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Outsource Innovation by Tapping into Supplier Expertise

IP and Confidentiality Concerns
The terms of the relationship and obligations of the parties can be defined contractually; however, there can still be concerns by both the OEM and the supplier regarding intellectual property (IP) and confidentiality. All of these concerns can be addressed with a well-constructed Supply or Service Agreement that should be in place before engaging in an innovation outsourcing project. It is important that particular attention be placed on ownership of product design (typically the OEM), jointly developed process improvements and supplier proprietary process and design elements incorporated into the final product. In the end, the OEM should actually be in a much stronger IP position through capture of multiple unique features and methods that can be included in patent and other submissions. For the supplier, these value-added services should put them in a more secure position to gain and retain business.

Design Contribution and Market Based Competition
Of particular concern for suppliers in design contribution is assurance of return on that investment in the form of a long-term contract to manufacture. Some suppliers may take the position that by providing these value-added services, they will raise the bar, so to speak, for the competition so long as they get credit for that contribution. Although this could be true, most OEMs are required by policy to competitively bid all projects that exceed a certain dollar figure.

This may be addressed by:

  • Determining a value for the services and offering the innovating company a cost advantage or hurdle that competitive quotes must exceed to “win” the business. This can be a dangerous path as competitors, not knowing the particulars of the arrangement, may see the bidding process as unfair or rigged in favor of the incumbent. In addition, it may not stand up to the scrutiny of an audit of policy compliance unless fully and properly documented.
  • A one-time delay in the bidding process. Typically the largest and broadest purchases occur for the product launch, with subsequent orders for replenishment quantities only. Since launch quantities will be a part of the collaborative effort, the OEM could include in their item level cost quotes the capture of those costs. Another method could be recognition of the value of their contribution and agreement on the quantity that it will be spread across. Should those quantities not materialize, the OEM could agree to compensate the supplier for the shortfall, should future contracts go to alternate suppliers.
  • Agree on a pay-for-service cost prior to design engagement. This could be an absolute charge or the supplier could opt to not charge should contract to manufacture be awarded. This option can also help both parties better understand the supplier’s core competencies, be those in design innovation contribution, efficient manufacturing capability or both.

Outsourcing innovation can optimize the product design, improve timeline performance and reduce cost. It requires not just collaboration between the OEM and the supplier, but strong cooperative internal relations at both companies and an understanding of each company’s total core competency.

David Finch is the President and founder of Insight Collaboration Partners, consultants that assist companies in improving inter-departmental communication, supplier collaboration, strategic sourcing and overall operations efficiency and cost reduction. Mr. Finch has over 25 years of hands-on responsibility in global supply chain and manufacturing operations in the medical device and the orthopaedic industry with Becton Dickinson, Johnson & Johnson, Wright Medical Technology and MicroPort Orthopedics. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..


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