Outsource Innovation by Tapping into Supplier Expertise

When it comes to outsourcing, the traditional role of suppliers is based upon their core competencies in manufacturing or specialty services. Typically, the outsourcing process is not kicked off until after the internal design phase is complete and is the result of a financial make/buy calculation or lack of internal capacity within the OEM’s facilities. An inherent fault in this approach is that at this stage, the opportunities for change—regardless of benefit—are limited at best and in most cases non-existent due to the effort, cost and impact to a committed timeline. Furthermore, and far too often just when time is of the essence, issues arise at the request for quotation (RFQ) stage or worse, during the manufacturing stage due to a design that was not optimized across the entire delivery process. A better approach would have been to engage external resources earlier to maximize innovation collaboration for superior design and cost.

Beyond Collaboration
Outsourcing innovation involves not just collaboration, but integration with your suppliers early in the design phase. It requires participation from multiple departments at the OEM and the supplier. The team members will jointly optimize and identify product improvements, from raw material selection to final assembly, all before the prints and specs are final or the first component is manufactured. Where possible, the team should identify a baseline to capture and measure the value created through the collaborative effort and create a new ROI metric, Return on Innovation, to track and report on the performance dashboard to assure effectiveness as well as executive buy-in and support for the effort required.

Core Competence
The first step is to understand your company’s portfolio of core competencies and resource limitations. This can be accomplished in relatively short order with a good facilitator, focused interviews, a white board and an honest discussion on the cause of past failures. Done right, this process can be transformational in itself. This is equally important for both OEM and supplier. OEMs need to know the gaps that need to be filled and the suppliers need to know where they can make superior contributions.

In the context of innovation, these core competencies go beyond the shop floor. Companies are quick to offer examples of their superior machining, welding, coating or assembly capabilities, but beyond the equipment, what are their performance drivers? Could those be the core competencies? Perhaps it is driven by superior programing, tool making or a truly LEAN focused organization with high employee involvement in process improvement and cost reduction. Most importantly, you need to know how this will lead to a superior design and low cost.

Supplier Selection
For the OEM, the supplier selection process is often seen solely as a procurement function and begins with RFQs based on completed drawings, specifications and an inflexible time line that is sent to the minimum number of potential suppliers as required by company policy. Scope is limited to equipment, capacity and invoice price. Outsourcing for innovation requires a different approach, a better understanding of the resources needed and the core competencies of your supplier base that relate to those resources. It requires a strong cooperative relationship among all internal departments in an environment that rewards both individual and team accomplishments.

For suppliers, it is important that your customers are aware of your core competence. Many companies are good at “machining,” but by focusing on your grinding capability, for example, you are not limiting opportunities but improving the likelihood of success in securing projects that align with your core competence. You must take the same approach when determining your innovation core competencies. This approach to the customer relationship will require that sales representatives understand and promote the right capabilities and can identify projects that align with them.

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..