Learning from the history of supplier innovation

 

By Rob Handfield professor of supply chain management at North Carolina State University, and director of the Supply Chain Resource Cooperative 

A few years ago, I was working with a global manufacturer of tractors and agricultural machinery. When I spoke to its suppliers, they said something which underscores why supplier innovation is so tough.

I found out that suppliers of fittings and accessories were quite often small and medium-sized businesses. Although they thought the large manufacturer was extremely ethical, they still did not trust it. They didn’t trust the manufacturer’s ability to communicate effectively. They knew it didn’t understand their true costs. They knew it didn’t have the ability to speak in one voice in terms of product planning.
 
They said, “We really don’t get any feedback, we’re not able to talk to your end customers, so we don’t really know if the products we’re producing are good, or if customers like them or not, we’re running blind.” I’ve been studying topics related to supplier innovation for more than twenty years, and this example shows you have to have so many elements in line, internally and externally, to make it work.
 

Twenty-five years of study

One of my first studies was in the 1990s at Michigan State University, where I worked with a global procurement benchmarking initiative, which ran for about eight years. From that, I worked for the Global Electronic Benchmarking Network (GEBN), a consortium of 200 companies. And we were talking to them about best practices, and I wrote a number of technical reports about category strategy and ecommerce, supplier development, a lot of the concepts that were just starting to emerge in the mid-1990s.
 
I think of supplier innovation as an extension of supplier performance management and supplier relationship management: it is the top of the pyramid. Once you get your performance in line, and can measure it, and you’re developing suppliers, it creates opportunities for suppliers to start to innovate and start getting involved in product, process and service, and design integration.
 
The work with the GEBN led to a grant from the National Science Foundation, which led to our work being published in the California Management Review and eventually several books.
 
The lessons we found for organisations embarking on supplier innovation are that it requires a lot of alignment inside the buying company and some complex negotiations around intellectual property. Defining the roles and responsibilities is important too.

 

Understanding the supplier’s role

On top of that, it is not the same for every supplier. It depends on who they are and how they work with you. We came up with the white box, grey box, black box idea. In the white box, the buyer develops the design, hands it over to the supplier, which produces it exactly to those specifications. In the grey box, you may have the supplier involved in developing those specifications for the product as well, or they may be sitting on the design team. And then the black box is a complete outsource idea, where the supplier designs, produces and ships the product completely.
 
All these roles will vary in terms of what the supplier does for the buyer as you move along that scale. That’s where it gets tricky: the supplier starts saying: “Look, this is my idea, I want to own the intellectual property.” Well, that doesn’t sit well with a lot of buying organisations that are stuck in the traditional way of thinking. One company we worked with had in its contract that if a supplier shares an idea, the company owned it. But the supplier will say that retaining that IP will be the only way they can cover their costs associated with developing the technology. Then there is the problem of aligning internally. We have found often suppliers will come and say, “This is great, I’m excited about this idea, and I’m going to attend your design team meeting”, and that does not always go well. I remember one time, I had an engineer at a buying company who pointed his finger in my face and said, “There will be a cold day in hell before any supplier tells me how to design my product.” There’s a lot of internal resistance to supplier innovation. It is almost as if you are telling engineers they are not good enough, and they are worried their role is going to be outsourced. They can get so personal, those kinds of situations.
 

Harnessing supplier product knowledge

But the fact is suppliers know their technology better than the buying organisation, and it knows its products and market better too. It just makes a lot more sense to exploit that expertise.
 
Earlier this year, I reviewed progress from one of our most cited papers, Handfield & Bechtel (2002). The study helped me understand where supplier relationships are heading, considering the impact of technology on the economy . But there is still naivete from CFOs: they look at purchasing and still see the role as reducing costs and running RFPs and it cannot do anything beyond that. For supplier innovation to work the understanding has to reach across the entire business. I think 85% of it is internal alignment, not external alignment. It is getting everyone in your organisation to understand who the supplier is, what their role is, what the strategy is, and what we’re pursuing together. That’s when innovation can reap rewards.
There’s a lot of internal resistance to supplier innovation. It is almost as if you are telling engineers they are not good enough, and they are worried their role is going to be outsourced.

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