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A flexible approach to supplier contracting is needed for Supplier-Enabled Innovation. Sticking with traditional ways will undermine procurement’s efforts to drive innovations from the supply base.
The importance of structuring contracts differently in supplier innovation was highlighted earlier this month as General Motor’s Senior VP of Global Purchasing and Supply Chain, Steven Kiefer, explained how allowing suppliers to retain their intellectual property was instrumental in the company’s recently launched electric car, the Chevrolet Bolt.
Speaking at the CAR Management Briefing Seminars, Kiefer said GM had to change how it did business with non-traditional suppliers to use their technologies, with the handling of IP in its contracts playing a central role in doing so. He additionally told Automotive News that these contracts may become the blueprint for future car programs, and that contracts of between 10 and 12 years had already been negotiated for the car maker’s next-generation vehicles.
GM’s use of these contracts to tap into supplier technologies is indicative of how they fit into an SEI strategy. To drive intellectual capital from the supply base and co-develop with third parties, the conventional, sometimes rigid contracts that buying organizations are accustomed to must be replaced with the kinds of contracts that Kiefer describes.
The difference between the two is distinct. A traditional supplier contract serves as a reference point for the obligations of each party, with the power typically lying with the customer. The supplier is expected to produce X number of goods by a certain date and at a certain level of quality; while the buying organization makes payments at an agreed time.
The expectations of each party in an SEI relationship – where advanced technologies or other innovations are being shared – are more nuanced, with flexibility, transparency, and gain-share playing major roles. For GM’s Bolt, this meant that the IP of the technologies used stayed with suppliers instead of being transferred to GM. For several member companies of the Supplier-Enabled Innovation Center, it has meant adding more rewards than usual to their contracts.
Becoming a customer of choice
But getting to the point where such a contract’s terms can be agreed requires legwork. Before getting there, a buying organization must establish itself as a committed customer of choice.
If a supplier thinks it can find better value and growth potential with another customer – for GM, a realistic risk in the quickly developing electric car industry – then the foundations upon which the new relationship is built will be shaky. Quite simply, the supplier might be unwilling to share the desired innovations, and may go to a competitor. Building this reputation will take time, but is entirely possible for a determined procurement function.
Buying organizations that have this trust will be in a position to agree long-term, mutually beneficial contracts with key strategic suppliers. This paved the way for GM’s use of the technologies necessary for building the Bolt; while for the various member companies of the SEIC, it has led to external technologies and expertise increasingly appearing in their product ranges. Philips are a prime example, with 67% of their products now impacted by external capabilities.
Ultimately, however, the success of a long-term contract is measured differently to that of a conventional supplier agreement. While GM’s procurement of different supplier technologies and Philips’ extensive use of external expertise can serve as golden standards, long-term contracts also need to be fluid, with targets evolving to ensure that the relationship remains beneficial for both supplier and buyer.
This will, of course, take time and commitment on both sides – but for any buying organization that puts such an approach in place, emulating GM’s success and co-creating an innovative product will be within reach.
To learn more about Supplier-Enabled Innovation, please register to attend our invitation-only SRM & Innovation Summit on 27 September 2017.