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Implementing Supplier Innovation:Case Study Findings

A CAPS ResearchInitiative

Robert M. Monczka, Ph.D.Director, Strategic Sourcing and Supply Chain Strategy

Research, CAPS ResearchDistinguished Research Professor,

Supply Chain ManagementW. P. Carey School of Business

Arizona State University

Phillip L. Carter, DBAExecutive Director, CAPS Research

Professor of Supply Chain Management, Harold E. Fearon Chair in Purchasing

W. P. Carey School of BusinessArizona State University

Thomas V. Scannell, Ph.D.Associate Professor

Haworth College of BusinessWestern Michigan University

Joseph R. Carter DBA, CPSM, C.P.M.Avnet Professor of Supply Chain Management


CAPS Research

June 2010

Implementing Supplier Innovation: Case Study Findings

A CAPS ResearchInitiative

Robert M. Monczka, Ph.D.Director, Strategic Sourcing and Supply Chain Strategy Research, CAPS Research

Distinguished Research Professor, Supply Chain ManagementW. P. Carey School of Business


Phillip L. Carter, DBAExecutive Director, CAPS Research

Professor of Supply Chain Management, Harold E. Fearon Chair in PurchasingW. P. Carey School of Business


Thomas V. Scannell, Ph.D.Associate Professor

Haworth College of BusinessWestern Michigan University

Joseph R. Carter DBA, CPSM, C.P.M.Avnet Professor of Supply Chain Management


CAPS Research

2010

Copyright © 2010 Institute for Supply Management™ and W. P. Carey School of Business at Arizona State University.

All rights reserved. Contents may not be reproduced in whole or in part without the express permission of CAPS Research.

CAPS Research would like to acknowledge and thank the companies thatparticipated in this research. Although these companies asked to remain anonymousin this report, they generously and openly took part in the interviewing process.Their experiences and insights greatly added to the depth and breadth of theresearch.

We would also like to publicly acknowledge and thank the following members ofthe extended research team for their contributions:

• Steve Gozdecki, an independent writer, provided ongoing editorial guidanceand communications support for the study

• Debbie Maciejewski, CAPS Research who provided scheduling andcoordination support with participating companies

• Kathleen A. Chester, ISM for preparation of numerous draft reports andadministration with participating companies

ISBN 0-945968-81-7

2 Implementing Supplier Innovation: Case Study Findings

Acknowledgements

Innovation of products, services and processes is a critical strategic element atcompanies such as P&G, Whirlpool, Philips, Ford and others worldwide. Importantinnovations are developed internally, externally or jointly established.

However, firms have not yet fully established how they will most effectively leverageexternal supplier capabilities to accelerate innovation to the benefit of both buyersand suppliers. Innovation sourcing requires aligned and linked customer-drivenstrategies between senior company executives, supply and strategic suppliers, whichare in early development at most firms.

In this and a complementary report, Accelerating Innovation through Effective SupplierCollaboration, CAPS Research explains how leading companies and their suppliersare engaging in supplier innovation. The research examines the strategies andapproaches that are in place in a number of companies to accelerate and obtainsupplier innovations. Company case examples describe these strategic approaches,barriers to success, enablers and overall critical issues.

Forward

3CAPS Research

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Chapter 1 Achieving Supplier Innovation: Company Examples . . . . . . . . . . . . . . 10

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Supplier Innovation for Competitive Advantage . . . . . . . . . . . . . . . . . . . . . . . . 10Case Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Value from the Case Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Chapter 2 Case Study: Desco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Company Background and Competitive Environment . . . . . . . . . . . . . . . . . . . 13Company and Supply Innovation Strategy, Structure and Process . . . . . . . . . . 13Case-Specific Product and Project Description: Control Unit Interface with

Decorative Overlay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Insourcing/Outsourcing and Collaboration Decision Process . . . . . . . . . . . . . . 14Supplier Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Contract Development and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Collaboration Strategy, Structure and Process . . . . . . . . . . . . . . . . . . . . . . . . . . 16Project Challenges and Opportunities for Improvement . . . . . . . . . . . . . . . . . . 17Innovation Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Supply Management’s Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Important Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Key Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Chapter 3 Case Study: The Multi-Products Company . . . . . . . . . . . . . . . . . . . . . . 20Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Company Background and Competitive Environment . . . . . . . . . . . . . . . . . . . 20Company and Supply Innovation Strategy, Structure and Process . . . . . . . . . . 21Case-Specific Product and Project Description: The Common Office

Product (COP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Insourcing/Outsourcing and Collaboration Decision Process . . . . . . . . . . . . . . 21Supplier and Contract Manufacturer Selection Process. . . . . . . . . . . . . . . . . . . 22Project Challenges and Opportunities for Improvement . . . . . . . . . . . . . . . . . . 23Innovation Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Supply Management’s Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Important Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Key Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Chapter 4 Case Study: Integrated System Design . . . . . . . . . . . . . . . . . . . . . . . . . 27Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Table of Contents


Company Background and Competitive Environment . . . . . . . . . . . . . . . . . . . 27Case-Specific Product and Project Description: The Positioning Platform. . . . . 27Insourcing/Outsourcing and Collaboration Decision Process . . . . . . . . . . . . . . 27Supplier Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Contract Development and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Collaboration Strategy, Structure and Process . . . . . . . . . . . . . . . . . . . . . . . . . . 31Project Challenges and Opportunities for Improvement . . . . . . . . . . . . . . . . . . 31Innovation Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Supply Management’s Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Important Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Key Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Chapter 5 Case Study: I-Com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Company Background and Competitive Environment . . . . . . . . . . . . . . . . . . . 35Company and Supply Innovation Strategy, Structure and Process . . . . . . . . . . 35Case-Specific Product and Project Description: Data-to-Text Messaging . . . . . . 36Insourcing/Outsourcing and Collaboration Decision Process . . . . . . . . . . . . . . 36Supplier Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Contract Development and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Collaboration Strategy, Structure and Process . . . . . . . . . . . . . . . . . . . . . . . . . . 38Project Challenges and Opportunities for Improvement . . . . . . . . . . . . . . . . . . 39Innovation Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Supply Management’s Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Important Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Key Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Chapter 6 Case Study: InventCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Company Background and Competitive Environment . . . . . . . . . . . . . . . . . . . 42Company and Supply Innovation Strategy, Structure and Process . . . . . . . . . . 42Case-Specific Product and Project Description: The Dirt Destroyer . . . . . . . . . 43Supplier Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Contract Development and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Project Challenges and Opportunities for Improvement . . . . . . . . . . . . . . . . . . 44Innovation Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Supply Management’s Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Important Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Key Insight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Chapter 7 Case Study: ECOMP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Company Background and Competitive Environment . . . . . . . . . . . . . . . . . . . 47Company and Supply Innovation Strategy, Structure and Process . . . . . . . . . . 47Case-Specific Product and Project Description: The Electronic/

Mecanical System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Insourcing/Outsourcing and Collaboration Decision Process . . . . . . . . . . . . . . 49Supplier Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Contract Developmentt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Collaboration Strategy, Structure and Process . . . . . . . . . . . . . . . . . . . . . . . . . . 52Project Challenges and Opportunities for Improvement . . . . . . . . . . . . . . . . . . 53Innovation Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Supply Management’s Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Important Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Key Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Chapter 8 Case Study: DC Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Company Background and Competitive Environment . . . . . . . . . . . . . . . . . . . 56Company and Supply Innovation Strategy, Structure and Process . . . . . . . . . . 56

5CAPS Research

Case-Specific Product and Project Description: Ingredient A-Free Food. . . . . . 57Insourcing/Outsourcing and Collaboration Decision Process . . . . . . . . . . . . . . 57Supplier Selection Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Contract Development and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Collaboration Strategy, Structure and Process . . . . . . . . . . . . . . . . . . . . . . . . . . 59Project Challenges and Opportunities for Improvement . . . . . . . . . . . . . . . . . . 60Innovation Project Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Supply Management’s Role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Supplier Perspective and Comments: ChemOne . . . . . . . . . . . . . . . . . . . . . . . 61Important Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Key Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Chapter 9 Supplier Innovation: Key Learnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Intellectual Property (IP) Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Project Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Trust and Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Alignment and Risk/Reward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Innovation Metrcs, Supplier Capabilities and Performance Assessments. . . . . . 66Voice of the Customer and Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Cost Versus Innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Stage-Gate Processes: From Concept to Suppliers. . . . . . . . . . . . . . . . . . . . . . . 67Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Supply Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69


Figure 1-1: “Open Innovation” — A Perspective and Key Players . . . . . . 11

Figure 1-2: Innovation Research Focus . . . . . . . 11

Figure 4-1: 2x2 Second-Tier Supplier SelectionResponsibility . . . . . . . . . . . . . . . . . 30

Figure 5-1: The Change/Innovation Cycle . . . . 39

Figure 7-1: Product Development Process . . . . 48

Figure 8-1: Product/Supplier Matrix . . . . . . . . . 57

List of Figures

7CAPS Research

“Innovate or die.” What Tom Peters first said years agobecomes more and more prescient with each passingyear.

The hard part is learning how to innovate. Who shouldbe involved, internally and externally? How can trust bedeveloped with external partners? How should theprocess be managed?

There is an increasing corporate focus on innovation,especially around engaging the supply base. Firmsworldwide are recognizing that suppliers can serve asimportant sources of innovation by bringing newthinking and even finished concepts, shortening newproduct and service development time significantly.

To explore this phenomenon, CAPS Research undertookextensive exploratory case research with five leadingcompanies across nine business units to initially identifythose factors that most closely correlated with success inachieving supplier innovation while identifying possibleobstacles that need to be overcome.

The research objective was to unearth answers to thesequestions:

• What strategies and approaches can a companyuse to identify, select and effectively collaboratewith suppliers and supplier groups to accelerateinnovation?

• What is the specific role that supply managementcan play in accelerating innovation across thestages of product, service and process (PSP)development?

This report focuses on supplier innovation learningsgleaned from seven in-depth case studies of how firmsworked with suppliers to develop product or serviceinnovations in order to maintain or improve theircompetitive position. The report is complementary with

the overall research report, Accelerating Innovationthrough Effective Supplier Collaboration, both of which arepublished as CAPS Research Focus studies.

The seven cases provide detailed insights into companyand supply strategies that were implemented in differentindustries to accelerate and acquire supplier innovation.The industries include telecommunications, automotive,diversified manufacturing, high-technology business-to-business and consumer non-durable goods. Each caseprovides a differentiated view of how supplierinnovation was acquired.

Each of the cases provides sufficient detail to describethe critical issues facing the firms in their efforts toachieve supplier innovation. The manner in which theyapproached the critical issues and collaborated withsuppliers to achieve positive innovation results is alsodiscussed. At the end of each case we provide a set oflearnings that provides guidance to firms that may beinitiating or enhancing supplier innovation initiatives,along with what we consider to be the “big insights” tobe gained from the case.

The final section of this report provides cross-caselearnings presented as “guidelines” for firms to begin,enhance and/or compare supplier innovationapproaches with learnings from other leading firms.These guidelines include approaches to:

• Intellectual property ownership• Project management• Trust and communications• Strategic alignment and risk/reward• Innovation metrics, supplier capabilities and

performance assessments• Voice of the customer and suppliers• Cost versus innovation• Stage-gate processes: from concept to suppliers• Company innovation culture

Executive Summary


• Supply management’s role• Overall observations and critical problem areas

negatively affecting innovation development

9CAPS Research

Introduction

This report focuses on supplier innovation learningsgleaned from seven in-depth case studies of how firmsworked with suppliers to develop product or serviceinnovations in order to maintain or improve theircompetitive position. The report complements theoverall research report, Accelerating Innovation throughEffective Supplier Collaboration, both of which arepublished as CAPS Research Focus studies.

Case data were collected from extensive interviews withkey persons from five companies, includingrepresentatives from supply, engineering and R&D,operations, innovation and sales across nine differentbusiness units, as well as five of their suppliers. Thesespecific companies were chosen based on their strategicfocus on and history of achieving supplier innovation.

Supplier Innovation for Competitive Advantage

Global competitive pressure in a rapidly changingworld, firms with limited resources due to downsizingand outsourcing, and the need to differentiate productsand services for value capture and minimizecommoditization are increasingly requiring companiesto innovate. Overall, there is increasing executive focuson innovation as a company-wide priority. P&G, Philipsand Whirlpool are just a few of the companies across arange of industries that cite “innovation” as a strategicpriority.

In addition, firms worldwide are also recognizing thattheir current and prospective suppliers are importantsources of innovation. Suppliers can provideinnovations and help to shorten new productdevelopment time through the use of existingintellectual property and improvements in design for

manufacturability, logistics and so forth. Firms are alsoadopting the idea of “open innovation” in place of thetraditional closed, “only invented here” approach.Figure 1-1 illustrates open innovation.

Based on these emerging changes in philosophy, CAPSResearch undertook extensive exploratory case researchwith five leading companies across nine business unitsto identify those factors that most closely correlatedwith success in achieving supplier innovation whileidentifying possible obstacles that need to be overcome.

The primary research focus spanned the innovationprocess from ideation through development for bothtraditional and open-innovation approaches. However,innovation data were also collected that went beyondthe development stage through productcommercialization and product/service enhancement, asshown in Figure 1-2.

Specifically, the research questions guiding the overallresearch initiative were:

• What strategies and approaches can a companyuse to identify, select and effectively collaboratewith suppliers and supplier groups to accelerateinnovation?

• What is the specific role that supply managementcan play in accelerating innovation across thestages of product, service and process (PSP)development?

Case Overview

The seven cases included in this report provide detailedinsights into company and supply strategies that wereimplemented in different industries to accelerate andacquire supplier innovation. The industries includetelecommunications, automotive, diversified

Chapter 1 Achieving SupplierInnovation: Company Examples


manufacturing, high-technology business-to-businessand consumer non-durable goods.

Each case provides a differentiated view of how supplierinnovation was acquired. The seven cases and thepurpose of each are:

1. Desco illustrates the challenges of collaborationbetween a large global manufacturer (Desco) anda smaller supplier (TFI), particularly in relationto risk/reward sharing and resource allocation. Italso highlights how “technology push” adds riskto innovation and collaboration, and how thefailure to specifically define roles andresponsibilities may negatively impact aninnovation project.

2. MPCo describes the collaboration between aFortune 500 company and several of itssuppliers in an effort to drive innovation for acommon office equipment product that it hasmanufactured and sold for more than 45 years.This case illustrates how supply managementcan take the lead when sourcing new technology.

It also exemplifies the need to continually reviewsupplier capabilities and, when necessary, tochange suppliers to match up suppliercapabilities with changes in the market. Finally,the case demonstrates that well-establishedinternal processes must be continually reviewedin light of changing demands from the market.

3. ISD illustrates the complexity of managingand/or leading efforts to achieve incremental orbreakthrough innovation requiring a network ofsuppliers. Key focus areas to achieve innovationincluded insourcing/outsourcing decisions,supplier selection, innovation capabilityassessment, joint selection of second-tiersuppliers, supplier development, and projectmanagement and coordination.

4. I-Com examines an open innovation initiative inwhich the supplier approached the buying firmwith the innovation idea and capability. Theinnovation is a new data format conversionservice introduction, not a new productintroduction. The case study also illustrates how

11CAPS Research

Figure 1-1“Open Innovation” — A Perspective and Key Players

Figure 1-2Innovation Research Focus

the buyer and supplier collaborated ondeveloping the market pricing model for theservice. The case highlights how a cleardefinition of roles and responsibilities canpositively impact problem resolution andinnovation project results.

5. InventCo describes the culture and organizationof a company with a very successful closedinnovation model. The case highlights howsupply management plays an important role ininnovation within a company with a closedmodel.

6. ECOMP illustrates how a large, verticallyintegrated firm addresses cultural andorganizational issues to support the change toinnovation sourcing and collaboration withexternal suppliers. It also provides insights intocompetitive supplier assessment and selectionprocesses, as well as the need to develop andsupport the resulting collaborative relationship.

7. DC Corporation provides an example of how aglobal consumer products company was able towork with two of its larger suppliers to innovate,even though the company was a relatively smallbuyer from each supplier. While both supplierswere important to the company’s business, itinitially was not a strategic partner to eithersupplier. Because of this, the innovation effortrequired close management of the company’srelationship with each supplier. This case studyalso illustrates how “temporary outsourcing”might be used to develop internal capabilities tosupport future insourcing and innovation efforts.

Value from the Case Insights

Each of the cases provides sufficient detail to describethe critical issues facing the firms in their efforts toachieve supplier innovation. In addition, the manner inwhich the firms approached the critical issues andcollaborated with suppliers to achieve positiveinnovation results is also discussed. A careful review ofthe cases provides deep insights into specific workingrelationships with suppliers and factors thatstrengthened or weakened the collaborative efforts.

At the end of each case we provide a set of learningsbased on the case findings. Each of these learningsprovides guidance to firms that may be initiating orenhancing supplier innovation initiatives. We alsoprovide what we consider to be the “big insights” to begained from the case.

Finally, the last section of this report provides cross-caselearnings presented as “guidelines” for firms to begin,

enhance and/or compare supplier innovationapproaches with learnings from other leading firms.

We have chosen to focus this report on supplierinnovation rather than company-wide innovationstrategy, as little research is available to guide a firm’ssupply-based innovation strategy to maximizeachievement of required innovation from suppliers. Thereader is also invited to read the complementary overallreport, Accelerating Innovation through Effective SupplierCollaboration, available on the CAPS Research Web site,in order to gain additional insights and informationabout innovation sourcing.


Purpose

This case study illustrates the challenges faced in thecourse of a collaborative project between a large globalmanufacturer and a smaller supplier, particularly inrelation to risk/reward sharing and resource allocation.It also highlights how “technology push” adds risk toinnovation and collaboration, and how the failure tospecifically define roles and responsibilities maynegatively impact an innovation project.

Company Background and CompetitiveEnvironment

Desco is a Fortune 500 firm with annual revenues inthe billions of dollars and strategic business units (SBU)operating worldwide. This case study focuses on thetransportation industry SBU, which develops andproduces various integrated systems for originalequipment manufacturers (OEM), and for whichcustomers have specific and highly demandingrequirements.

The industry is highly competitive, and ongoinginnovation is important to competitive success.Products produced by this SBU are uniqueelectromechanical items requiring considerable designand engineering investments. Product life cycles andnew product development times are measured in years.

Company and Supply Innovation Strategy,Structure and Process

Desco had recently appointed an executive in charge ofinnovation for the entire SBU. Given the need forproduct innovation in the industry, it was assumed that

focused innovation efforts would lead to increasedproduct and process innovation as well as improvedproduct commercialization.

The executive-in-charge was responsible for establishingmetrics to help measure and drive innovation. Thisperson was also required to develop workingrelationships with major suppliers believed to possesssuperior innovation capabilities in an effort to acceleratesupplier innovation.

Historically, product and process innovations weredeveloped through the engineering division, whichworked with suppliers that brought innovation ideasdirectly to the technical community. These effortstended to lead to incremental innovation. Acoordinated, companywide innovation strategy toachieve breakthrough innovation had been initiated, butsuppliers were less willing to invest resources due to theeconomic downturn.

Case-Specific Product and Project Description:Control Unit Interface with Decorative Overlay

This case describes a collaborative innovation effortbetween Desco and a major supplier, TFI, to develop aunique and innovative panel for a control unit interface(CUI). The CUI would require the adaptation andimprovement of two existing technologies. Theinnovation required a combination of injection moldingand the processing of a unique material to “fit” the CUIand provide both decorative and functional properties.Desco would be responsible for the overall CUI system,while TFI would have primary responsibility for thedecorative, and ultimately functional, overlay (D/FO).

Desco’s goal of increasing market share and profitabilityin the CUI business drove this innovation project —

Chapter 2 Case Study: Desco Inc.

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one of a number of projects the company wasundertaking to grow the business.

Voice of the Customer (VOC) and StrategicObjectiveBoth Desco and TFI had strong incentives to developthe new product. Desco had a strategic imperative togrow the CUI business, while TFI wanted to expand itsproduct offerings in the transportation industry. Thecompanies decided to develop a prototype of the CUIwith a “decorative overlay” to spur customer interest.The CUI — with its new, appealing decorative overlay— was intended to replace an existing, multiple partCUI assembly at a reduced cost.

This first prototype did not include any functionality, asit was intended to allow Desco marketing and sales toimpress OEM customers and ultimate consumers withits appealing aesthetics. However, the Desco sales groupindicated that adding cost to the product relative to the“improved aesthetics” would be unacceptable tocustomers. The initial high cost of the project appearedto be driven by the complexity of aligning thedecorative overlay on the CUI, which was one of theprimary challenges of the project. The sales groupfurther suggested that more value and/or lower costswere needed to gain market acceptance.

Therefore, Desco and TFI investigated the feasibility ofadding “functionality” to the overlay in order to provideboth decorative and functional innovations. Thecompanies explored the possibility of integratingbuttons into the D/FO for the CUI. Instead of separatelaser-etched or painted subassemblies, the buttonscould be designed into the D/FO. Having the buttons inone piece replaced the work steps of producing separateinjection-molded subassemblies and the secondaryoperations of painting and laser etching graphics.Determined to make the decorative/functional overlaycost effective, Desco decided that five mechanicalbuttons would have to be eliminated from the CUI andreplaced with “touch” switches in the D/FO.

New functional prototypes were then developed anddisplayed at an industry trade show, where theyattracted OEM interest. However, the OEMs stillquestioned the potential cost-to-value relationships. Inaddition, initial clinical tests with consumers suggestedthat the quality and feel of the product “was not great.”The cost estimates for the product were too high andthe quality too low. The cost had to be reduced fromoriginal estimates, and quality had to be improved.

However, the strength of the VOC was limited. WhileOEMs expressed some interest in the prototype at the

trade show, the extent of this interest was unclear.Lacking a clear VOC, the project engineers andmanagers wanted to act quickly in order to reachcommercialization or come to a reasoned decision tocancel the project as soon as possible.

Insourcing/Outsourcing and CollaborationDecision Process

Both companies had to make collaboration andinnovation investment decisions. TFI had to decidewhat company to innovate and/or collaborate withbased on whether the customer was viewed as a long-term player in the industry. Before Desco would spendmoney and resources on an advanced new product/innovation project, it would develop a “project scope”paper to forecast market size and growth, and whereOEM customers might need innovations around specifictechnology applications. This was considered an“opportunity” paper that provided a snapshot overviewof the market. A four-stage approach was applied. Itincluded search and discovery of new ideas/innovations,idea assessment, business opportunities and conceptdevelopment.

The resulting information was shared with TFI, whichperformed its own internal assessment to evaluate theopportunity, costs and potential. TFI was smaller thanDesco and had limited R&D budgets. Therefore, itneeded to be confident that the opportunity was realand in a market that it wanted to enter. TFI viewedDesco as a growing customer with a good track recordand believed that Desco was profitable despite theindustry’s economic downturn. TFI saw Desco as acustomer of choice for the long term.

Supplier Selection Process

TFI supplied Desco with decorative D/FOs for variousproducts for more than 10 years, including overlaysused on CUIs and panels (e.g., speedometers andtachometers). TFI was a proven and preferred supplier.Desco considered TFI an innovative supplier, as it haddemonstrated the graphic design and productioncapabilities to innovate and provide items such asD/FOs with a 3-D appearance (similar to holograms oncredit cards). Desco had other potential suppliers ofdecorative/functional overlays, but Desco’s analysissuggested that TFI was the most innovative, researchintensive and capable supplier for the overlay. Descoalso believed that the two companies were aligned interms of focus and work ethic.


In addition, TFI had worked with OEM suppliers andcustomers for more than 20 years. Typically, TFI workedwith first-tier suppliers to the OEMs, although thecompany also occasionally worked directly with theOEMs on products. Given its experience in thetransportation industry and with Desco, TFI believedthat it understood Desco’s needs. However, previousbusiness deals between Desco and TFI had not involvedmajor innovation efforts. Nevertheless, the twocompanies had taken “baby steps” in the evolution oftheir “collaborative innovation” relationship.

The sharing and exploring of ideas between Desco andTFI was typically done through existing relationshipsbetween both companies’ project engineers or through aTFI account manager and Desco product managers. TFIwould show Desco products and technologies thatmight be used in a vehicle interior. It was during thesediscussions that Desco asked if it could potentiallyapply TFI’s overlay technology in other ways, such asadding backlighting and functionality, or even for otherassemblies.

One of the first collaborative innovation efforts betweenDesco and TFI was a D/FO prototype developed for theindustry trade show that demonstrated what could beachieved with decorative overlays. This initial work,coupled with further discussions to understand businessneeds, helped both companies focus resources on theinnovative D/FO project.

