Innovation Sourcing

Dr. M. Ramkumar
Assistant Professor
Indian Institute of Management Raipur
Learning objectives

• The differences between ‘closed innovation’ and

‘open innovation’.
• The role of suppliers in open innovation.
• The challenges of involving procurement in design
and new product development.
• The challenges of involving suppliers in design and
new product development.
• How to benefit from supplier enabled innovation.
 Procurement and innovation
• Innovation is different from three decades ago. It transitioned from
closed to open innovation:
– Sharing ideas
– Stage-gate models
• Open innovation: The purpose of open innovation is to create close
collaboration on R&D, new product design and development, and
market introduction with parties that share the company’s business
interests in such collaboration.
• Closed innovation: Closed innovation implies that companies try to
develop new products and processes based on the idea that the
company itself has the best possible knowledge and resources for
innovation.
• Complexity of products asks for external expertise.
• External co-operation can speed up the innovation process.
The innovation funnel: innovation managed as a
process marked with stage gates
 Closed vs open innovation

Source: Reprinted by permission of Harvard Business School Press. From

Open Innovation by Chesbrough, H. (2003).
Copyright ©Harvard Business School Publishing Corporation; all rights
reserved.
 The role of suppliers in new
product development
• Suppliers are an increasingly important source of
innovation, e.g. the automotive industry:
• Fuel injection by Bosch
• Sun protecting and security glass by Saint Gobain.
• Retractable roofs (Inalfa)
• Car seats (Lear)
• Tyre pressure sensors (Michelin)
• Navigation (TomTom)
• Airbags (Autoliv)
The role of suppliers in new product
development
• Academic results are controversial.
• Some problems in early supplier involvement:
• Conditions for co-operation not always present
• Conflicts considering intellectual property
• Overestimation of the developing skills of supplier
• How to reward the supplier for the efforts.
Early supplier involvement

• Van Echtelt (2004) distinguishes:

• Short-term benefits
 Better production quality
 Lower production costs
 Shorter development cycle
 Lower developing costs.
• Long-term benefits
 Joint research programmes on new technologies
 Aligning technology strategies and roadmaps
 Ability to work with these technology suppliers on a gain- and risk-
sharing basis.
 Early supplier involvement

Three parallel processes for overcoming the challenges in joint

innovation:
1. Strategic management processes
• Create infrastructure for future technological collaboration with suppliers.
2. Operational management processes
• Individual development process
• Help in deciding for which technology areas do we want to get suppliers
involved.
3. Collaboration processes
• How to foster and implement technological collaboration with external
partners.
Integrated new product development: three
core processes
Procurement and new product development

Stages of new product development:

• Idea generation
• Concept study stage
• Design stage
• Product development
• Preproduction planning
• Pilot production
• Start of regular production
Procurement’s relationship to the new
product development process
 Procurement and new product
development
How do large manufacturers communicate with their
first-tier suppliers in product development projects?
• Procurement engineering: A specialist function to provide the liaison
between the engineering department and the procurement department.
• Early supplier involvement (ESI): Best-in-class suppliers are invited to
participate in the company’s product/process development projects at an
early stage.
• Residential engineering: The supplier’s engineers are co-located within the
organization on a more or less permanent basis .
Interaction between
procurement and engineering
activities
Procurement and new product development
• Involving buyers at an early stage of development
processes can result in the contribution of new
knowledge and better understanding of:
• Construction
• Suitable materials
• Suppliers
• Supplier knowledge.
• Involving the supplier in ESI can result in considerable
savings and product improvements.
Supplier development portfolio
 Conditions for effective co-
innovation with suppliers
• Rather than involving suppliers early in a new product
development, buyers need to involve suppliers on a timely
basis in the new product development process.
• The best suppliers in the market want to work with their
best customers and are willing to invest in that
relationship, but they want to have something in return.
• Only when procurement professionals have a good
understanding of what really motivates suppliers would
they know what to do to ‘tempt’ the suppliers to invest in
their relationship and contribute to their innovation.
Summary
• In order to speed up innovation and share the massive
investment that goes with a new product development,
large corporations have embraced the open innovation
paradigm.
• A new product development portfolio can be used to
support effective decision-making as to when to involve
the supplier into the process.
• Stewardship theory may help buyers in fostering a
trusting, creative climate that allows all parties involved to
openly share their ideas and knowledge. Only when the
buyer’s organization is considered by the supplier as a
customer of choice will they share best ideas and bring
innovation to this customer first.