Partner Selection in the Fuzzy Front End

Manufacturers summary: Master Thesis Gerben Driest 2012 1

Partner selection in the Fuzzy-Front End:

Know why your customer wants you.

Manufacturers summary

Name: Gerben Driest University of Groningen Faculty of Economics and Business Program: MSC Business Administration Specialization: Strategy and Innovation Period: 02-2012 – 07-2012

Abstract: This research attempts to enhance the understanding of how manufacturers select suppliers for collaboration in the Fuzzy-Front End (FFE) of product innovation. The results based on data collected from 11 interviews with manufacturers and 7 interviews with suppliers, show that knowledge, trust, competencies, pro-active attitude, commitment and agreement in motivation and goals are the most important selection-criteria. Furthermore, the results of this research allow the suppliers to better understand their customers in the Business to Business (B2B) market, which could enhance their possibility to be chosen as development partner in the customers’ FFE.

Keywords: Innovation; collaboration; Fuzzy-Front End; partner selection; partnering concerns


Summary

The purpose of this research is to answer the question how suppliers can increase the probability to be chosen as partners in the FFE of a manufacturer. Besides the information that this research provides for the suppliers, it also gives more insight in the decision making process of manufacturers in the FFE. Several researches have been dedicated to this subject, and built on the insights from these papers the current research is conducted. In addition to the previous research, study investigates the mutual difference between selection criteria and different kinds of manufacturers. Also a comparison is made between the suppliers’ assumptions about the selection criteria of manufacturers and the actual ones. The results of the research show that suppliers need to be aware of the different requirements of their customers in the Business to Business market (B2B) which is caused by the high mutual difference between the demands of the manufactures. By knowing the customers, suppliers can deliver optimal value which increases the probability to be chosen as a partner. The quantitative results show that knowledge and competencies are valued as very important criteria. Knowledge is mentioned as difficult to sell but customers are searching for authorities and experts in their specific area of interest. Also the trust, commitment, pro-active attitude, goal correspondence and motivation correspondence are mentioned as decisive criteria. Especially in the FFE, these partner-related criteria are of great importance due to the lack of boundaries. The unpredictability of the FFE also requires a business model that allows risk taking, which is considered by several respondents as a business model which is not based on short term revenue but on intrinsic interest. By focusing on the specific needs of the customers and investing in the seven most important criteria that were mentioned before, suppliers can increase the probability to be chosen as a partner in the FFE of a manufacturer.

Introduction to the theory:

The demand for collaboration in New Product Development (NPD) has grown in recent years, which has resulted in a higher amount of integration of suppliers, customers and other organizations. This co-development is a result of a loss of internal industrial research effectiveness, the growing mobility of skilled people, the increasing turbulence of the external environment, the increasing complexity of technology that is needed to innovate and the rising costs of R&D, all of which leads to a paradigm shift from a closed to an open innovation model. This study will focus on co-development in the first phase of NPD (figure 1), that is also known as the “Fuzzy Front End”(FFE) which can be defined as the period between when an opportunity is first considered and when an idea is judged ready for development.


Theory:

Organizations are constantly searching for the most efficient way to maximize their innovation management efforts, in a changing global environment. Innovation is the responsibility of all the different parts of an organization and their involvement needs to be determined accordingly. The ability of an organization to identify, acquire, and utilize (external) ideas can be seen as a critical factor with regard to market success. The Business to Business (B2B) market will be the focal market in this research; therefore B2B relationships will be deliberated. It can be assumed that the buying decisions are based on tangible parameters in comparison to the Business to Consumer (B2C) market where a higher degree of intangible buying incentives is found. The need for risk reduction should be answered by the supplier with customized solutions, which require a good understanding of the specific needs of the customers, and the added (monetary) value of the service or product. Not only in the buying decision but also in selection of partners, firms are searching for ways to reduce the risk. There are several potentials that can be selected as partner, and the selection is dependent on the needs of the manufacturer. Examples of potential partners are suppliers, consumers, universities or knowledge institutions that can be involved in product development. In this research there will be a focus on partnerships with suppliers, because this research is written from the perspective of the supplier. Supplier involvement can occur in different areas of the production process and van a clear definition of supplier involvement which will be used in this study is: “Supplier involvement refers to the resources (capabilities, investments, information, knowledge, ideas) that suppliers provide, the tasks they carry out and the responsibilities they assume regarding the development of a part, process or service for the benefit of a buyer’s current or future product development projects”. Suppliers can provide additional resources which could increase the end-consumers satisfaction and can also reduce the time and money spent of unnecessary research and development on features and extra services. The reason that many manufacturers do not choose to involve suppliers in the early stages of product development is twofold: first, most of them want to develop internally and