Contract Development and Management

Though there was not a clear-cut contractualcommitment for the product from OEM customers,Desco made the strategic decision to develop the CUI’saesthetics and functionality. The decision to moveforward was driven by the overarching goal of capturingadditional market share in the CUI business for carsand trucks. Desco entered into a “collaborative”innovation effort with TFI to develop a user panel forthe CUI produced by in-line molding a single D/FO.Desco recognized that some risk would be unavoidable.

While a nondisclosure agreement (NDA) that coveredexisting patents and trade secrets was in force, the twoparties did not work under a joint developmentagreement (JDA). TFI’s development work and sampleswere paid for through invoices and purchase orders.

Desco suggested that the most likely reason a JDA wasnot agreed upon was because there may have beenownership issues regarding intellectual property (IP)rights that prevented a JDA from being reached. Thiswas confirmed by TFI. In the early stages of the effort,

TFI wanted to establish a JDA but elected not to sign a“drafted” agreement from Desco. TFI didn’t think it was“equitable” to give Desco all IP rights resulting from a“collaborative” effort.

TFI also did not want to limit the use of any technologyapplication, so the company was careful not to lock in atechnology with one customer or one application withina single market. In the past, TFI had patented newtechnologies developed while working with othercompanies and believed that this approach wasimportant to its future. For example, work with anothermanufacturer helped TFI develop technology thateliminated an “application process” for an assembly. TFI“shared” that technology with the customer, but alsospread the knowledge to other company divisions andproducts, enhancing sales.

Even without a JDA, TFI supported the D/FO project,as it had patented technologies and did not limit itstechnology insights to Desco. TFI did not believe thatlack of a JDA kept TFI or Desco from sharing ideas witheach other. TFI provided Desco with “guidelines”regarding what could be physically done with theoverlay. Desco provided ideas on other issues, such asbutton configurations. This became a “win-win”situation because Desco moved closer to the desiredproduct, and TFI identified opportunities forapplications to other industries. The informalunderstanding was that the application would beexclusive to Desco in the transportation industry butthat TFI was free to use the technology/approach inother industries. This was a “handshake agreement” notcovered in the NDA, as it only included trade secretsand IP that each company had already developed.

The significant levels of effort and communicationsbetween the companies suggested a high level of trust.Mutual trust appeared to have been developed overtime and continued between the individuals working onthe project. TFI had a high level of confidence and trustin the Desco personnel working on the project and viceversa.

There was, however, a downside to not working undera JDA. Neither side wanted to share “too muchinformation too early,” which may have slowed theproject. Communications about technical issues andproject vision were somewhat stilted, with each sideoccasionally waiting for the other to reveal usefulinformation.

New IP developed on this project was limited whencompared to other innovation efforts. “In-molddecorative overlays” were not completely new, so thefunctional aspects of this project were the most

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interesting. However, Desco had applied for aprovisional patent to cover the process of placing andchanging the D/FO in-mold, as well as for other featuresof the overlay. In recent years Desco’s patent office hadbecome more stringent in screening, submitting andtaking ownership of patent applications.

There also was uncertainty about which company wouldproduce the final product and about the technicalsupport required from TFI for the overlay. In addition,both Desco and TFI could manufacture the injectionmolding. It was not clear how the manufacturingdecision would be made and what the results would be.

Cost Modeling/Target PricingTFI was concerned that Desco would put a “low” priceon the new technology based on the most efficientmanufacturing cost model that ignored the cost relatedto innovation. TFI had concern that the price would be“commodity like,” even though the rest of the worldhad not yet been introduced to the technology.

In addition, the project had become more costly andrisky than originally projected. TFI had investedconsiderable resources, and some people in thecompany believed that it was “out on a limb.” Eventhough Desco had paid TFI for much of the effort, therewere other costs incurred which were not linked topurchase orders. It was important to TFI that it beawarded a contract for the project and compensated forinnovation. TFI was concerned that it would submit aquote to Desco based on actual costs and desired profitmargin, but Desco would want to negotiate the pricebased on target costs without taking costs related toinnovation into account. TFI could possibly createalternative ways that the targets could be achievedthrough engineering changes, but those changes couldprove unacceptable to Desco.

Collaboration Strategy, Structure and Process

Desco personnel involved in the project included theproduct and business development manager for theproduct, engineering manager, project engineer, CADdesigner, prototype engineer and tooling engineer.Supply management was not directly or significantlyinvolved in this project except for the execution ofpurchase orders and intellectual propertyconsiderations.

TFI personnel involved with this project includedadvanced sales and the Desco business manager, projectmanager, design engineer, ink and chemical specialists,and tooling experts. Supply management at TFI was notinvolved.

The project has been under way for two years and therehave been new project managers on both sides. TFI hashad four project managers in the past year. Althoughthe project manager at Desco has been on the projectlonger than his counterpart, he was not involved whenthe project began and was not entirely familiar with theproject history.

Although each company has its own internal teamworking on the project, the teams did not establish aformal cross-company project team. Each team focusedon its internal efforts, with coordination across thecompanies by the project managers. Duringdevelopment Desco would buy materials/parts from TFIthrough purchase orders. Overall, the workingrelationship was collaborative but informal.

Capability and TrustTFI viewed Desco as a competent organization, both ata macro and micro level. On a macro level, Desco wasseen as a large, successful first-tier supplier in the verycompetitive transportation industry. On a micro level,Desco was thought to be a technically competentmanufacturer with skilled and knowledgeable engineers.

Desco had a positive view of TFI’s capabilities, havingselected it for the collaborative project because itbelieved that TFI had the necessary R&D competence tofully develop the product. However, there was someconcern at Desco that TFI did not fully understand itsown limitations. Desco’s evaluation of TFI’s “innovationcapability” was quite subjective.

Both Desco and TFI considered one another to be“trustworthy.” Desco “trusted” TFI and believed that TFIwanted to do the right thing and vice versa. As oneDesco employee commented, “TFI employees are notsnakes.” Similarly, TFI believed that Desco employeeswere honest. The companies did not always agree witheach other on operating policies and business decisions,but both parties considered the other to be honestrather than opportunistic. Mutual honesty wasimportant to the success of this project.

There was some disagreement within Desco as well asbetween Desco and TFI regarding the resourcescommitted. Desco believed it had spent more moneythan TFI for the initial prototype effort by paying formaterials and some of TFI’s innovation efforts. TFIcountered that it had developed the materials and theforming to the readiness state, and that Desco’s valuecontribution was to add the functionality andmanufacture the mold. TFI also was performingengineering work that was not being billed to Desco.


Project Status Reporting and MetricsAt each early project stage, a five- to ten-page reportwas developed that addressed the market andtechnology feasibility of the project. It provided anoverview of feasibility, costs, budget, expectations andother considerations. These reports were used todetermine project viability and continuation. At variousstages, a one-page current update report wasimplemented to track innovation timing, cost andchanges. The project was an ongoing effort and anycancellation would be an executive-level decision giventhe overall goals of market expansion and new productfocus.

Overall, few hard metrics were associated with thisproject. There were routine reports issued concerningproblems identified and solved and exit reports at eachstage. Other reporting was done informally among theDesco team. This was sufficient since the team wassmall. It does not appear that formal reporting on aregular schedule was done to keep track of detailedproject progress.

Project Challenges and Opportunities forImprovement

Collaboration and Innovation IssuesDesco appeared willing to assume more risk than TFI.TFI had been willing to take risk in the past, but theoutcomes of many of these risky projects had notyielded significant commercial success. Late validationtests that found some surprises had caused someprojects to be canceled at the 90 percent completionmark. TFI had therefore lost some of its tolerance forrisk. The same trend was in evidence at Desco. Asputtering economy, lack of breakthrough innovationsuccess and changing OEM sourcing strategies ledDesco to shy away from risk. Both parties were quiteconcerned about project risk, which had negative effectson resource commitments and timing.

Innovation Budget and ResourcesDesco had some concerns about TFI’s capacity andcapability to focus on the project. Desco believed thatTFI’s capacity was fully utilized and that TFI might needto interrupt ongoing production to run part tests andother validations. Turnaround times for some tests weretwice as long as Desco expected.

Desco believed that TFI recognized the challenges andwanted to develop dedicated prototyping equipment.However, TFI indicated that it could not provide newcapital to support the innovation effort without aproduction contract in place. Desco, however, would

not pay for the prototyping equipment nor issue aproduction contract given the project risk andtightening economy.

There also were constraints on Desco’s resources. Forexample, Desco could have used additional resources sothat some activities could be done in parallel. Almost allwork was being done sequentially. However, thecompany was not willing to make additionalexpenditures given a tightening economy and risk.

Collaboration Process PerspectivesThe two companies had different perspectives regardingthe intensity of the collaboration. Cross-functional,cross-enterprise teams were not in place. Mostcommunications were “as needed” between projectmanagers and the engineering departments for technicalconsiderations.

TFI suggested that the innovation effort was “jointlydriven,” with each company investing time andresources equally in the new product innovation effort.Engineers from both companies worked as a “cohesive”team. Desco would frequently develop ideas, with TFIdeveloping processes for testing. Handoffs wereprevalent.

Desco believed that it was working as collaboratively asneeded with TFI, and that the collaboration was muchhigher during the early (versus later) stages ofdevelopment. It was suggested that Desco could haveenhanced its efforts with TFI by taking on moreownership and joint responsibility. Both companiesbelieved there was a need to work more closely as ateam, as they did in the initial stages of the project. Inaddition, it was uncertain whether each company wasas committed later on as they were at the beginning ofthe project.

An example of how the collaboration was somewhatlimited was provided by a Design of Experiments(DOE) effort. Problems between tolerance specificationswere identified, and Desco’s DOE results did not agreewith TFI’s results. There were differing opinions aboutwhy the results were different, but no effort toundertake a joint DOE effort. This lack of collaborationon a DOE for a project that was strategically importantand at a critical decision point suggested the need forbetter cooperation between the firms.

Part of the reason that there was less-than-optimalcollaboration during the project may have been becauseclear-cut resource and information-sharing expectationswere not fully established upfront. Nevertheless, theinnovation project required a successful melding ofproduct and process knowledge. TFI had the material

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and some manufacturing process expertise. Desco hadmanufacturing expertise, but needed help from TFI toperfect a viable manufacturing process that met industrycost and quality standards. The project required a fullycollaborative development process. It may havebenefited from more discussion early in the projectabout which company would do what and about thesharing of information.

Communication between Desco and TFIMeetings between Desco and TFI were generally ad-hocand event-driven, such as when parts were due or whena hard deadline for prototypes approached. In thesesituations, more meetings were held. Most of thecommunications were by email and phone, with face-to-face meetings as required. Desco and TFI werelocated near one another, so it was easy to meet in-person on short notice. TFI suggested that there“probably should have more meetings” to keep oneanother fully informed about all needs and progress.

Opportunities for enhancing communications andbuilding greater trust were demonstrated in severalways. First, neither firm was fully certain about theinvestment that the other side was making to theproject. TFI received payment for material ordered.However, TFI was investing development resources forwhich it assumed the cost. Desco appeared to beunaware of the magnitude of TFI’s investment. TFI alsohad low visibility to the investments being made byDesco, partly because the Desco resources were spreadover a large organization and many units. In summary,the lack of clear, continuous and robust communicationsbetween the parties may have slowed the progress onthe project to some degree.

Innovation Project Results

As of the writing of this case study, the innovationproject was ongoing, regularly reviewed and consideredsuccessful to date. A major status review and overallevaluation by executive management is pending.

Supply Management’s Role

Desco’s supply management function played a limitedrole in this innovation project. In addition to issuingpurchase orders, supply management was only involvedin the JDA, IP discussions and the drafting of relateddocuments.

It was unclear whether supply management would haveenhanced the project success or process in the early-

stage innovation effort. In addition, Desco philosophy’swas to have supply management focus on developmentof a leading-edge, worldwide supply base thatengineering could work with on new productdevelopment and innovation. Also, supply managementdid not want to impede engineer-to-engineer contactsand work efforts between the two companies.

Supply management also was actively pursuing productcost reductions across multiple current productsthrough cost modeling and value engineeringapproaches. It also conducted supplier council meetingsto tap supplier insights into Desco’s effectiveness inworking with suppliers and competitor practices. Asupplier portal was developed to collect supplierimprovement suggestions.

Important Lessons

Lesson 1: Establish Innovation Issues EarlyIssues such as final product price, innovationinvestment, intellectual property ownership andmake/buy decisions can create uncertainty in a projectand impact its overall success. In this case study, thefollowing issues were critical to the project:

• How would the purchase price for the productinnovation be established?

• Which company owns the IP?• Should the “innovation supplier” be awarded the

production volume contract for somevolume/time? If so, when?

• What would be the make/buy pattern, and whowould be sourced?

• How much, when and in what form wouldinvestments have to be made by each party duringthe innovation process?

In this case, the above issues did not significantly affectthe innovation project outcomes due to the high levelsof trust between both companies. However, if issuessuch as these are not fully resolved they can causemajor problems.

Lesson 2: Information Sharing Is CriticalSharing information about technology, processes andtesting can add speed and efficiency to innovationprojects. For example, the lack of comprehensiveinformation about work to be performed by bothcompanies and work already completed resulted insome inefficiencies. Desco provided information aboutone element of a required test process to be completedby TFI, but not information about the complete process.TFI had already done the complete manufacturingtesting and could have provided the results to Desco,enabling project resources to be used more effectively.


Sharing more information about OEM validationrequirements for the product could have reduceduncertainty at TFI.

Lesson 3: Maintain Stability of Key PersonnelPersonnel turnover during the project resulted ininformation loss, priority changes and overall loss ofcontinuity. Maintaining key people on a project, or fullyeducating and training replacements, is important tooverall project success.

Lesson 4: Be Explicit about Innovation NeedsCustomers provided Desco with two broad categories ofinnovation. The first category was general — betterquality, lower cost, lower weight and the like. Thesecond was more specific and provided guidance — forexample, reduce cost by a certain percentage, reducesize and weight by “y” and “z.” This more detailedinformation enables a company to better focus itsinnovation efforts and scarce resources.

Lesson 5: Provide Clear-Cut Goals and ProjectManagementDesco used a stage-gate process and regular one-pagestatus reports to track project progress. Projectmanagement tools are needed to continuously monitorprogress and goal achievement.

Lesson 6: Develop Assessment ToolsSupplier innovation capability assessment tools helpboth parties identify gaps in capability in order todeliver innovations on schedule and within cost,allowing for a perfect launch.

Even when a company is confident in an innovationsupplier’s overall capabilities, ongoing work, personnelchanges, investment requirements and risk/rewardconsiderations can slow — or even derail — innovationefforts and results.

Lesson 7: Consider PresourcingPresourcing production business to the innovationproject supplier can work to motivate the supplier andreduce risks to both parties.

Prior to presourcing, it is necessary to determinewhether the buying company can maximize the supplierinnovations and minimize unit cost by separatingdevelopment from production or combiningdevelopment efforts with production contracts with thepreferred suppliers. This requires a case-by-caseevaluation.

Lesson 8: Gaining Innovation Requires FocusGaining innovation from large organizations that havetechnology and innovation capability requires a focusedand resourced approach.

Desco found that many firms possessing innovationcapabilities often wanted to “sell” off-the-shelf productsversus new technologies. Desco was working to buildhigh-level relationships with select firms in order togain access to new technologies and innovation. Thiseffort took considerable executive and engineeringresources. It also required information sharing aboutfuture needs and market potential.

Lesson 9: Establish Cross-Company ProjectTeamsOrganizations should consider establishing a cross-company project team for innovation projects tofacilitate communication, speed up decision making andleverage the knowledge of both organizations tomaximize project efficiency and effectiveness.

In this case, a cross-company project team was notestablished. However, there were suggestions and someevidence that such a team could have benefited theinnovation effort. Cross-company innovation projectteams would probably be a good investment, especiallyfor a large, strategic project.

Key Insights

• The size of a company matters. Risk/rewardprofiles and affordability of required investmentsvary between large and small companies. Largeglobal companies will likely have to work closelywith smaller companies with innovations and takeon more risk to achieve commercialization.

• The health of the overall economy and theindustry’s economy impacts innovation. Theworse the economy, the more likely it is that R&Dand innovation efforts between companies willslow, mostly because of budget pressures.Companies need to anticipate the future. Theyneed to be realistic and set attainable projectgoals. They need to be creative around innovationby sharing costs, resources and risks.

• Recognize the tension that occurs when trying togain both supplier innovations and lowest price.Establish policies that balance both, especiallywhen innovation from the supply base will benefitthe top line. If the company is first to market withnew innovations and premium prices areavailable, speed and innovation trump getting thelowest price for the final design.

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Purpose

This case describes the collaboration between Multi-Products Company (MPCo), a US-based Fortune 500company, and several suppliers to drive innovation for acommon office equipment product (COP) that it hasmanufactured and sold for more than 45 years. Thiscase illustrates how supply management can take thelead on sourcing of new technology. It alsodemonstrates the need to continually review suppliercapabilities and, when necessary, to change suppliers tomatch capabilities with changes in the market. Finally,the case demonstrates that well-established internalprocesses must be continually reviewed in light ofchanging market demands.


MPCo takes pride in its innovation prowess and thenumber of successful new products that it introducesinto the marketplace each year. For a period of time,MPCo used the metric of percent of sales derived fromnew products as an indicator of its innovation efforts’success. MPCo has a broad portfolio of products spreadacross eight strategic business units (SBU), each ofwhich operates as a semi-independent company with itsown manufacturing, supply chain management,marketing and other support functions. Each SBU alsohas its own R&D staff and product developmentlaboratory, which are supported by the corporatetechnology staff and laboratories.

MPCo has a general manager (GM) responsible for eachcountry in which operates. Each of these country GMshas profit-and-loss responsibilities and reports upthrough corporate international operations. Each SBU

leader within a country reports to the GM of thatcountry and has a dotted line back to SBUheadquarters. The country GM decides which SBU isbest suited for meeting the sales objectives in thatcountry. If an SBU wants to operate in a specificcountry, it has to sell the idea to the country GM, whichcreates some tensions between the SBUs and thecountry GMs. However, this classic matrix organizationprovides flexibility to the country GM while leveragingMPCo capabilities.

Due to surging demand from emerging markets, MPCo’scombined international sales have come to exceed itsdomestic sales. The approximate sales distribution for2008 was:

• United States — 40 percent and stable• Europe — 25 percent and growing• Asia-Pacific — 25 percent and surging• Latin America — 10 percent and stable

MPCo has corporate and SBU goals in place that reflectthe important role of innovation in its corporatestrategy, including:

• Attaining sales growth from new products• Growing earnings by double digits• Achieving 20 percent or greater return on

investment• Adding new technology platforms to its portfolio• Achieving operational excellence through the

application of lean and Six Sigma principles• Making acquisitions that complement existing

businesses• Creating new business and new SBUs• Achieving international growth

Chapter 3 Case Study: The Multi-Products Company



Global BusinessMPCo is a truly global company, with 25 technicalcenters and 75 manufacturing plants dispersedthroughout the developed and emerging economies.Much of the company’s appliance business is handledthrough its German operations, while much of theelectronics business is conducted in Asia. MPCo rarelyintroduces products without adapting them to localmarket preferences. This customization is done in-country using local manufacturing facilities.

Supplier Role in Innovation at MPCoAlthough MPCo recognizes the need for some supplierinvolvement in product innovation, the role of suppliersis generally highly restricted. There is a concernthroughout the organization about the potential loss ofintellectual property (IP) to suppliers. MPCo is alsoconcerned that it could create future competitors ifsuppliers play too large a role in an innovation and endup with substantial IP. Thus, MPCo forms few strategicalliances or joint ventures to collaborate on innovation.Rather than partnering with suppliers on innovation,MPCo prefers to buy their technology or even buy thesupplier outright if the need to control the IP is greatenough.

It is very difficult for MPCo to collaborate on innovationwith large companies, which are often as protective ofIP rights as MPCo itself is. It is easier to collaborate withsmaller companies which, motivated by MPCo’s globalreach into new markets, are more willing to concede IPrights to MPCo. On the other hand, if a new product issuccessful it can be challenging for smaller companiesto develop the capability to support large volumes andinternational markets.

Case-Specific Product and Project Description:The Common Office Product (COP)

A technology-based strategic business unit pioneeredthe common office product (COP) at MPCo more than45 years ago. Since then, the product and relatedsupplies have provided a steady source of revenue andprofit. The SBU made a wide variety of COPs — somesold under the MPCo name, but many under othercompanies’ brands.

However, the market for the COP and related supplieswas quickly dying as newer technologies were beingdeveloped, especially with the change from analog todigital technologies. The SBU was forced to rapidly

innovate or lose a profitable revenue stream altogether.Fortunately, the R&D group in the SBU developed aninnovative design for a new COP (NCOP) that used thelatest digital technology. Even more importantly, theR&D group also developed a new design for a “carry-over” component that would allow an unprecedentedreduction in size and weight.

After selling COPs for more than 45 years, MPCo knewthe market well. It knew that its competitors’ newdigital models were expensive to buy and install. MPCobelieved that its longtime customers would like theNCOP because of its small size, low installation costand flexibility in application. The company alsobelieved that the NCOP, if offered at a competitive price,would be adopted in new markets with significantdemand.

However, at this critical point in the productdevelopment process, a reorganization transferredresponsibility for the COP line of products from theoriginating SBU to the Office Equipment SBU (OE-SBU).


Despite its long history of innovation and strong newproduct development (NPD) process, development ofthe NCOP presented new challenges to MPCo. First,because of the reorganization there was no naturalleader for the project in the OE-SBU. Product managersin OE-SBU were not familiar with the product, itssagging fortunes, or plans to develop a radically newmodel. They also did not have the project managementresources to devote to developing the NCOP. Into thisvoid stepped Frank Hanson, a supply manager from theold SBU, who had recently transferred into the OE-SBU.Because Hanson was intimately familiar with the COPfrom his previous assignment and was interested in thedevelopment of the new model, he was allowed toexpand his supply management role and become theproject manager and, more importantly, a downstreampartner developer for the project. Under Hanson’sleadership, supply management was given responsibilityto “push” the NPD process along both internally andexternally. As project manager, Hanson searched forstrategic suppliers, contract manufacturers to assemblethe NCOPs, and customers to brand and sell theNCOPs. Hanson engaged in “technical marketing” andcalled on many office product, computer and softwarecompanies to sell them on licensing the new technologyfor their own products. “Not your normal sourcingwork,” Hanson dryly noted in describing his role.

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Finding companies to license the NCOP technology wascritical, as the sales volume for the NCOP under theMPCo brand name would be modest. To achievemanufacturing efficiencies and an acceptable return oninvestment, finding companies with global brands toadopt the technology was critical. It fell to Hanson tofind these companies and the contract manufacturers tobuild the units to the branding companies’specifications.

Another challenge was the need for an accelerateddevelopment cycle. Several competitors had alreadyintroduced COPs with new digital technology andmight be developing new versions with the additionalnew technology that MPCo was pursuing. However, theNPD process at MPCo required many well-definedsteps, with extensive reviews and sign-offs at everystage. This approach had served MPCo well over theyears, as many of MPCo’s current products had had longdevelopment times and extremely long life cycles. Someproducts were still producing profits even after 50 yearswithout a significant change in design. But MPCo’s NPDprocess was not designed with the speed necessary tocompete in a rapidly changing digital marketplace inmind.

To meet this need for speed, MPCo corporate gave theOE-SBU extraordinary local authority and the additionalresources needed to quickly drive the project throughthe NPD process. MPCo corporate had to trust that theSBU knew what it was doing, so NPD rules wererelaxed and reviews and signoffs were curtailed. Tomake this more informal process work, key managersand engineers collaborated closely and constantly onthe project within the SBU and communicated regularlywith executives at corporate level.

A remaining major challenge was that the NCOP wouldinitially require close collaboration with a technicallycapable supplier to develop the key “carry-over”component for which MPCo had developed theradically new technical specifications. MPCo did nothave the expertise to create the final design for ormanufacture this component, so a strong partner withthese capabilities would be needed. This raised issues ofintellectual property (IP) ownership and, as discussedabove, MPCo wanted to control the IP around itsproducts. The partner would have to be selected withgreat care.

