SUPPLIER ENABLED INNOVATION

Collaboration with the suppliers to create competitive advantage and profitable growth

Innovation is one of the basic ways in which a business builds and maintains a competitive position in the market place.

Supplier Enabled Innovation is involving the strategic suppliers into the customers’ innovation process in early stages to create a pipeline of innovation which otherwise would be very difficult, time consuming and expensive if not impossible, based on customer needs to maintain competitive advantage in the market. Procurement departments, having a unique position between their companies and this huge external innovation source, can add value to their business beyond the traditional cost saving activities.

The purpose of this article is to describe the Supplier Enabled Innovation and its characteristics as well as giving a practical guideline for implementation.

Innovation

In today’s fast changing business conditions; all companies have different levels of strategies for innovation. The management guru Peter Drucker’s definition of innovation about 50 years ago, still remains relevant as describing innovation as one of the basic ways in which a business builds and maintains a competitive position in the market place. The companies that want to remain competitive should have an unmatched ability to transform the useful seeds of invention and ideas into solutions that are perceived more valuable than any existing alternative. 

Supplier Enabled Innovation

Since innovation is a long and expensive process, the companies that can find reliable external sources of innovation for a reasonable cost (or even no cost) can achieve a bigger advantage than the others. If the internalization of external knowledge can’t be done successfully, the development costs can quickly eat up the benefits of the growth in sales and profits generated.

Among such sources, suppliers are a very reliable and relevant source of innovation, generally coming with relatively low risk and faster pay-offs due to the familiarity of the business and the customer needs as well as typical existence of knowledge transfer from supplier to the customer. Supplier Enabled Innovation (SEI) is involving the strategic suppliers into the customers’ innovation process in early stages to create a competitive pipeline of innovation which otherwise would be very difficult, time consuming and expensive if not impossible based on customer needs. Procurement departments, having a unique position between their companies and this huge external innovation source, can add value to their business beyond the traditional cost saving activities.

Supplier Enabled Innovation – Benefits

Timing

There are two kinds of innovations – innovation to sustain the core and innovation for creating new business platforms in the long term. Innovations that are meant to sustain the core are generally developed within a company’s current business model and fit comfortably within its existing process. For these kinds of short- and medium-term innovations, the suppliers who are already part of this model will provide an advantage to overcome the challenges at hand or get ahead of their competitors.

For the long-term innovation projects; suppliers can be used in different ways to provide a predefined part of the innovation process to give the company opportunity to focus on certain areas only. This will help the companies to minimize the development time and increase the innovation efficiency and to be able to capture a price premium after launch

Cost

Although the buyer companies need the suppliers to contribute to their innovation process, this need is not one-sided. The innovating supplier firms are trying to capture the advantages of generating creative ideas, improving products performance, and reducing the risk of a new product not meeting the market by partnering with the customers. For this reason, suppliers can offer their ideas and innovation capabilities with a lower (and even no) cost comparing to other external sources like consultants, etc…

Specialized Expertise

The most important reason for involving suppliers early in innovation activities is to provide capabilities that are not available in-house. External suppliers are usually experts in their fields, having access to knowledge and well-conceived ideas borne of operating with a variety of customers. Considering their R&D teams and spend in their respective fields, this area promises a great potential to the customers to benefit from. With carefully assessed and selected suppliers, this expertise can be translated to a top-level product and process quality. 

Fit for Purpose

Main motivation of the innovative suppliers to share their innovation capabilities to the customers is to secure a future business with higher margins in the market as well as increasing their reputation in the market to step up their position during the negotiations. For this reason, they spend an extra effort to keep their innovation ideas relevant to the customer needs to turn them into profits. This relevance makes those innovation ideas a good fit for the customer’s innovation project. Supplier’s involvement in the early stages of the development process; and understanding of the customer’s needs and downstream user profile will increase the success of offering innovations to the buying organization the best solutions and products.

Creating Supplier Innovation Systems

Procurement’s Role

Collaboration with the suppliers and including them into the innovation strategy is not an easy task that makes procurement’s role in the process very critical. Procurement function’s first and foremost objective is to drive a paradigm shift in the organization; to overcome that unfortunate stereotype that procurement is only needed to negotiate the contracts and talk about the price with suppliers rather than creating and adding value to the business.

