When Coca-Cola distributed cans of its famous fizzy drink in South America last year bearing popular local names like Roberto and Alicia, it had its packaging supplier to thank. Beverage can maker Rexam had figured out a way to print eight different designs on the same production line and pack 24 variations on a single pallet — a far cry from the standardized approach of the past, and one that gave Coke valuable promotional buzz and boosted sales in its target markets.
Drawing on the ideas and inventiveness of external partners is one of the defining characteristics of innovation leaders, and increasingly a competitive imperative for companies across a broad range of industry sectors. The notion that internal R&D departments can respond to intensifying pressure for new brand variants and shorter timescales on their own is outmoded. “Open innovation” and collaboration are the order of the day, whether it be using social media channels to solicit feedback from customers or working closely with suppliers of packaging, ingredients, flavours or contract manufacturing services on product design and development.
Research by SCM World shows that food and beverage companies are strongly positive about the value that can be generated by engaging strategic suppliers in this way. Almost half of supply chain practitioners in the sector believe that it is “very important” for their firms’ competitive advantage, while 61% say that collaborating with suppliers on design improvements and co-development is “extremely relevant” to business success (see charts below). This compares well with peers in CPG, retail and hi-tech companies.
Figure 1: Importance of strategic supplier engagement to competitive advantage
Figure 2: Relevance of collaboration with suppliers on design improvements and co-development to business success
Source: SCM World Chief Supply Chain Officer Survey 2012
But collaboration and co-development is easier said than done. It requires not only agreement about who owns and has the rights to use the intellectual property created (a thorny problem that can easily get mired in a tortuous and costly legal process), but also effective internal alignment and communication between the R&D, product development, marketing, supply chain and other functions about when and where to involve suppliers. Snack food manufacturer Mondelez International has created a team of procurement innovation managers whose job it is to co-ordinate decision making and project management inside the company and to translate business strategy into meaningful guidance for supplier personnel about categories and product segments where their expertise and ideas will be most welcomed.
In today’s competitive supply markets, the challenge for buying organizations is to make themselves as “attractive” as possible to innovative suppliers, so that they — rather than their industry rivals — get first refusal on new ideas and product enhancements. Attractiveness in this context goes beyond order volumes and the amount of money a customer spends with a supplier each year (although these things are, of course, important) and into areas such as how willing the customer is to listen to ideas, how quickly they make decisions, the extent to which they share development risks/costs, and their effectiveness in commercializing new products.
SCM World’s research has highlighted 10 practices that help to build trust, foster collaborative business relationships and ensure that firms position themselves as the “customer of choice” for key supply partners when it comes to innovation:
- Share strategic information such as product roadmaps, customer requirements and future expansion plans. Involving CEOs and other c-level executives in this process is hugely valued by suppliers.
- Get agreement on the ownership and sharing of intellectual property rights early on. Exclusivity for a set period is often the fairest way to promote the interests of both parties.
- Involve suppliers early in the development process and ensure that they have the scope to contribute their ideas before key decisions are made.
- Speak with one voice – work tirelessly on internal alignment so that individuals in different functions and business units deal with suppliers in consistent way.
- Live up to your commitments. Do what you say you are going to do, whether it’s lobbying for manufacturing time to trial new packaging or connecting individuals from different businesses.
- Accept some of the risk inherent in innovation projects and be prepared to share development costs with suppliers where appropriate.
- Consider the impact of your actions. Avoid practices like frequent late engineering and specification changes or adversarial price-reduction demands that create “relational stress”.
- Spend face time on supplier sites, not only because you can look each other in the eye, but also because you get the chance to see what they are working on up close.
- Give feedback and keep suppliers in the loop. Responding in a timely way to suppliers’ proposals and providing regular status updates helps to keep the ideas pipeline flowing.
- Measure and reward success. Use innovation-specific KPIs and reward high-performing suppliers with additional business, shared savings and public recognition through innovation awards.
Geraint John is senior vice president, research, at SCM World.