Supplier and Contract Manufacturer SelectionProcess

The Initial ChoiceBecause of the breakthrough innovation embedded inthe product, the supply partner had to be a companythat MPCo could trust to protect its IP. For this, Hansonturned to GSCo, a longtime German-based supplier ofcomponents for the original COP, to collaborate on thedevelopment of the new component as well as theinitial manufacturing. He knew GSCo would be a high-cost manufacturer, but time-to-market and quality weremore critical than the initial cost. MPCo gave detailedperformance specifications to GSCo, which developed anew design that met the functional and sizespecifications. GSCo also designed and created a newmanufacturing process and manufactured the newcomponent for MPCo. The initial sales volumes wereexpected to be relatively small, and GSCo excelled atsmall-volume manufacturing.

GSCo was a longtime trusted partner that allowedMPCo to complete the development contract in a singleday. The development effort went very well, withengineers and managers from both companies in closeand constant communication as the work proceeded.Executives at both MPCo and GSCo had highexpectations for the NCOP and supported thecollaboration effort.

In the end, each party received some IP rights from theproject. For MPCo, the key was that it received the IPrights needed to protect and control the product in themarketplace. This was achieved in part by paying GSCoa large upfront development fee and not offering any IPrights or revenue streams from the final product. GSCowas able to develop some IP from the project for itspurposes, so both companies gained from the final IPagreement.

After the product was successfully launched, GSCoremained a supplier of the new component for fouryears. In addition to its development fee, GSCo receivedrevenues from the sale of components to MPCo and IPrelated to its core business. Over these four years theGSCo business model evolved, and the companyeventually sold its NCOP-component-related businessto a Taiwanese company.

The Move to AsiaAs with most high-tech digital products, the sellingprice for the NCOP was under continuous pressure inthe marketplace. Keeping GSCo as a high-cost supplierbecame untenable, and MPCo recognized the need tochange partners. In response, it sought out Asian


suppliers that offered lower manufacturing costs.However, going to Asia also presented significant risksfor IP loss. Some Asian companies were deemedtrustworthy, while others were not. Fortunately, MPCocould rely on its extensive personnel resources in Asiato help find the right suppliers. Whichevermanufacturer was selected, it would be new to MPCo;trust would need to be earned on both sides.

HKCoAn MPCo designer made contact with a top designer ata Hong Kong company, HKCo, and inquired about itsinterest in the business. MPCo knew key people atHKCo and had a good understanding of its technicalcapabilities. HKCo wanted to get into the COP businessusing digital technology. It excelled in designingcomponents similar to what MPCo was buying fromGSCo, and was interested in the opportunity for newbusiness from MPCo. HKCo was viewed by MPCo asbeing the right size for the scope of the project. Aftercareful vetting by MPCo people in Asia, HKCo wasselected to supply the component.

After negotiating a contract with MPCo, HKCo startedmanufacturing the GSCo-developed component. At thesame time, HKCo invested in the development of a newdesign for the component that would allow it to beproduced at a much lower cost. This new, lower costcomponent would allow the price of the NCOP to besignificantly reduced, opening up several new marketsfor it. Additionally, the new component allowed for thedevelopment and manufacture of a portable version ofthe NCOP, opening even more markets andapplications.

After a period of producing the component and fullyassembled NCOPs for sale under both its own and theMPCo brand, HKCo decided that the profit margins onthis business were lower than it had anticipated anddecided to exit the business. This left Hanson to searchfor yet another supplier to make the component andassemble the final product. HKCo recommended TSCo,a Taiwanese company, as a new supplier to build boththe component and completed units for MPCo. Aftercareful vetting of TSCo, MPCo signed a new contractand began the process of transferring the business toTSCo.

TSCoTSCo is one of the largest electronic componentdesigners and manufacturers in the world. It also hadbeen producing COPs with digital technology and wasreceptive to working with MPCo on the NCOP. TSCobought the NCOP component business from HKCo andbegan building the new product under the MPCobrand. Helping the transition was the move of a key

designer from HKCo to TSCo. TSCo eventuallydeveloped an even smaller NCOP for MPCo, so theproduct entered yet another cycle and was able topenetrate even more markets.

CXCoIn addition to having NCOPs manufactured under itsown brand, MPCo’s strategy was to license thetechnology to subcontractors to produce large volumesof the NCOP for major global electronics companiesfrom Japan and Korea. To execute this strategy, MPCosigned an agreement with CXCo, an Asian companywith high-volume manufacturing capabilities. CXCowas one of the world’s largest manufacturers of commonoffice equipment products with digital technology andalready manufactured four other products for MPCo.Although CXCo was not as innovative as TSCo, theneed for innovation on the new product had decreasedin tandem with the increased need for higher volumesand lower costs.


International CommunicationsWhile technical communications are never easy, theywere especially difficult for the development of thisproject due to the myriad countries, cultures andlanguages involved. Moreover, because the developmenttime for the project was significantly compressed,keeping the engineering changes and other databases upto date in the NPD process was challenging. In themidst of all of this activity, MPCo was forced to developcollaborative relationships with several new suppliers.Constant communications at many levels within thecompany and between trading partners are absolutelynecessary for NPD success.

Strategic AlignmentFinding right-sized suppliers with the needed technicalcapabilities remains a challenge. On the one hand,MPCo needed suppliers that were anxious to dobusiness and would commit the necessary resources toprojects and be flexible on IP. On the other hand, thesuppliers needed to be capable of quick ramp-up andlarge enough to support a global market. Supplymanagement should have the responsibility of findingsuppliers that fit this business model.

OutsourcingMPCo was faced with outsourcing decisions in alldevelopment phases of the NCOP. Although MPCodeveloped the functional specifications for a keycomponent, it had neither the expertise to create the

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final design — nor the ability to manufacture thecomponent. Thus they were obliged to find a supplierthat could design and manufacture this criticalcomponent. The low volume of MPCo-branded NCOPsprecluded it from manufacturing the final product in-house, although it had the capacity and expertise to doso. Only by outsourcing the production could MPComeet cost targets and achieve an acceptable return oninvestment. Finally, to increase the volume, MPColicensed the product technology to companies withglobal brands on the demand side. All of these decisionsforced MPCo to consider new options, taking thecompany out of its comfort zone as a technologydeveloper, manufacturer and distributor.

Supply Management CompetenciesSupply management was heavily involved in thesourcing of the new component technology. To continuein this role, supply management personnel will need togain expertise in a variety of technologies whilecultivating close relationships with MPCo technologists.It is not clear that the demand-side responsibilities thatsupply management played in this case will be, or needsto be, repeated for other new products. If MPCoexpands its business with contract manufacturers andincreases the amount of technology it licenses to othercompanies, then new positions will need to be createdto coordinate these activities.


The NCOP became a poster child for fast productdevelopment for MPCo. The initial NCOP wasdeveloped in less than 18 months, and new productvariations were introduced even more quickly, with thenewest model having a six-month development cycletime. Unfortunately, MPCo has not codified the lessonslearned in reducing cycle time for new products.Although the new product project received widespreadvisibility across the company, fast product developmentis still very much an ad-hoc process at MPCo.

MPCo continues to licenses the intellectual propertydeveloped with the NCOP to contract manufacturers(e.g., TSCo and CXCo), which in turn sell completedNCOPs to major branding companies approved byMPCo. The branding companies sign brand-usageagreements with MPCo and pay royalties to thecompany. MPCo also sells NCOPs under its own brand,but its market share remains small.

MPCo’s decision to license new technology that was stillbeing used internally to outside companies was highlyunusual. Frank Hanson helped sell this idea to MPCoexecutives and was instrumental in finding partners for

the technology. This business model generates newrevenue for MPCo without any factory investment.MPCo is considering this model for other internallydeveloped technologies.

Although initial costs in Asia were much lower thanwith GSCo, costs have since escalated in China,negating some of the initial advantages of moving thebusiness. Over time, MPCo has achieved a deepunderstanding of development costs associated withnew versions of the NCOP and can carefully negotiatethese costs with each new supplier. MPCo activelyworks on cost reduction efforts with its suppliers andcontract manufacturers.

Moving the business to Asia was initially a low-coststrategy and MPCo did not expect to get the same levelof innovation as it did from GSCo. However, Asiansuppliers are now the source of many new ideas forMPCo.

The fourth generation of the product is in productionand MPCo is developing the fifth generation, which willuse LED-illumination technology. Using MPCotechnology, a major Japanese company has developed a“companion product” that can be used in conjunctionwith cell phones. MPCo continues to own the essentialand important IP for the product. It pays TSCo, CXCoand other Asian suppliers for development work andtooling for new products under separate developmentcontracts.

NCOPs have been a big success in the market, andthere are now at least six competing brands. Somecompetitors have used other technology to get aroundMPCo’s IP, but their products are bigger, heavier, pricierand inferior in performance. Other competitors arebeing investigated for IP infringement.

Future of the InnovationNew applications for the NCOP are being found inbusiness, education and homes. The cycle time for newmodels continues to decrease, with the most recentiteration completed in six months. New NCOPs arebeing developed that will have applications with games,laptops and cell phones. A “pocket” model is pastprototype and being readied for production. Thevolume’s potential is thought to be enormous.


MPCo’s supply management group is primarily focusedon sourcing and cost reduction rather than innovation.With an eye toward continuous improvement andinnovation, supply management attempted to roll out


lean and Six Sigma concepts to the supply base but hadlimited success due to a lack of resources and thechallenge of managing many different technologies.Supply management believes that the SBUs are betterpositioned to drive Six Sigma innovation efforts in thesupply base, but the SBUs have not taken up thechallenge.

Several years ago, MPCo established new productinnovation buyer (NPIB) positions in supplymanagement to relieve the laboratory scientists, benchchemists and other technical people from doingsupplier and product searches, particularly when MPCohad capable suppliers on board. Individuals in thesepositions work directly with NPD scientists andengineers in those SBUs that have agreed to carry thebudget line for the NPIB. Only three of the eight SBUshave NPIBs on staff — two of these individuals areengineers, while the others come from a businessbackground but have technical skills. One unit hasasked for a second NPIB, finding that the first buyermore than paid for herself. On the other hand, adifferent SBU opted to let go of its NPIB during adownturn in business. The NPIBs assigned to SBUshave a solid-line reporting relationship to supplymanagement and are supported by that group. Despitethe success of the NPIBs, assessing supplymanagement’s overall contributions to innovation isproving to be an ongoing issue.

In this particular case example, supply managementplayed a unique role. Frank Hanson, a supply manager,took on “advanced sales and marketing” along with hisusual supply role. This was partly done out of necessity,as the company had limited resources in this SBU. Suchan assignment would not have been possible ifcorporate had not empowered the SBU to do what wasnecessary to “supercharge” a struggling market.

Hanson is still on the NCOP leadership team. Alongwith the engineers, he is continually on the lookout fornew technology, new suppliers and new customers.Corporate management is reviewing the possibility ofincreasing supply management’s involvement on thedemand side of the equation.

Important Lessons

Lesson 1: Know Your MarketMPCo marketers listened to their customers. Thecompany understood the common office equipmentproduct market because it had been selling the productfor many years. It also knew the old product hadreached the end of the line and that customers wouldwant a low-priced, small, flexible and easy-to-install

version of the product for the next iteration. Also keywas that MPCo envisioned huge new markets for aproduct with these characteristics.

Lesson 2: Strategically Align Trading Partnerswith Project ObjectivesStrategic alignment has multiple dimensions. For the“carry-over” component, MPCo needed alignment witha supplier with the following characteristics:

• Small in size — GSCo was smaller than MPCoand was interested in the business.

• Superior technical capabilities — GSCo was atechnology leader in this field.

• Mutual trust and ease of doing business — GSCoand MPCo had a long-term relationship.

• Speed — GSCo could develop the neededcomponents quickly.

• Capacity for manufacturing in small lots at targetcosts — GSCo could manufacture in smallquantities at quoted prices and high quality.

Later in the product life cycle, MPCo needed a morecost-effective supplier that would meet the growingvolume needs of the market. HKCo, the first Asiansupplier, was cost- efficient and the right size. However,HKCo later decided to exit the business because themargins on the NCOP did not meet its financial goals.That is, the strategic alignment between MPCo andHKCo did not ultimately match up after all. Thequestion remains whether or not MPCo should have orcould have known this ahead of time.

The second Asian supplier, TSCo, was a better strategicfit — it was the right size, agile and committed to theCOP market. TSCo was good at developing newproduct variations with low volumes.

Although TSCo strategically matched up with MPCo oncost, volume and flexibility, developing mutual trusttook some time and effort.

Lesson 3: Internal Flexibility Needed toSupport InnovationThe short development time needed for the NCOPproject did not fit the usual NPD model at MPCo. MPCocorporate gave the SBU an unusual amount of authorityand resources and did not micromanage the project.Supply management was given extraordinaryresponsibility to “push” the process along, both internallyand externally. A supply manager was appointed projectmanager with responsibility for finding strategicsuppliers, contract manufacturers and customers for theNCOP. In the end MPCo acted more like a merchant thana traditional manufacturer for the NCOP by sourcing keycomponents, outsourcing the manufacturing andlicensing the technology to third parties.

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Lesson 4: Clarify Intellectual Property RightsMPCo and GSCo clarified IP ownership at the start ofthe project. This was accomplished in part by MPCoreimbursing GSCo’s development costs in exchange forthe IP that MPCo wanted to retain. Both MPCo andGSCo ended up with IP that was critical to theirstrategic plans. MPCo retained these important IP rightsas it moved the business to new suppliers and newcontract manufacturers. The new Asian suppliers havealso developed new IP for themselves while respectingand protecting MPCo’s IP rights.

Lesson 5: Good Communication Is Essential,But DifficultClose and constant communications within MPCo andbetween MPCo and GSCo were critical to keeping thisfast development project on track and on schedule.Achieving this same communication level with the newAsian supplier was even more challenging and just asimportant.

Lesson 6: Incremental Innovation Must FollowRadical InnovationMPCo understood that the high prices it could chargefor the new-to-market NCOP were not sustainable andthat it would need to lower the cost of components andmanufacturing. This led it to Asia, where it found notonly lower cost suppliers but new sources ofinnovation.

With each iteration of the product, MPCo pushed thedesign limits further but was still able to drive downdevelopment costs, manufacturing costs and cycletimes. Although the new versions do not have radicalinnovations, the incremental improvements and costreductions have kept MPCo a leader in the marketplace.

Lesson 7: Match Supplier Capabilities toMarket NeedsAs competitors entered the field, MPCo had to developsmaller, less expensive versions of the product at anever-faster rate. MPCo was able to successfully switchsuppliers as needed because it owned the essential IPand had a deep understanding of the developmentprocess for new versions of the product and the costs ofmanufacturing.

Key Insights

• Supply management can play a strategic role inproduct innovation, including leveraging globalsupply market knowledge.

• Executive management can provide significantopportunity and support for supply management

to play a more strategic role in innovation. Inmost companies, this requires a change ofthinking about the traditional role of supplymanagement.

• Leadership skills are more important in drivingmajor innovations in collaboration with thesupply base than functional knowledge of supplymanagement.


Purpose

This case illustrates the complexity of managing and/orleading efforts to achieve incremental or breakthroughinnovation requiring a network of suppliers.

Key areas found to impact innovation include:• Insourcing/outsourcing decisions• Supplier selection• Innovation capability assessment• Joint selection of second-tier suppliers• Supplier development• Project management and coordination


Integrated System Design (ISD) is a large global companywith annual sales in the billions of dollars. Sales,operations and R&D are located in locations worldwide.ISD conducts integrated systems design anddevelopment, service, marketing and sales for severalindustries, primarily medical. ISD also manufacturesproducts across its worldwide locations. Its overallbusiness strategy is to be a leader in productdevelopment and to provide full-service solutions tobusiness customers. It conducts design and development,both internally and with external suppliers.

The ongoing challenge facing ISD is the design,development and manufacturing of integrated systemproducts that provide leading-edge capabilities, andincorporating technology and application innovations toincrease customer satisfaction. The integrated systemsgenerally take 12 months to 36 months to develop andhave multiyear product/system life cycles, some ofwhich exceed 10 years.

The technology used in the systems is both leading edgeand industry standard. In addition, the systems areincreasingly a combination of mechanical and electroniccomponents/modules controlled by advanced software.

Case-Specific Product and Project Description:The Positioning Platform

The product examined in this case study is anintegrated Positioning Platform (PP) used duringdiagnostic examinations. The PP is a complex,integrated system that must provide extremely tightmovement and positioning control. The PP is one ofmany major subsystems used in the overall examinationprocess.

The integrated PP system was sold as an ISD “turnkeysolution” to demanding customers with many uniqueneeds. However, more than 25 suppliers were requiredto manufacture the PP after design and development,and prior to finishing touches completed by ISD tomeet exacting customer needs and specifications.


ISD had to decide whether to outsource or retaindesign, development and manufacturing of the PPsystem, as well as how much involvement it shouldhave with the selection and management of second-tiersuppliers for the PP components. The business unitmanagement team made the outsourcing decision for PPdevelopment. The main parameters for the insourcing/outsourcing decision included:

Chapter 4 Case Study: IntegratedSystem Design

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• Competitiveness — How good is ISD comparedto other firms regarding design and developmentwith innovation, cost, quality and so forth?

• Strategic importance — How important is theproduct and underlying technology to thecompany’s success over the long term?

• Available capacity

The integrated PP consists of many electromechanicalparts that were not core to ISD, so the PP wasestablished as an outsourced development project. Inaddition, the PP was not considered “strategic” becauseit was not an “order winner” for ISD. Also, ISD did nothave extensive electromechanical capabilities, and thelimited internal electromechanical capabilities it hadwere fully utilized. However, even though the decisionwas to outsource the PP, the control of the software forthe project was not easily transferred to externalsuppliers. Because it was critical to the project, ISDwould develop the software.

In addition to direct software development, ISDrecognized the need for ongoing involvement in themanagement and selection of second-tier suppliers ofother technologies for the PP because of theircomplexity. The first step was to select the first-tiersupplier, then work with that supplier to manage therest of the supply chain and the project.


At the beginning of the project, ISD was beginning todevelop its global preferred supplier list (PSL) formechatronics and related purchase categories.Historically, ISD motion controls had been developedinternally. There was no PSL established for the motorcontrol PP application, so ISD established a list of morethan 100 potential suppliers.

A global ISD category team was responsible for supplybase development and creation of the preferred supplierlist. The team performed a worldwide search for potentialsuppliers. Supply drove the supplier selection process,using input from engineering and other functions.

Twenty potential motion suppliers were consideredbased on information obtained through generaldiscussions, reviews of supplier websites and otherpublicly available information. The 20 potentialsuppliers were then given a detailed 10-pagequestionnaire about their organization, quality systems,design capability and other important considerations.From this initial high-level capability assessment, fivesuppliers were selected to participate in a design-in-workshop (DIW) program.

The objective of the DIW was to determine whichsuppliers had the capability and the innovative ideasmost critical to redesign of the system. Individual DIWswere conducted for each supplier to minimizeintellectual property (IP) loss concerns. The motioncontrol supply world was relatively “close knit,” so thesuppliers had some idea of which companies they werecompeting against.

As a result of the DIWs, the potential supplier list wasreduced to two suppliers. ISD then conducted anotherworkshop to determine how each of the potentialsuppliers would leverage its engineering and innovationtalent and establish the concepts. ISD provided thesuppliers with the fundamental project requirementsand asked each to develop a proposal. ISD specialistswere made available to each supplier throughout theworkshop to answer questions. Detailed concepts weredeveloped during this workshop. Suppliers were notpaid to participate in the workshop, and they had toabsorb concept development costs. ISD retained all IPthat was developed and believed that only thosesuppliers that were keenly interested in the businesswould participate.

Tempted by the possibility of winning lucrativeproduction contracts, the suppliers agreed to participatein the DIWs despite the fact that they had to absorb thedevelopment costs and cede the rights to any IPdeveloped to ISD. These suppliers were “industrial”suppliers that were focused on production volumecontracts rather than IP ownership. The suppliers alsogained insights through working with ISD that theycould use to capture business from other customers.

After the two suppliers developed a feasibility model,Specialco was selected to design and develop the basicPP, which included all PP components/movements withthe exception of a few options. Specialco was amachining company that had migrated to design andengineering work in mechatronics as well asmanufacturing. Specialco was already a supplier to ISDfor similar items and was a “preferred supplier,”although not originally qualified for this system.

Specialco was paid competitive labor rates per employeefor development ($40 to $60 per hour). Specialcoeventually received the production contract, with abouta 25 percent volume increase in sales to ISD. Theproduction contract was awarded after about a year ofdevelopment and facilitated the development of targetcosts, as both parties helped with the product design’sevolution.

Specialco had limited knowledge about the detailedindustry application characteristics of the PP. However,


even though unique applications knowledge wasrequired, ISD believed that Specialco was capable ofperforming the design and development work. Thisbelief was based on the DIW and prior experience withSpecialco and its PSL status, combined with anexcellent track record on prior smaller projects andongoing development of its technical knowledge andskills.

In retrospect, there were a number of issues that couldhave posed potential problems. First, this was an initialoutsourcing project, and the ISD engineers were notinterested in providing assistance to an externalsupplier. Second, an ISD supplier assessment tool thatevaluated supplier technology, development andinnovation capability was not in place. Third, only asomewhat limited assessment of Specialco wasconducted because it was on the preferred supplier list.

As ISD was executing the supplier selection process, itinitially developed a statement of work (SOW), whichwould then be converted to a contract with the selectedsupplier. A steering committee (supply representative,supply account manager and engineering manager) wasresponsible for contract authorization, execution andthe tracking of progress against contract terms andconditions.

It was anticipated that the selected supplier (Specialco)would be responsible for the complete PP with limitedsupport from ISD. However, it was later demonstratedthat even though Specialco had concept knowledge, itwas limited in specific design and developmentcapabilities, especially for motion controls. Therefore,the SOW and eventual contract had to be modified,with ISD providing design work support and a muchhigher degree of involvement than it had earlieranticipated.

Second-Tier Supplier SelectionA critical PP sourcing issue was the selection of second-tier suppliers supporting Specialco. Given thecomplexity of the PP, which was made up ofapproximately 30 major subassemblies andcommodities, a team from ISD and Specialco workedtogether to establish the lead company responsible forsupplier selection and management of commodities.The following list shows examples of specificcommodities and the company responsible for leadingthe supplier selection and management for each:

• Gears — Specialco lead• Mechanical — Specialco lead• Controls — ISD lead• Motors — ISD lead• Platforms — ISD lead

Within each of the major assemblies, there weretypically multiple subassemblies and components. Thecompanies examined the subassemblies within themajor assemblies and further determined which wouldhave responsibilities for supplier selection andmanagement. All of the supplier selection andmanagement issues were agreed upon by both partiesand included in the contract.

Specialco had limited knowledge of second-tier suppliercapabilities, and it was not fully aware of overall ISDproject needs. Challenges associated with second-tiersupplier selection included 10- to 15-year servicerequirements for both subassemblies and componentsand ISD’s preference for standardized productcomponents to minimize the number of spare parts andSKUs. Even though ISD preferred that its first-tiersuppliers select and manage their own supply bases, anaccommodation was required to ensure that ISD’ longerterm needs were being met. The result was a model thatallowed for a range of ISD involvement regardingsecond-tier sourcing decisions.

To facilitate the second-tier supplier selection processfor the benefit of the project, the 2 x 2 matrix shown inFigure 4-1 was developed to identify which companywould be the lead firm based on price/cost impact andrisk, with risk including functionality andservice/responsiveness. Where cost/price and risk arehigher, ISD is more engaged. However, both firmsexchanged views and information about the second-tiersuppliers.

Establishing purchase requirements, segmentingresponsibility and agreeing to a second-tier sourcingstrategy and process were reasonably doable for theindividual assemblies, subassemblies and components.However, the integration of the major assemblies wasmore difficult. The form and fit interfaces needed to beclosely coordinated. A project team consisting ofengineers from ISD and Specialco was established tojointly develop solutions to integration problems. Inaddition, it was decided that the company making thepurchase would be responsible for the actual purchaseas well as logistics, quality and price.

One interesting aspect of the project was the jointselection of the motion supplier for the PP. Duringdevelopment, Specialco, ISD and the motion supplierworked collaboratively to create the best innovativedesign and interfaces. This three-way collaborationprovided improved design solutions. Once the designwas released, Specialco managed the businessrelationship with the motion suppliers. Thisarrangement enabled collaboration during design anddevelopment, with one company eventually having

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focused responsibility for providing production volumerequirements.


Specialco and the other competing supplier entered intocompetitive DIWs without a guarantee that aproduction contract would be awarded to the moreinnovative development supplier. In addition, eventhough the winning supplier was confident that itwould win the production contract, it was unclear whatapproach ISD would take regarding pricing for thevolumes in the production contract volumes.

