Supplier Integration Into New Product/Process/Service Development
Robert M. Monczka, Ph.D.
Robert M. Monczka, Ph.D., Director, Professor of Strategic Sourcing Management and The National Association of Purchasing Management Professor.
David J. Frayer, Ph.D.
David J. Frayer, Ph.D., Assistant Director of Research, The Global Procurement and Supply Chain Benchmarking Initiative, The Eli Broad Graduate School of Management, Michigan State University.
Gary L. Ragatz, Ph.D.
Gary L. Ragatz, Ph.D., Associate Professor and Faculty Research Associate, The Global Procurement and Supply Chain Benchmarking Initiative, The Eli Broad Graduate School of Management, Michigan State University.
Robert B. Handfield, Ph.D.
Robert B. Handfield, Ph.D., Associate Professor and Faculty Research Associate, The Global Procurement and Supply Chain Benchmarking Initiative, The Eli Broad Graduate School of Management, Michigan State University.
Robert J. Trent, Ph.D.
Robert J. Trent, Ph.D., Assistant Professor, Lehigh University, Bethlehem, PA 18015, 610/758-4952.
82nd Annual International Conference Proceedings - 1997
Abstract. In many industries, shorter product life cycles and increased competition have raised the level of interest in the management of new product, process, and service development (NPD) processes. Firms are looking for ways to decrease concept to customer development time and, at the same time, improve quality and significantly reduce the cost of the resulting product. One approach many companies are taking is to involve suppliers earlier in the design process. This involvement may range from simple consultation with suppliers on design ideas to making suppliers fully responsible for the design of components or systems they will supply.
Over the past two years, a research team from the Global Procurement and Supply Chain Benchmarking Initiative at Michigan State University has been studying strategies and best practices for integrating suppliers into NPD efforts. An initial survey was conducted of the member companies of the Global Electronic Benchmarking Network (GEBN). That survey was followed by in-depth field interviews with 18 leading-edge companies and a larger-scale survey of companies worldwide (still in progress as of this writing).
In this workshop we examine why and how companies are integrating suppliers into NPD, and detail some of the strategies and practices that are required to make this kind of integration successful, focusing on the essential role that purchasing must assume to ensure success.
The New Product Development Process. The new product development process can be viewed as a series of stages during which a new product (or process or service) is brought from the "idea" stage to readiness for full-scale operation. As the company moves through these stages, the idea is refined and evaluated for business and technical feasibility, the design is firmed up, prototyping and testing is conducted, and the design is finalized. Within this process, problems are often identified which result in tradeoffs and changes in the design. The design may be modified numerous times before it is finalized.
For many companies, outside suppliers will provide materials that comprise a majority of the cost of a new product. In addition, suppliers may provide new product or process technologies that are critical to the development effort. For these technologies, the supplier may have better information or greater expertise than the buying company design personnel. Supplier input and/or active involvement of suppliers may be sought at any point in the development process (see diagram - Diagram is not available in this text-only version).
A study conducted by Computer-Aided Manufacturing International (CAM-I) concluded that while the concept and design engineering phases of new product development incur only 5-8 percent of the total product development costs, these two activities commit or "lock in" 80 percent of the total cost of the product. Decisions made in the design process have a significant impact on the resulting product quality, cycle time, and cost. As the development process continues, it becomes increasingly difficult and costly to make design changes (see diagram below). It is crucial then, for firms to bring to bear as much product, process, and technical expertise as possible early in the development process.
Research conducted by the Global Procurement and Supply Chain Benchmarking Initiative at Michigan State University suggests that companies across a wide range of industries recognize the potential benefits of involving suppliers early in the development process, and that this type of involvement will be expanding in the future. The vast majority of the companies responding to a survey on supplier integration indicated that they believe suppliers should be involved in the development process earlier than they are now. A large majority of the companies also indicated that they expect that in five years they will be integrating suppliers "more" or "much more" than they are now (see diagrams - Diagrams are not available in this text-only version.)
The companies reported that their current efforts at supplier integration have yielded substantial improvements in new product cost and quality as well as reductions in new product development time. Many of the companies also reported that supplier integration has improved their access to new product and process technologies.
Spectrum of Supplier Integration. The timing of supplier integration in the new product development process may vary, and so may the extent of integration. The diagram below shows a spectrum of ways suppliers may be integrated, ranging from no integration to "black box" integration. (Diagram is not available in this text-only version). The no-integration situation represents a traditional make-to-print role for the supplier. This is in stark contrast to black box integration, where the supplier has primary responsibility for the design of a component, sub-system, or system, typically working from general performance specifications/requirements from the buying company. Of course, even in the case of black box integration, the buying company retains ultimate approval authority for the design.
Keys to Managing Supplier Integration. The case for early integration of suppliers in the new product development process is compelling, but it is important to recognize that supplier integration is a process that must be managed properly in order to achieve maximum impact. Our research has revealed a number of valuable strategies and practices for successfully managing supplier integration. These can be grouped into six key areas:
- Use supplier integration selectively.
- Choose the right supplier(s).
- Build commitment to the integration effort in both the buyer and supplier organizations.
- Define metrics and targets clearly, and give the supplier(s) a voice in establishing the metrics and targets.
- Give the supplier(s) an active role on the development team.