Recurrence and intensity of procurement inclusion in innovation activities depends on the perception of procurement’s importance throughout the organization that will define the procurement status. After achieving the paradigm shift, maintaining the procurement status is critical and this can be obtained only by increasing the function’s absorptive capacity. Absorptive capacity is the firm’s ability to value, assimilate and utilize the external knowledge and is considered as one of the determinants of a successful knowledge transfer. Having a unique position with the suppliers and their huge source of information and the organization, procurement function’s absorptive capacity plays a big role to filter and transfer the valuable inputs in an open innovation system.

In order to increase the absorptive capacity, the procurement functions must be very well connected to the internal stakeholders as well as the suppliers. In today’s business environment; no procurement strategy will be successful unless it’s closely linked to the stakeholder needs. And procurement need to increase the activities to strengthen their status as a bridge between these business needs and linking them with the external capabilities that suppliers offer. Supplier connection is also very important although frequently overlooked.

Another enabler for an increased absorptive capacity is the talent who are technically skilled to understand the innovation requirements and have a good understanding of the external capabilities to offer solutions for the internal business needs. One good practice is to have this talented team involved in various work streams across the organization for a better understanding of those needs.

Procurement function should create, deploy and own the necessary tools and processes to be used for utilizing supplier innovation as a way of increasing and maintaining the absorptive capacity. These tools can be in different ways and forms, from technological tools like innovation platforms and databases to institutionalized processes of knowledge sharing, supplier gatherings, communication and collaboration strategies and so on… In any case, the procurement function should be aware of the knowledge cycle and how to welcome, manage and utilize the collaboration offerings from the suppliers.

Strategic Sourcing and more specifically, Category Management will help the teams to increase this absorptive capacity with a deeper focus on some certain categories and a strategic approach for managing this category. This strategic approach and the higher level of Supplier Relationship Management will open up opportunities for achieving the preferred customer status for these highly innovative and competent suppliers that are small in numbers to get preferential access to their resources and capabilities. Accordingly, the category management approach will give the organizations opportunity to differentiate their core and non-core spend; and apply the whole procurement function’s energy on the innovation activities of the core spend categories.

Choosing the Right Suppliers

In order to have a successful SEI system, buying companies need the capable suppliers. If the suppliers with high innovation capabilities can’t be identified and found, the whole system quickly falls apart.  To take advantage of supplier innovation, buying firms must identify and select the right suppliers, effectively integrate them into their product development process and collaborate with them to develop and commercialize an innovation. The procurement teams in this case must enhance their supplier selection criteria in alignment with the internal stakeholders. Research suggest that there are three main areas of criteria to assess the supplier’s fit for the system: Operational Criteria; Relational Criteria and Strategic Supplier criteria.

Operational sourcing criteria determines if the supplier can support the joint innovation process with its competence level in the area. Relational criteria on the other hand reveals the relationship between the buying organization and the supplier. Strategic Supplier Selection criteria defines the importance of the buying firm to the supplier and could be a sufficient qualification to obtain a preferred customer status.

In order to utilize the supplier’s contribution to the innovation process, there needs to be an objective and accurate evaluation of the competency and competitiveness levels of the buying organization’s itself; which in comparison with the supplier’s competence level in the category would guide how to utilize the suppliers.

After assessing all these selection criteria and utilization choice of the suppliers, the buying organization then can have a portfolio of suppliers that are classified based on their preferential choice and competitiveness in the subject matter field to target the best fit for the company’s innovation strategy. It’s worth mentioning that this assessment should be done with the existing suppliers first as identifying and developing a new supplier usually comes with additional cost and time.

Driving Supplier Innovation

The innovation process can be divided into three stages: the fuzzy front end, product development and commercialization. At each of these stages, collaboration with external parties, including suppliers, can enhance innovation capabilities.

Fuzzy Front End

This is the stage where the ideas that are mainly experimental and chaotic with unpredicted and uncertain commercialization date and revenue expectations are generated. Suppliers may be encouraged to push their innovation ideas as well as given specific challenges to come up with a solution. These ideas can be captured on the buying organization’s ERP platforms (SAP, ARIBA, etc…) or online platforms such as Yammer, Linked-in or a portal developed specifically for this purpose by the company. Accessing this platform and the inputs required by the suppliers can also be managed based on how “open” or “targeted” they are to the Supplier Innovation. Below figure is a simple guideline for this purpose.

The information gathered through these portals should be passed to the relevant functions in the organization. Procurement should take an active role in knowledge management to secure and utilize these data with the help of increase absorptive capacity to avoid two biggest mistakes: wasting efforts on not-good ideas and eliminating the good ideas. This idea screening phase also is where the procurement will challenge the supplier’s ideas, fit for purpose and practical benefits. During the evaluation process, on top of the evaluated idea, the time, objectives, references, persons, recipients, criteria and methods of evaluation should be determined. Other functions’ support can be requested in medium levels.

