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Benefits of Co-Innovation: A Data-Driven Case Study of the Automotive Industry

by Dave Hannon

April 20, 2011

By Dave Hannon

@Daveatwispubs

Lately I’ve been hearing a lot more talk about a concept SAP calls “co-innovation” and some others call “co-creation.”  But this is more than just the latest term on your buzzword bingo card—it’s a concept that can bring real business value. And to prove it, I’m going to present a data-driven argument using the automotive industry as an example.

To get an introduction to the concept of co-innovation and some great examples (as well as what SAP can offer), I’d point you to Steve Graham’s intriguing piece in the latest issue of SAPinsider called The Co-Innovation Imperative. In it, Steve states: “Today’s most innovative companies are moving toward co-innovation, leveraging ideas and input from suppliers, customers, academic institutions, industry experts, and sometimes even competitors.”

The concept seems to be popping up in a variety of spots by a few different names lately. Author and consultant Francis Gouillart covered the customer-facing side of this concept well in a blog called simply “Experience Co-creation” on the Harvard Business Review site. “To develop a new cus tomer experience, companies need a real-time engagement process that encourages customers and employees to devise new interactions between them and facilitates the emergence of innovative customer experiences,” he says.

But for me, the value of co-innovation (although it wasn’t called that) was most clearly illustrated in some research I came across a couple years ago while writing a story on the automotive industry. As most people likely are aware, U.S. automakers have had a rocky relationship with suppliers over the years. For many years, U.S. automakers took a heavy-handed approach to supplier relationships, focusing mostly on driving down cost and not viewing their suppliers as a source of innovation. “Make this part at this price or we’ll find someone who will” was, in essence the strategy. In the meantime, Japanese automakers including Honda and Toyota took a very different approach, building very close relationships with suppliers, in some cases even buying ownership stakes in their top suppliers to demonstrate their level of commitment.

The result over the long-term was quality in the U.S. automotive market in general declined while Honda and Toyota topped the list for quality and reliability year after year.

More recently, however, U.S. automakers have got the hint and re-focused their efforts on building closer relationships with suppliers. And the result has been a dramatic increase in quality and customer satisfaction for the U.S. automakers. The latest evidence to this trend is JD Power&rs quo;s most recent vehicle dependability survey, which says “domestic brands have closed the gap in initial quality with import brands.” In fact this year Lincoln – yes Lincoln, which is owned by Ford Motor Co. – took the top spot in the survey. And last year, for the first time, U.S. automakers scored higher on initial quality than Japanese firms in the JD Power Initial Quality Study.

I know what you’re thinking—I’ve built a nice, anecdotal case here for the link between supplier relationships and product quality and innovation. But you want some concrete evidence, right? Some data on this trend. Okay, here’s your data to bring it all home: Automotive industry consulting firm Planning Perspectives issues a survey every year called the Working Relations Index (WRI), which ranks automotive OEMs' supplier working relations based on 17 variables across five categories: OEM-Supplier Relationship, OEM Communication, OEM Help, OEM Hindrance, and Supplier Profit Opportunity.

Care to venture a guess which company has seen a staggering improvement in this index in the past three years? Yup, Ford Motor Co. has improved its rating among suppliers by a whopping 63% since 2007 (see chart). In fact, all three U.S. automakers have made major improvements in this index whil e Japanese firms are sliding. And how does that translate into better products?

Source: Planning Perspectives

The Planning Perspectives survey shows a direct correlation between an OEM’s overall WRI ranking and their suppliers’ willingness to invest and share new innovations and technology with the OEM (see table 2 in this review of the 2010 survey).

“Favorable supplier rankings of the automakers have a very real impact on the OEMs' future fortunes,” says the Planning Perspectives report. “For many years, the study has shown that automakers with the best rankings receive the greatest benefit from their suppliers in a variety of areas including lower costs, higher quality, and supplier innovation.”

So there it is—clear data-driven evidence that closer supplier collaboration—or co-innovation, if you prefer—results in improved business results. Of course, the facilitator to much of that co-innovation is IT. But that's a blog for another day.

If you’ve got another example of the business case for co-innovation, I’d love to hear it. Post a comment here or write your own blog about it here on ILN!

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