In this guest post, Procurement Leaders invites GEP's Santosh Nair to discuss supplier innovation and examples where effective alignment and relationship management has led to recognised results.
Darwin's quote of "It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change" has never been truer than in today's business environment. Disruptive changes in technology, industry structures, business models, consumer preferences and global boundaries are altering the shape of every company. Some companies are thriving in this environment through ongoing innovation, whereas others are struggling to adapt.
Procurement can be a key driver of innovation if the right resources, processes, incentives and metrics are established. The fact that Apple, the quintessential innovator, is currently run by an executive who has his roots in procurement underlines the importance of this theme. GEP has had the privilege of working with several Fortune 100 clients to help them unlock value from supplier innovation and this series is aimed at sharing some of those the lessons.
In my experience, a critical success factor to innovation is incentivizing and empowering suppliers to share innovative value creation approaches with their clients.
Many companies struggle to find this balance in their supplier relationships and are not able to leverage the untapped value of their suppliers. Recently, we worked with a company segmenting their supply base, an exercise which enabled us to identify a few suppliers who could be strategic partners for the client and could form a trust-based long-term collaboration partnership. One of these suppliers had a multi-million dollar business relationship with the client and provided several critical components as well as having the capability to provide additional products to the client and expand their business. The nature of this relationship enabled us to incentivize and empower the supplier to explore additional innovation value drivers. The win-win nature and expectations from the strategic partnership was explained to the supplier's leadership team and this was received with wholehearted enthusiasm.
A joint brainstorming session was conducted and the supplier submitted multiple ideas on value creation, based on their working history with the client. These ideas were screened by an internal cross-functional team and prioritized based on overall value, implementation effort and long-term benefit.
The first of these ideas was recently implemented and reduced the expenditure on an item by over 80%. The client purchased plastic cases from the supplier to enclose a critical business product. Due to unique specifications and business criticality, these items were historically sole-sourced from the supplier for approximately $100/unit. The supplier did not make high margins on the cases and supplied this product as part of a broader portfolio.
The manufacturing process for the case involved machining of a large resin block to chip away at the block and create the case. This involved significant manual labor and also a lot of scrap material. The supplier proposed a new design and manufacturing process for the case, while retaining the core functional requirements. This process involved development of a mold into which liquid resin would be poured to create the case, minimizing manual labor and scrap.
Discussions ensued with several clent functions including procurement, marketing, engineering and operations before formal internal approval was received on the new design and process. The client and the supplier invested jointly in developing a new mold and conducting trial runs of the new case. Within two weeks, the new plastic case was replacing the older version and the cost-per-case dropped by approximately 80%. The supplier did not mind the lower price since their efficiencies and margins improved, and the strategic partnership opened doors to other business opportunities with the client. Truly a win-win situation.
I've seen few companies that would invest the time and trust in developing such strategic relationships with their suppliers but the ones that do, realize long-term sustainable business benefits. Stay tuned for the next part in our series.
Santosh Nair is Sr. Director with GEP Worldwide and a management consulting professional with over 12 years of experience in leading strategic & operational consulting engagements for Fortune 200 clients.