Supplier Co-Innovation: The Next Source for Economic Growth

We hear the words “innovation” as a source for growth in the economy over and over again.   New ideas on how to manage business processes, digital technologies, ways of delivering value to customers, and supply chain linkages are all areas where we are likely to see new forms of innovation occurring.  But what will be the true source of innovation?  Will it come from big companies in the Fortune 500?

Hardly.  In a recent e-book I co-wrote with IBM, we argue that the real source of innovation in the global economy will be fostered and developed by small to medium sized suppliers.  If small companies are the source of innovation, we argue, then it makes sense to establish a process for companies to think about how they will nurture and develop these ideas into a commercial success.   The e-book provides a 5 step approach that is based on countless interviews I’ve conducted with executives, dating back to an NSF study we conducted  back in 1999 and which we wrote a book on.

Supply chain innovation can occur in multiple forms:

• New and improved products, including features, technology, or open new markets applications that can provide significant ground-breaking market penetration
• Service innovation, including market facing innovation services, bundling of services and products, and services that enable the business to be leaner, faster, or lower cost.
• Supply chain process innovation, spanning new third or fourth party logistics capabilities, order fulfillment, risk management, or other forms that are innovative and create supply chain value.

As organizations look to their suppliers to jumpstart product and process innovation, having the right information on unmet customer needs, emerging supplier technologies and capabilities that fill these gaps, and information on the capability of suppliers to execute on innovation projects is becoming key. In effect, procurement data on supply market technologies serves as the catalyst that drives the innovation process.   This occurs through a five step process:

1.  Defining the customer need.  Procurement and supply chain must work with the new product and service portfolio team to team to identify the gap in the current product or process portfolio and the specific set of customer outcomes. It may also involve identifying future technology developments that have a potential application in the current product or service offering.
2. Seek the right suppliers for the innovation project. This involves identifying current suppliers in the portfolio through Supplier Life Cycle Management tools, as well as potential future suppliers that are not in the portfolio that may have emerging technologies or capabilities.
3. Assess and validate the capabilities of those suppliers you want to work with.  This is a systematic approach for ascertaining the capability of suppliers that are likely candidates. This may include data mining, conducting detailed research, including supplier life cycle management data, conducting in-depth performance reviews, and other approaches.  Once a supplier has been highlighted as a potential innovation partner, there is a need to discuss specifics around the project. These discussions are often challenged by a lack of trust on the part of both parties, with many unanswered questions related to ownership of IP, economics around the new product, ability to meet timelines, and other factors.
4. Engage and collaborate with suppliers on technology development. This stage involves having more in-depth discussions with suppliers to explore the opportunity in more detail, and discover the likelihood of creating a strategic partnership once capabilities have been established. Co-development activities require a high degree of trust and communication to be successful, and this stage of the process involves often delicate positioning and exploration of the landscape of opportunities, scenario development, and building the foundation for a successful project.
5.  Guide the relationship to a successful outcome, paying attention to the “soft” elements.  As the innovation development project is kicked off, careful project management and monitoring of KPI’s, project targets, deliverables, and milestones is key to managing a successful outcome.   Regular communication and updates are key to keeping the project moving in the right direction, as well as post-commercialization relationship management.   It is important that companies think clearly about their motivation for working with the supplier, and be able to envision the type of relationship they desire and the level of access required early in the process. In many cases, buying companies have a single approach mandating exclusive access to all of the supplier’s potential insights, and this heavy-handed approach may not always produce effective outcomes.

The e-book provides a concise approach, based on my interaction with a number of automotive, manufacturing, and service industry companies that have been down this road.

A key ingredient for success is a change in culture in buying behaviors.  The figure below shows the key characteristics of buying companies that suppliers are looking for when they seek partners to help commercialize their innovation.

Procurement has been focused for so long on cost reduction as the major form of value that they have often overlooked innovation as a capability that is involves its key constituents: internal stakeholders, suppliers and customer. New forms of value creation (includes end to end cost savings) will require looking beyond traditional approaches of strategic sourcing, and requires an orientation of supplier engagement to drive revenue generating opportunities. Examples of such opportunities include improved demand management, product segmentation and expansion, new technologies, exploiting the digitization of products and flows, and working capital savings. To generate such forms of value creation, procurement will need to tap into a key source of new ideas and creativity: their suppliers.  Especially in a flat economy, which we are likely to continue to see for the foreseeable future….