Innovation is today a key business driver, holding pride of place in the corporate value chain. When innovation happens at the supplier’s end, it is all the more valuable. However, tapping into the supply chain for innovation still remains a challenge, but it can be overcome with the following points.
Today, the drastic increase in outsourcing has resulted in an increased openness of innovation processes, with procurement departments moving towards stronger partnership models with a limited set of key suppliers. These partnerships are based on shared risks and rewards instead of traditional transactional relationships. But strong supplier relationships alone are not enough and a limited set of (incumbent) partners is not necessarily a good source of innovation. To leverage that relationship Procurement needs to feed end customer needs into the supply base.
Innovation-driven procurement is now all about persuading the innovative supplier to provide. Most often, buying firms want to attain preferential access to those resources that will give them an innovation advantage over their competitors. Which is why, specific innovation-driven procurement strategies today focus on ‘strategic’ or ‘key suppliers’ rather
than on suppliers of commodity goods.
Competition for innovative suppliers
It is now known for a fact that the capability of firms to build close relations with innovative suppliers positively impacts a firm’s innovation performance. However, often key suppliers are shared with main competitors. As a consequence, firms frequently find themselves competing for a key supplier’s best resources. These resources can take different forms, and may refer either to tangible materials or to production capacity in times of scarcity or high demand. The same is true of the suppliers’ best ideas, most experienced engineers, and latest technologies etc. When, for example, four major competitors share one key supplier, this supplier can only share its best resources (e.g. best ideas, newest technologies, scarce materials, most experienced personnel) with only one of the four competitors. Such a situation requires procurement to step up their act by becoming a preferred customer.
Better innovation resources
Recent research by various firms has shown how a preferred customer status (i.e. a buying firm that obtains preferential resource allocation from suppliers) leads to a higher innovation contribution of suppliers. By becoming a preferred customer, firms could significantly improve the supplier’s contribution to their innovation projects. In fact, some procurement leaders even argue that a preferred customer status is even more important than the innovation capabilities of the suppliers.
Another important finding is that being a preferred customer status can lead to benevolence in the pricing behaviour of suppliers. In other words, these findings seem to indicate that firms can acquire better innovation resources than competitors without paying significantly more. When companies are planning to step up customer attractiveness, the following three issues are most important:
- The potential business opportunities for suppliers,
- A reputation for collaboration of the buyer, and
- A supplier’s expectation of an ease to do business with the given buyer.
When risks are shared and there is a continuous income flow, it results in supplier satisfaction, which is key to the innovation-driven buyer-supplier relationship. The other three main drivers for supplier satisfaction are:
- A durable business approach,
- A buyer’s relationship performance, and
- A fit between the firms.
Thus customer attractiveness, supplier satisfaction, and preferred customer strategies are important concepts for innovation-driven procurement functions. When applied properly, preferred customer strategies might make the difference in successful supplier integration for better innovation outcomes.