WHITEPAPER GENERATING GROWTH AND PROFIT

THROUGH SUPPLIER-ENABLED INNOVATION

By Sherry R. Gordon

Many companies are continually looking to provide new products, processes and services as

well as improve those that they already provide to customers. Research and development

(R&D) is one strategy to pursue innovation. Just as entrepreneurial ventures have a high

failure rate (over 90%), investment in internal R&D projects can come with high risk and a

high price tag for developing new, commercially successful products. Creating or maintaining

an internal R&D function can be risky and not affordable for many companies, especially

small to medium-size companies.

Challenges of using an internal R&D function to develop new products may include:

• Internal projects can be more costly to fund – design, testing, and capital expenditures

add time and cost

• Some executives may be risk averse and sometimes reluctant to sign off on major

innovation initiatives that require large investments. Passing internal approval hurdles

can cause delays

• Long cycle times to market for internal development may cause companies to miss

opportunities

• Firms risk having products and innovations sitting unlaunched in their development

portfolios

• Innovations may miss the mark or fail to be adopted by customers

Innovation is important for surviving and thriving in a competitive global environment.

The pressure on companies to reduce R&D costs and succeed in innovation is a tough

challenge. One practical option is to identify external sources of innovation to augment,

accelerate, and/or reduce the costs of internal R&D. Some external sources may include:

buying patents, licensing technology, and partnering with suppliers to help develop products,

processes and services to fuel future growth.

Benefits of Supplier-Enabled InnovationSupplier-enabled innovation can be defined as

working with suppliers to generate profitable growth,

introduce new products, innovate on processes such

as customer service and manufacturing, reduce time

to market, lower failure rates and costs to innovate.

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 within a shorter time horizon than internal R&D

capabilities alone can typically deliver

• Lower internal product development costs and lower COGS (cost of goods sold)

• Higher profits

• Faster times to market

• Increasing success rate in innovation pilots

• Co-develop and co-own intellectual property and use it to accelerate market

momentum

Some of the ways that suppliers can collaborate with customers on innovations may

include:

• Sharing ideas for new products and services that they can help develop. Many

companies conduct joint customer-supplier ideation workshops to initiate the process.

• Enhancing or improving current products and processes

• Providing access to new technology

• Providing access to new markets and market opportunities

• Provide access to expert resources

• Invest in, fund, or co-fund joint pilot projects and trials

• Reduce the regulatory burden and or risk to a client’s brand by taking on innovation

in sensitive and or grey areas

Suppliers can potentially provide these 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 PracticeSuccessful supplier-enabled innovation is challenging. Integrating suppliers into product

development and enabling innovation require important changes in approaches to

Procurement and R&D at the customer. 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. Procurement must

be able to deal with relationships as well as contractual issues. 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. Also, a customer company must be

easy for suppliers to work with.

Creating value and profit – both for the customer and the supplier – should prevail over

cost reduction pressure and procurement efficiency. Value gets created as companies work

together. Working with suppliers on innovation shifts the primary objective away from cost

reduction. 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 or

charge a higher rate on the existing business vs. own the intellectual property from the

eventual innovation. Suppliers can often easily justify the R&D and co-innovation expense as

cost of acquiring new business, which is sometimes easier for suppliers to justify than it is for

internal R&D groups to justify investments.

But before a customer jumps into supplier-enabled innovation, it first needs to get its own

house in order.

These are some best practices that a customer should have in place to be ready to move

forward:

• Since supplier-enabled innovation has cross-functional responsibilities, senior

management buy-in and support at the customer organization is required. Supplier-

enabled innovation cannot be pursued alone by Procurement or R&D organizations.

For example, procurement needs input on about end customers wants and needs.

Functions such as sales, marketing, and production all have important roles to play.

Likewise, upper management at suppliers must also be involved.

