When I talk with procurement professionals about supplier enabled innovation, early involvement in the innovation funnel is always a topic that comes back in the discussion. It is high on the agenda as it is perceived as one of the prerequisites for procurement and suppliers to be effectively and efficiently involved. But, is this really needed and in all cases?

In this article I’ll share some insights and considerations that matter for early involvement. Although they have been around for long-time, they nowadays seem to be still as relevant for the supplier enabled innovation programs that companies start up.

Late involvement in the innovation funnel

Late (too late) involvement of suppliers and procurement in the innovation funnel leads to missed business opportunities and revenue. In this situation suppliers and procurement are involved in a later stage of the innovation funnel. Typically, we refer than at the stages after conceptualizing such as prototyping or up-scaling of production when contracting of selected suppliers need to be done. By than the specifications are determined and fixed by internal engineers or stakeholders without looking widely in the supply markets via a strategic sourcing process. As a consequence the company might end up in single source situations, with gold-plated specifications, missing out on co-development options and over the product life cycled paying too much, which could result in revenue and margin losses on the sales side of the business.

This is the situation, which some variations to it, that procurement people very often have in mind if they call for the necessity of early involvement.

What role should Procurement and suppliers have in the innovation process

But should procurement always be involved in an early stage in the innovation funnel and when does it make sense?

It is important to realise that early involvement is not at all a free ride and comes with work, resource needs and often a long-term commitment that not always fits the time-frames of eg. category managers. For instance, collection of ideas, exchange of samples, collecting price indications, supplier information, bringing teams together, making sure your supplier is well coached on the internal processes, communication about project progress or sudden changes, bridging language and cultural differences between teams, all these aspects take time. And these aspects only take more time if your company is still on the change journey to take Supplier Enabled Innovation serious into the open innovation program. Many enablers will need to be put in place in that situation to get to a structural, efficient embedded end to end process. A change in which you move probably from a fantastic creative and happy jazz-band with great individual musicians to a well organised symphony orchestra with the best musicians playing the 9^th of Beethoven (thanks to Ton Geurts – former CPO AkzoNobel).

Further it shows from many studies that early involvement does not lead to better innovation (Suurmond and Wynstra, 2016). Reasons might be that suppliers always come first with their current products they want to sell. Also if there are too many supplier ideas in the beginning of an innovation process this probably might not make it a better more efficient innovation process.

Therefor it is good to consider how you scope the Supplier Enabled Innovation activities and where you want to be early involved. Three main considerations can help here.

1.The corporate innovation scope determines priorities for Supplier Enabled Innovation

First of all, supplier enabled innovation needs to be prioritized to support the corporate innovation program. This often means it will be about new products, molecules, packaging, marketing services or nowadays digital services. Procurement needs to align and team up with the business, the corporate innovation program and vice versa. These are the areas where the early innovation involvement matters and should become clearly anchored and embedded in the company processes.

This focus on corporate innovation priorities also means that a lot of supplier innovations happening in the NPR (indirect) categories will not be considered as priority areas. Here clear alignment and agreement with the functional heads (HR, Finance, SHE, IP, Travel, etc) how product/service improvements and innovations are introduced in the organisations is key.

2.The complexity of the product guides earlier or later involvement

Monczka, Handfield et al describe (Sloan Management review,vol 41, issue 2 – Avoid the pitfalls in supplier development) in 2000 that supplier involvement in the innovation funnel relates to the complexity of the supplied products and/or the technologies and the status of the suppliers (alliance, strategic vs commercial) (figure 1).

The more complex products and technologies are, and the more knowledge and competences the supplier has, the earlier involvement is required, to the extent that the supplier actually drives the innovation, or a joint development approach is needed. And yes, this means that for many products and services sourced, specifications and functional requirements can be determined, validated via a RfI to selected suppliers and followed up by a modified RfP.

3.Supplier capability and capacity (development responsibility) influence early involvement

In the same period, interesting studies of Finn Wynstra, Eric ten Pierick (2000) adapted by Robert Suurmond, Finn Wynstra for the International Supply management congress in 2016 and published by Robert Suurmond, Finn Wynstra and Jan Dul in  Supply Management Journal, January 2020 have shown in a meta-analysis of supplier involvement and effects on NPD performance that important considerations for early involvement of suppliers are:

-capacity of the supplier is larger than your own company

-capability of the supplier is larger than your own company

-the product, service elements have a high interdependence to the success of the new product

This leads to prioritisation for early involvement as displayed in the matrix (Finn Wynstra, Eric ten Pieryck, 2000, European Journal of Purchasing and Supply management):

Early supplier involvement is relevant for the strategic and critical development boxes, in which the supplier has the ability to drive innovation or where joint development is the rule.