Establishing product and assembly/subassembly targetcosts and prices was an important approach at ISD.Under certain circumstances, ISD applied marketpricing to determine product price targets for a finishedproduct. In this case, the PP was part of a larger system,so the price that a customer would pay for the PP wasunknown. Target costs were therefore established usingspecific cost-downs from the previous PP’s bill ofmaterial (BOM) plus additional costs for the newfunctionality. The prior PP was internally produced, soISD had a good idea of material and assembly costs.The initial target cost would be set by the BOM cost,plus an increment for new features, minus the expectedcost-downs. There was no premium for innovationbecause Specialco was compensated for nonrecurringengineering expense costs and was awarded theproduction contract. The margin was fixed and setequal to the expected cost-down percentage. In effect,ISD was going to pay the same price for the new PP as

the old PP, but with the new advanced features. Inretrospect, the additional costs of the plannedimprovements and features were underestimated. Costengineering was involved in the original cost estimating,but ISD lacked the experience and knowledge at thattime to assess the true cost impacts of the additionalfunctionality.

Engineering change control was managed by a projectchange control board. All proposed changes werediscussed, then accepted or rejected by projectmanagers from each company. This worked well untilseveral engineering changes occurred at the same time.Work was started on changes before they wereapproved, leading to numerous problems. Whenmultiple changes were made to one particular part,change management was not difficult. However,problems developed when changes were made tomultiple parts at the same time. For example, changeswere simultaneously being made to the frame thatcarried the cover, to the cover itself and to componentsinside the PP that changed the interface to the frame.The tolerance stack-up calculations were ultimatelyincorrect. Making multiple changes across multipleparts without coordination of the many changesseverely impacted performance and had to be corrected.

The modular design of the PP also made it difficult toestimate costs and value-to-price relationships.Modularity was the favored design strategy becausecompanies could delay customization until finalassembly while lowering costs of customization bydeveloping different modules. However, modulardesigns also can drive up overall product costs when all


Figure 4-12x2 Second-Tier Supplier Selection Responsibility

Avoid ISD Lead

SpecialcoLead Joint

Higher

Risk

Lower

Lower Higher

Cost/Price Impact

potential custom needs are incorporated into a productbut not activated. The cost for the modules may bespread across the products on an average-cost basis,thereby limiting full understanding of the true cost-to-price relationship (and value).

The project team used an Excel-based “cost monitor” totrack costs and cost changes as the project progressed.This tool worked well until multiple changes were madeconcurrently and the resulting delays set in. The use ofcost monitoring lagged during this period, and theoverall product cost impact of changes was unknown.Original cost targets were overrun, but it was too late tocorrect after design changes had been made. In thefuture, estimated change costs are to be reviewed andapproved prior to implementation, which could cause aschedule problem if not managed correctly.


After Specialco was selected for the PP, a project teamthat included engineering, manufacturing, quality, costmanagement, supply management and customer servicerepresentatives from both Specialco and ISD wasestablished. Subteams worked on specific design andother issues. ISD assigned a supplier manager to theteam, while Specialco assigned a senior buyer. Theproject team met regularly, generally having contact ona daily basis. The team created a project-specific formthat displayed the status (e.g., supplier selection status,contract status, activity status and responsibilities) forall work tasks required for the project. ISD andSpecialco both described the working relationship asclose.

A higher level steering committee was formed tomanage the overall relationship between the companiesand oversee contract management issues. The steeringcommittee, which met monthly, was established becauseof the complexity and the importance of the product.

The steering committee generally worked well and wasespecially helpful in obtaining resources needed for theproject. However, as time went on ISD’s decisionmaking about finances and resource support sloweddue to personnel changes and a lessening of focus andintensity. This was frustrating for both ISD andSpecialco. Also, at one point the committee becameoverly involved in the everyday operations of theproject and lost its focus on maintaining the health ofthe business relationship between the two firms. Thismay have occurred because of the length of the projectand the steering committee’s increasing involvement in“operational details.”

Specialco and ISD were located near one another, somost communications were face-to-face. It was almostan “on-site engineering” situation for the companies.One “communication” problem arose because ISD wasusing a different CAD/CAM system than Specialco. Thiswas not initially recognized, and the use of thesedifferent systems led to delays and uncertainty regardingwhether all of the information was properly translated.“Minor” yet important details were left out after filetransfers.


Need for SynchronizationIt was important to synchronize project phases,terminology and expectations. For example, to onecompany “prototype” might mean the first lab mock-upwhile to another company it might mean the first runfrom the initial production tools. Unfortunately, thesetypes of differences were not discovered until thisproject was under way. During the project, one second-tier supplier “released” a motor design for production inEastern Europe. However, ISD believed the motor wasnot released to its requirements and production. Whenthe question was asked, “Is the motor released?” thesupplier answered that it had been released. Followingan investigation, the customer said it had not beenreleased because qualification requirements weredifferent in different regions.

Quality Management Expectations and ControlSpecialco was a preferred supplier, and at one time hadquality approaches that met ISD’s supplier control plans.However, these quality processes had been modified bySpecialco after the company was originally qualified andplaced on the preferred supplier list. This led ISD torealize that initial product quality managementprocesses for new products must be assessed even whenusing a preferred supplier.

Influencing Supplier RiskBecause ISD would own all intellectual property, ISDhad to establish appropriate pay rates, developmenthours, profits and return on investment for productionvolumes in order to provide an incentive for Specialcoto take required risk. The sourcing of other product toSpecialco was also used as an inducement.

Specification CreepSpecification creep was a valid concern, as it came tobring a limited negative impact on the workingrelationship. For example, additional milling of a motorshaft drove additional cost. Costs began to rise, and

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price change negotiations were required without anagreed-upon formula to guide the amount of the pricechange. Negotiations then became difficult, to the pointwhere working relationships were negatively affected. Inthis project, new functionality was added after the priceof motors had been negotiated, leading the supplier tobelieve that ISD was trying to gain functionality withoutpayment. ISD was concerned that the supplier wasovercharging for a small change to get back the profit“lost” during initial negotiations. But in the end, thedifferences were resolved to the satisfaction of bothparties without impacting working relationships andtrust.

Maintaining TrustThe project described in this case study took place overseveral years and saw a combination of successes andfailures over its course. Communication was necessaryto continually present facts and maintain stakeholdersupport, including dispelling rumors and incorrectinformation. Without effective communications,incorrect or even negative perceptions about strategyand supplier performance can develop. It was importantthat communications related to performance in terms ofexpectations and supplier relationships be addressed athigh levels in the organizations. During this project thesteering team, which had been formed to manage therelationship between the companies, became soinvolved with project details that it began to lose sightof the goal of maintaining a positive workingrelationship and trust.

In complex outsourcing relationships, trust candeteriorate through any number of means. Followingare two examples from this project:

• When Specialco’s motion engineer left thecompany, ISD stepped in to assist. However, thiscreated the perception that Specialco was a poormanager of its resources and perhaps not to betrusted. This perception developed in partbecause when Specialco was selected, ISD did notconduct a detailed assessment of Specialco’s long-term engineering resources and the impact thatlosing a key person would have on the project.The result negatively affected ISD because its ownmotion engineering staff ultimately had toperform the engineering work. Both companiesneeded to understand the root cause of theproblem to keep from reaching inappropriateconclusions regarding one another’strustworthiness.

• When ISD asked what changes were being billedfor engineering development payments, Specialcoindicated that a portion of the hours being billedincluded internal meetings with ISD’s purchasingrepresentatives and the project team. ISD did not

believe these hours were direct engineering, butrather hours that were helping Specialco developcapabilities. This conflict negatively impacted thetrust relationship between the two companiesuntil it could be resolved. It is an example of howdifferent cost-driver expectations can impact trust.


While the project was originally estimated to take 12 to24 months, it ultimately took longer because a“timeout” was called during the project to reviewdevelopment and costs and reestablish priorities. Thedelay was acceptable to Specialco. Part of the reason forthe delay was the lack of motion engineering talent atSpecialco and the resulting need for ISD to provide thetalent, which was being used on other projects.

The final project audit deemed the project a success,and the products were extremely well received. Therewere the expected minor issues, given the significantplatform change. The project had delays and costincreases, which were not unusual in scope or scale.The overall ISD system was providing profits, as was thePP itself. The PP met specifications and had increasedfunctionality, even though initial target costs wereexceeded. After release, productivity improvementefforts were undertaken.

This project experience also provided ISD with theconfidence that it could increasingly work withsuppliers on major product changes and innovation.Internal ISD engineering attitudes have also changed, asthe engineering staff was now willing to work morecooperatively with suppliers. ISD engineeringrecognized the value-add that suppliers can bring. Theproject also signaled to suppliers that ISD would expectmore value and innovation in the future. ISD’s suppliersare now more proactively investing in higher levelpurchasing and engineering skills, making it easier forISD to outsource complex products/subsystems to them.ISD outsourcing has also influenced suppliers to sharecomplementary information.


The supply management group at ISD established thesupply base and determined how ISD would collaboratewith suppliers. The group managed most of theoutsourced suppliers, including both internal andexternal suppliers that supported multiple businessunits at ISD. DIWs were conducted by supplymanagement.


The supply management group also managed externalOEM suppliers that were providing full systemsintegrated within full-service laboratories (e.g.,medicines/dose measurement). ISD develops and sellsproducts to multiple industries but does not make all ofthe individual systems or products. The externallysourced systems or products were purchased off theshelf and/or jointly developed by ISD and suppliers.These jointly developed products were branded as ISDproducts, while others retained the supplier’s name. Thecompanies might jointly market the products orsubsystems; however, ISD will always be the turnkeysolution provider.

Important Lessons

Lesson 1: Estimate Time Needed for KnowledgeTransferEffective methods and realistic estimates of the timeneeded to transfer knowledge need to be established. Inthis case study, significant amounts of intrinsicknowledge had to be transferred to Specialco. Becausethe transfer took longer than anticipated to achieve, theproject’s time span was elongated.

Lesson 2: Evaluate Progress and ResultsFormal and regular evaluation of project progress andresults are critical to success.

Lesson 3: Project Leadership Continuity IsCriticalCare must be taken by executive leadership at bothbuyer and supplier to ensure project leadershipcontinuity. Project leads may and do change, asevidenced by this project. Original champions of acollaborative innovation effort are often critical todriving the commitment to achieving objectives andmeeting targets. As project leads change, crucialinformation and knowledge can be lost, personalcommitments and relationships may erode, therebyimpacting the innovation focus, timeline andcommercialization.

Lesson 4: Accurately Assess SupplierCapabilities (for Outsourcing)Frequently, more company resources than anticipated arerequired to transition to outsourcing and manage thenew interfaces and information transfer. ISD thought itcould work with Specialco using minimal resources,such as a few engineers, a purchaser and project lead.The project was ultimately more complex thananticipated and more than 20 engineers were required.The lesson learned here is that careful assessment of asupplier’s current and future capabilities, as well as

possible company resource commitments, is required toassure innovation project success.

Lesson 5: Understand Supplier InnovationAbilitiesEither intentionally or inadvertently, suppliers mayoverstate their overall and innovation capabilities, asSpecialco did. Specialco may have indicated that it“could” do something when it should have said it“wanted” to do it. Again, supplier innovation assessmentis very important.

Lesson 6: Communicate with SuppliersApplication engineers (similar to industrial engineers)could and should communicate directly with thesupplier about how the product actually will be used.This is important because a supplier usually does nothave deep insights regarding product end use and thesupplier may make decisions and engineering changesthat negatively impact overall system or productperformance. Application engineers from ISD couldhave worked more closely with Specialco to ensurealignment with end customer product use.

Lesson 7: Financial and Change ControlCriticalTight engineering change control and financial controlare critically important to early identification ofpotential problems during innovation projects. The costmonitoring tool could have been reviewed monthly todetermine the impact of engineering changes andwhether the customer, ISD or the supplier would incurthe change costs.

Lesson 8: Maintain Price-to-Cost ControlModularity and implementation of complete productfeatures, some of which are not activated for differentcustomers, frequently lead to limited insights betweenproduct features and their cost/price and value tocustomers. This was partially true in this case study. It isimportant that firms maintain the price-to-costrelationship for the modules that make up a finalproduct.

Lesson 9: Multiple Suppliers Can CollaborateThe case demonstrated that ISD and two supplierscould work together effectively in a complementarymanner to achieve innovative designs. Firms can andshould look for opportunities to collaborate bothvertically and horizontally with their suppliers.

Lesson 10: Common Engineering Systems AreImportantAssessment is required to determine whetherbuyers/suppliers are compatible so as to eliminate the

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potential for unforeseen problems to develop andincrease project completion time.

Lesson 11: Supplier Innovation Can BeAchieved through RewardsCompanies can motivate suppliers to work oninnovation and provide intellectual property to thebuying company when supplier rewards are properlystructured. In this case, volume production contractsand technology learning were the key motivators.

Lesson 12: “The Devil Is in the Details”Supply managers working with suppliers on innovationprojects must focus on the strategic workingrelationship between the two companies as well as theday-to-day operations and technical details. Innovationprojects with long lead times can be jeopardized ifteams do not focus on both the relationship and theoperational details.

Key Insights

• Multiple non-competing suppliers will worktogether on the buying company’s requiredinnovations if they trust that they will berewarded for their innovation and cooperation.

• Outsourcing to external suppliers is an opportunetime to fully assess supplier innovationcapabilities — especially as the firm’s corecompetencies for achieving competitive advantagebecome more limited.

• Truly understanding supplier innovationcapabilities and their willingness to provideinnovation for future returns is critical to success.


Purpose

This case study examines an open innovation initiativein which the supplier approached the buying firm withthe innovation idea and capability. The innovation is anew data format conversion service introduction, not anew product introduction. The case study alsoillustrates how the buyer and supplier collaborated todevelop the market pricing model for the service. Thecase highlights how a clear definition of roles andresponsibilities can positively impact problem resolutionand innovation project results.


I-Com is a leading telecommunications networkoperator that covers most of the United States. I-Comhas transitioned in recent years into a communications-only provider, with an eye toward expanding itsoperations through acquisitions.

Communications is a fast-growing industry that offersmany opportunities. The U.S. communications industryis widely regarded as underdeveloped compared tothose of Japan, China and Western Europe, signalingample opportunities for continued expansion. Digitaland broadband services are two segments experiencingsharp growth, and companies have begun test-marketing digital communications over the Internet.The communications industry is characterized by abewildering set of incongruent technologies. Industrycompetition may be best described as oligopolistic, withprimary barriers to entry including high initialinfrastructure costs, regulations and brand recognition.


Product development leadership at I-Com emanatesfrom top management, in particular the CEO. Thecompany has strong marketing functional leadership. Itclosely examines market demand for new products andservices to establish the “voice of the customer” (VOC)for the business. It also recognizes that suppliers aregenerating much of the innovation in the industry, andthus closely examines the supply market for innovativeapplications.

I-Com is not the largest company in the industry, yet itreceives much media acclaim for having developedsome of the most innovative product and serviceofferings in the market today. This can be explained bythe fact that smaller players have to think beyond thestatus quo and continually innovate. I-Com also isdescribed as an aggressive carrier in regards to contentinnovation and its willingness to partner with existingexperts. For example, I-Com was quick to cash in onthe benefits of a heightened interest in mobileapplications, especially those with a social slant, byadding three-dimensional animated avatars to itsmultimedia messaging service. I-Com’s “personnellocator” provides a scalable solution that allows smallbusinesses to monitor the locations of their mobileworkforces in real time.

I-Com competes against bigger carriers with biggerbudgets, more resources and more distributionchannels, which means that it needs to be moreinnovative and look to use suppliers differently. Forexample, I-Com proactively looks for suppliers thathave something interesting to offer while other carrierswait to be approached. Also, I-Com seems to reallylisten to those suppliers and to spend time with and

Chapter 5 Case Study: I-Com

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collaborate with them, rather than just purchase theirservices and products.

Case-Specific Product and Project Description:Data-to-Text Messaging

This case involves the development and marketing of adata-to-text application developed by a supplier for thecommunications industry. The primary players are I-Com and DataText Co. (data-to-text supplier), thoughintegration and collaboration was also required withServe Right (a data messaging hardware provider). Thetechnical personnel at each company worked togetheron the project. Supply management played a significantrole in coordinating the three-way communication andintegration. The three companies were often in the sameroom discussing integration, though all commercialdiscussions were separated. While this three-companycoordination is a point of interest, the focus of thisresearch is on the relationship between I-Com andDataText Co.

DataText Co. provides a data-to-text messaging service.It started with its proprietary data conversion system,becoming one of the first companies to convert data totext messages for both landlines and mobile telephones.Users subscribing to the service have incoming datatranscribed and sent as text messages or emails.

In order to compete with similar service providers,DataText Co. recently introduced some other features,such as a blogging feature that allows users to speak apost to a blog from any phone. There is also a memoservice through which users speak memos to themselvesthat are subsequently transcribed and sent as emailreminders. Also, DataText Co. users can speak a textmessage, update social networks or send messages togroups of people all at once using recipient lists.

DataText Co. offers Web applications, includingblogging, Facebook and Twitter integration, but its chiefofferings are in its mobile carrier product line, for whichconsumers pay extra. DataText Co. has partnershipswith many mobile carriers, predominately in Europe.The supplier has had limited penetration in the UnitedStates, although market trends and research suggest anincreasing interest in the applications it provides.


As a communications carrier, I-Com provides afundamental service for data communications. Suppliers

in this industry tend to provide much of the innovativefeatures and add-on services. Suppliers drive thefeatures and roadmap, as most of them are ahead of thegame when it comes to applications. I-Com does notextensively focus on technology or the productroadmaps that it develops. There is a strong technologypush by suppliers, followed closely by market research.Suppliers generally present technologies and productroadmaps to I-Com. In almost every case in which I-Com told a supplier that it wanted something, therewas a supplier who already had explored the idea inadvance of the inquiry. There is no shortage of supplierscoming to I-Com pitching new product ideas, so it willmost often look to external providers for services andproducts not directly associated with the fundamentalservice.

At the time of this project, I-Com was looking for waysto innovate and prove that it was more than just anordinary carrier. It was trying to rebrand throughinnovation. Data communication services wereincreasingly becoming a commodity, so unique data anddata management approaches became a focus at I-Com.


This case is somewhat unusual as an example ofsupplier innovation, as it is as much about the supplierselecting the right buyer as it is the buyer finding theright supplier. DataText Co. has a formal process fordetermining how and when to approach potentialcustomers with new products. DataText Co. is relativelysmall, and its closely knit management team can makerapid decisions about such matters. Key accountmanagers at DataText Co. are in very closecommunications with corporate, and the executiveshave a good understanding of market position.

DataText Co. had already developed the core technologyfor data-to-text and was supplying that technology inEuropean markets. It was trying to find a U.S.-basedcarrier to collaborate with in order to develop theappropriate interfaces and to introduce the servicequickly in the U.S. It had already partnered with aregional carrier in the U.S., but it needed to penetrate alarger market. While some large carriers talk aboutdeploying innovation, they are not innovating at thespeed desired. In fact, they are considered quite slow indeployment. In addition, the big carriers tend to be abit closed to externally generated innovative ideas. Atthe other extreme, small carriers are simply trying tosell whatever they can, and they do not offer significantmarket opportunity. Midsized companies like I-Com aremotivated to innovate rapidly, yet they have robustprocesses in place to ensure that the product/service is


of appropriate quality and built to market needs. Theissues for DataText Co. were the length of time it wouldtake to get something done and what it would get outof the partnership.

To find an appropriate partner, DataText Co. initiallyspent significant time developing an understanding ofthe U.S. carrier market and how the companiescompeted and behaved. It tried to understand keyproducts and services and how quickly the carriersresponded to market conditions. DataText Co. spent agreat deal of time trying to understand the underlyingprocesses at the companies. It talked with several U.S.carriers to conduct due diligence concerningpartnerships. I-Com was viewed as being the “right size”and as having the appropriate approach to innovationmanagement — and as a good carrier with a nationalcustomer base. Two key factors that made I-Comparticularly attractive were speed to market and itswillingness to collaborate. It was considered a companythat could get things done, and it had a reputation ofbeing quick to market with new applications, whichwas a key determinant of preferred selection byDataText Co. DataText Co. believed that I-Com wouldbe nimble — move quickly, deploy quickly, learnduring deployment, adapt and execute well. Some otherDataText Co. customers also had some of thosequalities, but I-Com distinguished itself by itswillingness to collaborate.

If DataText Co. had worked with a larger carrier, itwould have been like going for a “moon launch.”Scalability from the technology side is important. Whilethe underlying technology is very similar from companyto company, telecom processing with a large carrier isvery volume heavy. A supplier can stretch itself too faras an organization in terms of the operations required.With I-Com there could be a million transactions a day,while with the largest carrier there could be 5 milliontransactions. This larger carrier would require moreinfrastructure, software, mainframes, people andprocesses to support the project.

After initially being approached by DataText Co., I-Comperformed due diligence by looking at other competingproducts and vetting other suppliers for this type ofproduct. I-Com did not default to DataText Co., whichconducted a trial to demonstrate the concept andservice to I-Com. The product offering was deemedtechnically sophisticated enough to be meaningful to I-Com. It believed that the technology would besuccessful, that a market existed for the service and thatit would gain knowledge from the product developmentand introduction. Further, I-Com viewed DataText Co.as different from other suppliers in regards to pricing, asthe two companies worked together to understand the

market and jointly develop potential pricing modelsbefore I-Com selected DataText Co.


IP Issues: Not a ProblemI-Com had little interest in capturing a supplier’sintellectual property (IP), so the companies did notspend much time negotiating IP issues. The relationshipstarted with a nondisclosure agreement (NDA), whichseemed to suffice. I-Com and DataText Co. sharedinformation freely and trusted each other — perhapsbecause DataText Co. was a hosted service rather than ahardware product.

Most of what DataText Co. was offering was alreadysupplier-owned IP. Most of what I-Com was bringing tothe project was covered by the IP in its data conversionhardware system. The challenge in collaboration wasworking the interfaces to one another’s products. Nonew product was to be jointly developed; the effortfocused on integration of two existing IP-protectedproducts. The one initial concern for I-Com was thatDataText Co. did, in fact, own the data-to-text IPexclusively and not in conjunction with any othercompany, supplier or otherwise. Given the nature of theproduct (competing options), IP ownership was never asignificant issue with DataText Co. and I-Com.

Risk and Reward SharingThere was a constant ongoing discussion of pricingfrom two perspectives:

• What should I-Com charge for the service?• How should that money be allocated, and who

should receive what?

DataText Co. was not comfortable telling customerswhat to charge for a service, but because of the openbusiness relationship in place the topic was discussed.Many carriers are very rigid in their pricing modeldevelopment, which can be detrimental to new offeringsbecause every region’s pricing models are somewhatdifferent. I-Com was able to focus on customersatisfaction as the basis for setting price and theresulting model.

The business contract was structured so that DataTextCo. only made money if I-Com generated revenueexceeding DataText charges from the new product. Thepricing model was jointly developed and was a point ofongoing discussions between the two parties that weredescribed as “open and dynamic.” In addition, thepricing model changed when necessary, and the productproved profitable after some initial market penetrationchallenges.

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The technical model drove the commercial model.Initially, the charge to customers for data-to-textservices was “per data message translated into text.” The“de-risking” nature of this first pricing model drove upprice to the consumer. Sales initially did not meet theforecast, and the commercial model had to be modifiedto enhance the customer value proposition. A newmonthly pricing structure for text message translationswas agreed upon. The companies re-launched theproduct in trial as a “first month free” service instead ofcharging a per-message fee for active users. I-Cominitially paid for its employees to have the service freeor at a reduced cost. This new pricing model increasedthe revenue risk for DataText Co., but decreased theper-unit charge for the consumer — a model that metwith success.

Both parties had development costs at risk. DataTextCo. bore all of the costs of product development andproof of concept, while I-Com incurred internaldevelopment and execution costs. The two partiesshared some other costs. They agreed that I-Com wouldpay integration costs, but that the product trial wouldbe free to I-Com. Much of the new collaboration costsfocused on the integration of technology rather than thedevelopment of new technologies and their integration.The other key cost component was the market risktaken by DataText Co. It was very important toDataText Co. that both parties shared risk during therevenue model change. I-Com considered the risksharing equitable.


Organization and CommunicationFrom the beginning, there were high-level conversationsabout the business relationship. Executive-levelpersonnel involved in the relationship included thedirector of data products, the senior vice president ofproduct management and marketing, and the executivevice president of marketing.

