TU-E2040 Management of external resources (3-5 cr)

Early Supplier Involvement25.9.2017Mervi Vuori

The innovation imperative

New knowledge and innovations are vital for business growth and success

Shift from closed i.e. firm-centric innovation model towards open

External resources can provide knowledge and competencies that complement the focal

company knowledge base

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Innovation doesn’t happen in a vacuum. You’re never alone. No one has the key just by himself.- Rogier van der Heide, Chief Design Officer of Philips Lighting

Chesbrough 2006; Un et al 2010

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Closed Innovation Principles Open Innovation Principles

The smart people in the field work for us. Not all the smart people work for us. We need to work with smart people inside and outside our company.

To profit from R&D, we must discover it, develop it, and ship it ourselves.

External R&D can create significant value: internal R&D is needed to claim some portion of that value.

If we discover it ourselves, we will get it to the market first.

We don’t have to originate the research to profit from it.

The company that gets an innovation to the market first will win.

Building a better business model is better than getting to the market first.

If we create the most and the best ideas in the industry, we will win.

If we make the best use of internal and external ideas, we will win.

If we create the most and the best ideas in the industry, we will win.

We should profit from others’ use of our IP, and we should buy others’ IP whenever it advances our business model.

Chesbrough (2003)

Companies can collaborate with various external resources for knowledge creation and exchange

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Juntunen, Takala, Tamminen, Vuori (eds.) 2013. Innovation in Sourcing Competencies.

Research dissemination report, Aalto University Publication Series 6/2013.

Example: P&G Connect and Develop

In-house innovation model was not adequate to keep up desired top-line growth

• Constant introduction of new technologies

• Many new product launches were failing

• Radical market share fall

Target set by the CEO : 50% of innovations must come from external sources

Internet provided access to global talent

• For one P&G engineer there were 200 scientists or engineers in the world who were just as talented

• New approach to sourcing ideas from external resources using both closed and open networks

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Huston & Sakkab, 2006

www.pgconnectanddevelop.com

Example: P&G Connect and Develop

Closed networks

• Technology entrepreneurs, lead by senior P&G people, hubs around the world

• Suppliers : sharing technology briefs over a secure IT platform with top 15 suppliers, exchange of R&D personnel

Open networks

• NineSigma: Companies, universities, technology labs, consultants, connecting the problem and the solver

• Innocentive: brokers solutions to narrowly defined problems from scientists in the network

Has it worked?

• More than 35% of new products have elements that have originated externally

• 45% of initiatives in product portfolio have external input

• R&D productivity is up by 60%, whilst R&D investment has decreased

• Innovation success rate more than doubled

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Huston & Sakkab, 2006

www.pgconnectanddevelop.com

Supplier involvement in new product development – why?

• Airbus Industries (Superjumbo A380), Boeing (Dreamliner) and various automakers in Europe, US and Japan have rationalized their supply base and started to involve suppliers early in the development process of new products

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Case and discussion

1) What does Airbus gain through supplier involvement?

2) Why don’t they develop the A380 on their own?

3) What’s in it for the suppliers?

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Why should suppliers be involved in new productdevelopment? Benefits

Benefits for the buyer

• Reduced costs

• Shorter time-to-market

• Improved quality

• Access to supplier technologies

Benefits for supplier

• Direct gains, i.e. incomerelated to service sales

• Reference value

• Learning and accumulation of knowledge

• Improved chances to becomevolume supplier

Petersen et al, 2005; Smals & Smits, 2012

Why should suppliers be involved in new productdevelopment? Risks

Potential risks for the buyer

• Risks of losing proprietary knowledge

• Hollowing out internal competencies

• Increased dependence on strategic suppliers

• Competitors increasingly able to copy key technologies

Mikkola & Skjott-Larsen, 2003

Why to involve suppliers in NPD?

1) Suppliers seen as sources of manufacturing knowledge, product technologies and process capabilities: important as products become increasingly complex

2) Supplier involvement can reduce new product cost and time to market, and improve product quality

3) Early Supplier Involvement (ESI) enables design for manufacture and helps to prevent and reduce design changes that become more expensive later on in the process : 'first time right‘

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See e.g. Johnsen, 2009

Why early supplier involvement

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Cost of Design

Changes

Flexibility

in Design

Low

Time

Supplier involvement in new product development

“Supplier involvement refers to the resources (capabilities, investments, information, knowledge, ideas) that suppliers provide, the tasks they carry out and the responsibilities they assume regarding the development of a part, process or service for the benefit of a buyer’s current and/or future product development projects”

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van Echtelt et al., 2008

New product development

• Risky, complex and expensive with no foreseeable outcomes

• 80% of the manufacturing cost of a product is determined by the design

of the product

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Planning Design Production

Functional specifiction

General product specs

Lead time requirements

Platform/Architecture specs

Outsourcing decisions

Detailed engineering

BOM and blue prints generation

Prototype building and testing

Manufacturing process and

equipment selected and tested

Possible supplier

involvement points

Clark and Fujimoto, 1991

Mikkola and Skjoett-Larsen, 2003

Degree of supplier involvement

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None “Grey Box”

No supplier

Involvement -

Supplier simply

“makes to print”

“White Box”

Customer ‘consults’

with supplier

on customer’s

design - Customer

provides detailed

technical

specifications

Jointly

developed design

specifications

between

customer and

supplier

“Black Box”

Design is

primarily

supplier driven,

based on

customer’s

functional

specifications

Increasing Supplier Responsibility

Petersen et al., 2005

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Successful supplier integration into NPD is due to:

• Buyer’s top management commitment

• Shared education and training

• Joint agreement of performance measures

• Confidence in supplier’s capabilities

• Risk and reward sharing formalized

• Trust

• Supplier’s top management commitment

ESI is a process that needs to be managed

Elements of successful supplier involvement

Ragatz, 1997

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• “Intuition and good luck” rather than systematic analysis behind supplier selection for innovation purposes (Schiele, 2006)

• Although managers say that quality is the most important attribute for a supplier, suppliers are chosen based on cost and delivery performance (Verma & Pullman, 1998)

• Supplier selection is one major success factor for ESI; an issue of selectingthe right suppliers for parts of high value and complexity stressinginnovative capability and complementarity (Johnsen, 2009)

In reality ESI may be more difficult than anticipated

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• Ability of the supplier to design new products or make changes to existing ones

• Level of technological capabilities

• Willingness to share key technological information

• Capabilities to collaborate

• Level of own R&D activities

• Degree of specialisation

• Degree of collaboration (many links to external partners vs. few)

• Enabling factors: trust, commitment, physical proximity

What makes an innovative supplier?

Schiele, 2006

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• To get the benefits our of ESI collaboration, companies should payattention to both strategic management as well as to operational projectmanagement

How to make supplier involvement work?

Van Echtelt et al 2008

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Van Echtelt et al., 2008

Main take-aways

Suppliers can be seen as valuable sources of innovations, knowledge and technologies

Early involvement of suppliers in new product development may bring benefits in terms

of speed, costs and risk management

Internal cross-functional collaboration, supplier relationship management and supplier

selection are critical factors for successful supplier involvement

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“Today, a company’s competitiveness depends not only on capabilities that it can create and exploit internally, but on the effectiveness with which it can gain access and utilisesources of technological knowledge and capabilities beoyndits boundaries.*”

Howells, James and Malik (2003)