Why supply chain innovation matters

Innovation has been said to be at the heart of business success, but in a contract fabrication shop that often doesn’t entail product design, where is that innovation? According to a recent publication by the consultancy Plante Moran, titled the 2012 Innovation Quotient Survey, innovation doesn’t necessarily mean product innovation. It also can be process innovation, like innovative manufacturing methods or technologies. And there are innovations within supply chain relationships.

Jeff Mengel, leader of Plante Moran’s manufacturing group, described how such innovation changes customer relationships from one that’s simply a matter of convenience into one that is intimate-- not in the romantic sense, of course. Instead, Mengel uses “intimate” to describe a business relationship that would be very inconvenient and disruptive to break.



Last week I talked with Mengel about one manufacturer (to remain anonymous) that developed such a relationship. The company did this not just by applying continuous improvement and changing part flow on the shop floor, but also by changing the very foundations of its business model.

Its major customer wanted the contract manufacturer to build a new plant--a risky venture. I recalled how much my Rolodex changed after the dot-com bust: So many plants invested heavily and rode on the backs of seemingly ever expanding telecom companies and other giants, only to fall off when the Internet bubble burst.

Mengel’s story probably won’t end this way. Instead of building a new plant to meet customer needs, the contract manufacturer opened the lines of communication. The supplier actually embedded several engineers, including quality and program launch personnel, on-site at the customer. Such close collaboration led to even more business.

The customer knew that certain cells at its supplier were dedicated to their product lines, so capacity wasn’t a worry. And because the supplier had its engineers and other technicians on-site at the customer, the two companies could communicate continually. The supplier could get in on the ground floor with product launches, and knew true inventory levels and demand predictions. In short, both companies opened the kimono.

The supplier didn’t just continue to work with one customer. Instead, it diversified into other areas involving lower-volume, high-value work--the kind that, again, requires close customer collaboration.

This is what Mengel called an intimate customer relationship, not just a relationship of convenience. The contract manufacturer still has few customers, not hundreds. And yes, that one supplier still provides about 70 percent of company revenue. But the contract manufacturer evolved that relationship to promote transparency. Both parties know what’s coming down the pike, so both can plan as needed for. And at least in the short term, both parties know that the relationship would be disruptive to break.

Undoubtedly, such a relationship does require some level of trust. But all business relationships do to some extent. In this case, Mengel said, the benefits have far outweighed the risks.