Newsletter Summary

Keeping pace with a changing world: Challenges for contract management and negotiation

From ’servitization’ to the service-oriented enterprise, a call for business innovation

Managing supplier integration in new product development

Contractual challenges in moving from products to services and solutions

Connective forces - getting back to the bargain

Why integrating your buy-side and sell-side agreements in
one contract management system is advantageous

Better business through proactive productization and visualization of contracts

Managing risk in SaaS, Cloud Computing and other on demand and Web 2.0 IT contracts

From the front line

Introduction

Research
in new product development (NPD) has shown that a number of factors are
important to the creation of successful new products. Two of these more
firm-centric factors include design for qualityand design for manufacturability.

Although
extensive research has focused on integrating customer requirements
into new product development, it is only relatively recently that
supplier integration has received
significant attention. Despite the criticality of this subject to
managers, mechanisms for successfully coordinating decisions on how
products are designed, how they are manufactured and/or delivered, and
how the supply base can support the manufacturing/delivery of such a
design are still largely undetermined. Moreover, supply chain design is
effectively determined during the product development stage — when
product, process and information systems decisions are specified and
determined.

Early involvement allows procurement
and suppliers to suggest new technologies, manufacturing methods and
processes that add joint value and competitive advantage — before
product design is locked down.
Involving procurement in design also advances initiatives to meet and
beat target cost models and to ensure sufficient supply capacity and
quality to support proposed designs at volume production levels.

The
nature of relationships between customers, manufacturers and suppliers
is also often established early in the new product development process.
It is at this stage that critical decisions are made, with respect to
not only the functionality of the product for the customer but, indeed,
the packaging, logistical channels, source of materials, and selection
of product and process technology that will provide the end user with
the desired functionality. In the words of a senior purchasing executive
at a major automotive company interviewed during this research: “unless
you can impact the sourcing early in product development, you have
almost no impact on the resulting design of the supply chain.”

Indeed,
an Aberdeen Group examination of product development approaches found
that companies involving suppliers early in new product development
process were able to:

The challenge of supplier integration

More
than 60% of manufacturers report initiatives to involve procurement,
suppliers and other relevant stakeholders earlier in product
development. Despite the importance of the supplier relationship, many
managers we spoke with characterized the execution processes for
integrating suppliers into NPD projects as a “black box”.²
Prior research suggests that the participation of these outside
constituents is important, but that many of the processes associated
with integration of third parties (suppliers) into the process are
lacking. Our case studies suggest that companies who are successful at
supplier integration employ a systematic process.³
There are several elements of early supplier integration (ESI) that act
as coordinating mechanisms in this context. One area of importance to
managers relates to the critical elements required to develop and manage
the business relationship with suppliers. A second area of importance
is the extent to which such supplier integration efforts have a
meaningful financial benefit, as pursuing them is certainly not without a
substantial investment of time and resources.

There
are several key management issues that can enable improved supplier
integration into new product development. These are discussed below.

Detailed supplier selection process

The
buyer firm must undertake a detailed assessment of the suppliers being
considered for involvement, leading to the selection of a supplier with
capabilities well-matched to the buying company’s needs. In fact, more
than a third of the product development process is tied up in assessing
the market to understand customer preferences and requirements, and
searching for new parts required to create a product concept. Most
companies expect that a supplier who is involved in the design process
will also supply at least a portion of the volume production
requirements for the item, so supplier selection criteria relevant for
any sourcing decision will be relevant here as well (eg, price, quality
and delivery). Additional criteria specific to considering a supplier
for integration into an NPD effort are also necessary, such as past
experience with the supplier, and alignment of culture and technological
capabilities. A rigorous supplier selection process, which yields a
supplier with capabilities that are a good match with the buying
company’s needs, will lead to improved project team effectiveness.

