Financial Year Magazine
February 5, 2013
Today, it's not simply enough to say that you are an innovative company; you must be able to continuously demonstrate your capability and capacity to innovate. The challenge of course is that there is not much new under the sun, and unless you are blessed (or burdened) with a significant structure and budget to support continuous R&D, driving innovation can very quickly become an uphill battle.
Fortunately all hope is not lost. Innovation in its less than pure form can be invoked if we set aside the idea of continuously investing in and testing new ideas and concepts, and shift our focus to determining how we might better utilize our existing resources to drive new and innovative change. The answer to this somewhat challenging question lies outside our very door, literally. Innovation can and should be driven through supplier engagement and incentives.
Several years ago I was asked to negotiate a contract resolution between an electronic component supplier and their customer. The customer had, over a period of 12 months, requested and purchased dozens of components in an attempt to bring a ballooning and fragmented project to completion. Their plight to develop an innovative solution to a longstanding problem had resulted in several misguided investments in components, none of which were able to resolve their problem. The customers' unwillingness to engage their supplier in developing an innovative solution resulted in unnecessary material costs and significant delays, the results of which had tarnished the buyer-supplier relationship to the point that mediation was required. But who was at fault?
From our research it was apparent that the customer had failed to consider two very basic tenants of the circumstances at hand. First, what was the root cause of the problem? Secondly, who might be most qualified to address the root cause(s)? The electronic component supplier had never been engaged in the problem, only used as a resource to provide material. The component supplier in turn failed to ask their customer about the reasons behind the excessive and somewhat erratic purchases, thereby missing the opportunity to engage their sub-tier suppliers to determine if more innovative and less costly solutions existed.
To be innovative is to offer solutions to customers that resolve issues that either do not yet exist or have not escalated to the point that resolution is deemed to be necessary. This type of innovation requires engagement at all levels of the supply chain including sub-tier suppliers. Through our work in creating innovative supply chains we have identified several steps to creating such innovation, here are the top three steps:
1. Convey intent: Today the buyer-supplier relationship is still adversarial to a large extent. Customers identify problems, outline possible solutions, and then ask supplier(s) for products or services that will deliver the intended solutions. There is very little dialogue (other than with the sales desk), just one-way communication. Intentions between the buyer and supplier must be clear. Using supplier portals such as Grainger's Gateway or investing in supplier conferences as organizations such as Kicker Audio have are great ways to engage in dialogue with suppliers to outline your intent to collect, analyze, test or engage in developing new solutions. If you don't communicate your intent, don't expect results.
2. Collaboration is key: In conveying intent, communication becomes a necessity in order to collaborate on innovative solutions. Beyond the everyday sales transactions are opportunities to identify new choices, test various options, and develop robust solutions that are both unique and innovative. Proctor and Gamble makes a concerted effort to reach out to their supply base and collaborate on solutions. As a result, P&G has made the claim that it expects more than half of its innovation to be generated outside of the Research and Development department in 2012, making collaboration a strategic component of its innovation formula.
3. What's in it for me? Despite collecting revenue, what would engage a supplier to invest in new opportunities? Simply put, the theory behind Pavlov's dog still applies today. Suppliers must have incentive to invest time and resources in innovation. Incentives can vary depending on the complexity of the innovation and the organization, but using supplier rewards and recognition, or sharing in the profits and progress of innovative ideas are both great examples of how to incentivize suppliers to participate. If you expect a supplier to put some skin in the game, you must be able to articulate what's in it for them.
Innovation is not something that can be achieved alone, nor is it an elusive new concept that must be first proven in R&D. The most innovative ideas are often those that evolve as a collaborative concept. Engage your suppliers to provide incentives to drive innovation and watch your competitive advantage soar.
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