- Share information openly and extensively.
Use Supplier Integration Selectively. The successful company will have a systematic process for determining the types of components/materials for which supplier integration is appropriate and for determining the degree of integration needed. The critical elements of this process include
- Identification of the company's strategic core competencies.
- Establishment of preliminary new product/process/service requirements.
- Assessment of relevant internal design and manufacturing capability and capacity.
- Identification of gaps between requirements and internal capability and capacity.
- Assessment of potential for competitive advantage.
- Establishment of specific objectives of supplier integration.
Primary candidates for supplier integration will be items that are not part of the buying company's core competency and are critical in terms of their impact on product performance, their technical complexity, their impact on product development time, and/or their impact on product cost.
Choose the Right Supplier(s). 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. There are likely to be additional criteria however, that are specific to considering a supplier for integration into a design effort. These may include issues such as the supplier's:
- design and engineering capability.
- willingness to be involved in the design effort.
- ability to meet the schedule for the development effort.
- research and development capability and technology leadership.
- willingness to share cost and technology information.
- cultural compatibility with the buying company.
- willingness to co-locate design/engineering personnel.
The importance of these specific criteria will vary from company to company and from project to project. The fundamental objective is to achieve alignment between the buying company's needs and the supplier's capabilities, both from a technical standpoint and a cultural/behavioral standpoint. This objective should not necessarily be limited to short-term alignment. The supplier's future capabilities may be as important as their current capabilities if the buying company intends to make its involvement with the supplier a long-term relationship.
Build Commitment to the Integration Effort. For any supplier integration effort to be successful, both organizations must be committed to the relationship. For many companies, supplier involvement in a product development effort is a new and uncomfortable type of relationship. Without a solid commitment in both organizations, the communication and sharing of information and resources necessary to make the relationship work will probably not occur. One of the keys to achieving the necessary commitment is convincing top management within both organizations of the potential benefits/rewards of the relationship, both short-term and long-term. Some firms use formalized risk/reward sharing agreements to explicitly identify what each party can expect from the relationship.
Define Metrics and Targets Clearly. Clearly defined and understood metrics and targets are important to the success of almost any project. They are particularly critical when two or more organizations are working jointly on a project. Clearly defined and agreed to targets give the parties a common direction in the project, and they serve as a basis for making tradeoffs and resolving conflicts during the project.
An important element of target setting in the supplier integration context is including the supplier in the target setting process. The supplier, because of his technical knowledge or expertise, may have valuable information about what are achievable goals and what tradeoffs might be involved in achieving particular goals. 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 reasonable, and also in assuring the supplier's buy-in to the goals.
Give Supplier(s) an Active Role. The companies experiencing the greatest success with supplier integration into new product development are those that make the supplier an active participant on the project team. A supplier representative does not necessarily have to be present at every project team meeting, but the supplier must be kept apprised of decisions that are relevant to his involvement. At times, it may be beneficial to physically co-locate supplier and buyer company personnel. This allows face-to-face interaction and facilitates problem solving.
Share Information Openly and Extensively. At a basic level, supplier integration into new product development is beneficial because it facilitates better decision making and problem resolution at an earlier stage in the development process. This requires significant amounts of communication between the buyer and seller companies during the process, and also requires significant amounts of information to be shared between the companies.
Information on customer requirements, costs, and technology are important for decision making and problem resolution during the design effort. Sharing of technology roadmap information can be helpful in achieving longer-term alignment between the organizations.
The ability of design and engineering personnel in the two organizations to communicate directly is critical. If the communication process is too cumbersome, it discourages communication and slows down the decision making process. To avoid potential problems with this type of direct communication channel, guidelines need to be established for what types of direct communication are acceptable, and mechanisms must be in place to keep the project team and other relevant functions informed.
A major barrier to open communication and information sharing for many companies is a concern over disclosure of proprietary information. This can be alleviated to some extent by the use of formal confidentiality agreements. Such agreements lay the groundwork for information sharing, but at some level, the sharing must be based on trust between the parties. Solid buy-in and commitment of top management in both firms (mentioned above) can help to establish an environment of trust, but often the only way to firmly establish a trusting relationship is to perform over time and earn the trust of the other party. Many of the companies participating in this study indicated their willingness to share information with a supplier was a function of their familiarity and past involvement with the supplier.
Communication and information sharing can also be facilitated by electronic linkages between the companies. Many companies find the ability to share designs via a common CAD system to be very helpful.
Conclusion. Three key conclusions can be drawn from this examination of supplier integration into new product development. First, supplier integration is of growing importance as tool for competitive advantage in a rapidly changing environment. Companies plan to make greater use of supplier integration in the future, and will be integrating suppliers at earlier stages of the new product development process.
Second, firms must use supplier integration selectively. Successful supplier integration requires substantial management effort on the part of the buying company. The decision to integrate a supplier must be made carefully, to ensure that the potential benefits justify the effort. Furthermore, the decision to integrate a supplier must be made in the context of the firm's strategic business priorities and its core competencies.
Finally, for companies that have decided to pursue a strategy of supplier integration, integration efforts must be managed carefully. Six key management strategy/practice areas were outlined here, and further study is underway to develop a more detailed picture of the practices that will lead to successful supplier integration.