ism 2017 the next s-curve of supplier innovation collaboration can unlock additional value for...

ISM 2017 –The next S-curve of Supplier Innovation

Supplier Collaboration and Innovation… to get us started

Here’s a question for you……have a guess &

…tell us what you think!

50-70%How much R&D spend across all sectors is dedicated every year to innovation?1

How many of those fantastic new products and innovations actually reach consumers?2

What percentage of innovations are typically sourced externally?3

How many people do companies usually fully dedicate to innovation sourcing?4

Only

12-25%

~55-65%

None!

…so, a lot!

…but odds of success seem low…

…and mostly driven by our business partners

Here is your chance!

Supplier Collaboration can unlock additional value for companies with significant portions of their value chain outside of their 4 walls

SOURCE: McKinsey Operations/PSM practice, Team analysis

100

60 40

Percentage of product value

70

100

30

80

100

20

In house TotalOut-sourced

Majority of the value chain in most industries today resides outside of the manufacturer

Automotive

CPG

Pharma

Those companies with advanced supplier collaboration capabilities tend to outperform their peers in both top and bottom line performance1

SOURCE: PSM Supplier Innovation service line

1 High growth companies also showed strong starting EBIT (i.e., growth is not due weak starting position)

Percentage growth in EBIT, In percent, over a period of 5 years

196%

0.3

Leaders are ~2X better

Results based on survey of 105 companies

High scoring companies see

- 5-10% COGS reduction- 7-10% revenue uplift

How important is supplier collaboration and innovation for you?

-5.1

4.9

Innovateregularly and systematically

Selectiveinnovation

(ad-hoc)

No real projectsto innovatewith suppliers

Industry leaders are thoughtfully collaborating with thesuppliers to unlock value in their network

Focus today

Typical impact on addressed baselineSource of value

▪ Combine purchase volumes for raw material inputs

▪ Joint end-to-end process and flow optimization

▪ Lean at suppliers

Sourcing cost reduction% of current addressable total

5-15

▪ Joint planning and capacity management

▪ End-2-end transparency into value chain

▪ Joint risk management

Service, Quality and risk improvement% of current performance

5-25

Innovation / contribution to revenue% of current revenue

▪ Design-to-Value to optimize products

▪ Partner on innovation agenda to bring new to world products and technologies

▪ Specifications management and optimization

5-10

What is innovation sourcing?

SOURCE: McKinsey Procurement Practice Supplier Innovation service line

Innovation Sourcing represents the mechanisms to identify and get innovations through 3rd

parties for value creation

… a variety of partners including … … to bring innovation on …

Companies can work with …

• Suppliers

• Universities / Research institutes

• Design centers

• Customers

• Ecosystems (e.g., dedicated networks)

• New or existing Products(e.g., blockbuster bike from Ikea)

• Internal Processes efficiency (e.g., robotics for warehouse management from Amazon)

• Improved customer Services (e.g., mobile payment technologies from Starbucks)

Why Innovation Sourcing is important and why it should be oneveryone’s agenda

Organizations need to widen their funnel and get innovations faster to the market – Innovation sourcing enables this

50-70% of R&D

spend across all sectors every year

is dedicated to innovation

~55-65% of

innovations are sourced

externally1

Only 12-25% of all new products/

innovations reach consumers

25-45% of

revenues across all sectors come from

product innovations

40% faster route

to commercialization for externally-

sourced Innovations2

SOURCE: McKinsey Procurement Practice Supplier Innovation service line, McKinsey PDMA CPAS surveys

1 Based on research input from ‘Ambidexterity in technology sourcing’ by Frank T. Rothaermel2 Based on McKinsey’s PDMA, CPAS survey results - supplier innovations help organizations move most of their portfolio from ‘more innovative products’ to ‘incremental innovations’

Innovation sourcing can generate benefits in 3 major areas


How innovation sourcing can help

Financial

Brand awareness

Areas Dimensions

• Enables Procurement to get in the heart of the innovation agenda and activity; provides a strong platform for strategic supplier partnerships