For DataText Co., these top-level conversations werecritical. The company believed that an innovationpartner’s engagement with the customer depends uponthe customer. At I-Com, the product marketing team isa core decision maker and the engine that drivesrevenue for the company. Many activities, not justtraditional marketing, revolve around productmarketing at I-Com. DataText Co. put considerableenergy into managing the relationship with I-Com’sproduct marketing group, which allowed productmarketing at both companies to jointly understand theultimate consumer. This “joint selling” of the service tothe final customer was a very important aspect of this

case and points to the full use of supplier commercialcapabilities. Eventually, DataText Co. and I-Compersonnel concurrently visited stores to train peoplehow to use the product.

DataText Co. had an interfacing process for taking newproducts to market and for interfacing with thecustomer that seemed to be quite effective. The goal ofthe process was to interface with customer personnelwho have intimate knowledge of their customers andneeds, which is why DataText Co. started talking withI-Com’s product marketing organization. DataText Co. isa matrixed organization and can make quick decisions.It routinely scans market and pricing, and has constantcommunication with corporate on how key accounts aredoing.

As it became clear that the two companies wouldcollaborate, conversations cascaded throughout theorganizations. Technology personnel and managementpersonnel became involved subsequent to this topmanagement buy-in. Conversations were held with topmanagement to establish “how things would work” —the business relationships and processes — andsubsequently with technology personnel who would bewriting code to “make it work.”

I-Com employees moved quickly with the concept andproduct ideas in general, and were excited about theproduct. A winning strategy for DataText Co. involvedworking with the product marketing manager at I-Com.The manager “did the heavy blocking and tackling” forthe relationship. He was the communications linkbetween the sales manager at DataText Co. and thedirector of data products at I-Com. At some carriers,entry into the company is through engineering. At I-Com, product marketing is the development processhub and entry point. This led to a rapid productdevelopment process, since product marketing has theVOC orientation and can integrate marketing andadvertising efforts.

Stage-Gate ProcessThe data-to-text product went through a stage-gate newproduct introduction process at I-Com. While somecompanies use this type of process to winnow outproducts and eliminate all risks, I-Com uses it to getproblems solved effectively and efficiently. At I-Com thisprocess acts as a facilitator for quick, smooth execution.The new product introduction process was not viewedby DataText Co. as a way to cull out new products thathad a low probability of success. This same perspectivewas not the normal mode for most other DataText Co.customers.


Ongoing CommunicationsDataText Co. focused on keeping I-Com ahead of thecompetition and innovating on this product. Personnelat all levels in each organization had to make thisinnovation work. Both an I-Com account manager(sales) and a marketing manager were specificallydedicated to such efforts. For the most part, productextensions and innovations come from subscriber input,as with the voice-to-blog feature. Technology roadmapswere developed by DataText Co. and opened to I-Comfor feedback. Continuous change and innovation arecritical to success in this industry and in thispartnership. Figure 5-1 shows how thechange/innovation cycle flows.

The two companies were very open with commercialdiscussions early on, which enabled subsequentinnovation discussions. They shared their businessmodels, and established strong touch points at themanagement level. This partnership is an example of abusiness best practice because it has:

• A partnership at the working level• Management believing in the project and allowing

the teams to work• Direct lines of communication within and

between companies• An established level of trust while producing

results


Prepare for Bumps in the RoadIn any new product/service development and executionprocess there will be some “bumps in the road.” For theI-Com-DataText Co. relationship, challenges arose onboth the commercial and technical aspects of theproject. Resolution of the challenges requiredsimultaneous coordination of commercial and technicalconsiderations.

Carefully Plan Pricing ModelThe initial commercial model (pricing) was, inhindsight, clearly wrong. As a result, initial sales were

below target. The pricing model may have beeninappropriate because this was the first majorimplementation of the service in the U.S. DataText Co.initiated discussions on a new pricing model, whichcreated more revenue risk for itself. The companies hit astumbling block at “re-risking” the pricing model, and ittook significant time to get past that hurdle, costingseveral months of potential revenue. It took executiveinvolvement from both companies to break the logjambecause top-level management had to make thedecisions regarding risk/reward sharing. On anemotional level, the executives had to feel morecomfortable with each other. On a practical level, therewas some “moving around of money” that helped offsetrisk and break the logjam.

Do Not Move Too QuicklyDuring initial startup, there were some fast-paced trialsthat may have gone “too fast.” Also, technical problemsoccurred that might have been avoided or resolvedsooner if the DataText Co. trials had taken more time.However, I-Com recognized that there would beproblems and worked with DataText Co. to resolvethem. Once again, the vertical collaborativerelationships within each firm were as important as thehorizontal collaborative relationship between DataTextCo. and I-Com. For example, when the product wasfirst rolled out the customer had to manually set up thedata-to-text account, including a pin number. Theprocess was completely under the control of the userand was difficult to undergo. DataText Co. worked withI-Com so that the accounts are now automatically setup when a subscriber buys data-to-text monthly service.


Both parties considered the project to be a success. Theproduct development process was relatively short (sixmonths), and market penetration was on target afterrevision of the pricing model. The success was largelydriven by the high level of support throughout theorganizations, including technical and supplymanagement as well as marketing and executivemanagement.

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Figure 5-1The Change/Innovation Cycle

Initial Trial Learn Feedback to Innovate New TrialSupplier

The business relationship processes and outcomes werealso viewed as successful. Both firms started theinnovation relationship at the appropriate level, andmultilevel relationships were effectively built andmaintained. These relationships were built aroundvalue-based interactions and collaborations. Both firmscommunicated clearly and openly. DataText Co. viewedthe customer’s business model as a relationship-buildingopportunity and continually invested resources into thecustomer relationship.

Some product extensions in the data-to-text servicewere developed based on subscriber input, such as theconvergence of data and text messaging logins. Theselogins were initially separate processes at I-Com, whichfrustrated customers. Now, the logins are doneinstantaneously following a jointly managed change byDataText Co. and I-Com. DataText Co. made some ofthese customer-requested changes, while others weremade by the carrier. In many ways, DataText Co. isdriving extensions. The company knows the coreproducts, capabilities and the market. For example,text-to-blogs is possible, but I-Com has not yet adoptedthis extension.


There are two diametrically opposed approaches that asupply management organization can take in sourcing:

1. “Bashing” supplier prices down withoutunderstanding the product and/or entire impactof such actions on relationship and otherproducts.

2. Focusing on total value by understanding theproduct and the relationship between the buyerand supplier.

Supply management at I-Com shifted from the “classic”procurement approach of price bashing to acollaborative relationship model that focuses on totalvalue. At the outset, I-Com supply management did notplace much focus on bringing the price down.Currently, supply management is still focused on bothfacilitation and achieving competitive prices. This newfocus was driven by the I-Com supply managementdirector, who values a holistic skill set and knowledge.

I-Com supply management continues to look for newsuppliers. However, the organization is not necessarilylooking for suppliers to meet specified needs, but forinnovative suppliers with new ideas. Doing so requires athorough understanding of both the VOC and the voiceof the supplier.

Supply management was a key facilitator and remainedactively engaged throughout the I-Com new productintroduction process. Its role increased as the projectprogressed, as a handoff of the lead role from productmarketing to supply management occured.

DataText Co. believed it had a strong workingrelationship and a positive experience with I-Com’ssupply management organization, describing therelationship as “collaborative.” DataText Co. had severalvalue-added discussions with supply management tomake sure that processes and products wereunderstood, as well as how the business relationshipshould proceed. Supply management clearly understoodthe I-Com business model and what both partners weretrying to achieve. In other words, supply managementunderstood the VOC and communicated thisundertaking to DataText Co. effectively. Supplymanagement was able to represent the financial interestsof I-Com relative to customer needs, and both I-Comand DataText Co. viewed supply management at I-Comas an asset.

In summary, the role that I-Com’s supply managementorganization played in the partnership involved morethan product pricing. It focused on creating andmaintaining a positive working relationship. Supplymanagement brought in other personnel and functionsto help support the partnership relationship, whileprotecting I-Com’s financial position. Supplymanagement’s role was to understand the new productand develop a mutually beneficial relationship with thesupplier.

Important Lessons

Lesson 1: Establish High-Level RelationshipsEarlyHold conversations early in the process with uppermanagement to establish “how things will work” — thebusiness relationships and processes — then work withthe technology and sales/marketing departments to“make it work.”

Lesson 2: Communicate FrequentlyThere needs to be constant, ongoing communicationbetween the buying firm and the supplier. Multilevelrelationships must be effectively built and maintainedaround value-based interactions and collaborations

Lesson 3: Deliberately Plan CommercialRelationshipsThere are two parts of a buyer and supplier relationshipthat need careful planning — the setup piece and the


ongoing piece. For example, contracts can — and attimes should — have built-in exclusivity arrangementsand/or supplier preference agreements. The value forthe supplier should not be esoteric or subtle; suppliersneed to be given an explicit understanding of the valuein the relationship.

Lesson 4: Define Project ChampionsWho is going to do the heavy lifting and the blockingand tackling during the innovation developmentprocess? A single point of contact or champion at bothfirms can get things done during development anddeployment.

Lesson 5: Invest in the RelationshipAny good relationship needs investment by the buyingfirm at a level that is meaningful enough to signal to thesupplier that the buying firm will keep interest andfollow through. In this case study, the partnershipestablished with the buying firm was important to thesupplier and the successful product launch. Multilevelrelationships were effectively built and maintained.These relationships were built around value-basedinteractions and collaborations.

Lesson 6: Listen to the Voice of the CustomerSupply management from the buying firm must beengaged in trying to find a valuable solution for the endcustomer, and not focus solely on its own businessmodel. The supplier, if it understands the customer’sbusiness model, can contribute to revenue growth.

Lesson 7: Jointly Optimize Pricing/ServiceModelsBoth parties took responsibility for initiating the changein the consumer pricing policy. Both parties saw thechange as increasing the risk for themselves anddecreasing the risk for the end consumer.

Lesson 8: Multiple Entry Points Are NeededThere likely will be and probably should be multipleentry points for new ideas/innovations.

Lesson 9: Manage Risks HolisticallyCommercial (revenue) risk, not IP or technical risk, isoften the biggest concern of the supplier.

Lesson 10: Be NimbleThe supplier needs to feel that the buyer is nimble —that it can move and deploy quickly, learn and adaptduring deployment and execute well. The advantages ofsize matching are clearly seen in this case study. Theparties were not the same size, but both were of a sizethat could work together closely and quickly.

Lesson 11: Allow for Cultural ChangeBoth firms should understand that there will be bumpsin the road. These bumps are not just technical; theycan be cultural and emotional and change may berequired. Trust is important — from honoringnondisclosure statements to working collaboratively toget problems fixed.

Lesson 12: Use the Stage-Gate Process as aSuccess DriverThe stage-gate NPD process should not be seen as a wayto stop new projects. Instead, the process should beviewed as a way to make things work. This perspectiveis not the normal mode for most firms.

Lesson 13: Expand Supply Management’sMandateAt I-Com, supply management played the role ofauditor in evaluating the financial value of projects inthe NPD process. Supply management should beengaged in understanding the product and customers. Itshould not just be “buyers.” It needs to be customer-centric and focused on the actual end consumer, notjust the next person with whom it comes in contact.Supply management still needs to negotiate price atsome point. But with a customer-centric perspective thediscussion is not just around price, but about overallservice. This is the contrast between merely “buyingthings” and genuinely meeting end-user needs.

Key Insights

• Project leadership correlates to project success.Project leaders are necessary to get projectscompleted on time and on budget. No innovationproject goes entirely according to plan — leaderswill be needed to get them back on track, lead theproblem solving, oversee the communications,keep the teams together and keep the necessaryresources assigned to the project.

• Use the VOC to guide innovation. I-Com closelyexamines market demand for new products andservices to establish the VOC for the business.This VOC is then successfully communicatedthroughout the organization and key suppliers.

• Supply management’s role should be aligned withthe company innovation strategy. At I-Com,supply management played the role of auditor inevaluating the financial value of projects in theNPD process. Supply management should beengaged in understanding the product andcustomers. It needs to be endcustomer centric.What cannot be forgotten is that supply manage-ment still needs to negotiate price at some point.

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Purpose

This case describes the culture and organization of acompany with a very successful closed innovationmodel, highlighting how supply management plays animportant role in innovation within a company with aclosed model.


InventCo is a U.S.-based diversified technologycompany with a global presence in four major businesssegments. It is among the leading manufacturers ofproducts for many of the industrial and consumermarkets it serves. Most InventCo products aredeveloped via the company’s expertise in productdevelopment, manufacturing and marketing. InventCoproducts are sold through numerous distributionchannels, including directly to users and throughnumerous wholesalers, distributors and retailers inmany countries around the world. In 2008, the majorityof its sales and employees were outside of the U.S.

InventCo’s business strategy emphasizes a commitmentto grow at a fast pace, using a four-pronged approachthat calls for:

• Reinvesting in its core businesses• Developing adjacent emerging business

opportunities• Expanding on the company’s world-class

capabilities internationally• Acquiring companies in complementary faster

growing industries


At InventCo, innovation is an inherent part of thebusiness model. InventCo defines innovation as thedevelopment of something new through the coupling ofa differentiated technology with a customer need.Research and development, covering basic scientificresearch and the application of scientific advances to thedevelopment of new and improved products, has drivengrowth and profits. InventCo gives its researchers widelatitude to pursue research that they find interesting andof potential benefit to the company. One of the pillars ofthe “InventCo way” is that workers can seek fundingfrom a number of company sources to get their projectsoff the ground. The company explicitly encourages riskand tolerates failure. To help keep the creative juicesflowing, InventCo spends a considerable percentage ofits revenue on R&D and funnels money into more than40 core technology areas. This approach to R&D hasresulted in a steady stream of inventions that arecovered by new patents, providing an importantcompetitive advantage in many of its businesses.

Six basic principles and practices define InventCo’sinnovation culture:

1. Top-down commitment to innovation2. A culture of individual freedom that allows

inventors to pursue things not on their dailywork schedule

3. Access to multiple technologies. InventCo hasmore than 40 technology platforms; one key tosuccess is blending those technologies togetherto create new technologies and new products

4. Networking, informal and formal — more than9,000 technical people run their own technicalforums, which have the primary objective ofkeeping people talking to each other

Chapter 6 Case Study: InventCo


5. Rewards and recognitions — the career paths forscientists and engineers are tied to doing goodscience and getting that science commercialized

6. The combination of technology with a customeror societal need

InventCo often designs new manufacturing processes inconjunction with new products. This gives the companythe ability to manufacture new products in its ownplants, or to outsource the manufacturing to a thirdparty.

InventCo historically has taken a “closed” approach toinnovation. Its large investment in R&D has resulted ina technical prowess that churns out a continual streamof new technologies and products. This has allowedInventCo to avoid depending on its supply base forbreakthrough technologies, new products or jointventures. As a consequence, its supply managementfunction has focused on the traditional tasks of sourcingfor well-specified parts and components and workingwith suppliers to ensure competitive quality, deliveryand cost. Finding suppliers to collaborate withInventCo on new technologies is generally notnecessary.

New Product “Ideation” ProcessInventCo has a long history of inventing successfulproducts in its own laboratories. Corporate labsinvestigate new science and technologies that may be farremoved from application in a product. They are inconstant communication with renowned university andgovernment labs on new scientific discoveries anddevelopments. The corporate labs create newtechnology “platforms” that often become the basis fornew product development across several strategicbusiness units (SBUs). To get ideas for using atechnology in new products, the company stronglyencourages technical platform people to talk withmarketing people about consumer needs.

The company has a strong marketing group that iscontinually listening to the voice of the customer andtrading partners (business customers, distributors andretailers) down the supply chain. Each SBU has an“ideation” process with sales/marketing and labsconstantly looking for new product and businessopportunities.

A common new product development (NPD) process isused in all of the SBUs. Once an idea is qualified andbegins moving through the product developmentprocess, the innovation team faces “go/no go” decisionsat every critical milestone. At each gate, decisions aremade about which initiatives are ready to go forward,which need more work and which should be stopped.

At every stage the market realities of the new productare reviewed, including projected selling price, cost andvolume. Every decision is designed to maximize theproductivity of innovation investments and generateshareholder value. Supply management is nearly alwaysinvolved in the NPD process, sometimes very early onbut more often in the latter parts of the concept stage.

Supplier Role in IdeationWhen suppliers approach InventCo with new ideas,there is a standard process for connecting them to themost appropriate labs and SBUs for review of the ideas.Additionally, opportunities are provided for suppliers tomake presentations to groups of scientists and engineersat the company.

InventCo occasionally approaches suppliers and asksthem for help developing a new product or idea. Thecompany may offer development contracts to pay thesuppliers for their work in exchange for any intellectualproperty (IP) rights that may be developed. Forexample, a supplier that owns a proprietarymanufacturing process may approach the company witha new product idea that uses its process. InventCo mayoffer a development contract that does not grant any IPrights for the new product to the supplier. If thesupplier accepts the agreement, the project discussionwill go forward. If the supplier takes exception to the IPprovisions of the contract, the company’s legaldepartment will get involved in the negotiation to helpdecide how to proceed.

InventCo is now asking packaging suppliers to developmore environmentally friendly or “green” packaging. Allof its SBUs have had ideation sessions with packagingsuppliers. Sometimes an SBU will work concurrentlywith multiple packaging suppliers and let them competeby presenting the best new ideas.

Supplier Innovation AssessmentHistorically, InventCo’s “closed” approach to innovationhas made “innovation” assessments of suppliersunnecessary. More recently, as InventCo starts to asksuppliers for more substantial innovation ideas it isbeginning to develop a supplier innovation assessmentprocess and related metrics.

Case-Specific Product and Project Description:The Dirt Destroyer

Market data clearly indicated a high potential demandfor the Dirt Destroyer, a new easy-to-use, highlyeffective tool for eradicating tough-to-removeparticulates and dirt from surfaces. This same research

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also made clear that a related product already on themarket was not suitable for this task. The potentialmarket and profits from the Dirt Destroyer werethought to be equal to the current product, which hadbeen a steady seller for many years. Importantly, thechannel of distribution for both products, primarily big-box retailers, would be the same. During the feasibilityand scale-up stages of the NPD process, InventCoshared its market research with the retailers andconvinced them to stock and sell the product.

The Dirt Destroyer includes two new substrates, one apermanent part of the product and the other disposable.The disposable substrate attaches to the permanent oneand collects the dirt. When the disposable substrate isfull of dirt, it is removed by the consumer and replacedwith a new substrate. Both substrates are proprietarymaterial for which InventCo also developed themanufacturing processes.


During the feasibility stage of the Dirt Destroyer NPDprocess, supply management was asked to find twosuppliers to support the product. One supplier wasneeded to develop molded parts to InventCospecifications and a second supplier was needed todevelop innovative packaging for the product. Onoccasion InventCo invites new suppliers to bid ondevelopment projects, but its preference is to stick withits qualified preferred suppliers. Due to the need for acompressed cycle time on this project, the search forsuppliers was limited to those already on the preferredsupplier list.

InventCo developed a prototype for the Dirt Destroyerand sent prototypes and design performancerequirements to select preferred suppliers. One designrequirement was that the molded handle had to beclear, non-translucent and bubble-free, with a tightfriction fit. The molding supplier was expected to makeinnovation contributions to aesthetics andmanufacturing processes rather than productperformance. The supplier also would have to design amanufacturing process for applying the permanentsubstrate from InventCo to the molded assembly.

The suppliers selected to bid on the project were askedto submit quotes for development work, scale-up andfinal production. The development work was to be paidfor in the piece price paid, which would adjust downafter the supplier recovered the development costs.

In selecting the final suppliers for this project, supplymanagement first looked for competitive costs. The

second screen was an assessment of the supplier’stechnical and engineering resources available for theproject. This assessment was somewhat subjective andtended to capture “relationship” management issuesrather than technical capability directly. Finally,proximity and ease of communication were consideredin the selection process. The selection of local suppliersfor assembly and packaging would help reduce thedevelopment cycle time.

In the end, local, preferred supplier PowerMold wasselected for molding the parts, assembling the moldedparts with the InventCo-provided substrates into afinished product and shipping the assembled product tothe packaging supplier. The packaging supplier packedindividual units, prepared them for shipping andshipped them to the retailers.


InventCo had a master agreement (MA) withPowerMold that included the handling of developmentagreements. PowerMold was not paid for its design andtest work, but was allowed to recover its tooling costs.PowerMold paid for the tooling upfront and recoveredthis cost by its margins on the piece price to InventCountil the tooling was fully amortized. PowerMold andthe packaging supplier were given three-yearproduction contracts, but not a guaranteed volume ofbusiness. Although the projected launch volume washigh, there was no guarantee for long-term production.In fact, if the volume grew to be high enough, InventCocould conceivably insource the manufacturing to reducecosts.

Contract negotiation time was short, as PowerMold hadexperience working with InventCo and knew what toexpect in terms of development cost recovery and IPrights. This left more time for PowerMold to perform itsdevelopment work and gave InventCo confidence thatthe work would be done on time and at target qualityand cost levels.


Meeting the Challenge of a Short DevelopmentCycleInventCo took an unusually long time to finish theconcept and feasibility stages and complete thespecifications and drawings. This left only four monthsfrom feasibility review to market introduction anddelayed the sourcing of the molded parts and


packaging. To meet this tight time schedule, supplymanagement only considered current preferredsuppliers to work on the project. Fortunately, capablesuppliers were readily identified. However, the brieftime allowed for the search precluded a search forperhaps an even more capable supplier.

PowerMold and the packaging supplier were locatednear the InventCo product development facilities, easingcommunications and exchange of technical data. Bothsuppliers had experience in working with InventCo onother products and projects. In addition, both suppliersassigned a sales representative with a technicalbackground and a manufacturing engineer to theproject.

Technical ChallengesAlthough the suppliers finished their development workon time, the short cycle time contributed to anunanticipated manufacturing problem. It wasenvisioned that joining the permanent substrate to themolded parts would be done through an automatedprocess. However, this proved to be a difficult task.Instead, manual assembly by a manufacturing operatorwas required to complete the process, which increasedthe production costs. Though market launch was ontime, the manufacturing glitch led to a price increasefrom PowerMold to cover manufacturing capabilityadjustments and redesign. However, the projectremained within budget. PowerMold hopes to developautomation to apply the substrate, with a projectedcapital cost of $60,000 to $100,000.


Despite the difficulties with the manufacturing process,the Dirt Destroyer was introduced to the market ontime and within budget. The initial sales targets wereachieved and the Dirt Destroyer continues to do wellwith consumers.


Supply management’s role in the NPD project was tofind competitive and competent suppliers to collaborateon the project. Because a relatively small amount ofinnovation was expected from the suppliers, supplymanagement was brought in late in the process.Nonetheless, because it had developed a base ofqualified suppliers, supply management was successfulin finding competitive suppliers in time to meet theproject schedule.

Important Lessons

Lesson 1: Supply Management Can SpeedInnovationSupply management has a key role to play in speedinginnovation. It can identify qualified suppliers that canrespond to proposals on a short lead-time basis. It canidentify potential suppliers with a positive record ofinnovating in general and innovating in areas germaneto a particular project. Supply management also canidentify suppliers and work with them to ease thecommunications challenges present with all NPDprojects. Additionally, supply management can facilitatethe collaboration and interaction between suppliers ifmore than one supplier is needed for the developmentproject.

Lesson 2: Involve Supply Management EarlyInvolving supply management early in the NPD processcan bring big rewards. Most of the value of a newproduct is created in the early stages of the NPDprocess. Suppliers brought into this process early willhave more time to contribute unique ideas, technologiesand developments to the project. Good communicationswill keep suppliers synchronized so that when theircontribution is needed they will be ready and theproject will not be delayed.

Lesson 3: Technology Platforms Can SpeedInnovationBuilding new products from a technology platformsignificantly increases development speed. Newtechnology platforms developed at corporate labsshould be available to the SBU/product developmentlabs for development of new products. Cross-fertilization of ideas and techniques among SBUs alsoworks to stimulate new product ideas, improve existingideas with new technology and open up new marketsby modifying existing products.

Lesson 4: All NPD Projects Need SupplierInputEven companies with strong internal R&D capabilitiesand closed innovation strategies will eventually needsome supplier input to complete NPD and go-to-marketcycles. It is important to nourish these suppliers andhave them ready when needed.

Lesson 5: Suppliers Will Exchange IP Rights forMarket AccessLarge companies can exchange their market power andreach for IP rights from smaller suppliers. In manycases, small suppliers — even if they have great newtechnology or products — face insurmountablechallenges in getting their ideas to market. Partnering

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with a larger company that has established channels ofdistribution and brand recognition can benefit bothcompanies. Giving up some or all IP rights may be thebest avenue available to turn potential IP value intorealized value.