• Companies need to develop or foster a culture that supports innovation in general

and supplier collaboration in particular. Even with executive support, collaboration

with suppliers may hit roadblocks from middle management functions who don’t feel

comfortable with outside suppliers being involved in product development. In some

firms, suppliers may not be viewed as having more expertise than the customer and

their value and contributions may be dismissed.

• Customers must have supplier-friendly processes such as: paying suppliers on time,

timely communications, minimizing less-than-lead-time orders and generally be easy

to do business with. Being a customer of choice helps ensure that suppliers will want

to work with your firm.

• Customers must also clearly communicate to suppliers the benefits of participating

in pilot and innovation. Benefits can include more business, better rates, more RFP

invitations, more senior management access and preferred supplier status – things

suppliers may want more than IP rights to any eventual innovation.

• Innovation processes should be defined and in place before embarking on

collaborative product development with suppliers (as they should be for internal new

product development). This involves sharing of innovation agendas, scoping, pilots,

evidence and proof, testing and validation, so there is more acceptance both within

the organization and with the supplier.

• Review current capabilities to see which might be most suitable to outsource to

suppliers. Just as companies do not typically outsource core competencies, they

should use a similar approach to outsourcing innovation capabilities to suppliers and

chose those that are not core.

• Risks and rewards for supplier who are involved in innovation should be fair. The

monetary benefits should be allocated equitably between customer and supplier.

Many compensation models are available. Clearly defined rules of engagement help

create the basis for trust.

• Training and education may be needed to help Procurement and R&D understand

their specific roles in the collaborative process with suppliers. Procurement

professionals involved in this process ideally should have skills in both technology

and negotiating.

• Intellectual property (IP) of both the customer and the supplier needs to be properly

and legally protected. One of the biggest potential roadblocks and pitfalls of supplier-

enabled innovation can be IP protection. For example, a supplier who simply discusses

an idea with its customer needs to be cautioned not to divulge anything proprietary

before agreements are made so that there is no chance or appearance of IP loss in

initial conversations. Legal non-disclosure agreements should be put in place. Also,

when an idea is developed jointly, clear agreements help prevent disputes about

ownership. Customers and especially suppliers are concerned that their intellectual

property will fall into the wrong hands or be stolen. Customer fear that their IP will

get to their competitors through their suppliers. And likewise, suppliers fear that

customers will discard them after they have used their IP and that their IP will morph

into a new product that they are not a part of developing. Suppliers fear that customers

will simply steal their IP without any benefit to them. Besides having IP protections in

place, choosing complementary not competitive collaboration partners helps avoid

future problems when developing joint intellectual property.

Training of Procurement and R&D

Fair allocations of risks and rewards to suppliers

Review current Innovation capabilities

for Potential Outsourcing

Protect Intellectual Property

Foster Culture of Innovation

Define Innovation Processes

Customer of choice

Senior management buy-in support at customer and supplier

Best Practices

Getting Your House in Order

Developing the Customer-Supplier Relationship

Firms need to find and select promising collaboration suppliers who have capabilities

appropriate to a customer’s innovation needs. Collaborating with suppliers on innovation

requires building relationships with a sufficient level of trust. Most suppliers are not ready

to jump right in and share their ideas with a customer without some period of developing

and strengthening the relationship to the point of increased mutual trust. The challenge is to

find suppliers among these potential partners whose relationship with a customer is at the

level of development, capability and trust that they are ready, willing and able to collaborate

on innovation. Motivations between both parties need to be aligned and the relationship

balanced. Suppliers want to feel that customers will accept bumps in the road along the way

without terminating the relationship.

Many firms use supply base segmentation to identify potential supplier innovation partners

considering input from supply management and R&D and other functions.

Good collaboration suppliers are made, not born. While some suppliers have the characteristics

that their customer may be looking for, there is typically more work to be done to develop

the relationship and capabilities to the point of working together on innovations and to

reduce operational risks. Once a company has gone through the process of identifying and

approaching potential partners, they can begin to deepen relationships and capabilities. In

some cases, suppliers may approach their customers to suggest new business opportunities.

