Spend Matters welcomes a new guest post from Alan Day, chairman and founder of State of Flux.
A vendor manager and the supplier’s account manager get to the end of year supplier review and have the awkward conversation about innovation, which goes something like this:
Vendor manager – “... the contract says you were to give us five innovations over the year and we haven’t received any.”
Supplier’s account manager – “What do you mean, we gave you ten!”
Vendor manager – “Innovations? They looked more like speculative sales pitches to us.”
Supplier’s account manager – “They were innovations, but what do you expect when we make the effort to submit new ideas and never get any feedback.”
At best these conversations become a source of frustration for both parties. And at worst they lead to “supplier fatigue” – that is, the supplier deciding it is not worth the time and trouble to give you any more innovations as they know they never go anywhere.
From our research, we have seen that harnessing supplier innovation is often one of the key drivers for starting a supplier relationship management (SRM) program and also one of the reasons organizations actively seek to become a customer of choice. At State of Flux, we define a customer of choice as an organization that, through its practices and behaviours, consistently positions itself to receive preferential access to resources, ideas, and innovations from key suppliers, giving it a competitive advantage.
Over the last five years of conducting global SRM studies, we have seen that the more you invest in SRM, the more benefit you get out of it. SRM “leaders” not only have the most developed programs, but they are also receiving much higher benefits, both in terms of hard financial (some in excess of 8%) as well as customer of choice benefits.
If your organization is not among SRM leaders, chances are you’re actually falling behind. For over the last five years we have seen the benefit gap widening between “leaders” and “followers,” especially in customer of choice benefits, with the greatest differential being access to innovation.
When we review different approaches to innovation, we split innovation into two categories: “open” versus “guided” innovation. And we look at how organizations handle these. Open innovation is where you simply invite suppliers to come to you with any good ideas or improvements. Guided innovation is where you post a need or a challenge to a supplier or groups of suppliers, and ask them to respond with their views on how to solve the need or challenge.
The common challenges we observe in organizations harnessing and managing innovation are as follows:
- Definition of innovation – It’s often not clear what the organization means by innovation. We have seen innovation being described as anything from major step changes to continuous improvement.
- Process to receive and review open innovations – Open innovations are like gold and should be treated as such. Remember, you didn’t ask for them, and the suppliers care enough to give you their thoughts and ideas. However, these are often under-valued and are either turned down without proper consideration or disappear into a “black hole” of confused roles and responsibilities without real ownership.
- True innovation or sales pitch? – Innovation is often confused with sales pitches and suppliers using this simply as a forum to sell more.
- Process to receive and review guided innovations – Crucial to benefitting from innovation is having a process that enables you to evaluate suppliers’ responses and act on their suggested solutions. Many organizations have a haphazard approach that relies on personal contacts or simply throwing ideas over the wall into R&D.
- Supplier feedback process – Crucial to managing both proactive and reactive innovation is having a supplier feedback process in place that keeps suppliers informed. Nothing frustrates suppliers more than submitting ideas, only to hear nothing for months.
- Benefit sharing – Our SRM research has shown that most organizations still struggle with sharing benefits with suppliers, both in concept and in practice.
- Contracts – Large organizations often fall into the trap of having an intellectual property clause within the supplier contract, stating that they own any good idea or innovation the supplier brings to them – hardly an incentive for suppliers.
So what can you do differently to ensure you are the customer of choice when it comes to receiving innovations from suppliers? Ask yourself:
- Have we defined what our organization regards as innovation? Is innovation limited to big “game changing” ideas or does it include incremental improvements? There isn’t a right or wrong answer, only the answer that’s right for you.
- Are you happy and willing to receive open innovations? Do you have the infrastructure in place to handle them effectively and efficiently?
- Do your suppliers understand your innovation process and have you educated them not to regard it as just another sales channel?
- Have you defined a template that requires the supplier to complete a mini business case for the innovation? This will ensure it is focused on adding value to your organization and will aid the evaluation of these good ideas to see if you want to pursue them.
- Are you mature enough as an organization to admit you don’t have all the answers and are therefore prepared to receive help from your suppliers? This is a great way of expanding the collective “brain power” on problem solving by using current and even prospective suppliers.
- Are you giving suppliers constructive and regular feedback? This is vital to keeping the pipeline of good ideas flowing. Once this pipeline is blocked it will be extremely difficult to get it moving again.
- Are you able to share the benefits of innovation with your suppliers? Whilst we appreciate that in practice this may be difficult, especially as it is often hard to calculate the exact impact of innovation, we believe you need to firstly accept the concept and then build practical mechanisms. Remember, sharing the benefit does not always need to be a 100% financial arrangement.
- Is your contract conducive to innovation? Look carefully at your IP clause and rather than claim ownership of all ideas / innovations, look at time bound exclusivity as an alternative.