Lesson 6: Consider New ManufacturingProcesses During NPDNew manufacturing processes may have to be inventedfor new products built with new technology. These newmanufacturing processes need to be developed intandem with the new product. Unanticipated problemsin manufacturing can slow the development process andadd unexpected costs.

Lesson 7: Carefully Evaluate SupplierAgreementsBuying companies should fairly compensate suppliersfor their work on NPD projects. Fair compensation alsoincludes sharing the development risks. Approachesinclude:

• A standard contract that can be modified asnecessary to accommodate each newproduct/supplier situation. Such contracts willspeed the process of reaching agreements.

• A contract that pays the supplier for work ondeveloping its part of the project. This minimizesthe development risk for suppliers since they getpaid for their work even if the new product is notsuccessful. In this arrangement, the IP rights tothe development will likely go to the buying firm.However, some other arrangement might bereached depending on relative market power, thevalue of the IP rights and the profit/volumepotential of the product.

• A contract that allows suppliers to recoup theirdevelopment (and tooling) costs through the pricecharged to buying company. After the supplierrecoups the development costs, the price can dropto a level to cover the supplier’s manufacturingcosts plus a profit margin. This increases the riskfor the supplier because if the product volumesare low, it may take a long time to recoupdevelopment costs. Tooling costs may beseparately considered, with the buying companyguaranteeing that the suppliers will be paid fortheir tooling cost. Or the buying company maysimply pay for the tooling costs as they areincurred and take ownership of the tooling.

Key Insight

• Supply management has a role to play in allinnovation strategies. For a company with a

closed strategy that engages suppliers late in theNPD process, creating an “innovation-capable” setof suppliers can help keep the project onschedule. Engaging suppliers earlier, even in aclosed innovation environment that asks suppliersfor only modest contributions, can add value andreduce risks for the project.


Purpose

This case study illustrates how a large, verticallyintegrated firm addresses cultural and organizationalissues to support the change to innovation sourcing andcollaboration with external suppliers. It also providesinsights into competitive supplier assessment andselection processes, and the need to develop andsupport the resulting collaborative relationship.


ECOMP, a large, global firm that designs, manufacturesand sells worldwide, has sales in the billions of dollarsand competes against a handful of other largeworldwide firms. It sells products in more than 100countries. Competing firms invest significantly inresearch and development to bring product innovationsto the marketplace. The products take months, evenyears, to develop and have multiyear product life cycles.Sales are business-to-business and are important tocustomer performance. Technology introduction isimportant to the firm’s success. Product selling pricesrange from tens to hundreds of thousands of dollars.The business customers are sophisticated decisionmakers looking for innovation and leading-edgetechnology to benefit their customers. ECOMP focuseson the design and installation of fully integratedsystems, with mission critical subsystems insourced.Non-critical subsystems have also been made internally,but ECOMP now is increasingly turning to its supplybase for innovation.

ECOMP is a technology leader and believed thatsuppliers were generally “followers” rather thantechnology “leaders.” However, the firm was attempting

to gain more innovation from suppliers, especially inareas not considered to be a core technology orcompetency. Cost improvement and achieving supplierinnovation in order to contribute to timelyproduct/system innovation for customers will berequired to compete in the future.


ECOMP is heavily focused on innovation as a lever forlonger term competitive success and established aninnovation strategy within its overall productdevelopment process. Product development includes anannual cycle of product strategy development,opportunity creation and technology road-mapping.Recently, the company drove two major organizationalchanges to better leverage internal and externalinnovation capabilities — a common innovation processand a new role for supply management.

A common technology and product developmentprocess shown in Figure 7-1 was being implementedacross multiple business units in the company. Thisframework ensured that each development effort waslinked to the product(s) life cycle and the overallportfolio of product platforms and products, includingan evaluation of resources available across the companybefore initiating a new project.

There are two major interdependent stages to theinnovation process. Long- to intermediate-termplanning involves the development of new technologies,portfolio management of products and projects,knowledge development and platform generation.Intermediate to shorter term planning and processesinvolve the “commercialization” of a new product.During each stage, strategic imperatives and internal

Chapter 7 Case Study: ECOMP

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capabilities are compared to technical needs to makeinsourcing/outsourcing decisions and identifyopportunities for collaboration.

In addition, the pace of technological change, lead timepressures, financial constraints, intense globalcompetition and availability of qualified suppliers ledECOMP to recognize the increasing need to involvesuppliers in the innovation process. Therefore,concurrent with development of a standardizedinnovation process, the company believed it needed toshift the current supply management and companyinnovation paradigm to enable early supplierinvolvement.

This transformation required a change in structure,process and mindset across multiple functions. Forexample, supply management traditionally had beeninvolved in the later stages of product development.ECOMP now involved supply management in thecomplete value chain. This required the implementation

of new programs and tools that were aligned andstandardized across business units on a companywidebasis.

The transformation also required a shift from what hadbeen primarily a price focus to a more holistic focus onquality, value and total cost of ownership. ECOMP hadincreasingly involved suppliers more closely in theproduct development process and innovation in aneffort to establish a foundation for an ecosystem basedon “open innovation.”

Suppliers were willing to develop close relationshipsand engage in co-development with ECOMP for avariety of reasons. ECOMP was known as an innovativecompany and trusted customer. It provided suppliersaccess to channels leading to new and larger markets.To further motivate collaboration, ECOMP wasstandardizing its work processes, communications,trust-building and risk-/reward-sharing approaches.


Figure 7-1Product Development Process

➞➞

Industry characteristics were supportive of innovationcollaboration. In fast-paced technology industries suchas consumer electronics, original design manufacturers(ODMs) dominate and drive innovation, which limitscollaboration. In longer term product and technologylife-cycle industries, such as automotive, healthcare andaerospace, original equipment manufacturers (OEMs)are able to focus innovation efforts with longer termstrategic suppliers. ECOMP primarily played in thelonger life-cycle competitive space.

Some of the most significant challenges to this newperspective and approach came from within ECOMP.The supply management group wanted to achievesupplier innovation more quickly than the R&D groupdid. This was due to past practices, as ECOMP hadbeen highly vertically integrated. Typical concerns of theinternal R&D groups were loss of intellectual property(IP), loss of control and the “not invented here”syndrome. Supply management also wanted a smallersupply base and to focus innovation efforts on suppliersthat had innovation capabilities.

Case-Specific Product and Project Description:The Electronic/Mechanical System

The Electronic/Mechanical System (E/MS) was anoverhead suspension system that enabled placement ofTV-like monitors to assist technical personnel workingon complex projects. The E/MS provided for flexible,freely rotating positioning of two to eight monitors,depending on need and size. The monitors movedtransversally, longitudinally and symmetrically over thesystem axis. The suspension allowed motorized heightadjustment. User-friendliness and safety were of primeimportance to such products. The systems also neededto provide a high degree of adaptation to differentapplications, which required modular components andstandardized interfaces. The new E/MS developmentrequiring innovation was a collaborative effort byECOMP and a new supplier, Frameco.

Voice of the CustomerThe need for an updated E/MS was identified during anoverall project to identify the “working environment ofthe future.” ECOMP conducted its “customer insight”process with marketing, application specialists and aninternal design group. After extensive analysis,including visits to more than 30 customers worldwideand open-ended question interviews, the following keyuser and E/MS needs were established:

• Increased flexibility and multipurpose spaceutilization

• Improvement in efficiencies and work flows (i.e.,less time required of the technicians to use theE/MS and enhanced movement of users andothers in the workspace)

• Reduction of clutter in the workspace in the formof cables and wiring

In addition, the idea of creating a “command andcontrol” center in the workspace (a cockpit area) toimprove displays from multiple E/MSs was alsoestablished during voice of the customer (VOC)sessions. Redesign of the E/MS would also need to meetother functional and business requirements, such as:

• Ease of use• Cost reduction of 25 percent from the current

E/MS• Hidden cables• Reduced weight• Improved reliability and quality compared to

prior system• Improved movement capabilities• Ability to adapt to future design and features (e.g.,

voice controls, intercoms)• Integration of standard parts (e.g., IR sensor,

X-ray on light, temperature sensor)

The old E/MS could not meet the identified needs andrequirements, nor could it be redesigned to meet thoseneeds. The previous E/MS was bulky and did not allowfor mounting of the larger color display monitors, and itwas difficult to add new features such as voice controls.

The VOC efforts also helped ECOMP identify therequirements for suppliers that would be needed tosupport the project. However, suppliers were notengaged in VOC. ECOMP already knew about currentapplications in the market, so there was no value ininvolving suppliers early in its efforts. In addition, theproject was so new that ECOMP did not believe thatsuppliers could add value at such an early stage. Thesupplier ultimately selected to work on the project,Frameco, was not a current supplier, so it would nothave been involved in direct communications with theECOMP customers.


ECOMP formed a small project team to determine howit would purchase, design, make or outsource a newE/MS. A review of the internal ECOMP product linesand catalogs failed to identify an off-the-shelf solution.The most likely options were a new innovative E/MS or

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the adaptation of a product that provided similarfunctions in a different application. Although ECOMPhad historically insourced development of such items,the items now were identified as non-core products.The E/MS technologies were not advanced, andproducts could be developed by several companies.Also, the E/MS was not considered to be a discriminatingfactor for customers. In addition, the internal team triedto involve suppliers who offered off-the-shelf products.However, an off-the-shelf solution could not beprovided by these suppliers. Therefore, the decision wasmade to outsource the development and manufacture ofthe new E/MS.

However, it was recognized that there were risks inoutsourcing. For example, suppliers could make aseemingly minor product, material or process designchange without informing ECOMP. Even minor changescould impact the entire system and the systemqualifications requested by customers. Therefore,change control would have to be a critical focus.

ECOMP traditionally provided detailed performancespecifications to suppliers. In this case, the decision wasmade to provide higher level “functional requirements”to the supplier and empower it to develop the technicalspecifications. The supplier would need to understandthe overall working environment in which this productwas used as well as the product-specific functionalrequirements to ensure seamless integration. Finalindustrial design would be the responsibility of ECOMPto ensure that the product was consistent with thecompany look and user experiences. The supplierwould be responsible for design and development of thetechnical specifications.


Incumbent ECOMP suppliers could only manufactureproducts to the specifications provided. They lacked thedesign and development capability to support thisoutsourced project and its need for product innovation.New suppliers needed to be identified, and the selectedsupplier had to have its own innovation capabilities andapplications knowledge. In order to outsource “totalsolutions” and achieve added value from externalsuppliers, ECOMP had to either develop currentsuppliers or find new suppliers.

The supplier selection process occurred in five steps:

1. Define the business requirements — This stepincluded analysis of the outsourcing levelrequired, determination of required suppliercapabilities, generation of potential supplier

profiles and preliminary assessment of IP andproduct ownership needs. These businessrequirements were established primarily bymarketing, R&D and technology, with supportfrom supply management.

2. Define a short list — A short list of potentialsuppliers with the potential to meet the businessrequirements was developed. R&D and supplymanagement developed the short list and bothlooked at components worldwide. R&D wasresponsible for providing/developing thetechnology roadmaps, while supply managementwas primarily responsible for “getting” thetechnology to support the roadmap. Duringprojects, both departments worked together toidentify potential sources of supply. To definethe short list, they aligned supplier capabilitieswith the global commodity strategy and used aworldwide search, existing supply base analysis,Internet searches, trade shows and othersources. Key discriminators included theavailable catalog in E/MS, market andapplication knowledge, the ability to take fullproduct ownership and business match. Sevennew potential suppliers, two in the U.S. and fivein Europe, were identified.

3. Initial supplier selection — From the short list,three main candidate suppliers were identified.These companies were the only firms withindustry-specific applications knowledge and thecapability to develop and manufacture theproduct. One of the three was eliminatedbecause of its strong alliance with a majorECOMP competitor. A remaining potentialsupplier, Frameco, was a market leader insuspension systems, with a strong focus on OEMcustomers and E/MS. It was one of the largestand most important suppliers with respect tospring-balanced overhead suspension systems inthe world. Frameco already provided relatedproducts to a competitor but had not suppliedECOMP. The other potential supplier, Suspendit,provided a complete range of catalog products.

4. Supplier qualification — To gain insight intoFrameco’s and Suspendit’s ability to add valueand innovate at the early concept stage of theproject, each supplier was asked to conduct afeasibility study for the product. Both had theopportunity to prove their capabilities,particularly in regards to translating functionalrequirements into a basic design. ECOMPidentified six “functional requirements” for thefuture E/MS and gave the suppliers two weeks to


develop a concept and preliminary specifications.Both suppliers could contact the companyduring the two-week period to ask for new orclarifying information. Each supplier wasprovided the same level of information. Thesuppliers were not provided IP-sensitiveinformation, and supplier-developed informationwas not shared with the other supplier. Thesuppliers knew that they were competing againstseveral other suppliers; each had to believe thatit had a serious chance of winning the business,as the suppliers took on most of the“entrepreneurial risk” during this feasibilityeffort through their development spending.ECOMP only paid for limited materials and non-recurring engineering expenses to developprototypes.

The suppliers were required to develop conceptsthat ECOMP rated. Frameco showed very goodprogress on E/MS development. The companycarried out reverse engineering on a similarsystem from another firm that supplied a majorcompetitor of ECOMP. The supplier thenestablished an overview ofadvantages/disadvantages of the competitivedesign and began designing the best possibleE/MS for the market.

A hands-on “upfront assessment” of eachpotential supplier’s current product portfolio wasalso conducted. This provided a judgmentalevaluation of how well the supplier met and/oranticipated customer needs in terms of itsprocesses for design, “added value” operationsand innovation capabilities. ECOMP alsodiscussed each supplier’s performance withseveral of its customers to determine how wellthe supplier met other buying company needsand to assess the supplier’s innovation and levelof support. ECOMP believed that same-industryexperience was especially important.

This approach was a subjective evaluation, and adetailed early evaluation of supplier innovationcapabilities was not in place. Even without aformal assessment, the team believed that itunderstood the suppliers’ technical capabilities.However, future innovation capabilities andsupplier investments were not well known.

Neither of the two suppliers in the feasibilitycompetition had a contract, so the supplierswere “sticking their necks out.” The suppliersneeded to recapture investment by winning theproduction contract and resulting volumes.

Development costs were relatively low for thesuppliers. Because each recognized that ECOMPwas an important player in the market, thebusiness potential justified the risk taking.

Supplier commitments from ECOMP werelimited to a concept and feasibility study. Asupplier contribution agreement was signed thatcovered IP issues and financial obligations.Mutual expectations and responsibilities weredefined, and agreement on the main contractualclauses was reached.

5. Supplier selection — ECOMP assembled a smallteam to conduct a full two-day on-siteassessment of Frameco, the supplier thatperformed better on the feasibility effort. Thiseffort examined a range of capabilities andcircumstances, including production systems,quality systems, financial status andmanufacturing capabilities. Some “innovationmetrics,” such as product development,benchmarking and reverse engineeringcapabilities, were also used.

Frameco was ultimately selected based on itscompetitive qualification performance and on-site assessment results. In addition, Frameco wasselected over Suspendit because of its businessmodel. While Frameco was working solely forOEMs, Suspendit used dealers to sell itsproducts, which affected price, distribution andcommunication. It was also conceivable thatSuspendit would ultimately become acompetitor because of its work with dealers.Final approval from Frameco would have tocome from all stakeholders, chiefly engineering,project managers and supply management.

The companies drew up a developmentagreement for full concept development byFrameco. At the end of the development project,a business contract was signed. The time fromproject start to initial supplier selection lastedthree months. Supplier qualification (conceptand feasibility) took six months. The projectteam then had six months to move from conceptto the first version of the product.

Contract Development

As mentioned previously, neither of the supplierscompeting for the business were guaranteed aproduction contract even if selected for development.They both took on some risks, although the winner was

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relatively confident that it would receive the productioncontract.

Trust and Intellectual Property (IP) RightsNondisclosure agreements (NDAs) with all potentialsuppliers were in place from the beginning of theprocess. However, this product was not considered tobe extremely complex or high tech, and it was not likelythat important IP would be developed. Therefore,ECOMP did not focus significant efforts on IPprotection.

Frameco was a new supplier, and ECOMP establishedFrameco’s “trustworthiness” and “competitiveness”through a review of its general reputation and workwith a competitor. Frameco trusted ECOMP because ofECOMP’s reputation for honesty. In the past, when therewas a breakdown of “trust” between ECOMP and asupplier, the cause could be traced to systems orunreliable processes rather than the actions ofemployees, such as intentionally misleading a supplier.

Eventually, an IP agreement was finalized betweenFrameco and ECOMP. ECOMP generally filed for allapplication patents and, depending on how advancedthe technology was, it could also apply for themanufacturing patents. In this case, ECOMP applied forthe application patents while Frameco filed themanufacturing patents. Only one application for apatent resulted from development of the E/MS, and thatcame from Frameco.

The ownership of the E/MS and drawings resided withFrameco. The supplier was free to use its knowledge toprovide other companies with the product. ECOMP didnot have access or control of the prints, but the contractenabled ECOMP to reverse engineer the product andsource it from any other supplier if, for any reason,Frameco and ECOMP terminated their relationship.This provided competitive pressures at the supplierlevel and supply protection to ECOMP.


The two companies established a development projectplan that identified the project steps andcommunication processes for the project team. Thisproject plan identified all the people involved, theirroles, contact information, communication schedulesand project schedule. The plan drove highcommunications expectations between the companies.Communications were primarily peer-to-peer by emailor via face-to-face meetings. Computer-aided design(CAD) models were also shared electronically to goodeffect.

At ECOMP as well as at Frameco, mechanical andelectrical engineers within and across the companiesregularly talked with each other. Supply managementalso was involved from the beginning of the project.Most communications regarding commercial issues werechanneled through supply management, while mosttechnical communications were channeled through theengineering project manager. On-site visits andmeetings among all groups were also organized. It wasimportant for ECOMP to sit together with key peoplefrom Frameco to discuss issues, especially since this wasa new supplier.

The technical interfaces between Frameco’s product andECOMP’s system were simple, so there were limitedtechnical issues. However, the two companiescommunicated in detail about design changes, asoriginally agreed-upon in the development agreement,to ensure that all were working to the samespecifications. All design changes, from critical toseemingly minor, typically began with engineer-to-engineer discussions. “Minor” changes werecommunicated to the project team, while “criticalchanges” were discussed by the entire team before beingadopted. Frameco monitored and reported progress onmodification proposals using SAP.

Even though the E/MS was not technologically complex,it was not “easy” to design and develop. Newfunctionality was added to fit different-size monitorswithout excess gaps between the monitors, while at thesame time the E/MS had to be low cost. The overallview of the monitors depended on the size of themonitors installed as well as factors like the framing andhandgrips — all of these requirements had to be takeninto consideration. All drawings, minutes,communications and other documents were storedusing SAP.

The E/MS was designed and developed within a three-stage process:

1. Feasibility of concept proven — This involvedmodule and prototype tests. Category-one riskswere mitigated using failure mode and effectsanalysis (FMEA), and lifetime testing occurredduring these tests. Reliability and cost targetswere established, and the project plan wasdeveloped. Another assessment of Frameco wasalso conducted that focused in greater detail onits supply chain management processes, overallmanagement, production and developmentcapabilities.

2. Engineering of concept proven — This stepincluded consolidation and assessment of FMEAresults and further risk mitigation. Reliabilityand cost targets were updated, and the project


plan revised accordingly. A prototype also wasdeveloped.

3. Pilot run — This final step included the pilotrun and production ramp-up leading tofinalization of mounting instructions, productionand test tooling.


On the surface, the concept of hanging an E/MS from aceiling seems relatively simple. However, given all of theperformance, technical, safety and businessrequirements, the challenges were significant.

Timing PressuresNew feasibility models needed to be developed quickly(within six months) for an upcoming trade show. Suchshows were critical to sales. Even if ECOMPdemonstrated the product and it was well received atthe trade show, ECOMP would have to be able toprovide the product, or at least an estimate of when theproduct would be available, to meet customerexpectations.

Outsourcing ResistanceAlthough ECOMP was increasing its use of outsourcing,its engineering division preferred that all design anddevelopment be done internally and outsourcing belimited. The technical community was somewhatresistant to increased outsourcing, as it might be athreat to their jobs. Therefore, the project team wasintentionally kept small and focused. The core teamconsisted of one person from each company from sixdifferent disciplines — project management, supplymanagement, mechanical engineering, R&D, qualitymanagement and service — providing for one-to-onecontact at each company.

When the first prototype was received from thesupplier, several people external to the project team hadnegative comments about the prototype and supplier. Ifa supplier made a mistake, ECOMP personnel generallywould react negatively to the product and the supplier.But when ECOMP made a mistake, it was rationalizedas a way of gaining “advanced insights.” While therewere significant differences between how ECOMP andsupplier mistakes were judged by some, the projectmanager took a positive view and limited any impact ofthe “naysayers,” stating: “The project will continue tocompletion.” Executive management also supported theproject team by reinforcing the outsourcing strategy asimportant to overall business success.

Project Team StabilityDuring the project, especially at ECOMP, manyemployees changed positions and responsibilities. Forexample, the project managers at ECOMP and thesupplier had been working closely together, but bothleft the project before it was finalized. When newpeople were assigned as project managers, the handoffof information was not always clear, and timing andtechnical problems developed. ECOMP recognized theneed to involve potential “successors” in the projectbefore people, especially project managers, transitionedoff the project. This was a small project relative to otherprojects at ECOMP, so even if ECOMP had a “successorplan” in place it would have been unlikely that thisproject would have required one.

Coordination of Supply ChainCabling was critical to E/MS performance andappearance. The cabling systems were very complex, aswas the supply chain for the E/MS. For example, acabling supplier for a different product twice shut downECOMP operations because of the inadequatemanagement of cable supply, and the company lostsignificant sales volume. In the past, the integration ofcabling with the E/MS was done by ECOMP. However,the project team decided to outsource cabling for thesystem, which increased uncertainty and risk.

In the current situation, ECOMP suggested thatFrameco source cabling from ECOMP’s preferredsupplier. However, Frameco was not obligated to usethis supplier if it demonstrated that another suppliercould be qualified and perform better. Nonetheless, itwas assumed that the new E/MS would use currentcabling from ECOMP’s preferred cabling supplier. Atthis time, another design group within ECOMP waschanging cable specifications, and the group did notnotify the E/MS design team or Frameco. Thespecification change caused E/MS cabling interfaceproblems and project delays when Frameco received theredesigned cable. ECOMP moved quickly to resolve thespecifications and potential use problems. In the future,all cabling changes would have to be approved byFrameco.

Specification CreepECOMP had “frozen” specifications on the E/MS.However, after prototype development the specificationssomehow became “unfrozen.” Earlier, the projectmanager had attempted to “connect all the departments”and obtain design input from them prior to prototypedevelopment to prevent design change problems fromdeveloping. However, when prototypes were actually in-hand, people become “more serious” about the need fortheir input and designs and specifications actuallychanged.

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Outcomes from the outsourcing and innovation projectwere compared to similar prior projects that had beenpreviously executed to determine effectiveness. Overall,the project was determined to be a success. Keyperformance indicators (KPI) included time-to-market(speed-to-market introduction versus plan), cost (non-recurring engineering and product costs versus plan)and amount of internal resources required tocommercialize the new E/MS. In addition, innovation inthe product design and material specifications enabledthe project to meet VOC requirements. More full-timeemployees were required for this project than had beenexpected. This was driven to some degree by thepersonnel changes during the project, which requiredextra time to make effective handoffs.

The existing E/MS was the baseline for initial costtargets for the project. The cost target was thenadjusted, taking into account innovative design changesand added functionality. Actual costs exceeded targetsby 2 to 3 percent due to the specification changes madeafter prototype. Overall, a 10 to 15 percent costreduction from the previous E/MS was achieved.

ECOMP also benefited from the skilled andknowledgeable employees at Frameco. Frameco’s rolewas critical to successful development and finalizationof the E/MS design and specifications. It also regularlychallenged ECOMP’s thinking and helped driveinnovation. Overall, customers responded positively tothe E/MS innovations.


Historically, the product development process atECOMP had been vertically integrated, with little earlyinvolvement of external suppliers. To the extent thatexternal suppliers had been involved in new productdevelopment, most efforts focused on incrementalinnovations. This is changing as the company continuesto redefine itself and its processes. The involvement ofsuppliers and supply management in the innovationprocess at ECOMP was supported at the executive level.However, change was taking time, in large part due tothe industry structure and prior practices at ECOMP.For example:

• ECOMP traditionally did not expect suppliers toprovide breakthrough innovations. As a result,many current ECOMP suppliers did not have thecapacity and capability to provide majorinnovations.

