For many companies, the supply chain is one of the ideal places to source a deep mine of innovation. Suppliers have invested billions of dollars in their plants, equipment, and their people. This is one of the mother lodes of innovation. Thousands of engineers, technicians, scientists, mechanics, and common sense practitioners are implanted in the world’s suppliers.

However, the large majority of companies remain in the dark ages as they disparagingly look with distrust and disdain upon their suppliers. This medieval approach has only gotten worse with the advent of internet auction.

For years procurement has been taught to “squeeze the vendor” and “leave nothing on the table.” Chief Financial Officers had ordered their procurement departments to get tough and get costs lower to increase profits. 

The result of beggar-thy-neighbor tactics has not been promising. In a number of industries, notably automotive, there has been a wholesale exodus of suppliers in search of greener pastures.

A few companies saw their suppliers as a source of innovation, new products, and revenue enhancers. They new how to “triage” their supply base into:

• low-value commodity vendors,
• reliable preferred suppliers, and
• high-value alliance partners capable of producing a long-term stream of competitive advantage.

• Implications:
• For most companies, the opportunity to tap into their supply and outsourcing relationships for a stream of innovation has gone untapped.
• Suppliers are seldom seen as sources of revenues because they are managed by procurement groups, with little review by marketing and sales departments.
• Companies that endlessly squeeze their suppliers run the risk of destroying their supply base, and losing their competitive position in the marketplace as Innovation lags, Time to Market slows, and Customer Value begins evaporating
• In major outsourcing deals, (such as IT outsourcing) the short-term focus of the legal contract prohibits flexibility despite major changes in strategic and business operating conditions. Because neither the relationship nor the contract is dynamic and regenerative, the arrangement becomes rigid and eventually stultifying, resulting in mutual dissatisfaction, squabbles, and win-lose dysfunctional behavior.

• Evidence:
• Companies in a number of industries cited and erosion of their supply base. One electronics firm told us that within the decade most of their suppliers of a critical component had gone belly-up. Of the three remaining, two were on the ropes.
• Other companies told us of wanting to bring new products and innovations to their best customers, only to be turned away unceremoniously with the comment from buyers: “I only get rewarded if I cut your prices.”
• On the other side, a few companies like P&G had active programs in place to support the flow of innovation from their suppliers. Harley Davidson concluded that its supplier’s continuous flow of ideas, innovations, and improvements had a large impact on Harley’s long term recovery. Generally, companies that took this approach were prospering from their efforts.