Organiza-tional

Foster cross functional collaboration

• 40% faster route to commercialization for externally-sourced innovations (thus supporting innovation portfolio growth)

Faster innovation pipeline creation

• Generating new revenues through new products and services or differentiating technologies

Revenue growth

• Supporting cost reduction and sustaining continuous improvement across the value chain

Cost optimization

• Strengthening your responsible image by influencing suppliers and customers to buy differently

Driving sustainability

Brand building• Strengthening your brand image both across the

market and outside world

There are 4 main archetypes of best-in-class innovationsourcing companies


Characteristics (examples) Leaders

Innovation sourcing through partnerships

• Vast pipeline of innovative ideas• Negotiation of exclusivity contracts with partners• Speed

Systematic innovation sourcing through broad scouting

• Best practice sourcing innovators and scouting capabilities• Broad ecosystem of 3rd parties• Systematic approach with a dedicated team

Project based innovation sourcing

• Scouting activities triggered by a specific need• Often financial KPIs as main driver

In-house innovation

• Processes developed to embed innovation in day-to-day work• Complemented through acquisition of 3rd parties with

distinctive innovations

P&G radical strategy of mindset focus and selected interventions delivered almost 50% of the company’s innovation and billions of dollars in revenue

SOURCE: McKinsey Procurement Practice Supplier Innovation service line, Connect and Develop – Harvard Business Review (2006), press interviews

1 Percentage of new products to meet financial objectives 2 Nasdaq – value at year end

Not invented here Proudly found elsewhere

100% internal 50%+ externalR&D

35% 60%+R&D productivity1

15% of new products in market

~50% of new products in market

External contribution

$ ~39 $ ~91Stock price2

Year 2000 2014

Ideation• Open innovation• Consumer

communities

Execution

• Strategic alliance• Collaborative design

thinking• Co-development• Supplier brief

Partner selection

• External network

Change of mindset from … … to Main interventions

P&G stock priceUSD

0

20

40

60

80

100

The journey was everything but easy starting from a big change: betting on the capability of external networks to be the source of competitive advantage

SOURCE: McKinsey Procurement Practice Supplier Innovation service line, Nasdaq, press release, interview

Innovation became substantial part of the company DNA internally driven and slow

Main focus on negotiation and cost improvement

Moment of truthGetting innovation in scope Innovation as the key strategy to execute, seamlessly

Focusing on break-through innovations

Master collaboration agreement and cross functional teams

Target external contribution to exceed 50% of company revenue

Embrace a truly revenue sharing partnership

The next s-curve

Liaise with innovation partners to find “the next Bn$ product”

P&G innovation program blends company expertise and know-how with existing partner breakthrough technologies

SOURCE: Huston Sakkab, Connect and Develop – Harvard Business Review (2006) ; Interview

CASE EXAMPLE

2001

Discover• P&G technology entrepreneur

discovered a stain removing sponge in a grocery store in Osaka (Japan)

• The sponge is an original automotive product from BASF

2002

2003

2004

Evaluate

Launch

Co-create

2004 - 2016

Continuous collaboration

• US Labs to evaluate sample performances

• Product moved into development

• Product is launched on the market

• P&G and BASF improved product performances

• The first co-created product is on the market

• Collaboration of BASF and P&Gcontinues

• Improving the effectiveness of the product

• The product family was enlarged to complete the range of usage

Apple turned innovation into a unique competitive advantage through a “locking” strategy. But innovation is not only sourced from tier 1 partners …

SOURCE: iSupply, CNNMoney, literature search KN103413

1 Lithium is the lightest, rare earth metal that allows more energy to be stored in lighter and smaller spaces than alternatives; currently Apple along with other forward – thinking giants including Microsoft, Google, IBM, HP, Toyota, GE, GM, Sony etc. strives to secure its future stocks

CASE EXAMPLE

Example

Approach

Invested 4$ Bn in equip-ment for manufacturing and took exclusive hold of one Sharp facility for iPhone and iPad displays

Blocked vast capacity for batteries and invested significant assets in lithium metal supplies1

Prepaid $1.25 billion mainly to Samsung and Hynix to corner flash memory market through 2010

Transactional SourcingStrategic Sourcing

Supplier Collaboration

… as the next breakthrough chip in the iPhone will come in Q1 2017 from a Taiwanese supplier who leverages open innovation


CASE EXAMPLE

ResultsSituation and Approach

• Taiwan Semiconductor Manufacturing Company (TSMC) manufactures iPhone chips for Apple.