• ECOMP typically was not forced to quicklychange its strategies, practices or productsbecause of regulation, long product life cycles andlarge investment requirement, combined with alower tolerance for risk in the industry.

• Product development times were long andproduct volumes relatively low. Therefore, manysuppliers were not interested in makinginnovation investments in a low-volume, longtimespan product development environment asreturn on investment took extended time toachieve.

• Product life cycles on some products wererelatively long (e.g., 10 years). This forcedsuppliers to carry capacity to service a low-volume product for a long period of time, withoutany promise of new business on that product line.Therefore at best, the focus is on incrementalinnovation after launch.

To help overcome these challenges, supply managementwas asked to play an increasingly critical role in theinnovation process. ECOMP recognized that it neededprofessionals in supply management with innovationexperience and the ability to identify external supplyopportunities for innovation. These supply managementprofessionals also needed to manage key supplierrelationships. In the past, supply management mightswitch suppliers to obtain lower prices without a fullunderstanding of ECOMP products and needs. Now,total cost decisions are the focus.

Supply management has responsibilities for a number ofactivities that support innovation:

• Search for suppliers with innovation capabilities• Influence the attitude of project teams regarding

outsourcing• Convince ECOMP project teams that a supplier

can do the job or grow into it. It is important todemonstrate to the ECOMP team that the supplierhas the same level of project and innovationcommitment as the ECOMP team does

• Manage cultural differences• Navigate and reduce process differences

Overall, while supply management continues to play atraditional sourcing role, it also works at the front endof product development and fosters early supplierinvolvement in an effort to achieve innovation.

Important Lessons

Lesson 1: Suppliers Can Drive InnovationOverall, E/MS project success was primarily driven byFrameco’s strengths, competencies and contributions


combined with strong project management. Suppliersselected to support and/or drive innovation can make orbreak the project.

Lesson 2: Cooperation, Communications Key toSuccessClose cooperation between innovation/technical groups,supply management and the supplier was required forsuccess.

Open communications and a clear definition ofresponsibilities within and across the firms were key topositive and complete information flow and trustdevelopment. A structured process was adopted thatincluded clear team definition and responsibilities,project schedules and milestones agreed to by bothparties. Even with jointly developed expectations, thecompanies monitored and adjusted expectations duringdevelopment as needed. Regularly scheduled suppliermeetings were conducted to exchange ideas andmonitor progress.

Lesson 3: Manage Personnel TransitionsPersonnel transitions could negatively impact projecttiming and cost. However, transitions could bemitigated through successor planning and frequentcommunications, which was important to success.

For example, both the supply management andengineering project team leads for ECOMP wereconcurrently being transitioned to other responsibilities.Neither person had as much time to spend on theproject as originally planned. Face-to-facecommunications with Frameco became less frequent.The reduced communication level lowered Frameco’sfocus and effort because it assumed that the projectpriority had lessened, even though this was not the case.

Lesson 4: Personal Relationships ImportantPositive personal relationships between key persons atboth companies were important to project success.While robust processes and procedures are important,ultimately it is the people who solve problems. Strongpersonal relationships were found to enhancecommunications, raise levels of trust and increase thewillingness to solve problems collaboratively.

Lesson 5: Team Members Need to Be Cross-FunctionalAs suppliers were becoming involved earlier in productdevelopment, supply personnel needed a technicalbackground and/or understanding combined withcommercial know-how.

Supply management personnel did not need to be“technical experts,” but they needed enough technical

knowledge to be good partners with the internalengineering and R&D team as well as suppliers.Similarly, technical personnel should have enoughcommercial knowledge to know the impact of theiractions on costs, contracts and supply relationships.Ultimately, project success required a cross-functional/organizational team effort. Team membershad to be able to work together effectively. There wassome concern at ECOMP that it should be moreintegrated across functions to fully support a teamapproach.

Lesson 6: Culture Change Regarding SupplierInnovation Can Happen Through StrongLeadership and ResultsExecutive and project leaders at ECOMP were able tochange the perceptions that suppliers could notinnovate and were not as capable as ECOMP. This wasachieved by executive direction that suppliers be asource of innovation, project leadership that treatedsupplier product innovation problems as fixable asopposed to a reason to fail, demonstrable results, andsupply management scouting for and finding excellentsuppliers with innovation capabilities.

Key Insights

• Buying firms can stimulate supplier innovationand competition concurrently while workingcollaboratively.

• Time and resources devoted to understandingcurrent and future supplier innovation capabilitiesand focus (beyond traditional management,manufacturing/operations and logisticalcapabilities) is critical to gaining andcommercializing supplier innovation.

• Effective project management and personalrelationships, with smooth succession of leaders,is a key enabler for achieving innovation success.

• IP emphasis can and should vary based on a firm’score competency. Maintaining all IP as a blanketpolicy is not always critical or necessary, and mayeven stifle supplier innovations.

• Firms need to be aware of and modify a companyor functional culture that stifles suppliercontributions to innovation.

• Companies need a formal approach to stimulateand achieve supplier innovation, especially whentransforming away from a highly verticallyintegrated model.

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Purpose

This case study provides an example of how a globalconsumer products company was able to work with twoof its larger suppliers to provide a required innovation.While both suppliers were important to the company,neither was initially a strategic partner. Because thecompany was not a strategic partner, the innovationeffort required further development of the company’srelationships with each supplier to achieve thenecessary innovation. This case study also illustrateshow “temporary outsourcing” was used to developinternal capabilities to support future insourcing andinnovation efforts.


DC Corporation is a public company with globaloperations engaged in the production and sale of non-durable consumer products. DC produces and sellsfood, beverage and household products. Its vision is tobe the first choice of consumers and customers aroundthe world by driving innovative ideas and continuousimprovement. The company’s values support innovationand collaboration, including imagination, teamwork andexcellence.

DC’s North American businesses were off to a strongstart in fiscal 2009. Each of its main divisions reportedhigher sales and double-digit gains in adjustedoperating income in the September quarter. Thecompany was having a more difficult time in foreignmarkets, where it generates significant revenues. Theweakness partly reflected strategic investments made inorder to support future growth. A challenging economicenvironment in key European markets was also a factor,

and DC expected these conditions to linger in thequarters ahead.


DC uses an innovation process similar to the well-known stage-gate processes in which many ideas enterthe “wide-rimmed side of a hopper” but are increasinglyscreened out based on strategic, technical or marketrequirements. Ideas that make it to the narrow part ofthe “hopper” then enter the set of screened ideas forstage-gate development.

Innovation is the responsibility of everyone in theorganization, including marketing, R&D, finance andsupply management. Ideas may come from internal orexternal and new or existing sources. But while an ideacan come from anywhere, every idea must go through aproduct development evaluation. The companyhistorically had a difficult time determining linkagesbetween new ideas and new product lines. An improvedevaluation approach was established early in theevaluation to better match ideas to products and to givethe business units a process for matching ideas toproduct roadmaps.

The degree of intensity of collaborative supplierinnovation in the stage-gate process varied by industry,company, product and/or commodity. The degree ofopen innovation also varied. The company was movingtoward an open innovation approach that was in itsvery earliest stages and was most likely to focus onexisting suppliers for needed innovation.

Chapter 8 Case Study: DC Corporation


Case-Specific Product and Project Description:Ingredient A-Free Food

DC faced a significant challenges when a certain foodadditive, “Ingredient A,” that was used in many of thecompany’s products was deemed “unhealthy,” withgovernment agencies and consumer groups calling forits immediate removal. DC faced a strategic competitiveneed to remove Ingredient A from all of the food serviceitems it sold in major metropolitan areas. Thisinnovation initiative was driven by the need to complywith a new regional law declaring that artificially addedIngredient A would not be allowed in food serviceitems. This law did not impact products sold directly toconsumers because the packaging enabled consumers toread the label and make their own choices. For foodservices, consumers could not be expected to know thefood ingredients, so they warranted protection againstIngredient A. In addition, the Ingredient A-free initiativewould not initially be carried over to the retail businessdue to the costs involved (e.g., new formula, newpackaging, new marketing, etc.).


The new regulation had significant implications for DC.It had to comply with all regulations to sell food serviceitems in major markets. In addition, other largemunicipalities were either studying or implementingsimilar laws. The company also faced a major timeconstraint, as compliance was required within a year ofthe regulation’s passage.

The technical and schedule challenges required thecompany to examine two critical issues:

1. Insourcing/outsourcing: Did they have theinternal capabilities and capacity to reformulateexisting products to Ingredient A-free products?

2. Collaboration: Which external suppliers ofIngredient A-free compounds would be capableof supporting this innovation initiative?

The importance of this market and product linesuggested that the process should be insourced.

However, DC determined that although it had internalcapabilities, given the technical challenge and timeconcerns, it did not have the resources to manage thiseffort internally. Therefore, the company decided totemporarily outsource the effort. It hired Good Foods(GF) Consulting, a group of technical scientists withexpertise in the food service industry, to initially drivethe effort.

DC established a team of six employees and five expertsfrom GF Consulting. This team would have fullresponsibilities for the Ingredient A-free initiative,including reformulation, sourcing and project planning.GF Consulting would direct the team.

DC typically had primarily developed innovationsinternally and did not practice “open innovation.” Inaddition, the company had recently begun to obtainand leverage supplier ideas to a greater extent as itundertook efforts to achieve a more open andcollaborative model. Most of DC’s suppliers werecomplementary rather than competitive, so establishingmore collaborative working relationships with supplierswould be possible. Actions to drive increasedcollaboration with suppliers included:

• Increased supply management responsibilities tosupport innovation

• Creation of a new vice president, strategictechnologies role to support open innovation

• Creation of a new procurement innovation andvalue improvement manager role

• Creation of a director of open innovation role

These organizational changes helped open the door forinnovation and collaboration with external suppliers.The DC team decided that it would need to collaboratewith Ingredient A suppliers to meet the technical andtiming challenges of the initiative.


In order to decide which supplier(s) might be bestpositioned to support CD’s innovation effort, thestrategic technologies group and the DC teamdeveloped a matrix (shown in Figure 8-1) of all SKUs

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Figure 8-1Product/Supplier Matrix

ProductsP1 P2 P3 Etc. Etc.

Food Service S1, S7, S10 S6, S10 Etc. Etc. Etc.Retail S2, S3, S7 S4, S5 Etc. Etc. Etc.

containing Ingredient A and the suppliers that providedthe ingredient. For example, supplier 1 (S1) providedingredient A for product 1 (P1) but not for product 2(P2). This process was used to screen suppliers andidentify where Ingredient A-free solutions alreadyexisted and where there were gaps.

The following questions were then asked:• Do any of these suppliers have an immediate

solution to evaluate?• Which of the existing suppliers or potential new

suppliers can develop an innovation solution?

In some cases the existing suppliers had off-the-shelfsolutions for the product line. In other cases, somereformulation of the ingredient by an existing supplier,based on applications feedback, led to a solution. Inthose cases in which the existing supplier did not havea solution or the capabilities to develop a solution, DCneeded to change suppliers.

Current suppliers were categorized as A, B or C. The Asuppliers were identified as potential strategic supplierswith capabilities and scale to generate innovativeingredient solutions across the widest range of products.The B suppliers were also key suppliers that hadtechnology capabilities. The C suppliers were identifiedas not strategic and unable to provide solutions.

Most current Ingredient A suppliers suggested that theyeither had or were working on a solution. Given thetime constraints and capacity issues, DC could notevaluate all of the suppliers and all of the ideas. Besidesmeeting the product requirements on schedule, othersolution objectives or goals driving the supplierselection process included:

1. DC wanted a solution for the largest number ofproducts.

2. Time to market was critical. Cost was importantbut speed was the top priority, even if theIngredient A-free product would cost more inthe short term prior to cost reduction efforts.

3. DC’s supply management organization wanted tolimit the size of the supply base. For example, ifthe company already had 10 Ingredient Asuppliers, it wanted no more than 10 suppliersafter the initiative. This was consistent withoverall company goals to rationalize the supplybase.

4 . DC looked for opportunities to reduce thenumber of ingredients in its products (or at leastnot increase the number) as it moved toIngredient A-free formulations.

Given these requirements and objectives, DC evaluatedthe supply base and decided to focus on its two

A-category suppliers, ChemOne and Lipids Inc. Theselarge global suppliers were already providing solutionsto other customers. In addition, they supplied most ofthe existing Ingredient A to DC, and they hadsignificant research capabilities. Two B-categorysuppliers were also selected for certain niche productlines.

Initially, DC asked ChemOne and Lipids Inc. thequestion, “What are you best at?” Based on theresponses and a detailed supplier evaluation todetermine which could most quickly develop effectivesolutions, it was determined that ChemOne was thebetter supplier to work with on the innovation initiativefor the following reasons:

• The company had strong cross-enterprise “tech-to-tech” interfaces that were keys to the initiative’ssuccess.

• ChemOne could quickly translate what was notworking and commit resources to DC to achievereformulating, quick turnaround and othersolutions.

• ChemOne was willing and demonstrated a verycollaborative working approach by visiting DCplants to “problem solve” to meet company’sneeds.

Lipids Inc. was equal to ChemOne on many capabilitydimensions, but it did not provide the same level ofdirect technical and manufacturing support to DC thatChemOne did. DC believed that Lipids Inc. wasproviding rather limited support. For example, DC didnot get the same fast turnarounds and technical supportfrom Lipids Inc. that it did from ChemOne.


ChemOne primarily focused on the food service side ofDC’s business. The price of Ingredient A was not amajor point of the discussion between the twocompanies because a significant percent of Ingredient A’sprice was established by a Chicago Board of Tradebenchmark. Final food price included the price ofIngredient A plus a premium.

Intellectual property (IP) ownership was not asignificant issue because the company’s products werecomplementary rather than competitive. However,nondisclosure agreements (NDAs) were in place.

As a provider of goods like soybean oil for saladdressing and milling, DC was already a key account forChemOne across other business lines. ChemOne wasselected as the key supplier for two categories ofIngredient A-free products in support of the Ingredient


A-free project, which had been expanded acrossmultiple products. The major contract focus was aroundthe achievement of a required timeline.


DC believed the process of working with ChemOnewent well. The ChemOne employee who was linked toresearch & development at DC was critical to theproject’s success. This person had the technical expertiseand influence within ChemOne to “make thingshappen.” This was a critical point, because theemployee demonstrated that ChemOne fully supportedthe DC projects. This person also had the ability to lookbeyond the technical solution to identify “totalsolutions,” including supply chain and packagingsolutions. The companies developed a sense of a “one-project team” primarily made up of technical personnel.

DC’s experience working with Lipids Inc. was lesssatisfactory. The process started the same as withChemOne, but Lipids Inc. never provided a “keycontact person.” DC began to question whether LipidsInc. viewed it as a key customer for its Ingredient Ainitiative. DC did not believe that it was getting thesupport or turnaround times needed for this project. Italso believed that it had to tell Lipids Inc. what to dowhen Lipids Inc. should have been providing thetechnology expertise. In addition, there were qualityproblems with a Lipids Inc. product during a time ofhigh seasonal demand. Lipids Inc. did not believe it wasat fault, so it did not help to solve the problem. DCbelieved Lipids Inc. was not using its expertise topartner and solve the problem. This experience was instark contrast to the experience with ChemOne.ChemOne worked with DC to provide a solution andvalidate the process. DC provided feedback to LipidsInc. to help the company become a better supplier.

DC relearned important lessons from this experience. Itlearned that a company has to “be on the map” as animportant customer to get the support it needs. Further,it realized that a company may be an importantcustomer for some products but not for others. DCfaced a challenging balancing act — how could it sharebusiness with two key suppliers (ChemOne and LipidsInc.) so that each would consider it a key customer?Similarly, how could a supplier share business acrosskey customers without stretching itself too thin, whileat the same time, maintaining preferred supplier statuswith key customers? This question is extremely criticalif both suppliers have significant innovation capability.

DC and ChemOne CollaborationEven though DC’s team consisted of internal employeesand consultants, GF provided R&D and generalknowledge to DC and was the key interface withChemOne. ChemOne stated several times that GF’sknowledge and experience were critical to the success ofthe project.

To initiate discussions and possible collaboration, a GFconsultant contacted ChemOne to provide backgroundon the Ingredient A-free initiative in general and a foodservice project in particular and discuss several possiblesolutions. ChemOne also provided GF with some off-the-shelf options. An iterative process of options, testingand feedback then took place. Communications andfeedback were “perfect” and included new formulationimpacts on factors like taste, shelf life, nutrition andappearance. There was open and “greatcommunication.” Within a short time, a solution wasdeveloped. ChemOne turned around things quickly, inlarge part because of the open communications andfeedback.

The collaboration resembled a friendly tennis match.Each party took a turn at an improvement andpresented the results to the other. There was no“traditional” co-location or co-innovation. Each partytrusted that the other knew its own side of the businessand its own technology and applications. For example,if DC said an ingredient would not provide theconsistency needed, then ChemOne believed DC ratherthan question the total mix of ingredients used by DC.Similarly, DC did not get involved in reformulation ofcompounds. Co-development was not a focus, althougheach party provided detailed feedback about outcomesand provided ideas for improvement.

Early in the process of working together, there was lackof communication about what each party expected ofthe other. This may have stemmed from DC not clearlyunderstanding ChemOne’s capabilities. During March2007, the companies met to recalibrate each party’sexpectations and decide how to move forward. This wasthe only somewhat significant “hiccup” in theircommunications.

After about a year of employing GF, DC weaned itselffrom the consultants. It then assigned some of its ownemployees to continue the Ingredient A-free initiativeand subsequent projects. A subsequent productcollaboration project was a big success. Personnel fromDC and ChemOne worked on the BIGCO project, inwhich DC was providing product to BIGCO. WhileChemOne proposed an off-the-shelf solution, DC had tomake a few minor modifications to the product formula

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— otherwise, everything worked well. Continuous anddetailed feedback was critical to the project. The BIGCOproduct took longer than expected to roll out because itrequired time for BIGCO to work through its ownapproval process. The companies have subsequentlydeveloped Ingredient A-free solutions for three otherproducts.


A number of challenges were encountered andsubsequently resolved during the Ingredient A project.

Maintain FocusThere was concern at one point that the relationshipwas becoming stagnant because DC and ChemOne hadallowed the one-on-one meetings to lapse for a time.Without a project focus, the business relationship cansuffer.

Transition Plan NeededAfter DC disbanded the Ingredient A team, ChemOnedid not know who the point person was at DC. Whenthe R&D project champion left, it also was unclear whothe new point person was. ChemOne had a greatrelationship with the champion and her team, and thetransition limited forward momentum between the twocompanies. If supplier innovation collaboration is basedupon a project orientation, then a clear transition planneeds to be established.

Internal Communications Are ImportantThere seemed to be limited communication betweenDC’s research & development and its operations/plants.Communications between the two groups could havebeen enhanced. The internal firm ecosystem exists, butcommunications can be limited.

Examine Risk/Reward SystemChemOne would like DC to increase the rate ofconsolidation of its suppliers and its SKUs forIngredient A-free product, thereby giving ChemOnemore business. The risk/investment/reward systemneeds examination and planning before collaboration.


The results of this project can be assessed in terms ofdirect project outcomes and overall impact on businessrelationships. The Ingredient A project lasted 18months, but different projects were phased in over timebased on priority. DC met its goal to introduce

Ingredient A-free products into select markets within ayear. DC also was first to market with many of theIngredient A-free products. Being first to market is wellregarded by Wall Street analysts.

In terms of business relationships, all companiesachieved positive outcomes. GF Consulting proved itsvalue to DC and ChemOne. GF’s potential to win futurebusiness from DC was increased by its performance onthis project. ChemOne gained a part of DC’s businessthat it had attempted to capture earlier. It establisheditself as a strategic supplier in a new segment of DC’sproduct portfolio. ChemOne also demonstrated itsability to be a good partner, to innovate and tocommunicate. DC gained knowledge from both GFConsulting and the supplier. New internal capabilitieswere developed and instituted. The project alsostrengthened the case for increased involvement ofsupply management and suppliers in future newproduct and innovation efforts. Ultimately, all of thecompanies learned from each other and developed atrust that none of them would exploit the knowledgethey gained in a way that would adversely affect anyother company.


Supply management’s role during the initial stages ofthis project was to identify all existing sources of supplyfor the many food categories impacted by the IngredientA-free regulations. The development of the resulting“product/supply” matrix was key to developing a planto move forward. The maintenance of an approvedsupplier list enabled DC to identify off-the-shelfsolutions for certain products, and then identify criticalsuppliers to fill the innovation and supply voids. Duringthe actual collaboration process, supply managementhad a limited role when things were going well.However, when issues came up supply managementhelped manage the relationship because it had greaterinsight into the total buy and working relationshipsthan the other functional areas did.

When suppliers become involved in innovation, supplymanagement also is involved to some degree thoughthere is still some engineering/R&D resistance orskepticism about why and when supply managementneeds to be involved. In addition, engineering and R&Dcontinue to reach out to suppliers directly withoutsupply management involvement, which could leadthem to overlook production capabilities and otherpotential risks. The organizational changes discussedearlier, such as the creation of a new procurementinnovation and value improvement manager position,will help mitigate some of those issues in the future.


Supplier Perspective and Comments: ChemOne

A senior technology sales manager for food compoundsat ChemOne provided a supplier’s perspective aboutthis initiative and his company’s relationship with DC.This sales manager’s role is to interact with groups likecustomers, sales, product development and production.His role also is to serve as the conduit to “obtainbusiness” for ChemOne by taking on projects fromcustomers and helping them through ChemOneprocesses, such as R&D and development, in a timely,efficient and effective manner.

Since 2002 and prior to being approached by DC towork on the Ingredient A-free initiative, ChemOne hadconducted significant research and development aroundthe removal of artificial Ingredient A from foods. TheIngredient A work at ChemOne continues with DC andother food companies throughout North America.

The relationship between ChemOne and DC was notalways strategic, despite prior efforts by ChemOne tostrengthen the relationship. For example, two yearsprior to this initiative the sales manager and ChemOnemet with DC, but DC did not embrace ChemOne as a“strategic supplier.” ChemOne even specificallydiscussed low-to-zero Ingredient A food solutions forfood products with DC, but it had limited successgenerating interest much less generating business. Salesand business relations between DC and ChemOne weregood for other product lines, but there was no strongbusiness or technical relations around Ingredient A.There were some higher level discussions between thecompanies over time that perhaps smoothed the way forfuture work in compounds. In January 2007, DCinvited ChemOne to discuss the Ingredient A initiative.The portfolio of DC and ChemOne products wasreviewed and they decided to focus on two segments ofthat portfolio to reformulate without Ingredient A.

For DC, the relationship was developed out of themandate to meet new food service requirements in amajor market. ChemOne had been working onIngredient A for some time in reaction to previouslyenacted FDA labeling laws, but the new regional lawaccelerated the effort. To some extent, both companieswere motivated to:

• Protect business overall• Protect a major market• Minimize potential negative impact on dollar sales

change• Meet customer and consumer satisfaction• Meet time and budget requirements

Important Lessons

Lesson 1: Feedback Is CriticalTimely and relevant feedback to a supplier during aproject is critical to success.

Lesson 2: Avoid Being Considered a BadCustomerSome of the characteristics of a bad customer includefailing to provide feedback, failing to give a supplier thechance to improve (switching to new suppliersunexpectedly) and maintaining a perspective that thesupplier is just trying to push products rather thantrying to provide a holistic solution.

Lesson 3: Understand Risks That Suppliers FaceGenerally, suppliers evaluate customers in terms ofbenefits and risk. The primary risks that suppliers faceinclude building inventory that will not be sold, pricingincongruence, availability of critical planninginformation, ongoing business and the risk that thecustomer will switch to another supplier.

Lesson 4: Become a Key CustomerA company needs “to be on the map” as an importantcustomer to get needed supplier support. The buyingfirm may be an important customer for some SKUs andnot others. This is a challenging balancing act — howdoes the buying firm keep enough business sharedamong key suppliers so that each supplier considers thebuying firm to be a key customer? Similarly, how does asupplier share enough business across key customerswithout stretching itself too thin and still maintain keysupplier status with key customers?

Lesson 5: Commercial-Technical AlignmentNeededBesides business alignment, companies involved in jointdevelopment need to ensure technology and capabilityalignment.