• Develop suppliers who have collaboration potential. Helping supplier improve in

areas such as cost, quality, and responsiveness can increase capabilities and mutual

trust. For example, I worked with an aerospace company that wanted to make sure that

the suppliers it chose to work with on product development met their performance

expectations and standards and were well-run. I helped them create a development

supplier assessment that communicated customer performance expectations and

critical capabilities. The objective was to help reduce risk in collaborative product

development projects, recognize good performance, and deepen mutual trust.

• Increase openness and timely communication with potential partners. For example,

sharing your company’s strategic direction and product roadmap helps potential

collaboration suppliers understand where they may be able to support your future

needs.

• Use a cooperative, not combative approach with potential supplier partners. Avoid

adversarial or one-sided relationships. Collaboration suppliers are the extended

enterprise and can help create value that customers can literally take to the bank.

To maintain support and momentum, companies should develop an approach to measuring

progress and success. For example, The Clorox Company used metrics such as agreements

completed, in progress, under exploration and terminated and incremental sales or cost-

savings dollar value of the portfolio1. Using metrics to understand and demonstrate how

collaborative innovation impacts profitability can help fuel more innovation and growth.

Examples

When it comes to supplier-enabled innovation, many approaches have been used. The Clorox

Company created an innovation sourcing management group that was part of sourcing but

resided in R&D. It worked closely with R&D, Legal and Global Supply Services to create partner

agreements, technology and patent licenses, joint development agreements, and even IP

agreements. Within three years, the group closed about 180 innovation deals2. Another

example is industrial equipment provider Wilbur Curtis, who developed a partnership with

a printed circuit-board supplier that allowed them to bring innovative technology to their

products3. In another example, Proctor & Gamble was able use an edible printing process by

working with a small bakery in order to print the word “Pringles” on its chips. Kimberly-Clark

collaborated with a small supplier to launch a new sun-care product (an adhesive strip that

can monitor UV exposure) within only 6 months4.

Supplier Enablement Tools Can HelpSupplier enablement tools can 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.

• Electronic tools can help manage both the relationship and the product development

process. These may include platforms for

• electronic collaboration, especially for New Product Introduction and Innovation project management,

• technology-sharing agreements,

• supplier improvement plans

• supplier performance evaluation and feedback,

• customer-supplier communications channels,

• monitoring and managing the product development process,

• idea portals, and

• scorecards for measuring the success and ROI of the collaborative product development process

• savings tracking tools

• tracking key supplier resources and skill-sets

1 Mary Siegfried, “Bridging the Innovation Gap”, Inside Supply Management, April 2014, p. 28

2 Mary Siegfried, “Bridging the Innovation Gap”, Inside Supply Management, April 2014, p. 28

3 Ron Wilson, ”Establishing well-placed partnerships can lead to innovation gold for supply management professions”, Inside Supply Management, September 2012, p. 8

4 Mike Friedman and Helayne Angelus, “Best Practices in Collaborative Innovation”, Kalypso White Paper, p. 4

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Sherry Gordon is President of Value Chain Group, a consulting firm that helps companies and their suppliers deepen relationships and improve performance. Sherry is a management consultant, entrepreneur, writer, trainer, and business adviser. She was Founder and CEO of Valuedge, a supplier performance management software firm acquired by Emptoris (now part of IBM). Before starting Valuedge, she developed from inception then ran the New England Suppliers Institute, an organization focused on improving customer-supplier business relationships and on using lean enterprise practices and customer-supplier collaboration to improve performance. She held positions with several major manufacturing and distribution companies and management consulting firms. In addition to supply management, she has a functional background in quality and materials management, and expertise in continuous improvement methodologies and lean enterprise. Ms. Gordon is a leading authority on supplier evaluation and the author of the highly-regarded book, Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results. Ms. Gordon earned a B.A. from the University of Michigan, M.A. from Columbia University, and an MBA from Simmons College School of Management.

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