Suppliers’ commitment and contribution to this stage may also be obtained through firm contracts with different objectives such as cost saving, revenue generation and operational efficiency.

Product Development

This stage is where the company’s innovation objectives and the expectations from the supplier are clearer. There’s a high degree of certainty about the commercialization date and revenue expectations typically with a project plan. In this stage, the suppliers should be invited to the process physically with high level involvement from both parties.

Procurement should be in the steering community of these projects and monitor the implementation and the results. In order to run this stage smoothly between the companies, procurement should actively manage the portfolio of the projects as with the ongoing innovation activities may create several different projects with different suppliers.

Commercialization

Although commercialization stage may seem to be a stage where the suppliers don’t have direct involvement, this is an area for the procurement to keep the suppliers still engaged through formal and informal channels. Sometimes the solutions provided by the supplier may create some unforeseen challenges and constraints that can only be identified by the users and upstream suppliers. For these cases, the suppliers may address these challenges and address them accordingly with their own supply base.

Knowledge management is another area to keep an eye in this process. The agreed confidential information, exclusivity agreements and aligned IP rights must be closely monitored by the procurement function to maintain the competitive advantage that innovation brings to both parties; and utilized for other innovation activities in the pipeline.

In order to incentivize the supplier enabled innovation, it might be a good idea to have a commitment to sharing the financial benefits of the end innovation. In case of such a prior agreement, the performance and the additional revenue and profit generation during the commercialization process must be reported for a fair treatment.

Measuring Performance

One essential point for a successful Supplier Enabled Innovation is to establish the Key Performance Indicators (KPIs) to measure the efficiency of Supplier Enabled Innovation process and the performance of the suppliers’ innovation performance. For the former, there can be three categories: First, internal procurement metrics which are used to monitor the direct action of buyers. Second, more commercial metrics which relate to the organization’s market position. And third, external metrics which are directly applied to suppliers and other third parties. The number of successfully implemented projects which come through Supplier Enabled Innovation is a very good indication of the success of the system that stands out among the others though.

On the other hand, the ultimate purpose of Supplier Enabled Innovation is to create additional value to the business by the procurement function through the suppliers. And this additional value can be in different forms such as: Savings, risk reductions, operational efficiencies and revenue generation.

The saving performance of the supplier enabled innovation process can be one of the main indicators for measuring the performance of the suppliers’ innovation support. Procurement’s involvement provides an uplift in that area more than any other as it also relates to the traditional core relationship between the supplier and the buyer.

For the risk reduction, majority of the benefit is obtained through implementation and adoption of procurement tools especially a robust category management with a solid Supplier Relationship Management agenda. However, supplier’s offerings of innovation for supporting the risk elimination through the value chain such as modularity, elimination of process waste, etc… can be good indicators for measuring the performance.

A research from Procurement Leaders Supplier Enabled Innovation Center suggest that the procurement functions that are subject to higher levels of end-customer or consumer expectations of innovation are more likely to see greater operational efficiency improvements as an output to their SEI activities. Therefore, the evaluation criteria here should be obtained from the stakeholders and their satisfaction level from the suppliers and their innovation support during the process.

Of all the performance indicators to measure the success and efficiency of the supplier’s innovation capabilities; the ability to support the revenue generation stands out the most important element. This not only gives a clear and tangible insight into the efficiency of the process and the capability of the supplier; but also demonstrate the procurement’s position as a trusted advisor to the wide organization. Sustainable deliverables in this area will also help procurement function drive a paradigm shift in the organization, recognizing suppliers are genuine source of innovation and competitive advantage for the buying firm, and not simply servant to the buying firm’s master role of driving cost reduction.

Conclusion

In today’s fast changing business environment, those companies that want to remain competitive must also be innovative. Customer oriented companies are more likely to innovate and develop new products and services to maintain their competitive position in the market. However, fostering customer orientation in order to guide the company’s innovation activities is not enough when suppliers account for the largest portion of the value delivered to the customer. Therefore, companies should implement a structured Supplier Enabled Innovation process through Procurement Functions to tap this huge external knowledge and expertise. If this process is created and implemented successfully, Procurement will evolve from a position of support function to one of the most critical functions that positively impacts the revenue, sustainability and profit objectives.