Supply Chain Frontiers issue #40
Companies can reap multiple benefits when they include suppliers in the new product development (NPD) process. A study by Fabrizio Salvador, IE Business School and MIT-Zaragoza Logistics Center, and Veronica Villena, IE Business School, shows that leveraging suppliers’ expertise in this way is particularly effective for those companies that have gained experience in successfully designing modular products – with one important caveat. During their study, Mitigating Supplier Integration’s Challenges in New Product Development: When Modular Design Competence Does and Does Not Help, the researchers found that where there is a high degree of innovation, the advantages of modularity can disappear.
Suppliers that are involved in the NPD process bring valuable expertise to the table. They can help manufacturers avoid costly mistakes by providing guidance early in the process when it is not too expensive to change product design. Reducing the risk of errors at this stage also makes it easier to meet cost and functionality targets.
Still, the researchers emphasize that the challenges of supplier integration can derail an NPD project and incur significant cost. Take, for example, the much publicized delays and cost overruns experienced by aircraft manufacturers Airbus and Boeing when they were developing the A380 superjumbo and Dreamliner 878 passenger jets. More generally, research sponsored by the U.S.-based National Institute of Standards and Technology found that the cost of poor buyer-supplier integration in different phases of NPD has been estimated to be at least $1 billion per year in the U.S. automotive industry and $3 billion per year in the U.S. capital facility industry.
One reason for these problems is that buyers underestimate the organizational challenges they face. “Suddenly what looked like a good idea becomes a coordination nightmare because every time a supplier makes a change, the buyer has to figure out what the effect might be on other parts designed by other suppliers,” explains Salvador. A chain reaction can ensue when other vendors modify the design of their components in response to the original change. “Also, when suppliers see constant change, their trust in the buyer’s ability to manage the NPD project is undermined, and so supplier commitment may falter,” he says.
Modularity mitigates these problems in a number of ways. For example, “the amount of interdependency between components is lower than with non-modular products,” Salvador says. As a result, modifications are less likely to trigger the chain reaction phenomenon. “We show empirically that this effect is magnified when it comes to coordinating suppliers and not just internal teams,” he says. The researchers tested their hypotheses on an international sample of 217 NPD projects.
In addition, reducing the number of design iterations gives suppliers a greater sense of control and fulfillment, since their overall contribution to the new product is clearer. A third advantage is that modularity helps to maintain active vendor participation. For example, when there are constant design changes, a supplier might be reluctant to assign design engineers immediately if this means interrupting other ongoing work.
However, “you don’t learn how to make modular products overnight,” points out Salvador. Companies have to build special organizational structures, acquire product standardization skills, and identify different cost drivers. Key to successful modularity is deep experience of the products concerned. In other words, modular design is a technical response to improve supplier involvement in NPD; but the organizational response is to create a modular design competence, and this takes time.
Even when experienced organizations are involved, however, innovation can negate the advantages of modular designs. The problem is that the buyer’s competence in modularity rests on familiar architectures and routines, which suddenly become unfamiliar when a radically new product concept is introduced. Innovation sweeps away many of the precedents that enable the NPD process to run smoothly. “Pragmatically, don’t try to leverage too much modularity when you are developing something radically new,” advises Salvador. In such cases, a better route might be to reduce the direct participation of suppliers until the new routines are tried and tested, or be prepared to accept high coordination costs.
The research project opens up new research possibilities. One issue that could be explored through new research is to what extent suppliers within an industry can become aware of potential buyers’ competence in modular product design. Also, should suppliers be able to gauge this level of competence before engaging in an NPD partnership? The vendors would compete to win business from buyers who are better at coordinating NPD, effectively turning competence in modularity into a sort of reputational capital for the buyer. Further research might identify whether there are components of a buyer’s modular product design that are not undermined by radical innovation. Moreover, it could reveal how to preserve and separate these components from competencies that should be “unlearned” by the buyer.
For further information on the Mitigating Supplier Integration’s Challenges in New Product Development: When Modular Design Competence Does and Does Not Help study, contact Fabrizio Salvador at email: fsalvador@zlc.edu.es, or telephone: +34 91 568 9856.