• The TSMC Open Innovation Platform uses third parties ecosystem to speed up innovation:

• Dedicated value chain approach

• independent design service partners providing innovative products at each step

• Breakthrough chip invention from TSMC of a 10nm FinFET chip technology – lighter, more powerful and less power demanding chip

• TSMC also heavily engaged in R&D for 5nm process technology, ready to use extreme ultraviolet lithography to make 5nm chips

Innovative warehouse management helped Amazon to provide its customers with unbeatable service by changing way of doing business


Need

• Amazon goal to become the A-to-Z market place targeting 85% of the world’s products available in its warehouses

• Speed was the key driver: shipment moved from a week to 1 day (or up to 2 hours for grocery)

Approach

• Amazon decided to invest heavily in innovation of warehouse management and pallet systems

• Amazon partnered with a supplier of mobile robotic fulfillment systems, investing heavily in technology and innovation

Results

• Amazon squeeze its delivery time to 24 hours

• Goods availability rose on average to 1M+ articles per fulfillment center

• The company invested 775$ Mio to create a new BU, “Amazon robotics”, world leader in full automatized fulfilment center, including drones

CASE EXAMPLE

Innovation can also be sourced by joining forces with other“best-in-class” innovators: Amazon joined forces with P&G toinnovate the delivery of bulky products


• Amazon entering delivery of bulky household productsat an affordable price

• These items traditionally show exhibit high shipping cost due to size

• Amazon introduced Vendor Flex demonstrating its intent for the future by name

• Amazon and P&G integrated some areas of their businesses to allow Amazon setting up small distribution shops inside P&G’s core warehouses

• Amazon employees package, label and ship the items directly from a ring-fenced areas within P&G

CASE EXAMPLE

Need Approach Results

The benefits are for both sides:

✓ Cost of storage

✓ Transport

✓ Quicker delivery

✓ Disruption

✓ Internet Sales

Ikea involves 3rd design partners end to end

SOURCE: Veryday ; web search

From an idea To a project based partnership

• Market research :

• In 2050, 70% of the world’s population will live in an urban environment, in cities and 80% of people could carry out all their transport needs with a bike

• Thus, Ikea came up with the idea of selling a bike for day to day use that reach a large customer base.

• To transform this idea into a product, Ikea entered into a partnership with an industrial design consultancy called Veryday which lasted 3 years and was organized in 3 phases:

• Concept and constraints definition

• Design

• Manufacturing location sourcing and production

• The role of the design partner evolved along the whole process.

• Ikea kept the IP of the product as part of the partnership with the design partner

SLADDA is a good design impact example of successful partnership between Ikea and a design center, Veryday

SOURCE: Veryday

• Designed SLADDA, IKEA’s first bicycle, with modular storage and automatic gears.

• Won 2016 Red Dot Award for Best Product Design

• Expected to be the world’s bestselling bike

Best in class companies master 4 key enablers for successfulinnovation sourcing


Enabler

Partner management processes

Right innovation mindset

Independent, dedicated innovation team

Early involvement with business partners

Getting tactical on innovation sourcing identified priorities by answering four questions


Who to involve internally?

Are there any relevant case examples to inspire us?

How to engage with these partners?

Who to partner with?

Latest toolbox includes diagnostics, use cases and examples for each intervention

Crowd sourcingCross-industry sourcing

Competitive dynamics mapping

Open innovation

Consumer communities

Innovation hackathon

Customer needs amplification

Supplier briefPartner-enabled development

Strategic alliance

Value optimizationCollaborative design thinking

Co-development

Value chain mapping External network

Conferences and fairs

Innovation award

Ideation

Execution

Partner selection

There are a set of proven and well-defined interventions which can help you on this journey


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