Your suppliers know things about your product that you do not. They see how your competitors buy the same part, which tolerances you specify but never use, and where your drawings make their line slower than it needs to be. Most of that knowledge never reaches you, because nobody asks. Supplier innovation is the habit of asking, and a supplier challenge is the simplest way to start.
This guide covers what supplier innovation is, why suppliers stay quiet, how to run a challenge from brief to pilot, and how to deal with the two questions every supplier asks first: who owns the idea, and who gets the savings. For the wider picture, see what open innovation is.
What is supplier innovation?
Supplier innovation means getting new ideas, products and improvements from the companies you buy from, and turning the good ones into changes in your products, processes or costs. It runs from small suggestions, such as a cheaper material that meets the same specification, to joint development of a new component.
It is not the same as supplier development, which is helping a supplier improve its own quality or delivery. In supplier innovation the supplier helps you.
Why ask suppliers for ideas?
Because a large share of what you sell is made by them. In many manufacturing companies, bought-in parts and materials are often more than half of the cost of the finished product, and the people who make those parts every day know where the cost is.
A few well-documented examples show how far this can go:
- Procter & Gamble. In 2006 two P&G executives, Larry Huston and Nabil Sakkab, described the company’s Connect + Develop model in Harvard Business Review. More than 35 percent of P&G’s new products in market then had elements that came from outside the company, up from about 15 percent in 2000. Its main suppliers were one of the networks it drew on.
- Toyota and Honda. In “Building Deep Supplier Relationships” (Harvard Business Review, 2004), Jeffrey Liker and Thomas Choi showed how both carmakers built close, demanding relationships with North American suppliers, often the same suppliers that had difficult relationships with Detroit’s carmakers.
- McKinsey. In a survey of more than 100 large organisations in several sectors, companies that regularly collaborated with suppliers showed higher growth, lower operating costs and greater profitability than their industry peers.
Why do suppliers keep their ideas to themselves?
If suppliers have ideas, why do you not hear them? Usually for one of five reasons:
- Nobody asks. Contact with suppliers runs through buyers, and buyers are measured on price. A supplier who suggests a better design to a buyer is often just asked for a lower price on the old one.
- They fear losing the idea. A supplier who shares a cost saving worries you will put it out to tender and give the work to a competitor.
- They fear losing the margin. If an idea cuts your cost by 10 percent, will their price be cut by 10 percent?
- There is no route in. Engineers who could judge an idea never meet the supplier’s engineers.
- Nothing happens. A supplier who suggested something two years ago and never heard back will not suggest anything again.
A good supplier challenge answers each of these in the brief, before anyone submits.
Which ways of working with suppliers on innovation are there?
| Way | How it works | Good for | Watch out for |
|---|---|---|---|
| Business reviews | Add an innovation item to quarterly reviews with key suppliers | Your top suppliers, little extra work | Ideas get lost in the price discussion |
| Supplier days | Invite suppliers to present new technology to your engineers | Seeing what is new, meeting their engineers | A trade fair on your premises; little follow-up |
| Supplier awards | Award the best contribution each year | Recognition, shows you value ideas | Rewards what already happened, does not ask for anything new |
| Joint development | A project with one supplier on one component or process | Deep technical work, long-term partners | Slow, needs contracts and trust up front |
| Supplier challenge | Publish one problem to a group of suppliers and compare their answers | Specific problems, many suppliers, comparable answers | Needs clear rules on IP and gains, a jury and fast answers |
Most companies end up with a mix. The challenge is often the fastest way to find out which suppliers are worth a joint development project.
How do you run a supplier challenge?
These nine steps take a challenge from problem to pilot. A first challenge usually runs eight to ten weeks.
- Pick one problem with a business owner. “Cut the cost of the rear bracket by 15 percent”, “Reduce packaging waste at goods receipt” or “Find a replacement for a material we can no longer source”. The owner is the person whose team will test the answers.
- Agree the rules with purchasing and legal first. Who owns an idea, what happens to it if you do not use it, and how savings are shared. See the next section. A challenge without these rules gets polite, empty answers.
- Choose who to invite. Start with your strategic suppliers for the category, then add a few you would like to know better. Inviting a supplier’s competitors is fine, as long as each one can only see their own answers.
- Write the brief. The problem with numbers, the constraints, what good looks like, what you offer, the rules on IP and gains, and the timeline.
- Agree the scoring criteria and the jury before you publish. The business owner, an engineer, and someone from purchasing. Write the criteria into the brief, so suppliers know how they will be judged.
- Open it for four to six weeks. Answer questions in one place, so every supplier gets the same information.
- Score on your own, then meet. Each juror scores every answer against the criteria before the jury discusses them.
- Test the best ideas. A trial on one line, a sample batch, or an engineering review with the supplier. Write down the success criteria first.
