The new era of business marketing is built upon effective relationship management[1].  Many business marketing firms create a collaborative advantage by demonstrating special skills in managing relationships with key customers or by jointly developing innovative strategies with alliance partners[2].  These alliances between supplier and customers exist when the relationship becomes a collaborative exchange where close information, social, and operational linkages as well as mutual commitments made in expectations of long-run benefits exists[3].

But, what drives both parties, the supplier and the customer, to engage in this type of collaboration and close relationship?  Why would a customer decide to rule out the supplier’s competitors in favor of a single supplier?  Why would a supplier focus on a handful of customers instead of trying to capture a larger market share?  While the reason behind this decision varies by company and industry, there is still a list of common benefits that the companies sick when engaging in an alliance partnership with a supplier.  An alliance that when implemented correctly will benefit both, the supplier and the customer.

One of the most intimate and strategic relationships between a customer and its supplier is thru Early Supplier Involvement (ESI).  ESI in manufacturing happens when a supplier is involved in the product development process from a very early stage.  These suppliers act as an important source of innovation for the product development process[4].

ESI has gained its importance in the manufacturing sector in developing competitive advantage and outperforming rivals in market share while defending against competitive forces.  By practicing early supplier involvement (ESI), suppliers in the approved suppliers’ list will work closely together with manufacturers (customers) in sharing information, technological capabilities, knowledge, technical skills, and experience.

In numerous industries, shorter product life cycles and increased competition have raised the level of interest in the management of new product development processes.  Many firms are looking for ways to decrease concept-to-customer development time and, improve quality and significantly reduce the cost of resulting products simultaneously.

One approach which many companies are taking is to involve material suppliers earlier in the design process.  ESI has been advocated as a means of integrating suppliers’ capabilities in the buying firm’s supply chain system and operations. Partnerships with suppliers were formed together to take advantage of their technical expertise in designing and manufacturing.

The implementation of early supplier involvement (ESI) in these manufacturing sectors focusing on the electrics and electronics industries is one of the strategies that companies should acquire to face the challenges of globalization. In addition, nowadays, designing the relationship between customers and suppliers is very important and essential to sustain competitiveness within the marketplace.  Great benefits and advantages can be obtained if suppliers are involved in the customer’s product development as early as possible[5]. ESI brings forth significant advantages due to the involvement of suppliers in cross-functional teams from the very initial stages of product development. It helps in improving and ensuring accountability and alignment throughout the product development, innovation, and launch processes.

Benefits of ESI 

Additional significant benefits, of ESI, include[6]:

Short term:

• Better production quality
• Lower production costs
• Shorter development cycle
• Lower development costs

Long term:

• Joint research programs
• Aligned technology strategies
• Risk sharing

Levels of Involvement

Suppliers get involved, participate and collaborate with the customer in product development in different ways.  Different levels of involvement or communication happen thru product development projects.  Manufacturers communicate with their first-tier suppliers thru[7]:

• Purchasing engineering – A specialist function to provide the liaison between the engineering department and the purchasing department
• Early supplier involvement (ESI) – Best-in-class suppliers are invited to participate in the company’s product/process development projects at an early stage.
• Residential engineering – Engineers from the other party are located permanently within the organization.

These levels of involvement not only benefit the customer by making the supplier a crucial part of the product development, but it also benefits the supplier by having early involvement and residential resources on the manufacturing locations and participating throughout the full or considerable part of the product development process provides the supplier with firsthand information on the customer needs and challenges.  This information gives the supplier an advantage that no other competitor enjoys and allows them to better customize their workforce and strategy to reinforce the alliance with the customer and built a long-term partnership.

