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Supplier innovation improves efficiency, reduces cost and risk, and accelerates growth. But when organisations put plans into action, they often hit barriers. Here, we discuss these challenges and how to overcome them.
Artificial intelligence is set to transform how organisations offer products and services, potentially adding $13 trillion to global economic output by 2030. But to benefit from AI, organisations will depend heavily on their suppliers. As well as technology suppliers, vendors from a breadth of buying categories will provide the data necessary to ensure AI achieves business value. Manufacturing machinery will come with Internet of Things (IoT) sensors, and the supplier will build predictive maintenance models. AI will help drug discovery in the pharma industry, relying on data from research institutes and ingredients suppliers. Marketing suppliers will use consumer data to help model and predict the effectiveness of future campaigns.
Suppliers support the innovation endgame
AI is just one example of the changes sweeping through industries, but it shows how dependent organisations are on their supply chains to innovate at the pace they will require.
Kasper Rørsted, CEO Adidas is quoted as saying: “We recognise that we need to complement the inspiration and creativity of our people with external innovation… you have to open yourself up to ideas that you might not have been open to in the past.” The rewards are clear: research shows that firms who collaborate systematically with suppliers record an EBIT growth rate double that of their peers. But our research shows only 15% of organisations have systematic collaboration with their suppliers in place. The fact remains that “the first overriding result in almost every research report is that there is a significant gap between innovation expectations and performance”.
In this years’ State of Flux SRM report, we provide data and a detailed analysis of organisations’ efforts at supplier innovation as well as, detailing how Toyota approach the subject.Olympic sprint cycling coach Justin Grace and former Oxford University vice-chancellor Sir John Hood also offer their perspectives on the subject.
Many forms of innovation
At State of Flux, we have been measuring organisations’ effectiveness in nurturing supplier innovation for more than 10 years. In that time, we have seen that innovation is not one thing. Focus tends to be drawn to product innovation when there are many other forms of innovation across a spectrum of organisational activity. It could be changing accounting processes to increase working capital. It could be operational efficiency to reduce costs and improve margins.
But organisations are often unsure where to start with broad-based supplier innovation. They ask, “How do we expand the definition of innovation and understand where suppliers can help? Where are the other examples of innovation in marketing, IT, finance and sales? What does innovation look like for these departments, and how can we express supplier innovation in a language they will understand?”
There are so many questions addressing innovation, and it is easy for thinking to become confused, and results difficult to come by. But State of Flux has been able demonstrate that organisations can develop a methodology for supplier innovation just as they can for sales and marketing.
Building an innovation funnel
Organisations face common barriers to supplier innovation, but with a sense of purpose they can overcome them. As well as poor innovation management know-how, there are other factors contributing to a gap between expectations and delivery in supplier innovation. There can be disparate activity which sends suppliers mixed messages.
Cultural blockers are also a factor: 78% of millennials believe that innovation is essential for business growth, but just 26% believe that their own organisation’s leadership encourages idea generation and sharing. Some organisations lack consistent executive leadership and have low internal collaboration. Organisations that are risk-averse do not support innovation well. Suppliers can be a factor if they have become disengaged through too many bad experiences.
Meanwhile, organisations can get tired of too many management buzzwords that promote innovation; consultants describing the problem without offering solutions; and projects starting without reaching a conclusion. Supplier innovation becomes just another ite on the list of failed initiatives. State of Flux has shown that through SRM, organisations can create an innovation funnel and pipeline: a metaphor describing a sequence of steps to develop initial ideas into successfully implemented projects that deliver value to both the organisation and the supplier. It is a framework for creating and managing ideas, similar to the marketing funnel.
Regardless of the blockers, interest in supplier innovation is unquestionable, and it is a logical outcome of effective SRM. It is nearly always part of thevalue proposition for SRM and is moving higher up the list: the majority of organisations say it is among their ambitions. From CEOs, we see that the old vision of procurement is fading: the idea that the department will continually reduce costs is taken as a given, and they want to hear something more interesting from its leaders. CEOs are hungry for innovation to keep pace with changes in technology and digital transformation. SRM is a way of harnessing supplier innovation and satisfying their appetite.
Organisations can create an innovation funnel and pipeline: a metaphor describing a sequence of steps to develop initial ideas into successfully implemented projects that deliver value to both the organisation and the supplier.
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