- Answer every supplier. A decision and a short reason for each answer, including the ones you turn down. Thank them by name if you use the idea. The next challenge depends on it.
Our guides on writing a challenge brief and running a first challenge in ten days go through the mechanics for internal challenges; almost all of it applies.
What should you promise on IP and savings?
These two questions decide whether suppliers send you their best ideas or their brochures. Settle them with purchasing and legal before you publish, and put them in the brief in plain words.
| Question | A common answer |
|---|---|
| Who owns the idea? | The supplier keeps ownership of its own ideas and know-how. If you want to use an idea, you agree terms with that supplier first. |
| Will you give the idea to a competitor? | No. An idea you take forward is developed with the supplier who suggested it, at least for an agreed period. |
| What can suppliers see? | Only their own answers. Nobody sees another supplier’s idea. |
| Who gets the savings? | A share agreed in advance, often split for a set period, for example the first year or the first contract. |
| Does a submitted idea affect the next tender? | It should count in the supplier’s favour, never against it. Say how. |
The exact terms are a business decision for you, and the right split depends on the category and the size of the saving. What matters most is that the terms exist before anyone submits, and that they are written down.
How should you score supplier ideas?
Score each answer on the same few criteria, from 1 to 5 or 1 to 10, with a short note. A common set for supplier challenges:
| Criterion | The question behind it |
|---|---|
| Value | How much would it save or earn per year, and how sure are we of that number? |
| Fit with the brief | Does it solve the problem we described, within our constraints? |
| Effort to test | Can we test it on one line or one batch, or does it need new tooling and approvals? |
| Risk | What could go wrong for quality, safety, delivery or certification? |
| The supplier’s ability to deliver | Can this supplier make it at our volumes, at the quality we need? |
Score alone first and discuss afterwards, so the most senior person in the room does not decide for everyone. Our guides to scorecards and scoring models and prioritising ideas cover weighting and calibration.
What are the most common mistakes?
- Running it through purchasing alone. If the only contact is the buyer, suppliers will assume the challenge is a price negotiation. Put an engineer or the business owner in front.
- A vague problem. “Send us your innovations” gets product catalogues. One clear problem with numbers gets solutions.
- No answer to IP and savings. Suppliers with good ideas keep them until they know what happens to them.
- Slow answers. Every week a supplier waits for a decision makes the next challenge harder.
- Taking the idea to tender. Do it once and no supplier will suggest anything again. They talk to each other.
Which tools do you need?
For a first challenge with five suppliers, email and a spreadsheet will do. They stop working when twenty suppliers answer, when each one must only see their own ideas, or when you need to show what came of last year’s challenge.
Hives runs a supplier challenge as a challenge of its own. Suppliers answer one short form without creating an account. As guests, they see their challenge and nothing else in your hive. You can hide answers so each supplier sees only their own, keep sensitive questions visible to managers only, and let the jury score every answer on the same criteria in one place. Hives does not include supplier management, contracts or purchasing. Our open innovation software guide compares the options by job, and our guide to startup scouting and open calls covers the same method for startups.
Frequently asked questions
What is supplier innovation?
Supplier innovation means getting ideas, products and improvements from the companies you buy from, and turning the good ones into changes in your products, processes or costs. It ranges from cheaper materials that meet the same specification to joint development of new components.
What is a supplier innovation challenge?
A supplier innovation challenge is a call to a group of suppliers to solve one specific problem by a deadline. Every supplier answers the same questions, a jury scores the answers on agreed criteria, and the best ideas are tested in a pilot.
How do you get suppliers to share their best ideas?
Ask a specific question, put an engineer or business owner in front rather than only the buyer, and settle the rules on ownership and savings before anyone submits. Then answer every supplier quickly, including the ones you turn down.
Who owns an idea a supplier submits?
That is for you and the supplier to agree, and it should be written in the brief. A common rule is that the supplier keeps ownership of its own ideas and know-how, and that any idea you use is developed with that supplier on terms you agree first.
Should suppliers share in the savings from their ideas?
In most cases, yes. If suppliers expect their idea to end in a price cut for themselves, they keep it. A share of the savings for an agreed period, set out before the challenge starts, is a common way to make sharing worth their while.
How is a supplier challenge different from an open call to startups?
A supplier challenge goes to companies you already buy from, so the questions are about ownership, savings and the next tender. An open call to startups goes to companies you do not know yet, so the questions are about technology readiness, pilots and how to buy from a small company.
Sources
- Larry Huston and Nabil Sakkab, “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation”, Harvard Business Review, March 2006
- Jeffrey K. Liker and Thomas Y. Choi, “Building Deep Supplier Relationships”, Harvard Business Review, December 2004
- McKinsey & Company, Overcoming barriers to multitier supplier collaboration