Nobody can help you like your suppliers but many organisations fail to exploit the full spectrum of vendors’ innovation
With costs rising and competition increasing, manufacturing and service organisations are looking to suppliers for innovation. Doing so makes sense. With manufacturing firms spending on average 50 per cent and up to 80 per cent of revenues on outside companies and service firms allocating up to 40 per cent, both are heavily dependent on vendors. They can also be an excellent source of innovation because they know what their customers need. And it is relatively easy for a vendor to transfer knowledge to a customer. It is, however, one thing for suppliers to have the means to transfer innovation to customers and quite another for a supplier to make its innovation available.
Collaborative buyer-supplier activities build trust and therefore foster innovation transfer. There are, however, competitive activities in every buyer-supplier relationship that get in the way. For example, a company and its contractor may unselfishly work together diligently to provide the highest quality end product, thereby unconsciously strengthening the trust between them. But when the same company asks the same supplier for price reductions, both will compete to maximise the outcome of the negotiation to their advantage.
Over years of evaluating supplier working relations in numerous firms in a variety of manufacturing and service industries, we found three dominant customer competitive activities that create stress in buyer-supplier working relations. It is this stress and resulting mistrust that affects a vendor’s willingness to make innovation available:
Conflicting objectives between various customer functional areas that put the supplier in the middle of a battleground with nowhere to hide or in the distasteful position of being a referee.
Excessive and late engineering or specification changes that the supplier is expected to fulfil regardless of the needed resources or the reasonableness of the required completion date; and
Customer price reduction pressure that considers only the customer’s financial needs without regard to the demand or the supplier’s financial state.
Conflicting objectives. When various customer functional areas do not talk to one another and/or are in competition, vendors get caught between the proverbial rock and a hard place. This is quite typical in manufacturing firms where purchasing and engineering do not reconcile their different (and sometimes competing) objectives when developing new products. Buyers try to keep costs down, while engineers, trying to maintain a solid reputation with the end user of the company’s products, want the “best” product for the customer. Similar conflicts are commonplace in service companies when it comes to different areas agreeing on project specifications. Such conflicting objectives can create considerable supplier stress and affect its willingness to make innovative available to the customer.
Engineering/specification changes. In manufacturing and service industries, the need for last-minute changes – whether real or perceived – can adversely affect suppliers. In complex products such as vehicles, aircraft engines and even small power tools, such design changes in product development are often implemented to improve new products. For service industry firms, sudden changes in market conditions, new competitive activities and rapidly developing opportunities can result in the need to quickly modify a marketing, advertising or sales activity that had been in the planning process for months. These situations create supplier stress as personnel are pulled off other projects to help create a new programme that meets the customer’s needs within the time limits of the original project. Vendors often believe these last-minute changes show little, if any, concern for the impact on them and their resources and little, if any, regard to standard processes and procedures. Subsequently, supplier commitment to the customer may dissipate, as will its willingness to make innovation available.
Price reduction pressure. Price reduction pressure on a supplier can be positive for all parties if the customer approaches the vendor with the lower price expectation in a way that is consistent with trusting supplier working relations. Customer price reduction expectations, however, typically involve demands placed on vendors in a somewhat adversarial manner that makes the situation a win-lose proposition as, inevitably, one party gives up monies to the other. Regardless of the outcome, stress generated in the negotiation process as customer and supplier attempt to reconcile their differences can result in the supplier being less willing to make innovation available to the customer.
Supplier innovation behaviourThere are two relatively common means used by suppliers to make innovation available to customers:
- Internally investing resources in technology that will result in innovative products or processes to support potential business with the customer.
- Sharing new technology with a customer without the assurance of a purchase order.
These activities indicate a supplier’s commitment to the relationship and allow both customer and supplier to develop confidence and trust in the stability of their working relations.
In the automotive industry, for example, vendor willingness to invest in and share technology is a major differentiator of successful customer-supplier collaborations. Automotive suppliers reserve their greatest technological innovations for customers with whom they have a trusting, co-operative working partnership. Also, those customers with which vendors have the best working relations are more likely to be told about new technology first and, if accepted, often receive short-term exclusive contracts for use of it before the vendor takes it to other automotive manufacturers.
The importance of supplier innovation cannot be underestimated, as the competitive positions of many well-established companies have eroded in many industries because of the lack of new technologies.
What’s a customer to do?Given the importance of supplier innovation, what can a company do to ensure its vendors offer access to their new ideas? Our research found that the way a customer can increase supplier innovation is quite clear: the company should maximise its collaboration activities and minimise its competitive activities that affect the vendor’s innovation activities.
Maximising collaborative activitiesIf a supplier is to undertake customer-specific innovation investments, it must perceive that its working relations with the customer are reasonably stable and capable of lasting at least long enough to recoup the costs of its investment. These supplier perceptions suggest that their innovation activities are affected by customer-initiated collaborative activities.