Conclusions

The discussed considerations do have a consequence on supplier collaboration models (or partnerships) and could be used in the segmentation of suppliers to select innovation partners and how to work with those.

Hence segmentation and supplier collaboration models taking these considerations into account, support to allocate resources, time and efforts to the areas where early involvement truly has an effect on the ROI of innovation programs.

Of course other elements, not discusses here, need to be considered as well. You can think of alignment of overall company strategies, innovation track records, cultural fit, people wanting to work with each other and overall partnership fit. Therefor you can use the AIE company innovation partner checklist

Interested to discuss further on supplier enabled innovation, please contact us at the AIE company.

Value can only be created in the realization of the business strategy

With a vast range of suppliers ranging from Transportation, ICT, Consultants, Equipment, Facilities, raw materials and packaging, procurement organizations are normally responsible for a spend that equals a value of about 55-80% of company turnover. In recent years, Procurement moved from a focus on savings and price negotiations for the business, to adding value in terms of Total Cost of Ownership, sustainability (purpose), innovation and risk management (resilience). Areas core to business strategies of companies, is where the real value for business is perceived and can be realized.

To succeed moving towards ‘value creation’, project management, early involvement in projects, working in x-functional teams, front end loading, idea generation and good feasibility assessments are crucial.

No other function than Procurement is so well placed to connect the outside world of suppliers and to come up with answers to the business needs and the realization of the company strategy.

Wasting money, delaying projects and creating risky supply situations

Looking at project management in companies, much can be improved. Innovation, typically an important project management area, is according to 84% of executives important, however only 6% of executives are satisfied about the results (McKinsey). Procurement and supplier involvement was typically in later phases of projects, to negotiate the price, finish the contract and assure the goods or services could be purchased through the relevant Purchase channel in the Purchase to Pay process. Downside of this ‘late involvement’ was that it often created the perception that procurement was slowing down instead of adding value. It could also happen that requirements and specifications were already preset in the project team without proper sourcing process looking outside to ‘market’ and supplier offerings.  This cumulation of events could result into company money wrongly spent, Total Cost of Ownership only partly influenced, and the company locked in in risky supply situations.

Why should we use the capabilities and resources of the supply base to the utmost?  And are we indeed ready and willing to use key competences of suppliers and integrate those in projects?

Obtaining your fair share of R&D investments at your suppliers

Many of the suppliers invest dedicated time and efforts in innovation and R&D, usually between 2-14% of revenue, to maintain leading in their markets and build on their value proposition.  They have sales and technical specialists able and willing to support their customers in those fields they consider as their core competences.  It would not be wise to ignore and not use these competences, products, resources and their interest for joint development or involvement in projects. It is helpful to understand how much your supply base is investing in R&D and to monitor if you get your fair share. As an example: if your revenue is 5 bln Euro, your own R&D budget is 8% of revenue (400 mln Euro) and your 3^rd party spend is 60%, being 3 bln Euro. Assume your supply base also invests 5% average on their revenue to your company, this would mean that your augmented R&D budget could be 150 mln Euro.

Back to project management, involving suppliers with their resources and competences in early phase of projects can speed up projects. It can increase the value of the product life cycle of the products and can prevent that your company ends up in single sourced situation which are expensive, risky and difficult to mitigate. Even so important, it can minimize risks and quality issues in later phases. Time spend in early phases and even joint development lead to better understanding each other’s systems, processes and requirements. Can this and should this be done with all suppliers?

Key supplier-, partner- collaboration in projects

Of course, not all suppliers can add this extra value to the business. Therefore, Procurement segments its supply base and selects those suppliers that are capable and fit to participate and contribute in the strategic projects. Typically, these suppliers are selected and managed cross functional in the business groups and a long-term plan is in place showing opportunities and benefits to work on. Also, in projects, it asks for another way of working and linking suppliers to the project, in which collaboration platforms should be considered.

If we would like to continue in this path and get the maximum benefits for your company, there are consequences for how you run projects, how you work with the supply base, how you select and scout for the right partners, startups and how you collaborate internally in projects with the supply base.

Interested in value-based segmentation, innovation sourcing or organizing successful project management with suppliers, please contact us at the AIE company.