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Industries:  General 

Getting the most out of your suppliers via Innovation

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By: Ipsita Suman
Principal Analyst, Indirects

calender14 Feb 2019

getting-most-out-your-suppliers-via-innovation

The Procurement team has already been involved in improving bottom-line savings, process, etc. Now, with changing business scenarios leading to New Product Development, Procurement is highly expected to bring about Innovation. As most of the companies have already exhausted internal innovative approaches, they are turning towards suppliers in order to bring about Innovation.

Procurement teams have been focusing on process and system improvements to bring about innovation and encourage savings. However, with most procurement teams moving swiftly into mature phases, the low-hanging fruits have already been plucked.

According to the Deloitte CPO Survey 2018, 58 percent of the procurement leaders are focused on new products, services, and market development. Hence, Procurement’s role is changing from mere Cost Reduction to Innovation. Collaboration and Cooperation with key suppliers can help bring about Innovation and lead to the lowering of the Supply Chain Risk.

Below are the key drivers of Supplier Innovation 

Supply Chain Cost

  • The demand for high quality products at lower cost increases the pressure to come up with innovative ideas to decrease cost.
  • There is cost pressure across the supply chain, and it is not limited to the product.

Market Agility

  • Faster new product introduction (NPI) and a reduction in the time taken to realize profits
  • Formulating new supply channels and collaborations with suppliers to serve customers better

Technology

  • Technology revamp of supply chain requires increased supplier engagement.
  • Better technology enables greater supplier engagement and hence, provides opportunities to innovate.

IP Protection

  • Intellectual property threatened in modern day competition
  • Increase trust with suppliers to preserve IP and help them file new IPs

Proposed Solutions

  • Best In Class organizations use a combination of approaches to encourage Supplier Innovation in different scenarios.
  • It has been observed that organizations are able to maintain better relationships and negotiate better rates and payment terms with suppliers engaged in innovation.

Steps involved in a systematic innovation process

  • Need Identification: Companies must understand the needs of the customer to communicate them to the suitable supply base.
  • Translate: Companies must translate the customer needs into tangible specifications to set focus for the suppliers.
  • Seek & Share: Companies have to reach out to the relevant base of suppliers and share the customer’s need in the form of tangible specifications.
  • Assess: Companies must have the engaged suppliers in a transparent environment where the sharing of benefits is clear.
  • Select & Implement: Feasible ideas must be selected and guided by the company in a suitable infrastructure.
  • Communicate: Companies must efficiently communicate the success of the innovation with the customers to review the actual benefits achieved.

Innovation Models and Industry Case Examples

There are three different approaches to Supplier Innovation.

The People – Process – Tool methodology helps a company identify an area of approach for Supplier Innovation.

people-pocess-tool

Best In Class companies usually start with the Process approach, which is deploying SRM programs, Collaboration models, Fixed Profit, and Flexible Contract model. This is because these approaches can be managed and handled without the supervision of a third party or tool.

Case 1: Via Process – SRM Programs

The Procurement Organization conducts various SRM programs such as R&D collaboration, strategy discussions, ‘Supplier Innovation events,’ etc. to drive innovation among suppliers.

Case Example

Company

Innovation Strategy

Approach

Large CPG company

  • In the company’s collaborative innovation model, the role of supplier shifts from transactional, subservient providers of components or services to valued sources of new product or market ideas.
  • Their procurement teams enable this through highly strategic supplier engagement models that focus on the right part of the profit equation at the right phase of the product lifecycle.
  • The supplier scorecard assesses the total environmental footprint of external business partners and encourages continued improvement by measuring energy use, water use, waste disposal, and greenhouse gas emissions on a yearly  basis.
  • This will measure and improve the environmental performance of the company's key suppliers and business partners with three goals:
  • Enhance supply chain collaboration
  • Improve key environmental indicators
  • Encourage the sharing of ideas and capabilities to deliver more sustainable products and services for our consumers

Large F&B company

  • The company launched carbon management strategy and proprietary energy assessment tool to educate suppliers about potential opportunities to innovate their own operations.
  • The company has uncovered more than $60 million in energy savings opportunities and a 16 percent reduction in per-unit energy use across its beverage plants, as a result of its carbon management strategy and proprietary energy assessment tool.
  • By providing suppliers with access to the same energy assessment tools, a mutual return on investment is witnessed with their suppliers.

