This is part 1 of a 4-part series about supplier collaboration called Driving Innovation with Supplier Collaboration. This blog series explores the potential associated with open innovation in new product development.
The most forward-thinking manufacturers constantly seek new ways to innovate. Yet, many overlook one of the most advantageous and effective methods to innovate in product design: the supply chain. Manufacturers tend to treat their relationships with suppliers as transactional—and even adversarial—rather than collaborative. They approach their relationships with suppliers cautiously, in many cases simply trying to squeeze out cost savings or efficiency improvements while just “meeting spec.”
Yet, mutually beneficial relationships with suppliers has proven to be an essential element of innovation. Supplier collaboration can unleash more brain power, approach a wider variety of challenges, provide expertise, focus your business, and expand opportunities. With the right approach and practices, supplier relationships can be productive and impactful across the entire enterprise.
What is Open Innovation?
Manufacturers typically work in “siloed” thinking, where information is hoarded within certain teams or departments. Not only do silos occur internally, manufacturers often treat their own organization as a silo separate from the suppliers. Supplier collaboration creates new opportunities to break down this disparate thinking and share knowledge with suppliers to drive bigger productivity gains and generate innovation.
This type of collaboration is frequently referred to as “open innovation.” According to Henry Chesbrough, a former Silicon Valley businessman and current Berkeley professor who literally wrote the book on open innovation, no company can ever effectively innovate on its own. Open innovation allows external ideas to come into the innovation process, bringing a new spirit of collaboration and sharing information.
Part of open innovation is integrating supplier collaboration—coordinating and sharing information to gain better knowledge of processes, capabilities, and constraints. Supplier collaboration is a growing opportunity for manufacturers to improve their overall production process.
Partnerships with Suppliers during Product Development
Some manufacturing organizations recognize the impact of open innovation with suppliers, seeing them as more than vendors who sell a commodity part or product input. According to benchmarking data from APQC, “66 percent of organizations involve their suppliers in new product or service development, including product improvements and extensions.” Various companies are starting to expand their connections to all sorts of external partners as a source of innovation – including suppliers, customers, universities, and even competitors.
A recent study suggested that external collaboration not only improves innovation, but can sometimes match or exceed internal R&D: “Companies with low R&D intensity may adopt an alternative approach which aims at substituting—not merely complementing—internal R&D with external innovations… the innovation process requires significant collaboration and the buying company’s supplier management capabilities may improve the success of inbound open innovation projects of this type.”
Completely cutting an R&D department in favor of collaborating with external partners certainly won’t work for every company. But the fact that this very concept may match and also boost innovation proves the value that external collaboration can bring. Suppliers prove to bring a wealth of knowledge, skills, information, and expertise that directly impact a company’s success. Despite the clear value in supplier collaboration, only 31 percent of organizations have extensive involvement with suppliers in product development.
Suppliers Fill the Gaps of the Organization
Collaborating with external suppliers does more than bring more brain power and different opinions to the table. Suppliers have a unique vantage that many manufacturers don’t, bringing insights from both the end-customer and manufacturer. They understand the customers’ needs and the various aspects of the purchase decision that the manufacturer might not be exposed to every day.
Manufacturing companies have a specialized—even narrow—technical knowledge on the components that make their own products. Suppliers are part of a dynamic network, bringing in different aspects that complement the company. Suppliers expand the manufacturer’s strategic vision and technical knowledge by shedding light on possible blind spots and opening up new opportunities that the manufacturer might not have recognized without an additional outside perspective.
As a result, supplier collaboration improves product innovation by:
- Shortening time-to-market. Manufacturers work more closely with suppliers to develop new products faster.
- Increasing product quality. Engineers and designers resolve issues more thoroughly, ensuring a higher quality product.
- Reducing development costs. Both suppliers and manufacturers share internal processes and understand each other’s workflows, which reduces administrative costs and time.
- Innovating through long-term collaboration. Long-term partners are more likely to develop institutional knowledge of the manufacturer’s unique pain points and processes, bringing ideas that resolve innovation gaps.
- Focusing on core competencies. Trusted partnerships between OEMs and suppliers allow manufacturers to focus on their own intellectual property and key business differentiators while allowing their trusted suppliers to manage additional product innovations.
The Potential of Open Innovation
In many cases, the majority of a product’s components are developed off-site through suppliers. For example, consider off-highway mobile machine design such as a tractor or wheel loader. The average machine may have have thousands of unique parts, and a majority of these parts are sourced from a network of suppliers. Whether self-imposed or through silo-ed processes, manufacturers are limited in their ability to communicate with the team working on the part.
What does this actually mean? Let’s say the manufacturer is sourcing one part–a hydraulic pump–and tells the supplier the required information (such as duty cycle, maximum operating pressure, and some basic size dimensions). The supplier can only build to specification and provide exactly what they were instructed.
But—what if the suppliers were given access to a larger amount of information? For example, the neighboring geometry in the engine compartment, fixed hydraulic plumbing lines, the packaging constraints, and other important details. By giving the supplier more information upfront, they can make recommendations on how to deliver a better part with enhanced performance and more efficiency.
This kind of supplier innovation extends beyond Tier 1 suppliers into Tier 2 and Tier 3. When OEMs detail information throughout the supply chain, innovations can extend even further. Once all the suppliers understand the manufacturer’s vision and innovation plan, then the suppliers can unlock true creativity and innovation. This is the promise that open innovation and supplier collaboration holds.
Open Innovation Improves Products – Without Sharing Secrets
This example proves the true value and benefit behind open innovation and supplier collaboration. Suppliers can contribute with incremental innovations by enabling improvements to:
- Product quality
- Product cost targets
- Development budgets and schedules
However, many believe that the disadvantages to open innovation outweigh the benefits. Manufacturers have a misguided thought that supplier collaboration equates to giving away secrets or letting suppliers in on too much privileged information about intellectual property. Manufacturers have the power to make their supplier collaboration as “open” or “closed” as they are comfortable with. In the next blog, I will review how changes in the industry are leading to open innovation—without sharing too many secrets.