At the core, competitive advantage is built upon a foundation of enterprise partnerships with customers and suppliers that are innovative (i.e. hard to copy). This advantage is more likely to become sustainable if its costs stay in-line with the market (meaning competitively priced, not necessarily lowest-cost). Supplier partnerships and cost management? Procurement plays here. The “Open Innovation” initiatives at many large enterprises are designed to harness internal and external ideas to drive innovation. So, whether it is utilizing new optimization-based sourcing tools to shave millions off current shipping lane costs (and improve margins), working with contract manufacturers to increase their lead-time flexibility (as Xerox CPO Ken Syme has done in one of the many innovative supply/supplier strategies his team has implemented in recent years), or collaborating with suppliers on the design and packaging of new products, procurement can play a powerful role in larger enterprise innovation efforts.
Here are a few recommendations for Chief Procurement Officers (CPOs) and enterprises looking to develop or enhance their supplier innovation initiatives:
- Define (or redefine) “Supplier Innovation” for your team and to your suppliers – The word innovation conjures up different images for different people. Many procurement professionals may view innovation solely in terms of technical improvements made to a product; many suppliers hear the word innovation as the preamble to a request for cost reductions. Both views have substance but take a narrow view of a broad concept. Technical innovations are wonderful as are innovations that save money; but, innovations in business process or business models can also yield significant results. Peter Drucker defines innovation as “change that creates a new dimension of performance.” I like it, but I love all-things Drucker. Your definition of supplier innovation should be made in the context of your enterprise and its business but your definition will largely define what supplier innovations will be realized.
- Establish trust and open communication with key suppliers – Plant the seeds for innovation by developing relationships with key suppliers based in trust and awareness. When Pratt & Whitney began developing its latest PW 600 series engines, it brought key suppliers to a series of Kaizen events very early in the product design process. This resulted in a jet engine with 50% fewer parts and a manufacturing process that was slimmed from 8 days to 8 hours.
- Provide clear and unambiguous incentives and rewards to suppliers for their innovations – Suppliers must invest time, money and effort in developing innovative ideas. What’s in it for them? How do you reward supplier-driven innovation today? Do you need to revisit your standard T’s & C’s that assign any and all rights emanating from a supplier idea to your enterprise? What type of gain-share agreements are fair and make sense? What can you do to become your supplier’s preferred partner/customer to share their innovations?
- Develop a separate project team for supplier innovation – Clayton Christensen believes that when it comes to innovation, an enterprise’s capabilities also define its constraints and that managers need to evaluate whether processes and values are in place to promote innovation. I’ll be more aggressive. While a World-Class SRM program is important in creating the environment for supplier innovation, there is no reason to think that it would be effective at managing innovation ideas through a process. Create supplier innovation teams that are complementary, but distinct, to the current SRM team. Incent innovation teams on innovation goals.
- Develop a deliberate and robust process to source, vet, and drive supplier innovation ideas – The days of accidental innovation in Big Pharma have long been replaced by intense/sophisticated/deliberate/etc. R&D. They have taken a scientific approach to their science. The same holds true here. A systematic approach to supplier innovation will produce the greatest yield. The same general process should, however, differ based upon the type of innovation idea that is suggested (savings vs. revenue; incremental vs. disruptive; process vs. product)
- Vary approach based upon type of supplier and potential opportunity – Many key strategic suppliers will warrant one-on-one meetings where others simply will not. Don’t forget the agile little guys who play at the margins but may be sitting on the next big thing.
- Develop a set of supplier innovation metrics to help track program performance – Goals should fall into several categories: (1) financial – increase in revenue, cost reductions, ROI on innovation projects (2) programmatic – number of supplier ideas submitted, number of ideas advanced, number of supplier innovations that are realized, also metrics that measure process efficiency and timing (3) supplier-focused – percentage of suppliers that are aware of the program, percentage of suppliers actively participating, number of collaborative projects.
- Be open to what innovation can mean – Beauty is in the eye of the beholder. One person’s reversed bathrobe is another’s best holiday gift ever.
I hope you’ve enjoyed “Supplier Innovation” week at CPO Rising as much as I’ve enjoyed writing and thinking about supplier innovation. We’ll certainly to revisit the topic in the future with other ideas and case studies. Until we do, please feel free to share your ideas (and case studies) here or by email.