Service Orchestration of SMEs in Emerging Economies

1. Service Orchestration of SMEs in Emerging Economies International Conference on Services in Emerging Markets 23 - 24 September 2010 N Viswanadham Indian School of Business S Kameshwaran IBM Research - India

2. Small and Medium Enterprises SME: Small and Medium Enterprises • EU, World Bank, UN, WTO SMB: Small and Medium Businesses • US MSE: Micro and Small Enterprises • India SMME: Small, Medium, and Micro Enterprises • South Africa Parameters • Employment • Turnover • Asset size • Investments in machinery • …

3. SME Contribution India • 45% of the manufacturing output • 40% of the total export (in terms of value) • Employs 59.7 million personnel across 26.1 million enterprises EU • 99% of all firms • Employs 65 million people Globally • 40 to 50% of the GDP • Poverty alleviation • Employment • Affordable products and services • Drive innovation and competition

4. Strengths of SMEs Less manpower Low capital investment Fast decision making Adaptable to change Simple organizational structures Flexible processes

5. Challenges faced by SMEs • Limited capital and finances • Limited IT resources and technical manpower • Lack of R&D • Limited exposure to regulations, import-export policies, government incentives • Inefficient supply relationships: Shortage of supply, labor, and inputs • Marketing problems: Identifying potential customers • Conventional business models, not competitive for global markets • Dependent on large corporations for business • Myopic exposure to business processes in the entire supply chain

6. SMEs in Emerging Economies • Fragmented • Localized • Information asymmetry wrt global demand and requirements • Workshops • Trade conventions Orchestration

7. Innovation Business Models Integrator • Do-it-all: Perform all the activities in the value chain and retain maximum control over every aspect of execution process. • Intel (microprocessor), Zara (fashion), Seagate (disk-drive) Licensor • Achieves payback on the ideas and intellectual assets without having to make an investment in commercialization or realization. • Pierre Cardin, Rambus, Dolby, P&G. Orchestrator • Organizes and manages a set of activities in a network, by ensuring value creation opportunities in the system and value appropriation mechanisms for each player.

8. Orchestrator Organizes and manages a set of activities in a network Ensures value creation opportunities Handles value appropriation mechanisms Allows some or all of the activities to be performed by other players • Microsoft orchestrated different lines of Tablet PCs in partnership with hardware companies: • IBM, HP, Toshiba, Acer, Fujitsu • Bath & Body Works partnered with suppliers of specialty goods: • C. O. Bigelow, L’Occitane, Goldie, American Girl

9. Orchestrate for others Flextronics • Electronics contract manufacturer. • Service include design, test, component solutions, manufacturing, and assembly. • Partners with clients in any phase of the innovation process – from idea generation to realization. Medion AG (Germany) • Orchestrates the entire value chain from the initial product to after-sales services of computers and peripherals for its retail customers. Li & Fung (Hong Kong) • Extreme form of orchestration – Owns no hard capacities

10. Li & Fung (Hong Kong) Korea US Retailer China Japan Taiwan Bangladesh Philippines Li & Fung Thailand Indonesia Yarn Weaving & Dyeing Zippers Manufacturing

11. Li & Fung (Hong Kong) Korea US Retailer China Li & Fung Thailand Indonesia Yarn Weaving & Dyeing Zippers Manufacturing

12. Li & Fung (Hong Kong) • Apparel industry • Access to a large global network of service providers • Yarn suppliers • Accessories (zippers, buttons) suppliers • Mills and Dyers • Apparel manufacturers • Logistics providers • For a given customer order, Li & Fung designs a global supply chain to manufacture and deliver the goods. • It does not own any factory floor or manufacturing capacity – it merely acts as a trader. • Least cost is achieved by global sourcing and international division of labor.

13. Li & Fung (Hong Kong) International division of labor • Labor costs, Manufacturing capabilities, Duties, tariffs, and taxes, Import/export quotas Build-to-order • Customer order initiates design, procurement, and production Value chain disaggregation/Service Unbundling • Modular processes (with well defined interfaces) Service, not product • Product is manufactured for others Zero Inventory Project-based Activity Coordination costs

14. Assets Relationships • With service providers and customers Knowledge • Manufacturing capabilities • Special skills • Business practices • Regulations • Tariff, taxes, trade laws • Customs clearances • Security requirements • Interfacing with government authorities

15. Orchestrator and the SMEs SME Network Loosely Coupled Network Service Requests Service Providers

16. SME Orchestration

17. Economics of Orchestration for SMEs • Needs a complex service • Buy from a single service provider • Unbundle and outsource • Specialized atomic/basic services • Limited/no knowledge and control over other players in the network • Coordination problems with small multiple service providers • Search costs • Information asymmetry • Quality issues • Cultural differences • Regulations, regulations, & regulations

18. Strategic Roles of Orchestrator Recruit and develop participants into the SME network • Network of SMEs needs to be restructured - expanded, pruned, repositioned - in response to the market conditions Structure appropriate incentives for participants and increasing specialization over time • Market feedbacks • Technology enhancements • New roles and business processes Cultivate a deep understanding of processes and practices to continually improve the quality • in response to the ever changing customer needs, technologies, and business processes

19. Tactical Roles of Orchestrator Define standards for communication and coordination • The business processes are loosely coupled • Well defined standards for communication and message passing are required for coordination Develop and manage performance feedback loops to facilitate learning • Each customer order is a project-based activity • Performance evaluation (lead time, coordination costs, quality) • Monitor and improve individual SME capabilities • Composing better team of SMEs for a given project

20. Operational Roles of Orchestrator (Planning) For a customer demand, dynamically compose tailored business processes, involving multiple service providers Weaving & Dyeing Trimming & Lining Zippers & Buttons Yarn Procurement Leather Procurement Customer Manufacturing Service Unbundling

21. Operational Roles of Orchestrator (Planning) For a customer demand, dynamically compose tailored business processes, involving multiple service providers Service Composition

22. Operational Roles of Orchestrator (Execution) Execute the composed business processes, assuming ultimate responsibility for the end product • Identify check points, targets, deadlines, and interfaces for each of the activities in the service chain • Continually monitor the checkpoints at higher level • Risk identification and business continuity planning • Exception handling

23. Assets and Requirements Relationships Knowledge of underlying business process • Service unbundling Knowledge of various players in the ecosystem • SME • Government • Global clients and their demands Analytics and Optimization • Performance evaluation • Business analytics • Service composition IT Infrastructure: SOA

24. Questions, Comments, & Suggestions N_Viswanadham@isb.edu kameshwaran.s@in.ibm.com