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LEAD Innovation Blog

Read our latest articles on innovation management and innovation in a wide range of industries.

Date: 17-Jul-2019
Posted by: Daniel ZAPFL
Category: Automotive

How suppliers can set themselves apart from the competition with innovations


Suppliers usually receive very strict specifications from their customers as to what they have to deliver and what innovations they have to develop. At the same time, they are under enormous competitive and quality pressure. Read in this blog post how suppliers can gain a competitive advantage through intelligent innovation management.

Within a value chain, a classic supplier has a fixed place: The manufacturer gives him very clear specifications as to which components he has to deliver when and in which quality. Manufacturers usually pursue a multi-supplier strategy: if one parts supplier is unable to meet the specifications, then another is commissioned. Enormous delivery and quality pressure are therefore part of the daily routine of a component manufacturer. At the same time, the supplier is very dependent on the manufacturers: if an order is missing or a partnership ends, the supplier must quickly find a new customer in order to utilize his capacities.

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Suppliers are forced to "work to order

The automotive industry is one of the many industries that functions as just described. Car brands, also referred to as Original Equipment Manufacturers (OEMs) in this industry, use top tier suppliers (TIER-1) as extended workbenches. Put simply, they are forced to do their job according to OEM regulations.


OEMs reduce depth of value creation

At the same time, they are reducing their depth of value added. Today, many vehicle manufacturers are concentrating more and more on building and, above all, maintaining their brands and less on the technology and further development of their products. According to the German Association of the Automotive Industry, about three quarters of a car's value added is generated by its suppliers. Many OEMs are endeavouring to push this share further in the direction of 10 to 15 % in order to be able to concentrate even more on maintaining their own brand.


Manufacturers use the R&D resources of parts suppliers

Although the manufacturers specify the technical development of the automobile, they increasingly leave the innovation to the suppliers. OEMs simply buy in new technologies when needed. As a rule, their own R&D department no longer deals with this. This model has the advantage that car manufacturers can react extremely quickly to new trends. Because they don't have to spend the time and money themselves to develop the corresponding innovations. The OEMs simply use the R&D capacities of other companies that are competing for orders. With the current trend to control the car partly by speech and no longer by buttons, levers and unclear touchscreens, this is no different: VW, Mercedes or BMW are not concerned with the technologies that make cars follow their words. Suppliers such as Bosch and companies that deal with voice control in general make sure of this.


Suppliers lack direct contact with the user

However, their firmly anchored role in the value chain makes it impossible for component manufacturers to tailor their innovations to the needs of end users. This is because they have no direct contact with consumers. This is only available to the vehicle manufacturer. The latter does everything it can to keep it that way. After all, the direct connection to the target group is his capital. The specifications for the innovations that the supplier company has to develop are therefore determined by the manufacturer. However, this approach forces suppliers to carry out innovation projects according to the static waterfall model: The component manufacturer successively processes the manufacturer's specifications. Agile methods, on the other hand, are based on loops: A team derives concepts from customer needs and develops prototypes. These go through tests that show whether the user's needs are satisfied. The results serve as the basis for a new loop. The prototype is refined until it meets the requirements of the future user. However, agile methods are not applicable without direct contact to the end user.


Proactive innovation generates competitive advantage


By contrast, suppliers can establish direct contact with customers through their own innovation projects that are not specified by the manufacturer. It is also possible to gain a competitive advantage over the competition. A supplier company systematically deals with its own innovation past and the relevant trends. The result is a roadmap that serves as a concrete timetable for its own R&D activities, rather than those specified by the manufacturer. The perspective and expertise of LEAD users can already be incorporated into the creation of a roadmap. Direct contact with the future user is established at a very early stage.


Manufacturers must not feel ignored

Of course, OEMs do not like it when suppliers contact users directly. Their concerns can be dispelled by the fact that the component manufacturer deals with topics that the manufacturer himself specifies: The automotive industry in particular enjoys a high level of media attention. Top management statements about the future can serve suppliers as a source for innovation topics. The publications and studies that many OEMs themselves commission and publish also function as such. So if a supplier tries to solve more general problems than those addressed by the manufacturer himself, then he usually does not feel ignored.


Innovative strength impresses OEMs

Innovations developed by a supplier without a direct order can set him apart from the competition. In this way, a component manufacturer demonstrates its ability to look beyond its own nose. In addition to the duty of scalability, delivery reliability and quality, the parts supplier also offers its customers a free ride in the form of innovations. The supplier can use the pitches around the supplier's orders to present these innovations. The component manufacturer not only presents his solution for the task at hand, but also shows the OEM relevant innovations.


Patent mining shortens the path to inventions

The effort to develop these does not necessarily have to be great: By means of patent mining, the supplier can easily track down its own, hitherto unused internal know-how and generate new patents from it. Although a large number of inventions have hardly been included in the balance sheet to date, they still serve as an important indicator of a company's potential. Innovative suppliers enjoy a competitive advantage over those who merely fulfil the required duty.


Conclusio: How suppliers can set themselves apart from the competition with innovations

In many industries, suppliers have a very precisely defined role. They have to precisely meet the specifications of the manufacturers and align their innovation activities accordingly. In most cases, however, component manufacturers only compete on the basis of the required obligations such as low price, high quality and scalability as well as delivery reliability. Correspondingly, the companies are easy to exchange and replace. In some sectors, such as the automotive industry, manufacturers want to concentrate even more on maintaining their brands. The share of value added generated by suppliers continues to grow. This makes their role in product innovation more important. The exact specifications for this are usually provided by the manufacturers themselves. Because component manufacturers have no direct contact with the future user, they cannot include him in the innovation process. Own, unsolicited innovation projects offer a way out of this dilemma: Suppliers can work directly with the consumer without annoying the manufacturer. Through proactive innovation, suppliers also gain a competitive advantage. In the case of pitches, innovative strength serves as a convincing argument: Although the suppliers are generally not awarded the contract for the proactively developed inventions, they are not the ones who are able to make the most of the innovative power. However, they already win the actual contract in the competitive presentations.

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Image Source Cover Picture: https://pixabay.com/de/photos/lkw-transport-fahrzeug-rot-61760/

Daniel ZAPFL

Born in Graz, Austria. After positions as project manager & head of innovation of the project management at LEAD Innovation, Daniel Zapfl has been responsible for the success of the innovation projects of our innovation partners since January 2018.

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