Earlier this week, I discussed the opportunity to promote innovation by working with smaller suppliers and presented a successful case study of Kellogg’s development of supplier innovation program. Today, I will discuss another real world example of how one very successful supplier innovation program operates. My next article will present general recommendations on developing and managing an ongoing supplier innovation program and some potential metrics to consider using to help track performance.
I caught up with an old friend last week in an attempt to get some information that would help a story that is now caught in “publishing purgatory” escape onto its pages for the world to read (Sidebar: the story is still trapped and I need your help. If you currently source electronic components, please email me) when our discussion turned to innovation and my friend’s new position managing a large team within the procurement group of a global manufacturer, that is among other things, responsible for driving all supplier innovation projects within the North American region.
This company has a reputation for product quality, high performance, and a world-class supply chain. They operate in an industry that has, for better or worse, trained its customers to expect that product performance will improve year after year and that product prices will decline (which as I write this starts to sound like every other industry facing competitive pressure from globalization). Although it has fared better than most of its competitors, the global recession has put a strain on certain pockets of its supply chain and operations in general.
After managing teams in charge of some of the company’s most strategic suppliers/commodities for the past decade, my friend was recently given the opportunity to become the head of the project management team within the procurement department. The types of projects that this team tackles are really interesting and quite progressive within the world of supply management and I will try to bring him back to officially participate on the pages of CPO Rising. One area that his team owns for the company is the management and execution of its supplier innovation program.
The company has several things ingrained in its culture that benefit its supplier innovation program. To start, from a product design and engineering standpoint, the company has a culture of innovation and a culture of pride in bringing the best products to market. The company has also invested significantly over the years to establish very strong and open relationships with its strategic suppliers. Trust, fairness, and open communication describe the majority of current supplier relationships.
The company has developed two tracks to evaluate supplier innovation (1) innovations identified during product design and (2) innovations identified after product design.
(1) During Product Design: For many years, the company was able to directly reward its suppliers for ideas that were submitted and accepted during the design process. The impact of the global recession has cascaded down the supply chain and now the company considers any supplier-driven innovations during the product design cycle to be ‘good business’ for the supplier and a key consideration during any competitive bidding process for that part/component/service. The company values innovation and the supplier benefits by making a stronger bid for the contract and winning more business as a result. Since we are talking about significant supplier contracts that will run for several years, this approach seems fluid and fair to me. (Sidebar: Given the typical buyer-supplier tension, I was surprised to hear that the company had ever compensated suppliers for innovations made during the collaborative product design process. I wonder if any companies are doing this today.)
(2) After Product Design: Innovation ideas that are submitted by suppliers after final product design are not allowed to change the part or component design. Supplier submissions are evaluated by the product team for initial feasibility and, if accepted, the project team will then guide the idea through the process to its ultimate resolution (i.e. into the product or not). The project team has a view across all potential supplier identified innovations and prioritizes all opportunities based upon their potential benefit/impact, speed and ease to implement, as well as which products are impacted and where each product is in its lifecycle (for example: an innovation that cuts across several products may generate a greater benefit but may also take longer to implement; all things being equal, an innovation for a product with higher sales would be prioritized over one in a slower moving product, etc.). Once ideas are prioritized, the product team gets involved to review key considerations. They will often begin what can become a very iterative process with supplier to bring the best ideas to life in the product and to the market. Many ideas fall out along the way. Ideas that are implemented are reviewed by the project team which will estimate the potential total benefit from the innovation (they track the actual benefit throughout the year) and then work with the product team to determine the percentage of the innovation that was supplier-driven (during the iterative process, the company may have contributed significantly to the final innovation). The actual year one benefit is multiplied by the supplier’s contribution percentage and paid out at the end of the first year. The company keeps all gains in subsequent years.
The percentage of supplier innovations that are implemented is lower than I would have thought but the ROI on this supplier innovation program is phenomenal based upon the annual amount of supplier payouts (I cannot share either value).
This week, we’ve now looked at a few different approaches to fostering supplier innovation. I hope they have been insightful. I would like to hear how these approaches are either similar or different from what you are doing to drive supplier innovation today.
Finally, please join us on Monday for the “stirring conclusion” to Supplier Innovation week, you won’t want to miss it….