Joint setting of project’s technical goals

Supplier
input and involvement in the assessment of the technical elements
associated with the project (quality, reliability, functionality, and so
on). Given that new technologies are very often closely associated with
the inventing firm’s (supplier’s) core competencies, buying firms must
develop and manage cooperative/collaborative relationships with their
key strategic suppliers in order to gain access to key emerging
technologies. The objective is to maintain a selection of promising and
accessible technologies and suppliers on the “bookshelf”, ready for use
when the company wants to apply them in a new product application.⁴
The company must understand, influence and possibly manage the
development time of technologies so that they will be available when
needed. A key aspect of these relationships is leveraging the suppliers’
knowledge of what is feasible from a technology perspective. One way to
do this is to involve the suppliers in performing the technical
feasibility assessment and setting the technical targets for the
project.

Joint setting of project’s business goals

For
technology sharing to lead to better supplier solutions, a critical
element is the assessment of the business case for supplier integration.
All parties on the product development team, as well as key supplier
personnel, must understand and agree on the expected benefits associated
with the supplier integration effort, in terms of cost, quality,
pricing, scheduling, roles and responsibilities. When such elements are
openly shared and measured over the life of the project, the outcome is
not only a new product, but often lower costs as well.⁵

In
other interviews, managers noted that suppliers who had participated
early in initial technology sharing discussions later contributed to
setting goals regarding project outcomes. Suppliers, because of their
product and process knowledge or expertise, may have more realistic
information on the trade-offs involved in achieving particular goals.
Such goals are not limited to cost but often include product performance
characteristics (such as weight, size, speed, etc) and project
performance measures (such as development time). The buying company will
have the ultimate authority in goal setting, but the supplier’s
involvement can help in setting goals that are aggressive but achievable
and also help in assuring the supplier’s “buy-in” to the goals. For
example, a leading Japanese firm visits its key suppliers before the
detailed design of a new product begins. These visits help the purchaser
decide if the supplier can produce an item at the targeted cost and
quality levels. The buyer also assesses the supplier’s ability to become
part of the product development team. After a general discussion about
the technology required for the new product, the supplier submits an
initial design proposal. Starting with a basic frame and shape based
only on broad product requirements, the product design evolves, with
engineers from both companies working together to evaluate alternative
designs that satisfy product requirements.

Key questions:

The
second aim of this study was to assess whether the effectiveness of the
managerial practices described in our first goal (joint setting of
project’s technical goals) was affected by the timing of supplier
integration and/or the degree of responsibility awarded to the supplier
for the product design. Each of these factors is likely to impact on the
success of the supplier integration effort, and is elaborated below.

• The timing of supplier integration(ie,
earlier or later in the NPD process). We were interested in whether the
relationships in the model vary depending on when a supplier becomes
involved in the new product development process. As shown in Figure 2,6
there are at least five different phases of product development at which
suppliers might be involved.

Prior
research on ESI maintains that earlier involvement is always better.
There is evidence to show that earlier integration is beneficial in
cases of higher technology uncertainty; however, the benefits of earlier
integration are also countered by the disadvantages of being “locked
into” a particular supplier, especially when there are multiple
competing technologies vying to become the industry standard.7 We
compared companies who integrated a supplier in stages 1, 2 or 3 versus
those that integrated suppliers in stages 4 or 5.

• The level of responsibility assumed by the supplier (eg,
more or less responsibility for product design). Another question that
arose from our case studies addresses whether or not the relationships
vary depending on the supplier’s level of responsibility for the buyer’s
new product development process. We conceptualized “level of
responsibility” as the spectrum of supplier integration in Figure
3, including:

Table
1 provides further detail on the integration of suppliers in product
development. The black box form of involvement constitutes the highest
level of integration and customer–supplier information sharing with a
great deal of give-and-take during the process. We compared companies
who employed gray box integration with those who indicated they employed
black box integration.

