimately help you decide whether R&D ventures will be worth it.
If this draws a blank, think about which companies VC firms are funding in your industry. Can you partner with them? If that sounds unlikely, do you have a client or vendor with access to technology or resources that you could leverage if you expanded your partnership with them?
The point is, there are a number of ways to foster innovation that don’t involve research and development, but rather through leveraging mutually beneficial relationships.
4. Can You Increase the Budget?
Finally, ask yourself if it’s possible to increase the bucket for innovation. The first step towards a bigger innovation budget is to identify whether your company has a “growth gap” between your future financial targets and your current investments in growth. If your steel business expects to grow existing markets or enter new ones, the question to ask is whether you’re on track without allocating more funding to radical innovation. It may be time to readjust your spending to find initiatives that closer align with your long-term goals and financial constraints.
Again, you can do this by understanding how much of your existing budget is spent on daily operations and maintenance instead of innovation. Consider whether the outcomes of these investments will address the expected growth gap and if they are on track to do so efficiently. For most manufacturing businesses, the budget breakdown isn’t adequate when there is a growth gap and they may need to find alternate sources of funding. Many companies practicing on a global scale may want to consider the ministries of economic development in the country they’re operating. It turns out there might be grant money for any innovation or R&D that your company wants to engage in.
Innovation is an essential element of any effective long-term strategy, and without it, you risk falling behind your competition. Rapidly changing steel markets demand a dedicated budget for innovation in order to further their impact on industry and maximize their company’s growth. Whether that involves increased funding, reallocated working capital, R&D, or new connections, there are a number of ways you can effectively encourage innovation, even on a budget.
For more information, please visit https://www.kloecknermetals.com/products-services/.