 

Case 2: Via Process – Supplier Collaboration Models

Procurement Organization chooses to work with single or multiple suppliers on a specific goal such as inventory reduction and collaborates effectively with suppliers, thereby driving innovation.

Case Example

Model

Description

Industry Example

Partnership model

  • The company works with multiple sources/suppliers, simultaneously, and deploys innovative techniques to solve the business challenges.
  • The company must have the potential to align multiple suppliers and work as a group to be successful.
  • A large technology company came up with a Joint Inventory Turnover system with its suppliers as a part of supplier collaboration efforts.
  • The inventory turnover time was reduced by 57 percent, and the company was able to achieve significant cost savings and maintain its competitive advantage in the industry.

 

Co-development model

  • The company enters into a strategic relationship with a specific source/supplier to achieve product/process-related innovation.
  • The company must have an excellent relationship with the chosen source /supplier to deploy this approach.
  • A large CPG company has partnered with its key suppliers for Joint Business Development Plans.
  • Suppliers who have made a significant contribution in innovation are awarded the ‘Partner to win’.
  • More than 250 innovation ideas were taken into the Joint Business Development plans in 2012.

Collaboration

  • The source company works with the entrepreneurs/supplier by investing in them and helps the external entity to develop their business idea to support the company’s end objective.
  • A large CPG company partnered with a firm to design and manufacture Pureit, a device providing safe drinking water.
  • The collaboration focused on design issues that came up during the development and manufacturing process
  • The concept received numerous awards for the breakthrough invention.

Joint Business Plan

  • Two or more companies having complimentary skills can enter into a strategic relationship to bring about any product/process-related innovation.
  • Two large Pharma companies came together to expand the therapeutic scope of their previous collaborations.
  • Company 1 offered medicinal chemistry expertise in drug discovery.
  • Company 2 supplemented these skills by providing feedback on commercial areas of value and development planning expertise.

 

Case 3: Via Process – Fixed Profit Margin Model

The Procurement Organization follows ‘fixed profit margin’ with suppliers, thereby ensuring profitability for suppliers, and it demands innovative solutions on cost reduction, quality improvement, etc.

Case Example

Business Case: Accessing Innovation through Fixed Profit Margin Model

A fixed profit margin in the innovative commercial  model encouraged the suppliers to come up with innovative solutions to cut production cost and optimize company’s spend.

Business Case

  • A leading FTSE100 Utility had increasing spend on one of its indirect category-ICT (Information & Communication Technology).
  • The category’s spend was approximately GBP 3 million, and the spend increased every year.
  • Suppliers enjoyed a good profit margin every year but deployed no innovative practices.

 

Challenges

  • Company’s business model did not motivate suppliers to come up with innovative practices.
  • Suppliers did not facilitate the company in optimizing the spend.

 

Approach

supplier-cost-price-variation

  • The profit margin for suppliers was constant throughout the contract period thereby motivating profit conscious suppliers.
  • Suppliers were encouraged to come up with innovative solutions to cut their production cost.
  • Suppliers were given tangible benefits to come up with innovative solutions adding value to business.

 

Benifits Achieved
  • Suppliers came up with innovative approaches to cut their cost thereby, reducing the spend.
  • Supplier’s motivation improved around process innovation.
  • Other categories replicated the IT Application and Development Category's innovation approach.

Case 4: Via Process – Flexible Contract Management -

The Procurement Organization realizes cost saving opportunities by providing more flexibility to suppliers through an innovative contract management process.

Case Example

Business Case: Accessing Innovation through Flexible Contract Management

Companies could realize cost-saving opportunities by providing more flexibility to suppliers through an innovative contract management process.

Business Case

  • A leading FTSE100 Utility company based out of UK had the tail spend category – Office tools and supplies where the yearly spend  was approximately GBP 1 million
  • The company maintained “core basket” with the suppliers where prices were negotiated to realize the savings in the tail spend category
  • The company assigned products into “core & non-core basket” only once a year.

 

Challenges

  • The spend increased when products were purchased from ‘non-core basket’ as the prices were not negotiated, and new products entering the market were automatically assigned into non-core basket.
  • New products entering the market were purchased in more number which increased the total spend

 

Approach

  • The company came up with new process in ‘Contract Management’ where suppliers were given complete flexibility in maintaining ‘Core basket’.
  • Monetary benefits were given to suppliers when the products were purchased out of the ‘Core basket’.
  • The suppliers update the contract every six months, and new products in the market were allocated into the ‘Core basket’ to help the company increase its spend on ‘core basket’ purchases.
  • The suppliers documented the items purchased, thereby helping the company control Maverick spend.

