Wanted: Lower Tier Supplier Innovation

Few attributes are as obviously valuable and desired by OEMs, systems integrators and lower tier suppliers as innovation. For OEMs, innovation translates into “wow, must have vehicles.” For systems integrators, it provides a method to build brand equity and provide positive consumer differentiation. For lower tier suppliers, it enables cost reduction, quality and reliability improvements and stronger margins.

Despite broad recognition of the tangible benefits derived by a supply chain brimming with innovation, it is hard to imagine an environment more unfriendly to innovation than the automotive industry’s present sourcing practices.

Today’s innovation-stifling sourcing practices include:
1) Swollen supply decks filled with “C players,”
2) Disregard by customers for legitimate intellectual property rights associated with suppliers’ innovations,
3) Riskaverse engineers working in bureaucracy-laden engineering departments, reinforced by manufacturing planning executives loving process stability and
4) Naive customer notions that innovation-laden products should have a similar margin structure as commodity products.
 
The long-term solution to an innovationrich supply chain involves fundamental changes by both customer and supplier. Many are confident enlightened self-interest will eventually take hold and drive changes in philosophy by the Big 3 and their systems integrators (i.e., customers). However, the balance of this discussion focuses on the “circle of influence,” and accordingly presents proposed changes that are within the complete and total control of the supplier. Enablers need to infuse suppliers with steady streams of innovative products and:

• Nurture relationships with enlightened customers
  
• Spend resources supporting innovation at two times or greater the industry average
  
• Invest in knowing competitors products better than your customer
  
• Have the courage to kill less promising development programs, and wisdom to continue funding others even when the outcomes are in doubt
  
• Use of “bullet proof” program management systems
  
• Be customer intimate

It has long been the belief that suppliers generally deserve the customers whom they serve. How proud are you of the customer array your enterprise has developed and nurtured? Do your customers expect to pay for value (i.e., innovation)? Do they have cross-functional teams and systems that allow you, the supplier, to effectively collaborate within the customer organization, and get things done? Is there loyalty in relationships with their supplier partners based on demonstrated and sustained high performance levels in quality, cost, delivery and innovation?

Innovation can only be sustained if customers have proper philosophies, attitudes, infrastructure and systems that enable effective collaboration between supplier and customer. Savvy supplier organizations deliberately allocate their innovation resources to those customers with the greatest probability for commercial success.

It takes technical resources to develop and commercialize innovative products and processes. Yet so many of the sub-tier one suppliers have frighteningly small staffs of technical personnel working on product innovations. A company comes to mind that has more than 20 percent of its organization headcount with technical responsibilities such as product, process, tool, or quality engineering; program management; launch coordination; tool and fixture follow-up and estimating. This organization has an incredible history of delivering creative and high-value innovative products to its customers using terribly mundane 100 year-old process technology. Lower tier suppliers with a track record of delivering continuous waves of innovative products resource innovation with technical personnel at two times or greater the industry average. Supplier organizations with a legacy of a product innovation usually have a broad understanding of product/process alternatives within the context of specific product applications. As an example, suppliers of instrument panel reinforcements need to understand tradeoffs between single and multiple piece designs; magnesium, traditional steel, HSLA steel and aluminum material choices; and stamped, molded or die cast manufacturing technologies. Much of this awareness and knowledge of tradeoffs and possibilities comes from hiring technical talent with broad experience, as well as stimulating thinking through exposure to alternative product, process and design concepts.

Tear down activities can be an extremely effective means of stimulating thought and creativity, and targeting improvement opportunities in various product dimensions including cost, quality, reliability, weight and recycleability to name just a few. Display boards presenting physical parts produced by competitors ,along with related information on material, weight, inferred processing, tolerancing, piece cost, investment and process capability to name just a few items, are effective means of visually presenting information useful in generating creative ideas. Tear down activities provide an environment to stimulate creativity, enhance external market and competitor awareness, and better position a supplier to effectively serve as a solutions provider. A wellexecuted tear down activity can also give you a leg-up on your customer, which in these days and times, is greatly appreciated.

Innovation activities necessarily consume substantial human and cash resources to visualize, develop, validate and persuasively sell the innovations’ benefits to customers. Even with great track records for commercialization of ideas, part suppliers typically have less than 40 percent of development projects converted into commercial success. Accordingly, innovationbased lower tier suppliers need to follow a structured commercialization process that uses gates to regulate progression from one stage to the next. These gates serve a very import role of insuring adequate interim outcomes relative to feasibility, technical and commercial targets before additional development resources are committed and spent. Effective commercialization management processes insure poor projects are killed early, and promising projects are adequately funded and nurtured.

Project management is defined by the Project Management Institute as “the application of knowledge, skills, tools and techniques to project activities in order to meet or exceed stakeholders needs and expectations from a project.” Lower tier suppliers often experience system breakdowns, inefficiency, budget overruns and timing issues due to program management weaknesses for “part to print” components. These program management deficiencies become even more glaring and magnified when you add the complexity of supplier-responsible design using new processes or innovative design concepts. Solutions providers require “bullet proof” program management systems using IT based automated communications and notifications; process standardization including templates, milestones and defined gateways; defined roles and responsibilities; program metrics; robust engineering change management processes; defined program goals and objectives; and effective internal and external communications protocols and systems.
 
Customer-intimate suppliers deliver what a specific customer needs instead of what the market wants. The customer-intimate company makes a business of knowing the people it sells to and the products and services they need. Customer intimate enterprises pursue relationships instead of transactions. They are obsessed with core processes of solutions development, relationship management and results management.  Solutions bubble-up from employees that are close to the customer and empowered to make decisions. Most innovative lower tier suppliers have made hard choices regarding which customers they will become intimate.
 
Most lower tier automotive suppliers have not developed the strategy, systems and structure to deliver rich, customized streams of innovative products/solutions to their customers. The payoff for suppliers providing innovation is substantial. The Plante & Moran/OESA 2002 supplier survey determined the top 18 percent of financial performers in the lower tier supply chain averaged just under 14 percent operating income as a percent of revenues, and much of this performance was caused by innovation-driven marketplace differentiation. Now may be the time to seriously consider whether innovation ought to become a more important element in an enterprise strategy.

INNOVATION PYRAMID
	Invest in Knowing Competitors Products Better than Your Customers
	Be Customer Intimate
Structured Innovation Commercialization Process		“Bullet Proof” Program Management
Resource Innovation a +2X Industry Average
Partner with Enlightened Customer