For
example, Harley-Davidson has long made ESI a foundational component of
its product development process. The motorcycle legend has established
new product development sourcing groups that co-locate sourcing and
commodity managers (most of whom are degreed engineers) with their
product engineering groups. Depending upon the design and situation,
Harley Davidson will also co-locate key suppliers on-site within its
development facility. These commodity experts collaborate with engineers
from design concept through to production build to determine the supply
mix that provides access to leading innovations, ensures ample capacity
to support intended production volumes, and can beat target and
should-cost goals.

Lessons for managers

The results of our study led to a number of lessons for managers. These are outlined as follows.

Lesson 1: Conduct a detailed supplier assessment prior to project commencement

Our
results support the notion that firms who complete a more careful
analysis of the supplier’s capabilities prior to commencing the NPD
project will experience enhanced project team effectiveness. This has
critical implications for practicing managers as it emphasizes the
central importance of making the right decision about which supplier to
work with up front. Not only are
the supplier’s capabilities important in this decision, but so is
finding a supplier who has a compatible culture with the buying firm.

Lesson 2: Involve suppliers in setting technical goals

Our
results support the notion that firms who involve the supplier in
examining the technical feasibility of the project will experience
enhanced project team effectiveness. Involving the supplier helps
leverage their knowledge of technical feasibility, resulting in a
smoother project with more realistic expectations and targets.

Lesson 3: Joint setting of business goals has no effect on project team effectiveness

Interestingly,
the business assessment of the project had no impact on project team
effectiveness of supplier involvement. This may suggest that supplier
input on technical issues is more important than on business issues, and
that if the technical assessment is done well, the business case will
follow.

Lesson 4: Greater NPD team effectiveness improves the quality of product design

This result indicates thatas
we improve the management of the NPD process, particularly NPD teams,
we can expect better quality design outcomes. In addition, leading
performers are hiring or developing procurement, commodity and supply
chain experts who are degreed engineers, so they can identify technical
innovations in the supply base and “speak the language” of the design
team. The result includes lower item cost, ease of manufacture, and
greater alignment of the supplier component with the overall product
architecture.

Lesson 5: Greater NPD team effectiveness improves financial performance

This
result is encouraging for the proponents of early, and extensive,
supplier involvement. It shows that a firm can expect to achieve real
financial benefits from their inter-company product development efforts.

Lesson 6: Timing of supplier involvement

Analysis of the “earlier” versus “later” integration efforts reveals that supplier involvement in technical
project assessment is important in earlier-stage integration efforts,
but not in later-stage integration efforts, while supplier involvement
in business project assessment is
important in later-stage integration efforts, but not in earlier-stage
efforts. This may reflect the types of decisions that are being made
during the stage at which the supplier is first involved. In the very
early stages, the project is less well defined, and there may be
significant uncertainty about the feasibility of the project. The focus
of interaction with the supplier is likely to be on the question of
technical feasibility of the project, with the business case coming
later.

Lesson 7: Degree of supplier responsibility

Analysis
of the “gray box” versus the “black box” integration efforts shows that
supplier involvement in technical project assessment is more important
in black box efforts than in gray box efforts, while supplier
involvement in business project assessment is more important for gray
box than for black box efforts. This suggests that suppliers who are
assuming greater responsibility in the design effort need to have input
into the technical assessment in order to assure effective decision
making, and probably need to share more information with the buying
company. Suppliers involved at a black box level are assuming broad
responsibility for making sure the component/system they design will
function properly in the overall product. Suppliers who are taking on
less responsibility in the design effort don’t need the same level of
interaction with the buying firm regarding technical issues.

Tim Minahan,
Chief Marketing Officer,
Ariba Corporation,
Email: tminahan@ariba.com.
www.ariba.com.

About the authors

Robert Handfield, PhDis
Bank of America University Distinguished Professor of Supply Chain
Management at North Carolina State University, and Director of the
Supply Chain Resource Cooperative (http://scrc.ncsu.edu). He also serves as a Visiting Professor with the Supply Chain Management Research Group at the Manchester Business School.