It is suggested that the following practices help firms promote supplier innovation, especially among small businesses in their supply chains:
1. Offer suppliers assurance that they will receive a return on investments they make in new technologies and in upgrading their capabilities.
Investments in new capabilities and technologies are inherently risky, especially for small suppliers with tight margins and limited access to capital. Informal assurance from larger partners that these investments are of sufficient value to receive a price premium and continued business can reduce the risk of the investment. And guidance from larger manufacturers about emerging manufacturing technologies, especially those that may require collaborative changes in design between supplier and lead manufacturer, can help suppliers identify those technologies that provide the greatest value.
Bruno Independent Living Aids, a Wisconsin maker of accessibility solutions such as stair lifts, was able to convince a key supplier to make an investment in technology to solve its production needs through informal assurances. A few years ago, Bruno needed to find a way to inhibit rust on products used in outdoor environments. Bruno’s painting supplier, Ad-Tech Industries, invested in a new “E-coat” paint process that allows paint to adhere to metal very tightly using an electrostatic charge, thus reducing rust. The equipment cost over one million dollars, a large investment for a small supplier.
However, because Bruno was willing to make an informal assurance that it would buy capacity on the new machine at a reasonable price, Ad-Tech’s risk in making the investment fell significantly. As a result, Bruno has a solution to its quality problem, and Ad-Tech has a new capability that benefits other customers as well, thus strengthening the whole manufacturing ecosystem.
Similarly, Atlantic Tool and Die in Strongsville, Ohio had a single small factory when it began supplying small stamped parts to Honda in 1988. Today, Atlantic Tool and Die credits its partnership with Honda for enabling it to grow to six plants in the United States and abroad. In particular, Honda’s technical assistance on new technologies and commitment to future business enabled Atlantic Tool and Die to invest in robotic welding that made it attractive to new customers while benefiting Honda through improved quality and economies of scale. The skill that Atlantic gained enabled the firm to invest, early on, in putting sensors in its dies, a technology that reduced stamping errors by more than 90 percent.
2. Promote information-sharing and make changes in their own operations as a result of supplier suggestions.
Communication with suppliers may reveal actions by lead firms that turn out to be costly for suppliers – costs that ultimately may be passed on to the buying firm. For example, large companies often undertake policies such as frequent schedule changes or late payments that impose far greater costs on their suppliers than they realize. Other firms may allow suppliers to speak only to purchasing agents, in an attempt to preserve their bargaining power. However, blocking communication with engineers may mean that they miss out on suppliers’ best ideas and joint problem-solving that would benefit both firms.
An example from Itron, a maker of gas and electric meters, shows the value of joint problem-solving. A new Itron product had a terminal in which the contact area was coated with silver and cadmium, both very expensive metals. Combining their expertise, Itron and the supplier were able to reduce the area needed for contact, saving over a third of the cost of the component. Itron’s practice of frequent communication and joint problem-solving with its suppliers is a growing competitive strength for the company. These benefits of coordination among firms are magnified in the case of a breakthrough technology, such as a new material that requires a different production or joining process. #
3. Use a “Total Cost of Ownership” approach in making purchasing decisions.
Innovation is greatly facilitated if lead firms choose suppliers not on the narrow basis of low piece prices, but instead use a “Total Cost of Ownership” (TCO) approach, which considers the many kinds of costs to the buyer associated with the acquisition, transportation, and storage of products within the supply chain. These costs include shipping costs, shipping time, storage costs and risk of damage or obsolescence of inventory, quality costs, travel costs for supplier oversight, currency fluctuations, intellectual property risk, financing costs, and risk of interruptions to the supply chain.
Consideration of this broader set of costs encourages suppliers to innovate to find new ways to maximize value for the supply chain as a whole. For example, a supplier of advanced fuel systems was pursuing a large multi-year contract with one of the Detroit automakers. The automaker’s purchasing department demanded a price reduction, noting that a competing supplier had submitted a bid at a significantly lower price per piece. The first supplier’s patented catalyst technology used a wash coat technique to place precisely the precious metals used in its system, resulting in reduced use of the metals, lower cost of operation, and more effective oxidation of hydrocarbons and carbon monoxide. After the supplier’s marketing team quantified and documented the improvements they offered, the automaker agreed to pay a premium compared to the lower-priced bidder. Even with the premium, the automaker’s costs were lower than with the competing supplier because of the advanced technology.