Lesson 6: A Cultural Fit Is NecessarySuccessful innovation partners need to have a culturalfit. True partners require a culture of mutual trust,information sharing and openness for innovation tothrive. For this project, there was a cultural difference(non-fit) between the buying firm and one supplier,Lipids Inc. The buying firm was driving to a “win-win”situation and was willing to be more open. However,because Lipids Inc. was not transparent and did notshare information as much as needed, this relationshipwent nowhere.

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Lesson 7: Gather Necessary CompetenciesNot all critical capabilities need to exist in either thebuying firm or supplier. A third party can add value andwork well if managed properly. In this case study, thebuying firm hired technical consultants because itlacked the time to internally develop the technicalexpertise required for this project. The third-party firmprovided R&D and general knowledge to the buyingfirm and a key interface for the supplier. The supplierstated that the consultant was critical to success.

Lesson 8: Organizations Must Be Open toInnovationInnovations need to be resourced by all appropriatefunctional and other personnel in the organization. Thepoints of entry and the level of intensity of collaborativesupplier innovation in the stage-gate process will varyby industry, company, product or commodity. Thegeneral approach and openness to collaborativeinnovation will vary as well.

Lesson 9: Target the Right People for InnovationTargeting the correct people throughout theorganization can be critical to a project’s success. DCtargeted the right people — not necessarily the highestlevel executives — at each organization to get theirattention. At ChemOne, it was account managers andsalespeople on the ingredient side of the business thathad the “right” experience. At Lipids Inc., it was a“super customer rep” on the flour side of the business.Actions and responses by individuals in an organizationwill show if that organization is just interested in sellingor interested in innovation.

Key Insights

• Accelerating innovation and collaborating withsuppliers can be driven by a “burning platform.”In addition, innovation can languish without aculture that supports frequent and necessaryinnovations.

• Specific innovations can be achieved based on aspecific need. However, innovation will notflourish without an innovation culture andsupporting processes. This is especially true ifsupplier innovation is required.

Timely and relevant feedback to a supplier duringa project is critical.

Successful innovation partners need a cultural fit.There needs to be a culture of trust, sharing andopenness for innovation to thrive.

Not all critical capabilities need to exist in eitherthe buying firm or the supplier. Third-party value-add can work well if managed properly.

The points of entry and the level of intensity ofcollaborative supplier innovation in the stage-gateprocess will vary by industry, company, productor commodity. The general approach andopenness to collaborative innovation will vary aswell. Targeted efforts to facilitate innovation mustbe correctly established at each stage-gate processstep.


The following learnings are meant to provide guidanceto supply management and organizational executives forobtaining and accelerating supplier innovation. Theseideas are based on the seven detailed case studiescontained in this report and influenced by multiple other,shorter case vignettes and the overall research interviews.

Intellectual Property (IP) Ownership

1. Establish an IP strategy and negotiate IPrights with suppliers prior to the start of aninnovation project.A company should have a clearly established IPownership strategy, with supporting logic, beforebeginning negotiations with a supplier about ownershipof innovation IP. The company can strive to own all,some or none of the IP. However, the IP ownershipstrategy should be flexible based on the situation andneed. In the course of negotiations, IP ownershipshould be clearly established; otherwise, lack of IPownership clarity can become a barrier to collaboration,cross-enterprise communications and informationsharing throughout a project.

At Desco, where ownership of all innovation IP was agoal, TFI and othersuppliers were reluctant to provide leading-edgeinnovation without some form of inducement (payment,production contracts, future business, etc.) and/orguarantees that they could use the IP with othercustomers. However, at I-Com IP ownership was not anabsolute requirement, resulting in a more openapproach by suppliers to providing innovation.

2. Recognize that suppliers can and doexchange IP rights for market access.Larger companies can exchange their developmentresources, market volume and global reach for IP rights

from smaller suppliers. In many cases, small supplierswith new technologies or product offerings facesignificant challenges in getting innovations to market.Partnering with a larger company that has establishedchannels of distribution and market brand can create asituation in which both companies benefit. By giving upsome or all IP rights, the smaller supplier may be ableto turn potential IP value into realized value while thebuyer creates longer term value for both firms.

Project Management

3. Establish effective project managementapproaches.Effective project management is critical to the successfulcommercialization of innovation. The case researchillustrated that effective project management ofinnovation projects can help a project keep on budgetand schedule. No innovation project goes entirelyaccording to plan; leaders are needed to keep them ontrack, solve problems, oversee communications,maintain team stability and keep necessary resourcesassigned to the project.

In addition, all companies utilized some form of projectmanagement. A lack of structured project managementapproaches and problem-solving ability can derailinnovation projects.

4. Manage personnel transitions on projects.While personnel transitions can negatively impactproject timing and cost, this risk can be mitigatedthrough successor planning and frequent internal andcross-enterprise communications during project teamtransitions at both the buyer and supplier. Projectpersonnel turnover was found to result in informationloss, priority changes, changing personal commitmentsand overall loss of continuity. Maintaining key persons

Chapter 9 Supplier Innovation:Key Learnings

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on a project (or specifically educating and trainingreplacements) is important to overall project success.

Continuity of the champions of a collaborativeinnovation effort is critical to achieving objectives andmeeting targets. Personnel changes should be closelymonitored to ensure that correct leaders and teammembers are in place on an ongoing basis.

5. Innovation projects that involve multiplecompanies require robust project teams tomanage complex relationships.Relationships and collaboration were required betweenbuyers and suppliers. Technical personnel at eachcompany had to work closely together on systemintegration and other tasks to achieve success. Supplymanagement played a significant role in coordinatingmultiple communications and integration betweenfunctions and companies.

For example, at DC a team consisting of six internalemployees and five experts from GF Consulting wasestablished to drive project innovation. The team hadfull responsibilities (e.g., reformulation, sourcing,project planning, etc.) for the innovation initiative. GFConsulting directed the team. A ChemOne supplierperson linked to DC R&D was critical to the success.This person had the technical expertise and influencewithin ChemOne to “make things happen” at the firm.

At other companies, project teams were in place.However, there were some problems with team stabilitythat affected responsibilities, priorities and results —further illustrating the importance of highly capable andstable project teams to innovation project success.

Trust and Communications

6. Trust development is required.Trust between buyer and supplier, accompanied bybusiness strategy goal alignment, appeared to influenceinnovation success and collaboration across all cases.For example, at Desco an IP ownership agreementwould not be signed because of perceived inequitableterms and conditions, but the product innovation effortwas able to proceed because of a high level of trustbetween Desco and TFI. Trust was considered to be animportant factor positively affecting results.

However, even with higher levels of trust, we foundnumerous issues that could negatively impact trust andinnovation if not immediately corrected. At one firm, amisunderstanding of what were considered appropriatenon-recurring engineering expenses and the impact of

project lead personnel changes resulted incommunication and priority problems that negativelyimpacted trust until they could be resolved.

7. Successful collaboration and positiveexperience over time develops trust andinnovation.Both Desco and TFI considered each other to be“trustworthy” based on experience gained from years ofworking together. Desco “trusted” TFI and believed thatTFI wanted to do the right thing and vice versa. As oneDesco employee commented, “TFI employees are notsnakes.” Similarly, TFI believed that Desco employeeswere honest. The companies did not always agree witheach other on operating policies and business decisions,but both parties generally considered the other to behonest rather than opportunistic. Mutual honesty wasimportant to the success of this and other innovationprojects.

Small suppliers to InventCo trusted that they would betreated fairly by the much larger firm. This facilitatedgetting projects started quickly. Similarly, MPCo trustedGSCo and executed a development contract in a singleday.

8. Invest in the relationship to build trust.Good relationships require meaningful financial, humanand technology investment by both the buying firm andsuppliers to mutually signal that the businessrelationship and collaboration on innovation isimportant. Individual relationships between personnelfrom different firms are important to successfulinnovation, product launches and trust building.

9. Develop communications and informationsharing approaches to ensure coordination/collaboration between key stakeholders.All cases illustrated the need for good communicationsand information sharing between project team membersand across enterprises. Communications betweencollaborating partners were needed at all times as wellas at different levels at different times. At the beginningof an innovation project, effective two-waycommunications are required between the upperorganizational levels at the firms to establish necessaryalignment between the companies and developframeworks for contractual agreements. These high-level efforts may be required for initial projects withperiodic updates for subsequent efforts.

As an innovation project gets underway, communicationsbecome critical between project managers andfunctional members to ensure adequate exchange ofinformation about technology development, changes,


technical data, project schedules, responsibilities, costsand so forth. The more complex and lengthy theproject, the more need there is for communicationsbetween project team members both between andacross the organizations. For example, the ability toestablish a regular two-way flow of high quality andimportant information led DC to prefer ChemOne overanother supplier.

Alignment and Risk/Reward

10. Collaborate with suppliers that arestrategically aligned.Commercial, technical and risk alignment betweenbuyers and suppliers is required to increase thelikelihood of innovations being successfullycommercialized. For example, Desco’s assessmentsuggested that TFI was the most innovative, researchintensive and capable supplier for the overlay project.Desco also believed that the two companies werealigned in terms of focus and work ethic.

In addition, alignment between firms around underlyingproduct commercialization and speed-to-marketprocesses is critical to successful collaboration.Alignment on approaches to quickly commercializeinnovations was found to be important.

A company also needs “to be on the map” as animportant customer to gain significant innovationsupport from suppliers. This requires buyer analysis ofits overall importance to suppliers as well as byproducts purchased. This balancing of importance tosuppliers based on annual purchase expenditures wasfound to be important to successful collaboration andinnovation.

Finally, firms thought that innovation success wasachieved because they were properly aligned on costs,speed, trust, ease of collaboration and IP rights.

11. Design supply agreements that fit projectobjectives and balance the interests of bothbuyer and supplier.Buying companies and suppliers should consider whatis fair compensation to suppliers for their innovationcontributions to new product development projects.“Fair” compensation needs to carefully consider thevalue contributions that each party is making.

In addition, “fairness” can be evaluated both in terms ofthe initial and ongoing value accruing to both parties.For example, agreements can include initial paymentsto suppliers for development in return for exclusivity

and preferential treatment to suppliers (or buyers) canbe provided over time. Suppliers and buyers need to seeexplicit value in the relationship.

Firms can also leverage the possibility of significantfuture business to spur supplier innovation. At ECOMP,neither of the two suppliers in the feasibilitycompetition had a contract, so the suppliers were“sticking their necks out.” The suppliers needed torecapture investment by winning the productioncontract and resulting volumes. Development costs wererelatively low for the suppliers, so the substantialbusiness potential justified the risk taking by thesuppliers.

12. Align and balance the innovationrisk/reward profile.Supplier innovation contributions were clearly impactedby the innovation risk/reward profiles for the supplierand buying company. Three case examples illustrate keypoints.

I-Com was viewed as a fast-to-market firm withsufficient scale for suppliers to generate necessary returnon investment in a reasonable time. I-Com wastherefore viewed as a preferred customer for supplierinnovations. A similar situation was the case with DC,which required commercialization of productinnovations in a short period of time.

At MPCo, products required re-sourcing as theattractiveness of the business to incumbent supplierswaned due to required new investment in maturingtechnologies. Future technology innovation investmentsdid not meet incumbent supplier risk-reward profiles,so they exited the business — which then necessitatedre-sourcing to new suppliers.

At multiple companies, product innovationcommercialization lead times were long (some projectstook years) and suppliers were required to invest cash,which required them to justify the investment based onthe projected net present value of revenues, profits andreturns given forecast product volumes and timing.Supplier investments can be further rationalized andrisk reduced by IP ownership, advance payments,payment for engineering work and guaranteedproduction volume contracts.

Supplier size and the magnitude of the requiredinvestment over time significantly affected supplier riskand their decisions. In addition, collaborative oradversarial approaches by the buyer also positively ornegatively impacted suppliers’ attitude toward risktaking.

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13. Size of firms affects possible alignment.The size of both the buyer and supplier affects thesuccess of collaborative innovation efforts. Typically,facets like risk profiles, financial investment capability,IP ownership approach, speed of decision making andculture vary significantly between firms of significantlydifferent size, which affects the ability of these firms towork together. The smaller firm is limited by itsfinancial and human resources, the risk it can take andthe estimated time to commercialization.

Innovation Metrics, Supplier Capabilities andPerformance Assessments

14. Companies require further development ofinnovation metrics.Overall, few hard metrics around innovation werefound to be in use at the companies studied. Allexpressed a desire for better metrics and were workingto develop them. However, companies were early in thedevelopment phase and found it difficult to establishhard innovation metrics and their weightings comparedto other factors, such as cost, on which to base sourcingdecisions.

In addition, an “upfront assessment” of potentialsuppliers was conducted at some firms to help determineinnovation potential. This was a hands-on qualitativeassessment of each potential supplier’s current productportfolio. It was a judgmental (rather than quantitative)evaluation of how well the supplier met and/oranticipated customer needs, the supplier processes fordesign and “added value” operations, its innovationcapabilities and a review of the supplier’s customers.

All firms used supplier assessment tools that evaluatedbusiness capabilities and how “produceable” a productwas, but these tools provided a limited view of supplierinnovation capabilities and performance.

15. Focused worldwide supplier scouting,assessment and communication supportinginnovation is required.At the companies visited, supply management wascharged with scouting for innovative suppliers andparticipating in supplier assessments to determinesupplier ability to meet company needs. However, thetools to assess supplier innovation capabilities werequite limited and qualitative in nature. Capabilitiesassessment typically focused on traditionalmanufacturing, operations and business assessments.

The limited nature of these assessments may result fromfirms having a “closed” approach to innovation and not

looking to suppliers as a source of importantinnovations. For example, InventCo is just now startingto consider suppliers as a source for more substantialinnovation ideas and is beginning to develop supplierinnovation metrics to drive this process.ECOMP was a technology leader that believed thatsuppliers were generally “followers” rather thantechnology “leaders.” However, ECOMP was attemptingto gain more innovation from suppliers, especially inareas not considered to be a core technology orcompetency. For this reason, it was increasinglyinvolving suppliers more closely in the productdevelopment process and innovation to establish afoundation for “open innovation.” Soft measures werealso being implemented to track performance.

The lack of a formal supplier assessment process thatresulted in a negative outcome was best illustrated atISD, which had to dedicate additional technicalresources to the project because of a supplier capabilityand resource shortfall. In addition, at other firmssourcing decisions were primarily based on historicalrelationships, experience and judgment due to the lackof innovation capability assessment tools. This approachwas especially “tricky” when evaluating new suppliers.

In addition, it is important to clearly communicate thenature of innovation required from suppliers so thatthey can focus resources. This was only effectively doneby two of the firms, with positive results.

Overall, it appeared that the companies could havebenefited from more effective supplier innovationcapabilities assessment approaches and tools.

Voice of the Customer and Suppliers

16. Use the voice of the customer (VOC) toguide innovation and link to supplierrequirements.Multiple companies closely examined market demandfor their new and innovative products and services toestablish the VOC for the business and to developsupplier innovation requirements. ECOMP conducted a“customer insight” process with marketing, applicationspecialists and an internal design group. After extensiveanalysis, including visits to more than 30 customersworldwide and open-ended question interviews, themost relevant clinical and E/MS needs were established,including supplier requirements.

After a number of negative experiences with internallydeveloped technology push innovations, one companymodified its approach to carefully listen to the VOC


through both customer and consumer interview andanalysis. Innovation efforts would focus on areas forwhich there seemed to a clear customer demand, withdetermination of what suppliers needed to provide.

17. Communicate the VOC throughout thesupply chain.Buying company supply management personnel mustbe engaged across functions and firms to find solutionsto meet end customer needs — a narrow functionalfocus will not suffice. The supplier, if it understands thecustomer’s business model, can frequently contribute tothe meeting of customer needs and satisfaction. TheseVOC efforts help identify supplier innovationrequirements to support customer-focused innovationprojects.

Engineering, development and supply at the multiplebuying firms were communicating to suppliers how apurchased item was actually being used. This wasimportant, as suppliers typically lack deep insightsregarding product end use — without this knowledge,it is conceivable that they would unwittingly makeseemingly subtle decisions and engineering changes thatnegatively impact overall system or productperformance for new products or those underdevelopment.

Cost Versus Innovation

18. Recognize that cost versus innovation focusdifferences produce different results.At one company, suppliers were concerned that theywould not be paid for innovation because product“should cost” models were based on the most efficientway to produce the product after final (or close to final)design had been completed. They were thereby hesitantto provide innovations. But Design-in-Workshops, inwhich suppliers actually create product designs to meetcost and performance targets, can be used effectively forboth technology innovation and cost reductions. Inaddition, innovation versus cost reduction was theprimary driver at two firms, resulting in earlyachievement of required innovation.

The case analyses also strongly suggested thatinnovation efforts can be slowed due to poor anddeteriorating economic conditions and a primary focuson cost reduction, versus a more holistic approach tovalue and innovation achievements.

Stage-Gate Processes: From Concept toSuppliers

19. Formal stage-gate new product development(NPD) processes are critical to success.All firms visited had formal stage-gate NPD processes.Most effective stage gates include very specific timing,handoffs by stage and clearly defined responsibilitieswith signoffs by function, including supply. Effectivestage-gating processes generally shorten NPD, as cross-functional handoffs and signoffs are systematized withenhanced communications and clean-cutresponsibilities. In addition, the stage-gate process maybe accelerated for speed (shortened) for high-priority orlower risk projects.

20. Implement a common technology andproduct development process.The implementation of common technology andproduct development processes across functions andmultiple business units improves innovation successand technology road-mapping with suppliers across thefirm. Such a framework ensures that technologyinnovation efforts are linked to product life cycles andthe overall portfolio of product and technologyplatforms that are important to both the firm andsuppliers. The evaluation of human resources availableacross functions and the company before initiating anew project is enhanced with clear understanding oftechnology and product development needs.

In addition, there are typically two major interdependentstages to the innovation process. Long-term tointermediate planning involves the development of newtechnologies, portfolio management of products andprojects, knowledge development and platformgeneration. Intermediate to shorter term planning andprocesses involve the “commercialization” of a newproduct. During each stage, strategic imperatives andinternal capabilities are compared to technical needs tomake insourcing/outsourcing decisions and identifyopportunities for collaboration with importantsuppliers.

Culture

21. Develop companywide innovation culture.At the companies visited, significant cultural changewas required to stimulate and achieve supplierinnovations. At all of the companies but one (atechnology leader with a strong innovation trackrecord), the following typical changes were made:

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• New executive-level innovation leader andposition established

• Change in purchasing/supply structure and role• Development of new company and supply

approaches to obtain supplier innovation• Changes in mindset regarding outsourcing and a

more open approach to supplier innovation• Increased focus on speed and being quick to

commercialization

Without a corporate culture change that emphasizesinnovation in general and supplier innovation withsupporting management approaches in particular,obstacles to innovation will limit change rates.

Supply Management

22. Expand supply management’s role inacquiring innovation.The case studies illustrate three key findings regardingsupply management. First, supply management must bealigned with the company’s innovation strategy. Second,supply management was generally engaged at laterstages in the stage-gate process and rarely, if at all, inthe discovery stage. Third, there was increasingawareness of the benefits of getting supply managementmore actively engaged earlier in supplier innovationdevelopment and the new product development stage-gate process, as well as throughout implementation.

However, at all companies visited, supply managementwas increasingly becoming engaged earlier withexpanded roles. For example, at I-Com the supplymanagement function had broad-based responsibility tomotivate and secure supplier innovation. At ECOMPand ISD, executive management had established a broadcharter for supply management to become engaged inacquiring supplier innovation and participate earlier inthe NPD process, while scouting the world forinnovative suppliers. At InventCo, supply managementhad established a new product introduction specialist towork with engineering early in the new productdevelopment process. At MPCo, supply managementled the charge to achieve both product technologyinnovation and cost containment over multiplegenerations of the NCOP. Finally, at DC, supplymanagement “owned” supplier relationships and wasengaged with suppliers during the product innovationprocess. At Desco, supply management was seen as afacilitator of supplier innovation and supplierparticipation in NPD.

23. The role of supply management should bealigned with the company innovation strategy.At I-Com, supply management played the role ofauditor in evaluating the financial value of projects inthe NPD process. Supply management was engaged inunderstanding the product and customers and couldnot simply act as “buyers.” It needed to be endcustomer-/consumer-centric, while continuing tonegotiate price.

The role of supply management was shifting at ECOMPand DC as the companies moved toward a more openapproach to innovation. Historically, the productdevelopment process at ECOMP was verticallyintegrated and there was little early involvement ofexternal suppliers. To the extent that external suppliershad been involved in NPD, most of the efforts focusedon incremental innovations. This was changing as thecompany continued to redefine itself, its companystrategies and its processes. The involvement ofsuppliers and supply management in the innovationprocess at ECOMP was supported at the companyexecutive level. However, change was slow — in largepart due to the industry structure and prior practices atECOMP.

InventCo had a “closed” innovation model, whichlimited the role of supply management in innovationwith suppliers. Nonetheless, supply management had arole to play, namely qualifying a supply base that couldwork on the minor innovation projects needed byInventCo and supporting technology efforts to find off-the-shelf supplier technologies and products.

24. Increase the role of supply management inreaching a consensus about the price/costversus innovation tradeoffs with finance andother executives.Frequently, finance and top-level executives may focuson short-term price reductions from suppliers ratherthan longer term innovation benefits. Supply leadersshould use specific case examples to demonstrate themeasureable benefits to be gained from innovation thatmay be achieved over time versus an immediate pricereduction so as to establish a holistic policy andmeasurements using business case analysis to evaluateshort and longer tradeoffs between price andinnovation.

25. Supply should drive supplier innovationworkshops.Innovation workshops with leading suppliers that haveinnovation capabilities should be established andadministered by supply in cooperation with thetechnical community. The aim of the workshop is to


accelerate supplier innovation and investment inrequired innovation areas.

26. Lead development of online supplierinnovation e-systems and processes to obtain,evaluate and commercialize supplierinnovation.All companies had limited e-system approaches toacquiring supplier innovation ideas. A commonlimitation was that firms had inadequate commercialand technical resources to quickly and fully evaluatesupplier ideas and provide feedback and incentives.

Observations

It appears that supplier innovation can be best achievedby the buyer that provides suppliers a combination offast-to-market opportunity, sufficient volume, “fairpricing,” collaboration efforts and support/developmentof supplier capabilities as opposed to a strict costreduction focus. Cost improvements or productivity canbe achieved after product innovation introduction. Inaddition, target prices or cost targets driven by the VOCalso help to achieve required innovation withinestablished price/cost parameters.

Trust is also critical to successful supplier collaborationand innovation. Alignment of needs with effectivecommunications across the supply chain or networkalso enables supplier innovation. An effective supplymanagement organization with the right supportingstructure and metrics also enables acceleratedinnovation from suppliers.

Overall critical problem areas negativelyaffecting innovation developmentThere were numerous situations we observed duringinnovation development that, if not carefully managed,could negatively impact cross-enterprise collaborationwith suppliers and trust and cause the innovationinitiative to deliver limited results or be cancelled.These include:

1. Unsatisfactory supplier performance at aparticular stage-gate due to supplier or buyercausality.

2. Specification creep and/or change without clearcommunications between buyer/supplier,resulting in major cost impact or incorrect focusof development efforts.

3. Withholding or slowing of innovative ideas outof concern over equitable payment forinnovation.

4. Differences in terminology and systems betweenbuyer and supplier that were required to achievethe innovation(s).

5. Negative reaction to supplier innovation by thebuying companies’ technical community due toconcern over outsourcing, which canslow/disrupt supplier innovation contributionswithout strong company leadership.

6. Product innovation price/cost exceeding budgetand/or customer willingness to pay forinnovation changes requiring joint efforts toreduce and/or re-price.

7. Inadequate qualified personnel assigned to theinnovation projects.

8. Significant economic decline resulting in loss ofcompany profitability and negative cash flow.

9. Perception on the part of technical stakeholdersthat supplier innovation was of limitedimportance to the company.

10. Loss of focus or unexplained delays on a projectby one party can cause the other to questioncommitment to the project and lead to shiftingof resources to other projects.

11. An industry culture of freely appropriating or“shopping around” supplier IP severely restrictsthe flow of innovation.

12. The failure to “buck” impasses between lower tomid-level managers at buyers and suppliers upthe chain of command for resolution can slow orstop progress on a project.

13. Inadequate investment over the longer termfocused on supplier innovation activities andprocesses.

14. Inadequate communication of customer needs(VOC) to critical suppliers and innovationpartners.

Careful attention to each of these possible situations canlead to appropriate company actions to stimulate, ratherthan stifle, innovation.

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