Figure 1: NPD phases


don’t see the necessity of collaboration while second; many suppliers do not have the competencies to engage in this phase.

Fuzzy-Front End

In the FFE an organization is busy formulating a product concept and determining if the idea is worth the investment of resources for development, in addition the FFE includes the formulation of the product strategy, the identification of opportunities and ideas that precede a further development of the concept. The front end is one of the greatest areas of weakness of the innovation process and that it fundamentally determines the later innovation success. Figure 2 NPD Stages Khurana & Rosenthal

The model in Figure 2 shows that the FFE contains preliminary opportunity identification, and market and technology analysis, followed by the Front End where the product/ concept is defined. When an idea has made it through the front-end the management will make the Go/ No-Go decision. The FFE phase is characterized by its fuzziness, broad focus with a low degree of formalization, small teams and budgets and a low presence or complete absence of management commitment. In addition to this enumeration the FFE is mentioned as an unpredictable stage with a high degree of chaos because it is difficult to plan ‘Eureka’ moments. The unpredictability in this phase has as advantage that there are lower costs involved with technical changes, and the fact that there are more possibilities to reduce the manufacturing price. These advantages are shown in figure 3. In addition to the information that is shown in figure 3, it is mentioned that many manufacturers concentrate on research and sales, and outsource the development to partners, while the participation of suppliers in the research part could reduce the cost


Figure 3: NPD Specifications 1

Another advantage is the possibility to reduce the lead time in the beginning of the process, when the time pressure is low (figure 4). Unfortunately, managers pay most attention to the process when most of the early advantages are gone. In addition, the appropriate management of the FFE in intra-firm settings is essential, and that unsuccessful management of this phase could have considerable consequences. Figure 4: NPD specification 2

Need for collaboration

Product development is stated as one of the most risky investments of firms, the chance that a

product does become a success is approximately 33%, were another 33% is doubtful and the last 33%

is a failure. The reason that so many projects fail can in general be brought back to three critical

success factors: Marketing, technical and project management, while environmental factors of failure

were only mentioned a couple of times. The selection of one or more partners for a strategic alliance

is primary based on a lack of competences and resources at the requiring firm.


Not only the ability to gain the right knowledge or complementary assets in NPD process is a problem, but also the internal research has become less effective. The increasing global competition, the shortage of product life cycles, the growing mobility of skilled people, the turbulence of the external environment and the increased complexity of technology and R&D costs as incentives for collaboration. These developments resulted in an increased outsourcing of components and subsystems because critical resources may extend beyond firm boundaries. Early involvement can contribute knowledge of design, technology, costs, manufacturing lead times, product definition and project planning. Timesaving through joint technologies and earlier problem recognition in early cooperation can result in long-term relationships and could lead to a competitive advantage, through new insights and targeted. Partnership is not per definition a competitive advantage because competitors can collaborate with the same partners. It is argued that production networks could out-innovate other networks by improving their knowledge-sharing competences. It is also mentioned that in some industries (e.g. wire termination equipment) the majority of innovations could be traced back to suppliers.