 

Benefits achieved

  • The Maverick spend decreased significantly.
  • Contracts were renewed every six months, and new products were available in the core-basket for cost-effective buying.

Once companies exhaust these models, they go for the Tool approach to bring about Supplier Innovation.

Via Tools: Crowdsourcing

Crowdsourcing is a technique used for gathering ideas from multiple sources such as subject matter experts, consumers, suppliers, employees, and stakeholders of companies.

Case Example –

Business Case: Accessing Innovation using Crowd sourcing

Crowd sourcing technique served as a platform for multiple suppliers to come up with innovative ideas in a short span of time, and subject matter experts on the platform facilitated the conversion of raw ideas into feasible business plans.

Business Case

A FTSE100 UK-based electricity and utility company with thousands of suppliers across the globe was looking for solutions for its critical projects such as repairing ageing pipes without digging, inspecting live pipe-crossings across railways and rivers, etc.

 

Challenges

The company‘s key suppliers were present across the globe which put more challenges for the company in terms of finding solutions quickly.

Suppliers had raw ideas, but those ideas could not be converted into feasible business plans.

 

Approach

The company decided to deploy crowdsourcing technique to effectively channelize the supplier’s ideas and convert them into an actionable business plan.

     -  Each supplier posted their ideas using the crowdsourcing platform.

     -  The ideas were channelized through industry experts, and selective ideas were screened thoroughly and shaped into business plans.

Industry experts helped the suppliers in converting their raw ideas into business plans.

The company came up with awards and monetary benefits which motivated more suppliers to come up with multiple ideas for the challenges posed by the company.

 

Benefits achieved

The company managed to find new innovative suppliers across categories.

In less than three months, more than twenty-three challenges posted by the company was successfully fulfilled with innovative solutions

The process encouraged the participation of more than a thousand suppliers.

Bringing about Supplier Innovation via People/ Third Party is the latest approach which companies are using.

Via People: Third Party Entrepreneur programs

Third Party firms help in driving innovation through workshops and coaching sessions. Both suppliers and buyers participate in these programs in order to bring about innovation.

Case Example

About the organization: Agropur Cooperative is a leading North American dairy firm founded in 1938. With sales of $5.9 billion in 2015, the Cooperative is a source of pride to its 3,367 members and 8,000 employees. Agropur processes more than 5.7 billion liters of milk per year at its 39 plants across North America. It also boasts an impressive roster of brands and products including Natrel, Québon, OKA, Farmers, Agropur Signature, Agropur Grand Cheddar, Island Farms, BiPro, and the Ultima Foods joint venture’s iögo and Olympic brands.

Ongoing Business Case - Agropur Cooperative, in partnership with the Quartier de l’innovation de Montréal, AgBioCentre, and NineSigma, have announced the launch of Inno Challenge, an initiative to create new dairy products through open innovation.

Agropur’s ‘Together, Let’s Reinvent Dairy’ challenge seeks to identify impactful new innovations that expand, sustain, and reinvigorate the use of dairy products and elevate dairy beyond its status as a household staple. The results of their efforts will be presented at Agropur’s Inno Expo.

Innovation Partner- The Quartier de l’innovation (QI) is an innovation ecosystem in the heart of Montreal that aims to boost the city’s potential for creativity. QI draws on the complementary resources of its numerous partners in research, training, innovation, and entrepreneurship to create concrete projects.

Supplier benefits - Up to four projects will each receive a grant of up to $25,000 and access to Agropur’s innovation support resources. Agropur will work with them to co-develop the selected concepts and bring them to the prototype stage.

Conclusion

Best In Class organizations use a combination of approaches to bring about Supplier Innovation in various scenarios. Procurement can exploit the People-Process–System approach in order to bring about a holistic development in Innovative strategies.

For new product development and R&D collaboration (mostly Direct categories), companies usually go for the process based Supplier Innovation approach.

However, there is a trend of Tool based and People based approaches also for Direct category Supplier Innovation. Supplier Innovation is relatively low in Indirect categories.

It has also been observed that organizations are able to maintain better relationships and negotiate better rates and payment terms with the suppliers engaged in Supplier Innovation programs.

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