ESI in the automobile industry

Involving suppliers in cross-functional teams at the early stages of product development has strong roots in the Japanese automotive industry.  Today ESI remains quite common in the automotive and consumer electronics industries.  Many purchasing organizations view coordination with critical suppliers via ESI as important enablers to product, process, and supply chain structure development and as a cost reduction exercise[8].  One of the pioneers of ESI in the automobile industry is Toyota.  Toyota, along with other Japanese automobile companies such as Nissan and Mazda were outperforming U.S. competitors on nearly every measure: speed to market, design quality, product-design manufacturability, cost, and productivity. Observers concluded that the key to Japanese success, and the U.S. industry’s weakness, was integration—both between product design and manufacturing process design, and with marketing, purchasing, finance, and other business functions[9].  Japanese companies like Toyota only consider exclusive partners with about a dozen of their first-tier suppliers.  This elite group includes all the big suppliers, such as Nippondenso, Aisin Seiki, and Calsonic.  These big suppliers have the resources to invest in their customers.  They can provide station (residential) engineers full-time in their customers’ offices or pledge major resources to the development of products they will not make and sell for years to come.  As an example, Nippondenso spent years in research to determine the complete range of sizes and performance levels for alternators that potential customers worldwide (primarily Toyota) might require within the next ten years[10].

Another interesting case of ESI comes from the automobile industry but this time in Brazil.  Where the market demand for automobiles with flex-fuel technology in Brazil to handle gasoline with different ethanol levels made both, Volkswagen and General Motors, had to depend on electronic injection systems suppliers (MM in the case of VW and Delphi in the case of GM) to take over the development of the engine of specific models being manufactured and sold at Brazil because neither of these companies had developed the expertise or had the experience in the flex-fuel technology that these suppliers already possessed and which the market required[11].

Even though our last ESI example was driven by technology innovation, cost saving was probably one of the biggest drivers, because trying to do everything in-house may lead to a competitive disadvantage.  No company can afford to own all the requisite technology.  Suppliers usually possess state-of-the-art knowledge available as well as the most advanced technologies for their parts and materials[12].  It is known that approximately 80% of the manufacturing cost of a product is determined by the design of the product[13].  Customers go to ESI for different reasons, and even when some of the cases may not result in immediate cost savings from the process, the involvement of the supplier in the early stages of the product development may result in competitive advantages, which result in market share gain and profit.

ESI in sensors and controls manufacturing

Sensata is the world’s leading supplier of sensors and controls across a broad range of markets and applications.  They had a project to create product samples of a new component ready for production in only 20 weeks.  Usually, similar projects required 10-12 months to complete.  Sensata involved the supplier at the beginning stages, something they usually do not due because most of their projects are long-term and can take up to 2 years to complete.  Giving Sensata enough time to come up with their own ideas.  The project costs were reduced by 30% compared to the expected costs.  The reduction in time along with suggestions from the supplier to use less silver without affecting the functionality of the product resulted in major savings[14].

ESI in the tires industry

Another case to evaluate is the case where Apollo was required to develop a new type of tire for a customer.  The customer demanded a new test be conducted due to the introduction of a new type of tries which required different measurements.  In this case, the customer demanded Apollo to work closely with the German supplier from the first stage of product development.  The costs turned out to be as expected as they were agreed since the beginning of the project, and the customer expectations were met.  The project management from Apollo recognized that the expertise of the supplier in the early stages was important[15].

ESI in circuit manufacturing

Not every case of ESI results in cost savings, but may result in a competitive advantage.  This is the case with Siemens.  Siemens is a global powerhouse focusing on the areas of electrification, automation, and digitalization.  Siemens needed a Printed Circuit Board (PCB) for industrial use.  As the goal of Siemens is to play a pioneering role in the industrial market, the main goal is to get as much innovation from the supplier as possible before the competitors do.  Siemens did not have the innovation needed to supply the product market, therefore they involved the supplier from the very beginning of the product development.  The development costs doubled because the supplier perceived the dependency of Siemens on them to be able to develop the product and pioneer on the market or lose it.  This was no problem for Siemens as this allowed them to be the market leader and move ahead of the competition[16].

The Risks of ESI

As noted in some of the cases described early supplier involvement (ESI) can be very beneficial for both, the customer and the supplier, if done right.  ESI still possess some challenges in its implementation.

Some significant ones are[17]:

• Lack of cooperation
• Intellectual property conflicts
• Overestimation of the development skills of the supplier
• Reward structure for suppliers

To minimize the risk of being negatively impacted when using ESI the customer needs to remember that supplier integration is a process that must be managed properly to achieve maximum impact.  Research has revealed many valuable strategies and practices for successfully managing supplier integration.

