Getting Innovation from Suppliers

Article excerpt

Successful firms have understood the superiority of customer orientation over a firm's internal orientation ever since the promotion of the modern marketing concept by marketing gurus such as Jerome McCarthy, Theodore Levitt and Philip Kotler in the 1960s and 1970s. Customer-oriented firms are more likely to innovate and develop new products and services that are valued by their customers.

However, fostering customer orientation in order to guide the firm's innovation activities is not enough at a time when suppliers account for the largest portion of the value delivered to the customer, when the fragmentation of the supply chain has gone beyond the outsourcing of manufacturing and logistics tasks, and when suppliers have to bear more design and development responsibility than before. Companies like Siemens Automation Systems take heed of this by distinguishing "productivity suppliers" from "innovation suppliers" and managing them differently. From the former they expect cost reductions, and for the latter they orchestrate the industrial production of the resulting component to make the innovative solution usable in Siemens' products.

From our supplier innovation research conducted over the past 10 years we can derive the following unambiguous recommendations for getting innovation out of suppliers.

1. Identify and Attract Innovation Suppliers

There are numerous ways in which companies may promote, solicit, implement, and reward innovation with their suppliers. Encouraging ideas from suppliers can commence with standardized channels such as BMW's Virtual Innovation Agency, a Web portal to support active supplier scouting. In supplier innovation forums such as GM's three-day TechWorld conferences, supplier and buying firms can discuss innovation trends and dig deeper into technological developments.

However, such broad approaches and rather impersonal links can be only an initial step toward getting leading-edge innovation out of suppliers. Once a breakthrough innovation has been identified, co-location of engineers to explore the details and support to industrialize the resulting system or component are necessary. For example, ever since Porsche's initial commitment to the automotive supplier SGL in the late 1990s, Porsche has been highly involved with SGL in the development of the carbon-ceramic automotive brake. As a consequence, Porsche was able to use this revolutionary technology in its 911 model, four years earlier than other luxury-car makers.

2. Assess Suppliers' Downstream Customer Orientation

Despite the criticality of selecting suppliers for innovation activities, firms traditionally limit their assessment of the suppliers' technological and commercial capabilities. Our research shows that the orientation of suppliers further upstream in the supply chain toward the downstream customers plays a crucial role in the success or failure of the customer firm's new product. A supplier should understand, for example, the positioning of the customer in the market, or the societal trends that shape the end customer's buying behavior.

Suppliers' downstream customer orientation has a significant impact on innovativeness as well as on the cost and speed of new product development projects. Both translate into competitive advantage and financial benefits. What does that mean for buying organizations? They must augment their supplier selection process and assess the supplier's understanding of customers along the supply chain. Only a few companies do this.

3. Maintain Truly Collaborative Supplier Relationships

The automotive supplier survey conducted annually by the research firm, Planning Perspectives Inc. …

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