Partnership

The engagement in a partnership with suppliers is not without risks, because it is costly and takes time and effort. For that reason supplier engagement should be applied selectively. The extent of supplier involvement in NPD is dependent on the supplier’s ability to accomplish the. The extent of involvement has an impact on the supplier’s role in NPD. These roles are described by Kamath and Liker (1994) in table 3. As can be seen in the table, the different stages contain different responsibilities for the suppliers. This research will focus on the partner role of the supplier, because in other stages, the provided specifications are too specific for the FFE, and partners are allowed to get involved in the pre-concept stage. Many suppliers have an explicit strategy to become involved in product development, but need to have a clear incentive to join. The needs of suppliers could lead to a paradox that on the one hand suppliers want an open and unstructured environment to discuss in, while on the other hand they prefer a clear outcome. Further investigation on partnership revealed different views on relationships and transactions. Two of the most prominent views are the social or embedded view and the neoclassical view. Table 3: Supplier roles according to Kamath and Liker (1994)

The neoclassical view suggests that transactions can take place trough loose arm-length connections which are impersonal and continuously shifting that self-interest motivates the actions and that firms are avoiding dependence. On the other hand the social view represents a network that exists of stable and close relationships with embedded. These views are applied on the topic of partnering in


NPD where they distinguish the long-term strategic processes from the short-term operational processes. The long term collaboration is focused on the creation of a supplier-network that can engage in the product development processes, which should result in more efficient/ effective future collaboration, access to supplier’s technology, technology roadmap alignment and the transfer of earlier developed solutions to other projects. The short-term collaboration processes are concerned with the collaboration in specific development projects, which should result in shared technology and development costs and a reduction of the lead-time. Both views have their advantages and disadvantages, and firms should search for a balance between close and distant partners. The share and development of tacit knowledge is mentioned as results of collaborative arrangements and access to internal, which might over time enable partners to develop a common understanding of processes which could lead to a reduction of coordination expenses. A downside of strong ties is the fact that they are more vulnerable to abuse than the weaker ties, due to the trust in the other party that it would not harm a partner; making firms less alert to signs of abuse. Another problem with strong ties, or ties with partners within the network is that it might create a resistance to change (inertia), and a reduction of new information flow.

Partner selection

When a company has decided to cooperate with other firms in their NPD process, the problem of selecting the right one arises. Traditional criteria like costs and quality are not sufficient anymore, and more specific criteria are brought to the table in selecting the right partner. Due to the imperfect information about the trustworthiness, motives and qualities of the potential partners, collaboration contains a certain risk. Choosing the wrong partner may entail high costs and disappointment, so to reduce the uncertainty around the partner decision, many firms rely on past ties or references from third parties. Familiarity with partners or good referrals can increase trust, which could result in an assumption that the collaboration partner will not take advantage of you. Trust is defined as one party’s confidence in an exchange partner’s reliability and integrity, and appoint trust and commitment as the two key factors in a successful collaboration. A high degree of trust in exchange relationships is mentioned to be important because it enriches the firm’s opportunities, access to resources and flexibility in ways that that are difficult to emulate using arm’s-length ties. Companies are more likely to invest in relation-specific assets when these are protected by effective safe guards. Several studies have argued that informal safeguards like goodwill and trust are the best manner to protect the investments and exchanges that are made during a complex transaction. The search for partners is based on complementary knowledge but when the knowledge becomes too similar, there is no incentive to collaborate and when the knowledge is too different it becomes very hard to communicate. In addition it is stated that the need for additional resources is a primary reason for strategic alliances and for selecting specific alliance partners, they also mentioned that the reputation of a partner weights heavily in selection. When two firms have been engaged in an alliance they are likely to do so again, although the probability that they will learn again has decreased. Also the position of the supplier in the supply chain and the extent of focus on innovation are mentioned as an influential factor on the probability to be engaged in NPD. The place in the network seems to be an important aspect of the partner selection, but not the only. Both suppliers and manufacturers emphasize the importance of suppliers being pro-active. Suppliers are to an increasing extent responsible for benchmarking, which demands an increasing amount of knowledge in the technological front-line. The pro-active suppliers are also expected to come up with their own new design solutions without explicit demands made by the manufacturer. Finally, pro-active suppliers must be able to evaluate their products critically, especially in regard to their products interplay with other components. Innovation requires collective action to create shared understandings from heterogeneous perspectives, in addition it is stated that the future will be bright when technicians are gifted with


marketing imagination and marketers know the technical possibilities. But the conversion process from market to technology orientation and the other way around requires a change in. To increase the value for the manufacturer, suppliers should invest in the competences of marketing, technical knowledge and capabilities and project management. The problem with the theory is that managers do not always make rational decisions, and do not always have the right information which forces them to choose known or recommended partners for their. The case study will give more information about the reasons to select a certain partner over the other, which has to provide information for the positioning of partners.