When a supplier is exposed to specific customer collaborative activities, it will, over time, become convinced that the customer is committed to creating trusting working relations. The perceived customer commitment instils confidence in the supplier that working relations will be strong in the future. The vendor subsequently reciprocates by maintaining, if not enhancing, the trusting working relations with its customer, which includes making innovation available to the customer.
There are three specific areas of collaborative activities that customers can initiate to reduce the stress in their supplier working relations and increase supplier innovation that can benefit the customer.
- Involve suppliers in the company’s product development and other processes.
- Increase the openness and frequency of sharing information with vendors in a timely manner.
- Work with suppliers to help them improve their cost and quality competitiveness.
Supplier involvement. Customers involve suppliers throughout their product development process. This can range from asking vendors for design suggestions, giving them complete responsibility for the design and development of the new product in the early stages through to having suppliers help commercialise the product and manage aftersales product quality. Done correctly, supplier involvement can be a motivating force for increasing customer and vendor investment in the relationship. Giving the supplier a greater involvement in the customer’s business results in improved use of joint resources, which, in turn, leads to further customer-supplier co-ordinating activities as the customer becomes increasingly more dependent on the supplier and vice versa.
With greater involvement in customer activities, the supplier becomes more knowledgeable of the customer’s future plans and strategies, technology roadmaps and product development programmes. This enables the vendor to influence future business opportunities with the customer through its innovation-related activities. Subsequently, as the supplier becomes more involved with the customer, the former is also more inclined to work on customer-related innovation activities, ultimately benefiting the customer and itself.
Customer communication. For supplier involvement to occur in its most effective and efficient manner requires direction from the buyer. The company’s co-ordination with its customer needs timely and adequate information sharing by the customer. Communication by the customer of future plans and expectations, along with sharing technology roadmaps, help suppliers to better prepare to meet customer needs. Overall, open and honest communication creates a supportive and trusting environment that facilitates and increases vendor commitment to the relationship, while reducing the vendor’s fear of unexpected actions by the purchasing organisation that will result in lost business. The end result is increased supplier innovation activities that will benefit the customer.
Customer assistance. Customers’ reliance on their suppliers, coupled with competitive pressures, are causing customers to put increasing demands on them for lower prices and higher quality. Suppliers, however, do not always have the means or the capabilities to meet these demands. As a result, they frequently look to the customer for help and support. Or, as often happens with more enlightened buyers, the customer offers help before it is asked. In either case, the customer assistance signals to the supplier that it has confidence in its long-term capabilities. These activities increase the supplier’s confidence in the continuity of working relations, which, in turn, motivates it to engage in reciprocal behaviour, including customer-specific innovation activities.
Implementing collaborative activities. As the collaborative activities occur, the supplier becomes more forthright in sharing innovation with the customer, even without the assurance of a purchase order, and becomes more willing to invest in innovation in anticipation of future, but undefined, new business from the customer. Underlying this willingness is the supplier perception that the customer is committed to working together over the long term as long as the goods supplied remain competitive. In other words, the supplier perceives future business as assured, as long as the goods it sells continue to be competitive. But even if it falls behind its competition, the trusting working relations imply that the customer will give the supplier a chance to catch up and may even help it to do so before sourcing the goods from another vendor.
To reach this state of assurance between customer and supplier, the customer must be the initiator of the collaborative actions that will mitigate the stress in its working relations. The reduced stress will, in turn, result in the vendor being more inclined to offer innovation to the customer.
Minimising competitive activities The customer must recognise that it is difficult, in the short term, to minimise competitive activities and overcome the relational stress. The need for the purchasing organisation to apply constant pressure for price reductions to its supply base is dictated by the increasing pressures of the global business environment that confronts virtually every company. But if this necessary pressure is applied in a manner that is consistent with trusting supplier relations, the negative impact of the pressure on working relations will be minimised and the relational stress will be reduced.
Conflicting functional objectives, and excessive/late engineering and specification changes, are much less easily controlled in the short term. These are often symptomatic of issues in a company that cannot be resolved without fundamental changes in processes and procedures. Subsequently, as steps are being initiated in the short term to reduce the frequency and intensity of these activities, the customer must compensate by strengthening its collaborative actions. By doing so, relational stress will be mitigated and supplier willingness to invest in the relationship and innovation activities will remain high, rather than dissipating.
This model and its implementation recommendations underline the importance of companies aligning themselves with innovative suppliers for an extended enterprise. By doing so and following the recommendations above, a company can help ensure it is maximising its opportunities to gain innovation from its suppliers, thereby increasing its competitive advantages in the marketplace while strengthening working relations with these external sources of new ideas.
