Generate Growth and Profit through Supplier Innovation

Innovation is the Key for surviving in a competitive environment

Many companies are continually looking to provide new products, processes and services as well as improve those that they already provide to customers. And even though R&D is a good strategy, it doesn’t come without risks and challenges. For example, internal projects can be more costly to fund, long cycle times to market for internal development may cause companies to miss opportunities. So how can you reduce R&D costs while succeeding in innovation? One practical option is to identify external sources of innovation to augment, accelerate, and/or reduce the costs of internal R&D.

What are the benefits of Supplier-Enabled Innovation?

Supplier-enabled innovation can be defined as working with suppliers to generate profitable growth. Customers can enjoy benefits of supplier-enabled innovation by building upon the valuable knowledge and capabilities of suppliers who may have deeper knowledge of the market in their own areas of expertise while at the same time are familiar with their customers’ business and strengths. Benefits of Supplier-enabled innovation include:

• Creating new and better products in a shorter amount of time
• Lower internal product development costs
• Higher profits and faster times to market
• Co-develop and co-own Intellectual Property and use it to accelerate market momentum

Suppliers can also collaborate with customers on innovations in many ways and provide benefits in ways that can sometimes be faster, better and cheaper than internally-generated innovation. The ability to collaborate successfully with suppliers on innovation can be a competitive differentiator and critical success factor.

Challenges and Best Practice

Successful supplier-enabled innovation is challenging. For many firms, supplier-enabled innovation requires a culture shift. For Procurement, some of the changes required to be successful in supplier-enabled innovation go against the cost-out mindset of everyday sourcing. To encourage suppliers to collaborate on innovation, the typical cost pressures that occur during negotiations and ordinary day-to-day discussions need to be minimized. Creating value and profit – both for the customer and the supplier – should prevail over cost reduction pressure and procurement efficiency. If cost remains the main focus, the supplier may never develop a comfort level about collaborating and the process may be delayed or ultimately unsuccessful.

Procurement also needs to help suppliers understand how they will benefit from investing the time, money and efforts in co-innovation. Often, suppliers’ main motivation is to get a greater share on the existing business, which Procurement can influence especially if rates are lower than market rates and supplier consolidation potential exists.But before a customer jumps into supplier-enabled innovation, it first needs to get its own house in order.

Here are some best practices that a customer should have in place to be ready to move forward:

• Companies need to develop or foster a culture that supports innovation in general and supplier collaboration in particular.
• Customers must have supplier-friendly processes.
• Customers must clearly communicate to suppliers the benefits of participating in pilot and innovation.
• Innovation processes should be defined and in place before embarking on collaborative product development with suppliers.
• Risks and rewards for supplier who are involved in innovation should be fair.
• Training and education may be needed to help Procurement and R&D understand their specific roles in the collaborative process with suppliers.

Developing the Customer-Supplier Relationship:

Firms need to find and select promising collaboration suppliers who have capabilities appropriate to a customer’s innovation needs. Many firms use supply base segmentation to identify potential supplier innovation partners considering input from supply management and R&D and other functions. Once a company has gone through the process of identifying and approaching potential partners, they can begin to deepen relationships and capabilities:

• Develop suppliers who have collaboration potential.
• Increase openness and timely communication with potential partners.
• Use a cooperative, not combative approach with potential supplier partners.

Supplier Enablement Tools Can Help

Supplier enablement tools are also very efficient when it comes to support supplier-enabled innovation processes. For example, Supply base segmentation can be enhanced by the ability to comb through the supply base electronically to identify collaboration candidates, and electronic tools can help manage both the relationship and the product development process.

For more information on how SEI can help improve Procurement and increase its value to your company and stakeholders, you can download our free White Paper.