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March 12, 2012

Collaborative Innovation in the Supply Chain

In a post entitled Innovation from the Outside In, I referenced an article by John Yuva, editor of Inside Supply Management." ["Share and Share Alike," Inside Supply Management, Vol. 22, No. 7, September 2011] I indicated that Yuva makes a number of interesting points about collaborative innovation in the supply chain which were beyond the scope of that post, but I promised that I would discuss his ideas in a future post. This post is a fulfillment of that promise. Yuva writes:

"In today's marketplace, innovation is the cornerstone of competitive survival. Few companies can go it alone and remain viable. However, fostering innovation with suppliers through collaborative support and trusted relationships is no easy task. Innovation for any company represents potential revenue and leverage over competitors. It's time to dismantle the barriers to collaborative innovation and consider the value proposition and return on investment that is attainable. It's going to require giving and taking from both sides. However, the results may transform how the supply chain collaborates, and bring solutions to the marketplace."

Whenever one discusses collaboration between independent organizations, one must also raise the subject of trust. Trust is a particularly important issue when one is talking about collaborative innovation because the whole point of such collaboration, as Yuva notes, is to gain a competitive edge over rivals. That means that intellectual property and proprietary information is likely to be involved. As a result, a trusted relationship is the sine qua non for collaborative innovation. A company simply can't afford to give away its most cherished intellectual assets. Trust is dealt with in an almost casual manner in Yuva's article, but I think that trust is the 600-pound gorilla in the room. Yuva continues:

"Chris Thoen, former managing director, global open innovation office for Procter & Gamble (P&G), now senior vice president/global head, science and technology, at Givaudan Flavors Corporation in Cincinnati, says the future of competition is not going to be how well organizations create innovation on their own. Those that win in the future will be good at finding innovation, no matter where it is happening — internally and externally. 'You must be good at creating a comfort zone so that external partners will want to work with you as a company, on an ongoing basis,' says Thoen. 'It's about establishing those sustainable relationships where you can create new innovations over and over again with those partners.'"

A sustainable relationship is a trusting relationship. Yuva reports that a couple of years ago (2010) Capgemini published a study entitled Collaborating for Innovation. According to Yuva, "Capgemini surveyed a variety of manufacturing industries to gauge their levels of collaborative innovation both internally and externally with customers and suppliers." He continues:

"While the study noted that more innovation initiatives are occurring in the manufacturing sector among different partners, the primary focus remains cost reduction rather than value chain creation through collaborative partnering. 'To cope with the technological and competitive challenges, manufacturing companies must increase active involvement of their suppliers in the value creation part of the innovation process instead of just relying on delivery of defined components,' reads the report. 'As this happens, suppliers' roles shift towards risk-sharing models, which require new collaborative processes and tools.'"

How effective various industries are in collaborating with their suppliers in the innovation process is depicted in the following graphic.

Effectiveness of Involving Suppliers in the Innovation Process by Industry

It's not too surprising that the Auto, Aerospace & Defense industries didn't manage to achieve any excellent ratings. Traditionally they've made their profits selling proprietary equipment. That could be changing, especially in the auto industry. Following last year's disastrous earthquake/tsunami in Japan, that country's automakers began collaborating with suppliers in new ways. And, if you've been watching much television, you may have seen the Cadillac advertisement that trumpets the fact that Ferrari borrowed braking technology from the General Motors. Yuva goes on to note that there are "barriers to supplier innovation sharing." He writes:

"As supply management professionals know, many factors can dictate the success of such relationships. It can be a combination of several things — with culture near the top of the list. Henry Chesbrough, Ph.D., adjunct professor and executive director for the Center for Open Innovation at the University of California, Berkeley, says the 'not invented here syndrome' propagates the lack of trust in ideas from external sources. Often, whether an organization trusts an idea or innovation, it's kept in-house to ensure others in the marketplace cannot use it for competitive advantage. When it involves a supplier, organizations are essentially holding the intellectual property (IP) hostage."

I agree with Chesbrough that corporate culture plays a big role in innovation. For more on that topic, read my post entitled Innovation and Corporate Culture. Yuva continues his discussion of barriers to collaborative innovation:

"Capabilities are another factor that hinders collaborative supplier innovation sharing and value creation. There are two scenarios where capabilities become an issue. The first is when a solution doesn't benefit the business unit or enterprise but remains unusable to outside partners, as well. For example, during a manufacturing or chemical process, there may be byproducts that could prove beneficial or cost-effective for suppliers. Unfortunately, if there's no direct or immediate benefit to the business unit or organization, the discovery sits on the shelf rather than being shared with supply chain partners. The second scenario occurs when an innovation is shared externally but no IP ownership or contracts are established to reap any of the rewards. For example, Chesbrough conducted research at a major business solution manufacturer. He studied several R&D projects where some outcomes were adopted by the business, while others were explored further outside the organization. Despite many of these projects failing externally, some became extremely successful and evolved into new companies. Unfortunately, the organization failed to incorporate technology grant-back provisions in its contracts to benefit from new solution applications."

