Accessing Innovation: The Key to Purchasing in a Rising Market

n any liquid supply market there will be poor suppliers, exceptional suppliers and a much larger number of average suppliers. The cost-effectiveness of poor suppliers is much worse than that of their counterpart at the other end of the spectrum - the exceptional supplier. In looking for lower costs in falling or static markets, a buyer will typically switch from an average supplier to another average supplier in a lower cost economy. However, this shift in price is rarely as great as when one moves from an average supplier to an exceptional supplier - even within the same economic region.

Shifting economic regions is typically a trade off between labour rates and logistics/supply management costs. Process innovation, by contrast, can substantially diminish the labour content without increasing logistic costs at all. This process innovation may be a design change or an automation development. Alternatively, it may be that the supplier can source the high labour elements of their own process in lower cost economies without exposing their customer to any increase in supply management burden or additional supply chain risk. Their innovation provides value for the buyer by reducing the cost of manufacture.

So how are these innovative suppliers identified and then engaged? Part of the answer is in statistics. We have frequently made the point in this publication that if a global supply market comprised a thousand suppliers, and a buyer ran a tender that included only half a dozen of them, the likelihood that this sample would contain a supplier in the top five percentile of ideal suppliers for that contract would be very low. The probability that two or three of the top five percentile suppliers were within that small sample would be even more remote ... and this is critical. Without two or three of the exceptional suppliers competing for the business, then the true market price will never be discovered. If we assume for a moment that a buyer takes on board this statistical point and conducts extensive market research that identifies the optimum suppliers, the question would remain: why would these suppliers be interested in the contract?

The Pendulum Swings

Within rising markets the power balance swings from the buyer to the supplier, and the most innovative suppliers within this market will be aware of their own capability. Interesting them in new business requires much greater effort on the part of the buyer. Suppliers need to feel that they have a real opportunity to win business, particularly if the cost of bidding is high. In increasingly capacity-constrained, rising markets, the supplier may need to be convinced to substitute business from current customers to a new customer with the risks that this presents.

Finding and attracting the most innovative suppliers takes considerable effort and requires the latest procurement systems and approaches, but is it worth it? We can only look at our own results to answer this question. During the last 4 years, material and commodity prices in general have been rising. However, by identifying the most innovative suppliers within the global market and then tendering using appropriate market purchasing techniques, we have provided our customers with average savings that have exceeded 25% from their current costs in each of the last 4 years.

In addition to the process innovation mentioned above, approaching potential suppliers as a supply market can have a significant impact on product and technology innovation. This aspect of innovation can deliver competitive advantage by creating product differentiation, allowing margins to be augmented through product price increases. The ability to purchase this form of innovation is critical in the virtually integrated company of today.

Traditionally, when companies manufactured much of their own products, innovation came from within the organization. Now, with so much of a product being bought, much of the innovation needed to ensure a company continues to develop its products and market position has to come from the supply chain. Whereas a lot has been made of the need to develop strategic relationships with suppliers specifically for this purpose, this can actually be a limitation to innovation. Strategic suppliers are not always the leaders in innovation compared with other suppliers within the supply market. This is particularly true if the relationship has been a longstanding one, as other suppliers may have surpassed the existing supplier's innovation potential during the period of the relationship. They may be, or have become, just an average supplier. However, because they are deemed strategic, their position is never challenged or assessed in relation to other suppliers within the same supply market. In this situation, innovation within the supply network is limited to that within the buying company and the strategic, but possibly average, suppliers on whom they rely.

In approaching a supply market, the capabilities of incumbent suppliers can be assessed and other more innovative suppliers may be identified. Furthermore, the procurement process itself can harness the innovative potential of many suppliers simultaneously. Use of functional requests for information or quotations to large numbers of hand-picked potential suppliers, often outside the pool of suppliers normally approached, can effectively achieve supply market collaboration. Expertly done, such a tender can create a wealth of new ideas often leading to the application of technologies or approaches not previously considered. This can effectively step change the product's design or function.