Enabling Supplier Innovation - Building the Business Case for SRM (Part 3)
Supplier innovation doesn’t have to be as exciting as SpaceX landing two Falcon Heavy rocket boosters back on the launch pad in Cape Canaveral (like they did in February), though this stunning feat was made possible in part by contributions from their suppliers.
Value-added innovation is anything promoting efficiency or mitigating risk and can be as mundane as getting a supplier to license technology or form a JV with a supplier to support expansion in overseas markets. Just like making financial investments, promoting supplier innovation requires a portfolio approach. Selecting the appropriate suppliers is the first step, and it begins with segmentation. Others on Spend Matters, like Vikash Sharma, have done a great job explaining this process.
It’s critical to define a manageable set of strategic suppliers that will have the greatest impact on your business. Most companies we’ve worked with start with a pool of approximately 10 suppliers, sometimes increasing this number to as many as 25. We’ve seen organizations attempt to actively collaborate with more suppliers from the outset, but this approach often leads to a loss of focus in the program as a whole.
Expectations for supplier innovation should always be outlined up front, with suppliers and customers typically working together to cultivate innovation, measurable as additional value delivered beyond the contract value. We often see a figure of around 5% additional value here, but one CPO at a global food processor sets the bar at 7%–10% for strategic suppliers. Establishing and defining these percentages is crucial when building your business case for SRM investment.
A specific innovation opportunity can then be developed with one supplier or collectively with a group of suppliers depending on the situation. Dynamic SRM solutions leverage social communication features to facilitate customer collaboration with one supplier or among a group of suppliers. Enabling moderated discussions among your suppliers can be very interesting, not least because it will give you multi source insight into which of your processes are preventing greater value realization.
By encouraging supplier innovation, organizations generate value by gaining exclusive access to new supplier technology, solving difficult logistical or manufacturing challenges, developing innovative products or optimizing supply chains.
In our next blog, on reducing supplier risk, we will discuss how to minimize exposure to suppliers with weak quality management or noncompliance with safety, insurance, environmental and security requirements.