Look to Your Suppliers to Drive Innovation

February 9, 2014 mpotepa

As organizations face a challenging market for global growth, the knowledge that innovation is the life blood for market expansion is well understood. As R&D budgets become more constrained or have limited opportunities for smaller projects, executives recognize that many of the opportunities for innovation lie in the intellectual property, technical knowhow, and entrepreneurial spirit that lies in the extended supply base.

At the tactical level, supplier management will need to become more aligned to the needs of the business. As one executive mentioned, “We can’t afford to try to maintain or sustain duplicate capabilities in the supply base as well as within the organization.” Suppliers will be expected to take on more of a planning and operations role, but this needs to be introduced by procurement to harmonize the capability with the business. The old school thinkers who are trying to drive world class procurement principles into the business using “leverage and pressure” strategies are finding it doesn’t really make sense, and can drive the wrong behaviors.

Driving new ideas from suppliers into the business is an area where there is a lot of dialogue, but only a few companies are really achieving and making headway. As procurement matures, sources of supplier-led innovation will become more of a value driver than it is today. With that, the need for bringing stronger relationships as a precursor to innovation is important.

Unfortunately, many organizations find themselves unprepared to engage with suppliers, particularly in the area of procurement and product development. Procurement and engineering are the face of the organization and the primary channel for bringing supplier ideas and technologies to the attention of the enterprise, but this will require establishing an aligned approach with many barriers to overcome. This was noted for example in one organization:

Procurement and engineering are being asked to drive supplier innovation much more and be more aware of opportunities to drive innovation. We wanted procurement to be much more tied into the product design teams. In the past, development has dumped products onto procurement and there was no accountability once things went wrong. Today, there is a push to be faster and respond more quickly, and by having a cradle to grave approach and tie procurement and R&D together, they can align activities. Procurement is now part of every business unit to drive more end to end ownership of the process.

Other barriers abound. In some cases, regulatory barriers are discouraging innovation. Particularly in heavily regulated industries, innovation is being discouraged in lieu of compliance to established regimes and processes. Driving change while still meeting regulatory requirements will become important. Intellectual property concerns is another area, and suppliers are often loath to divulge emerging technology concepts without guarantees, while buyers are often demanding exclusivity arrangements that drive wedges into the negotiations. Finally, the ability of suppliers to grow and meet the demanding operational requirements of buying companies (cost control, product/service quality, delivery reliability, and financial stability) create further doubts as to the viability of a given supplier technology.

A host of new and challenging questions arise in this context:

What is the “right” level of management attention that is required to optimize the transaction and relational costs with suppliers in this category?
What is the “right” supplier integration process that ensures the reliability, warranty coverage, quality, and costs associated with enterprise expectations are assured?
What are the opportunities to encourage suppliers to drive new products that can create possible revenue growth opportunities?
How should my organization be optimally structured to align with internal stakeholder needs for new product solutions globally? Should it be supply-oriented or platform-oriented?
What are the roles and responsibilities associated with a partnering organization that will minimize risk and maximize product innovation and growth?
What are the appropriate set of audits and assessments required to conduct due diligence prior to contracting with a new supplier?
What are the characteristics required to make a supplier a good innovation partner, and how should the relationship be managed over the life of the relationship?
How should supplier growth aspirations be managed relative to a supplier’s core capabilities over time, while potentially leveraging those capabilities across product platforms?

One of the differentiating factors that leads organizations to succeed in integrating suppliers into product development efforts involves a defined process, combined with the right team of individuals for engaging suppliers. Having people who can truly lead improvement projects without negatively impacting the relationship is a delicate balance and a difficult skill to nurture, but one that will become increasingly important. Building this process, finding and keeping the right people on the team, and building the right relationships takes time.

What are you waiting for?