Procurement Strategy for Supplier-Enabled Innovation
Your company's next great idea will likely come from outside your company's four walls. That's the idea behind supplier-enabled innovation. Procurement teams can deliver business value through partnerships with innovative suppliers that can make a significant impact on the bottom line. There are risks, of course. But SEI can offer bottom-line impact that demonstrates significant value to stakeholders.
Tapping the expertise of your suppliers is like expanding your R&D department. You can count on the expertise of your supplier base to develop new products or refine existing ones.
Supplier innovation empowers organizations to identify innovations and bring them to market faster. For example, Procter & Gamble developed a strategy that delivered almost 50% of the company's innovation and accounted for billions of dollars in sales. Over a 14-year period, the company shifted from 100% internal R&D to a 50-50 split that improved R&D productivity by 60% and contributed to 50% of the new products on the market, according to a presentation for the Institute for Supply Chain Management.
The strategy required a radical mind shift from the "Not Invented Here" syndrome to embracing ideas from external resources. Here are three things you need to know about innovative supplier relationships.
1. What is Supplier Enabled Innovation?
SEI represents the mechanisms to identify and get innovations through third parties for value creation (ISM), according to the Institute for Supply Chain Management. That means companies should identify and develop a supply base with complementary capabilities that will drive value through collaboration. The customer and supplier can develop a joint process to support more innovative products.
There are many real-world examples. In consumer industries such as fashion, the brands manage sales, marketing and brand-driven design while outsourcing manufacturing and distribution. The suppliers provide innovations in materials and processes to the brand.
Rather than search the low-cost supplier, companies can partner with a vendor to develop unique solutions that customer value. The procurement organization can shift to maximizing total value from suppliers rather than focus on cost containment.
2. The Business Case for Supplier Enabled Innovation
Collaborating with suppliers can unlock additional value for companies that understand a significant portion of their value chain resides outside of their four walls.
Research shows that 55 to 65% of innovations are sourced externally, and 25 to 45% of revenues result from product innovations. However, less than 25% of all new products reach consumers (ISM). Partnerships are critical to developing a product pipeline at a level that's not sustainable for an organization to maintain on its own.
About half of recent sales growth in Europe was due to innovations from suppliers for Mondelez International (formerly Kraft Foods). The company counts on ideas and contributions from suppliers for a competitive advantage.
Engaging with suppliers enables companies to drive continuous improvement in the value chain at a lower cost. Companies have found that internal R&D teams were engaging with suppliers directly to solve problems and develop product innovations. The procurement team can manage this process to transform supplier innovation from ad hoc activities to coordinated projects that benefit the entire organization.
3. Transitioning to Innovation Focused Procurement
Companies that pursue supplier-enabled innovation realize that it's increasingly difficult for one organization to research and develop the innovations necessary to meet customer expectations in regional and local markets. Procurement teams must transform their role from passive buying agents to proactive innovation sourcing agents. The procurement team will direct the prioritization of projects with the suppliers so the suppliers are not overwhelmed with requests. The procurement team helps translate the business needs into terms that are meaningful for the suppliers.
To play a significant role in innovation, the procurement organization must transition from cost and risk reduction to adding value farther up the supply chain. Often, procurement becomes involved only after specifications are set. Innovation-focused procurement organizations support business strategies by becoming involved in innovation projects from the beginning. The procurement organization can find sources of innovation and manage supplier involvement in a collaborative rather than an adversarial approach. The procurement organization will continue to own the interface between the company and its supplier base.
If you'd like to learn more about supplier-enabled innovation strategies, the place to be is ProcureCon Indirect East 2020, taking place March 23-25 at the Omni Orlando Resort at ChampionsGate in Orlando, Florida. Download the agenda today to plan your schedule.