Results:

This research is built on an extensive base of literature regarding collaboration in NPD and supplier selection. Although there has been some research on the topic of FFE collaboration with suppliers some parts were still unclear. This research has investigated the mutual importance of selection criteria by performing several case studies at both suppliers and manufacturers in product development. Based on the information from both suppliers and manufacturers an assumption can be made in relation to the importance of the criteria, and the differences between types of manufacturers. The results agree with formerly mentioned literature concerning the reasons to collaborate with suppliers in NPD, where it was stated that additional knowledge and competencies and new (innovative) insights are reasons to collaborate. Also, the selection criteria that were mentioned in open questions of the interview were conform the literature. Figure 5: Selection Criteria scores (Manufacturers)

(mean is measured on a scale from 1 (very unimportant) to 5 (very important)

The first results show that a supplier needs to be keen on its knowledge and (technical) competencies. These criteria can fill the gaps in the manufacturers’ organization, and are therefore very important. Four other criteria on which the suppliers need to focus are the committed and pro-active attitude, trust and the agreement in motivation and goal. To achieve these criteria, it is mentioned that a passion for the project and knowledge of the customer is essential. Money is argued to be the wrong incentive to engage in a FFE, and therefore cost structures that are based on hourly wages are not favorable. Some manufacturers have lost their trust in development partners who were acting pro-active to stretch time and declare as many hours as possible. This is an example of how suppliers can decrease their chances on the most important partner-related criteria. One respondent argued that the different parties first need to match on an abstract level where they trust each other and have a common motivation; the other criteria are useless without this base.

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Forced merging of parties are in his opinion doomed to fail because the intrinsic motivation and trust are likely to miss. A comparison between the assumptions of suppliers about the selection criteria of manufacturers and the actual criteria showed that manufacturers graded the knowledge, pro-active attitude, long term orientation, common motivation and common goal as more important selection criteria than expected by the supplier. The second comparison was between SME’s and larger companies. Size is mentioned as a potential influencer of the selection criteria used by firms. The results show that large firms are more aware of the portfolio, commitment, competencies and also more focused on covering the 3 components (1) marketing, (2) technology and (3) project management in selecting their suppliers. SME’S, in contrast, grade the pro-active attitude of a supplier higher than the large firm. A part of the SME’s consisted of startups and this group is also compared with the rest of the population. In addition to the results of the SME’s the startups show to be the driving force behind the high importance of a pro-active attitude with smaller firms. Portfolio is in this case also more important for the more established firms. The expected need for competences and resources is not significantly different from more mature firms, because both grade these criteria very high. The difference between manufacturers in the B2B and the B2C was visible on the criteria; portfolio, supply chain, commitment and trust. Trust and portfolio are higher rewarded by B2B firms while commitment and supply chain are better rewarded by B2C firms. The difference in supply chain necessity could be caused by an earlier mentioned difference in organization of the NPD process. In summary, the results are in general in accordance with the previously mentioned literature, and can add additional insights that will be discussed in more detail in the conclusion.

Conclusion:

This research is conducted in collaboration with a group of suppliers to gain more insight in the way manufacturers select suppliers as partners in the FFE. The results of this research will be summarized in this conclusion. The results of the research showed that especially competencies and knowledge are valued as important criteria, which means that the supplier needs to know which competencies and knowledge is valued by their customers. The other important criteria are trust, pro-active attitude, commitment, motivational correspondence and goal correspondence. The suppliers in this research seemed to underestimate the important selection criteria knowledge, pro-active attitude, motivation agreement and goal agreement. Implications In relation to the results it is important for suppliers to know the customer and the context of the customer, to meet their specific requirements. Therefore suppliers should not only focus on the product but on the broader context of their consumer. By doing this, suppliers will increase the probability to be chosen as a partner in the FFE of their customer. This is strongly related to the positioning of the supplier, and the business model behind it. A model that is unlikely to fit in this process is a model based on making money in the FFE. This is a reason why several manufacturers are not enthusiastic about a business model based on hourly wages. The fuzziness and unpredictability of the phase does not allow too much fixed guidelines. This is a point where many suppliers struggle because they want both a certain outcome and in the meantime the full freedom in the discussion about the idea. But in general, participating in the Fuzzy Front End requires entrepreneurship and the corresponding daring to take risks. Another point that suppliers need to invest in are the criteria technology, marketing and project management because it allows them to communicate on an equal level with the several parties that are involved in the decision-making unit of the customer.


In summary, Suppliers need to be very aware of the different requirements of their customers in the B2B market. By knowing the customer and its requirements the supply can be adapted, so suppliers can deliver optimal value to their customers. The need for risk reduction among customers should be answered with customized solutions. Knowledge and competencies are valued as very important criteria and although knowledge is difficult to sell, customers are searching for authorities and experts in their specific area of interest. Also the trust, commitment, pro-active attitude, goal correspondence and motivation correspondence are mentioned as decisive criteria. Especially in the FFE, these partner-related criteria are of great importance due to the lack of boundaries. The unpredictability of the FFE also requires a business model that allows risk taking. So by knowing the customer and its context, suppliers are better able to adapt their offerings to the specific needs, and increase the probability to be chosen as a partner in the FFE of the customer.

Appendix:

For further information and/or questions you can contact me:

linkedin.com/in/gdriest

linkedin.com/in/gdriest


Appendix A: Results for Likert scale measurement.

Descriptive statistics Likert-scale measurement (Manufacturers)

proactive reputation portfolio Tariffs trust competencies knowledge

N Valid 11 11 11 11 11 11 11

Missing 0 0 0 0 0 0 0

Mean 4,6364 3,4545 4,0000 3,0909 4,8182 4,3636 4,8182

Std. Deviation

,67420 1,12815 1,00000 ,70065 ,40452 ,80904 ,40452

market repeat location network references overlap threekey

N Valid 11 11 11 11 11 11 11

Missing 0 0 0 0 0 0 0

Mean 3,5455 4,0000 3,2727 2,3636 3,6364 3,4545 3,3636

Std. Deviation

1,57249 ,44721 1,10371 1,02691 ,92442 ,93420 1,20605

supplychain motivation goal culture commitment longterm N Valid 11 11 11 11 11 11

Missing 0 0 0 0 0 0

Mean 3,1818 4,4545 4,2727 2,9091 4,7273 3,3636

Std. Deviation

1,16775 ,52223 1,00905 1,04447 ,46710 ,80904

(Mean is measured on a scale from 1 (very unimportant) to 5 (very important) Appendix B: Results from top 5 measurements.

Descriptive Statistics Top 5 measurement (manufacturers)

Criteria N Sum Mean Std.

Deviation Criteria N Sum Mean Std.

Deviation

Proactive 11 14 1,273 1,1037 networkpostion 11 0 0 0

reputation 11 3 0,273 0,6467 references 11 0 0 0

Portfolio 11 0 0 0 overlap 11 0 0 0

Costs 11 3 0,273 0,6467 threekey 11 0 0 0

Trust 11 17 1,545 1,3685 supplychain 11 2 0,182 0,603

competencies 11 17 1,545 1,4397 motivation 11 9 0,818 1,328

knowledge 11 18 1,636 1,5667 goal 11 6,5 0,591 0,97

marketknowledge 11 2 0,182 0,603 culture 11 3 0,273 0,9045

Repeat 11 2 0,182 0,603 commitment 11 10,5 0,955 1,0596

Location 11 1 0,091 0,3015 longterm 11 1 0,091 0,3015

(All participants were allowed to divide 10 points over their 5 most important criteria)

Partner Selection in the Fuzzy Front End

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