Increasing Supplier Enabled innovation, (SEI)
Increasingly organizations will need to seek external innovation from suppliers and customers, in order to access a broader range of disruptive innovation and remain competitive. Most suppliers have their own R&D budgets, investing in new product and service development. They choose how, and on what products, to invest their R&D resources and importantly, which customers will get priority access to their new innovation. Surprisingly, suppliers do not always take their innovation first to their largest, or even their most profitable, (highest margin), customers. They typically target customers with whom they have the closest relationships and see the best longer-term growth opportunities.
Unfortunately, companies often do little to differentiate themselves from their competitors, as a Partner of Choice, to secure first access to their supplier’s innovation. Procurement needs to do much more to influence their suppliers thinking, create closer relationships and increase their supplier attractiveness.
Access to SEI creates the opportunity to co-develop products, services and business processes, better aligned to the customers current and future needs. The value of this collaborative innovation typically can include, revenue growth, cost reductions, headcount efficiencies, speed/time improvements, customer service improvements, risk reductions and quality gains.
Stronger supplier relationships, through the co-development of innovative products and services can also provide other follow on benefits; through preferential treatment on pricing, priority technical support, priority shipments when there are supply issues, etc.
So how do you identify innovative suppliers and what are the key attributes that are likely to make the relationship work?
“Tenacity is not about avoiding being overwhelmed but being indomitable in the face of the overwhelming odds of your venture’s failure.” – Andy Dunn
All companies have limited resources, so it’s important to focus on suppliers of strategic products and services, who have ideally already demonstrated their innovation capability and where innovation has the largest potential value gain for both organizations. The targeted suppliers need to have the research and resource capability & capacity to generate, develop and successfully introduce the co-created innovative products, services and processes. Early alignment on the actual innovation targets, shared resource commitments and executive participation, will help ensure successful outcomes. Finally, of course, there is the human element. Do you want to work with each other?
Both companies are motivated when there is mutual value creation and transparency on each other’s value gains, although there does not need to be any formal process to ensure value equality. The customer and supplier jointly agreeing on innovation targets, resources allocated and value goals.
Procurement teams need to build trust with suppliers, through commercial intimacy and look for innovation opportunities that provide mutual value creation, ie. a win/win for both companies.
Changing the relationship from Customer/Supplier to Partner/Partner where both companies are equals, working together towards a shared goal, is ideal, aiming to work as if it was just one combined company.
One of the key questions is the ownership of any products/services that might result from a new innovation partnership.
Agreement on ownership of Intellectual Property (IP), resulting from co-created innovation, can be a major hurdle.
Suppliers desire to optimize their new innovation in the market whilst the customer wants exclusivity. Recognizing that competitive advantage is always a time-based phenomenon, existing only until competitors leap-frog the innovation, the best solution is joint IP, where co-created products and services are owned by both collaborating companies. The customer getting first access, priority pricing etc. The supplier being free to sell them to other customers after a pre-agreed period, perhaps with royalty payments or profit sharing.
For non co-created innovation, (eg. new supplier products already in development), then IP should remain with the original company.
Companies need to secure Supplier Enabled Innovation, through closer relationships, with strategic suppliers, focusing on mutual value creation.
If you are interested to discuss this further, please feel free to contact the author, using the Contact Us online form.
“Every once in a while, a new technology, an old problem, and a big idea turn into an innovation.” – Dean Kamen