These can be grouped into six key areas[18]:

• Use supplier integration selectively
• Choose the right supplier(s)
• Build commitment to the integration effort in both the buyer and supplier organizations
• Define metrics and targets clearly, and give the supplier(s) a voice in establishing the metrics and targets
• Give supplier(s) an active role on the development team
• Share information openly and extensively

Conclusion

As mentioned before, supplier integration is becoming crucial for companies to innovate, reduce costs, avoid risks, improve quality, and reduce product development time, but for all these goals to be achieved supplier integration needs to be done right.  The true desire for collaboration needs to be present, where both parties see the benefit in the long-term alliance.  Both need to continuously manage and measure their investment and benefit return from the business relationship.  A symbiotic relationship between customer and supplier will provide both with a competitive advantage in a very competitive market.

Resources

[1] For a comprehensive review, see Robert W. Palmatier, Relationship Marketing (Boston: Marketing Science Institute, 2008).

[2] Rosabeth Moss Kanter, “Collaborative Advantage”, Harvard Business Review 72 (July-August 1994): pp. 96-108

[3] Michael D. Hutt and Thomas W. Speh, “Business Marketing Management b2b”, Eleventh Ed. p. 65-66

[4] https://www.mbaskool.com/business-concepts/operations-logistics-supply-chain-terms/14951-early-supplier-involvement-esi.html, “Early Supplier Involvement (ESI)”, accessed Dec. 17, 2017

[5] Dr. Abu Bakar Abdul Hamid, “The Impact of Purchasing and Early Supplier Involvement (ESI) in a Manufacturing Firm” Research Vot 75211, Faculty of Management and Human Resource Development, Universiti Teknologi Malaysia, 2006: pp. 23-24

[6] https://www.mbaskool.com/business-concepts/operations-logistics-supply-chain-terms/14951-early-supplier-involvement-esi.html, “Early Supplier Involvement (ESI)”, accessed Dec. 17, 2017

[7] http://slideplayer.com/slide/5782795/, “Purchasing, new product development, and quality control”, accessed Dec. 17, 2017

[8] https://www.cips.org/en/knowledge/procurement-topics-and-skills/efficiency/collaborative-working1/early-supplier-involvement-esi/, “Early Supplier Involvement”, accessed Dec. 17, 2017

[9] https://hbr.org/1998/07/another-look-at-how-toyota-integrates-product-development, “Another look at how Toyota integrates product development”, accessed Dec. 17, 2017

[10] https://hbr.org/1994/11/a-second-look-at-japanese-product-development, “A second look at Japanese product development”, accessed Dec. 17, 2017

[11] https://www.academia.edu/29355816/Suppliers_Involvement_Strategies_in_Flex_Fuel_Vehicle_Development, “Suppliers involvement strategies in flex fuel vehicle development”, accessed Dec. 17, 2017

[12] Dr. Abu Bakar Abdul Hamid, “The Impact of Purchasing and Early Supplier Involvement (ESI) in a Manufacturing Firm” Research Vot 75211, Faculty of Management and Human Resource Development, Universiti Teknologi Malaysia, 2006: pp. 31

[13] Dr. Abu Bakar Abdul Hamid, “The Impact of Purchasing and Early Supplier Involvement (ESI) in a Manufacturing Firm” Research Vot 75211, Faculty of Management and Human Resource Development, Universiti Teknologi Malaysia, 2006: pp. 23

[14] David Basi, “How does early supplier involvement (ESI) timing affect development costs”, p. 5

[15] David Basi, “How does early supplier involvement (ESI) timing affect development costs”, p. 4

[16] David Basi, “How does early supplier involvement (ESI) timing affect development costs”, p. 5

[17] https://www.mbaskool.com/business-concepts/operations-logistics-supply-chain-terms/14951-early-supplier-involvement-esi.html, “Early Supplier Involvement (ESI)”, accessed Dec. 17, 2017

[18] https://www.instituteforsupplymanagement.org/pubs/Proceedings/confproceedingsdetail.cfm?ItemNumber=10417&SSO=1, “Supplier integration into new product/process/service development”, accessed Dec. 17, 2017