A suppliers' guide to innovation.

As automotive suppliers continue to get hammered by price cuts, material cost increases, and competitors in low-cost countries, renewed attention is being focused on product and process innovation as a way to improve competitive positioning and profitability. So here we'll look at the systems automotive suppliers need to implement if they want to consistently deliver on the innovation imperative.

A recent study by Deloitte of innovation in 650 manufacturing companies found that while manufacturers expect new product launches to be their No. 1 driver of growth, most companies do not have reliable systems for bringing products and services to the market, and 50% to 70% of all new product introductions still fail. (1) The problem is that companies haven't yet applied the concept of "operational excellence" to their innovation systems. Innovation and new product development are still thought of as unreliable and unpredictable processes that cannot be standardized. We disagree. We believe that a disciplined approach to innovation can be achieved and that "process stability and capability" is just as possible in new product and process development as it is in manufacturing.

Consistent innovators in the automotive market tend to be more profitable (averaging twice the return on sales of their competitors); have higher value-added products; and achieve more rapid growth (four times that of non-innovators). How do they do it? IRN recently conducted a background survey of innovation in the mid-sized manufacturing sector for the West Michigan Manufacturers Council and The Right Place Program, and concluded that there are five basic "innovation disciplines" that characterize the high-margin winners.

1. Aligning innovation with your company strategy. How you approach innovation needs to be driven by your "theory of your business." Are you one of the "innovators" who is differentiated by always having the leading-edge products in the market before anyone else? Or do you seek to "own the customer relationship" by customizing your operations to their systems and distinguishing yourself through customer service and responsiveness? Or are you a "low-cost provider" who competes primarily on price with commodity-like products? Depending on your answer, you will focus on different aspects of innovation. (See accompanying box.)

2. Creating disciplined innovation processes. You need disciplined business processes to support innovation just like you do to keep your manufacturing plant producing quality products on time. The key processes include:

* Opportunity identification and voice of the customer.

One mistake that many automotive suppliers make is to forget that the real customers for their products are the end users who buy and use the automobile. An astonishingly small percentage of product-oriented auto suppliers (even Tier is who control much of the design) do their own consumer research with product users. (One colleague of ours who is in the business of consumer research estimated it as low as 25%.) Consumer research not only helps you design better products, but it also gives you bargaining power with your value chain customers. Your case on product changes and pricing is far more compelling when backed up by user research.

A related mistake is to not understand the difference between engineering and design. Too many manufacturing companies fail to understand the role of industrial design in product development. They are obsessively focused on engineering performance, but completely miss out on aesthetics, ergonomics, color, shape and other elements of the design that relate to the user interface. Product-oriented suppliers should consider having in-house industrial design talent (or a strong outside partner) to counter the technical focus of industrial engineers. Leveraging this skill base means having connections and relationships with the OEM design studios, not just with the product engineers.

* Product design and development.

A disciplined "stage-gate" process is critical. Many companies have them, but get poor results, for the following reasons:

* They don't differentiate the process by type of project. A product modification can't be treated the same as development of a new platform. Failure to differentiate new development products by their level of complexity can turn the stage-gate process into a bureaucratic nightmare. (We have talked to many a product engineer who thinks of the process as a non-valueadded activity that impedes productivity.)

* They don't have clear criteria, especially for killing projects. As one person put it: "It is hard to drown puppies." Stage gates need to be real decision points, not just project reporting opportunities.

* The gatekeepers don't exercise discipline. Gatekeepers need to exercise basic operational discipline over the process--holding meetings on time, coming prepared, making decisions fast, and communicating.

* New product launch.

Product launch and program management is becoming an increasingly critical element of supplier competitiveness. And it is an area where many suppliers lose their margins. Bad launches cost a lot of money and can ruin customer-supplier relationships, even when the front end (engineering and design) and the back end (routine production) go very well.

3. Creating an innovation culture. Consistent culture supports stable and capable processes--in innovation as well as manufacturing. Innovative automotive suppliers typically will have cultures with a common set of characteristics: they reward creativity and risk taking; they celebrate the innovation process; they honor and value ideas from outside the company; they link pay to innovation results; and they provide clear management direction and leadership.

4. Creating innovation support infrastructures. Your innovation processes need to be supported by organizational and technology infrastructure. Some of the key elements include: a cross-functional development team structure (common now in most companies, but still typically not well executed); technology "brokers" who cross unit, company and industry boundaries to identify novel new combinations or applications of technologies; skill development emphasizing networking, collaboration and creativity; and an information technology system that allows for disciplined cross-company management of products and product knowledge (e.g. Product Lifecycle Management systems).

5. Measuring innovation. Most suppliers have adopted some version of the "balanced scorecard" for their companies--they just need to add innovation as one of the categories. Some useful innovation measures include: percent of successful product development projects; total number of projects in the portfolio, by type; number of patents and patent citation; average time to market; actual vs. budgeted costs; time from launch to full production; realized revenue vs. targets; percent of sales from new products.

The Gentex Example

Gentex Corp. (Zeeland, MI) stands out in the automotive sector as a high-growth company that has achieved extraordinary levels of profitability due to its product innovation and technology leadership. Gentex produces mirrors and related telematics and lighting systems. The company has sales of $470 million; a five-year CAGR of over 16%; and net profit margins of 22.7% (yes, that is net, not gross margin!). It invests an average of 6% of total sales in R & D.

A study by the Center for Automotive Research (2) looked in depth at Gentex's systems for delivering innovation results. Not surprisingly, Gentex had mastered all of the innovation disciplines--it is obsessively clear about the central role of innovation in its business strategy; it has developed very disciplined systems for product development (including close integration between R & D and production); its culture emphasizes the value of collaboration, communication and sharing of information; it measures innovation results and links the results to performance evaluation and compensation.

Not every supplier will be able to match Gentex's results, but the lesson is clear; innovation is a "learnable" discipline and a skill--just as operational excellence and lean manufacturing are. And similar to the Toyota Production System--which has been the management equivalent of an "open source code" for over 40 years, accessible to anyone who wanted to take the time to learn it--the basic elements of the innovation disciplines are accessible to anyone who has the drive and energy to learn and implement them.

This Positioning ...  Might Lead You To Focus on These Kinds of
                      Innovations

Lowest Price          * Process improvements that reduce costs
                      * Supply chain management strategies
Customer Intimacy     * Customer service interfaces
                      * Customer engineering support and "solutions
                        selling"
                      * Voices of the customer processes
Innovators            * Leading edge technology
                      * Innovative product design
                      * Focus on "lead users

(1) "Mastering the Innovation Paradox", Deloitte, 2004. Available an the Deloitte web site at www.deloitte.com/globalbenchmarking

(2) "Gentex Corporation--Leveraging Intangible Assets Through Relationships", Center for Automotive Research, September, 2001

By John Cleveland, Vice President, IRN, [e-mail]