While no company likes to be deprived of revenue it feels it rightfully deserves, Yuva points out there is another side to the IP coin. He writes:

"Customers are now demanding from suppliers all IP rights for all applications whether they're useful to the business or not — to the detriment of collaborative innovation. While that type of demand can be an innovation killer, it's typical in contracts between large customers and smaller suppliers. However, customers are only hurting themselves, says Chesbrough, because they're strangling the incentives for innovation in the supply chain. 'Within a network of supply chain partnerships, customers need to let go of complete control over their suppliers' IP and inventions,' he says. 'This enables suppliers to explore other applications of these solutions and markets, which may lower the cost of the input to the customer if they achieve some real volume in another application.'"

The following chart from the Capgemini study makes it abundantly clear that companies want to hold on to the IP rights.

Importance of Intellectual Property Control as Criterion During Partner Selection by Industry

If lack of trust and an unwillingness to share aren't barriers enough, Yuva reports, "There are other supply chain activities that can halt innovation sharing before it begins." He explains:

"In the Winter 2010 edition of the MIT Sloan Management Review, authors John W. Henke Jr. and Chun Zhang reveal in their article, Increasing Supplier-Driven Innovation, that while the knowledge transfer tools exist between customers and suppliers to share innovative thinking, those communication tools and channels are not being used. Why is this? The authors cite three competitive activities that thwart supplier innovation sharing:

1) Conflicting objectives among the customer's functional areas that put the supplier in a compromising position, either in the middle of a battleground with nowhere to hide or in the distasteful role of referee

2) Excessive and often late engineering or specification changes that the customer asks the supplier to fulfill without regard for the needed resources or the reasonableness of the completion date

3) Price-reduction pressures on suppliers that consider only the customer's financial needs — not the fairness of the demand or the supplier's own financial state."

Obviously Yuva doesn't believe that these barriers are insurmountable. So he asks, "What is it going to take to move beyond the factors and activities that stifle collaborative innovation sharing?" His answer, "Simply put, become a better customer and supplier to one another. Both parties can accelerate top-line growth initiatives and generate value through innovation by working as partners rather than adversaries. A good starting point is to incorporate incentives and metrics to reward and measure innovation input and value creation." Not every customer/supplier relationship may worth the effort it takes to do innovation right. So Yuva asks, "Which suppliers should the organization pursue for innovation sharing?" He continues:

"By segmenting suppliers into groups based on strategic relationships and capabilities — Gold, Silver and Bronze, for example — each would have specific measures and rewards. Chesbrough says each group of suppliers receives a scorecard, with Gold suppliers having the broadest and most strategic measures. The Silver group would include some but not all the measures and rewards of the Gold suppliers, while the Bronze suppliers would maintain their current relationship with supply management and continue focusing on cost, availability and incoming quality. 'In addition to price, and the ability to deliver on time and the quality of what is shipped, you would add measures about innovation,' says Chesbrough. 'How many new ideas do my suppliers come up with? How useful are these ideas? How much value do they create and how much money do they save? With these additional criteria for your Gold and Silver suppliers, you're broadening the scorecard.'"

The tighter the relationship the more trust is involved because information must be shared. Yuva continues:

"By sharing the same investment forecast and innovation needs, all partners can work together to develop solutions that fill those gaps and needs. 'In this way, you're taking the relationship out into the future, creating more trust and sharing more strategic information with each other,' says Chesbrough. 'You can't trust everyone on day one. You have to earn the trust. And that means, in turn, you have to be trustworthy yourself. Customers can sometimes take advantage of their suppliers for very short-term reasons. That's just exploiting your supplier.'"

Chesbrough went on to tell Yuva that "when trust, openness and collaboration exist between organizations and their suppliers, it truly is a unified supply chain. Suppliers are an extension of operations within organizations." Yuva continues:

"Chesbrough encourages supply chain partners to include employee rotations in each others' organizations. A three- or six-month rotation in a Gold supplier or customer facility can uncover strengths and weaknesses that everyone can capitalize on or strengthen. Thoen agrees. When these collaborations with suppliers exist, success is apparent when you enter a room with both parties present and you do not know who is from which company, he says. 'It really is a very open collaboration and exchange of ideas. Because innovation occurs during the early R&D phase at the beginning, there will, of course, be technical challenges. Not everything is going to be successful. But with that openness, and the collaborative exchange of information and ideas, you will speed up the innovation process and come back with better and stronger solutions because you are being open and thinking creatively about the challenges.'"

I'm a big supporter of collaborative innovation. Whenever Enterra Solutions looks to develop a new offering, we look for a partnering company that sees the benefits of co-development. This approach invariably benefits both companies and results in a much better product.

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