WHITEPAPER GENERATING GROWTH AND PROFIT THROUGH SUPPLIER-ENABLED INNOVATION

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1 WHITEPAPER GENERATING GROWTH AND PROFIT THROUGH SUPPLIER-ENABLED INNOVATION By Sherry R. Gordon

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

3 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 Innovation Supplier-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

4 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 Practice Successful 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-

5 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. Supplierenabled 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

6 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.

7 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 supplierenabled 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. Best Practices Training of Procurement and R&D Review current Innovation capabilities for Potential Outsourcing Foster Culture of Innovation Fair allocations of risks and rewards to suppliers Protect Intellectual Property Define Innovation Processes Customer of choice Senior management buy-in support at customer and supplier Getting Your House in Order

8 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.

9 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 costsavings dollar value of the portfolio 1. 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 deals 2. 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

10 products 3. 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 months 4. Supplier Enablement Tools Can Help Supplier 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 Mary Siegfried, Bridging the Innovation Gap, Inside Supply Management, April 2014, p 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

11 VALUE DELIVERED BY THE IVALUA SOLUTION The Ivalua Solution provides a proven, customizable procurement automation solution. With the help of Ivalua, procurement organizations can achieve savings and enhanced strategic business value. Through the Ivalua Suite, procurement organizations can take an active role in business expansion, new product introduction, and sustainability, while simultaneously achieving the key objectives of: increased savings, improved operational performance, and reduced supplier costs. Supplier Management Strategic Sourcing Contracts & Catalogs Procurement Invoicing Spend Analytics The Ivalua Solution consists of The Ivalua Suite provides a comprehensive, modular, source-to-pay suite for 100% of your spend on a single natively integrated code base. It provides a deep foundation for procurement excellence The Ivalua Platform provides the core set of technical components such as integration toolbox, workflow, portal, administration console, reporting, mobile interface and user management The Ivalua Cloud provides the NextGen Cloud Factory environment to securely access the Ivalua Suite, visualize update impact, control update timing, scale configurations with full reversibility The Ivalua Open Network provides connectivity to an ecosystem of suppliers, buyers and 3rd party partners. You can rapidly onboard, connect and collaborate with suppliers without any supplier fees

12 Ivalua is the leading provider of Spend Management Cloud Solutions and recognized by top Analysts as a global market leader. Our success is reflected in a community of 250 customers across 70 countries achieving high performance empowered with the Ivalua Solution. Our customers realise huge and rapid savings by improving visibility, streamlining and standardising processes and increasing Procurement and Finance productivity. But the overall value from Ivalua goes far beyond immediate savings: Procurement teams also actively contribute to accelerate innovation, enable company growth, mitigate risks and increase compliance. Ivalua is committed to building sustainable business partnerships with its customers and actively supporting them in their journey towards business excellence. ABOUT THE AUTHOR 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. IVALUA.COM Contact info@ivalua.com