Collaborative innovation in supply chain systems: Value creation and leadership structure

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Abstract

In the information age, collaborative innovation in process and product is critically important. In this paper, we study the value of a supply chain innovation in which one upstream supplier and one downstream manufacturer may co-develop a product that includes several innovative elements. The supplier is responsible for process innovation to optimise the production system and reduce unit production costs, and the manufacturer is responsible for product innovation. We study innovation leadership and consider the supplier-led (SL) and manufacturer-led (ML) innovation games. We find that in both SL and ML innovation games, if the manufacturer has sufficient resources and capability to invest in product innovation, the manufacturer is always willing to invest in product innovation, but not the supplier. We identify the value of co-innovation and innovation leadership. We find that the product with higher innovation level will be provided under the ML innovation game. When selling the technological and innovative products (as they usually have a larger profit margin ratio), the manufacturer should invest more in product innovation. When product innovation efficiency is large (small), the manufacturer's profit is convex (concave) in the profit margin ratio. We identify the optimal value creation of joint pricing and innovation in a supply chain and the impacts of “process-product innovation dependence”. Our results (i) highlight the value of manufacturer-led innovation and the importance of considering the product's profit margin ratio in co-innovation, (ii) indicate that the manufacturer should be the leader to invest in product innovation, and (iii) the co-innovated products should be sold at a high profit margin.

Introduction

Nowadays, in the information age, innovation is the major driver to create value, enhance competitiveness and attract consumers in supply chains (Chong and Zhou 2014; Yu et al., 2019). Supply chain innovation includes both product innovation and process innovation (Lee and Schmidt 2017). Product innovation refers to design enhancement of, e.g., the assembled products, with new features (Utterback and Abernathy 1975; Qi et al., 2020). It includes ideation, evaluation, design and development, testing and validation, launch and ramp-up, maintenance, and end of life (Lee and Schmidt 2017), and all of the above phases of product innovation enhance product design and quality (Plambeck and Taylor 2005). Process innovation refers to innovative approaches to producing and delivering products (Cherrafi et al., 2018) and it generates cost/performance attribute enhancement (Utterback and Abernathy 1975; Qi et al., 2020). According to PwC's Innovation Benchmark Report in 2017, process innovation efforts result in both revenue growth and cost reduction (Staack and Cole 2017). For example, automation can reduce production costs and enhance process innovation in apparel manufacturing under the Industrial 4.0 framework (Andersson et al., 2018). Both product and process innovation are important in supply chains, but cannot be completed by only one member in the supply chain. New product development requires different supply chain members' involvement in both product and process innovation (Lee and Schmidt 2017).

Channel collaboration on innovation is an important topic for both scholars and industrialists (Benitze et al., 2020; Beltagui et al., 2020; Shen and Chen 2020). Collaborative innovation needs a platform to co-develop the product that affects new product performance (Benitze et al., 2020). To ensure the success of collaborative innovation, the supply chain member may jointly develop a platform to communicate how product and process innovation can be enhanced. This paper is mainly motivated by the real practices of collaborative innovation in the well-known sportswear fashion brand Nike. For example, Nike co-invests in a collaborative innovation platform with its supplier Sinotex in China. In this collaborative innovation platform, Nike drives product innovation (e.g. design) to increase market demand, and the supplier follows Nike's requirement to minimise production costs and satisfy quality standards in terms of process innovation. Such co-innovation projects have been widely applied in Nike. For instance, Nike designs a new golf shirt with a wrinkle-free high-quality collar, and one of its contract manufacturers, Esquel, helps to develop new materials and “experiment” with different technologies (Peleg-Gillai and Lee 2013). Nike also works with Flex, a world-class global manufacturer that participates in collaborative innovation on footwear. By using the new production system introduced by Flex, the cost of labor could decrease by 50% and the cost of materials could reduce by 20% (Smith 2015). Flex produces sports shoes for Nike with a special knitting machine that can reduce labor input and material usage, and enhance product appearance (Bissel-Linsk 2017). Nike works with Far Eastern New Century Corporation in China to implement a water-free dying process in which water is replaced by recycled CO2. As a result, energy consumption is reduced and the need for added chemicals is eliminated (Nike news, 2014).

Table 1 shows the recent examples of collaborative innovation in Nike. The above cases show that Nike is keen on developing an innovation platform to work with its suppliers in terms of collaborative technological innovation. Undoubtedly, Nike's success is partly due to its effective product and process innovation. All aforementioned cases in Nike indicate that process innovation can not only reduce unit production cost due to special technology adoption, and fewer material usage but also enhance product quality, which further increases market demand. However, having product and process innovation requires significant investment from both Nike and its suppliers and the value of co-innovation in a supply chain system is unclear.

Based on the evolution of technology management, in the early stages of a product lifecycle, when product features and consumer tastes are uncertain, product innovation is important and the buyer should be the leader. In the later stages of the product lifecycle, when the product is more mature in the market, the supply chain focuses on efficiency and process innovation which can help generate cost reduction, so process innovation is important and the supplier should be the leader (Adner and Levinthal 2001). Therefore, in channel collaboration, what is the effective innovation leadership structure, i.e., who should lead innovation, is unclear (Orji and Liu 2020). This issue is also critical for Nike to adopt collaborative innovation strategies with their suppliers. Three research questions (RQs) arise.

RQ 1: What is the value of co-innovation in a supply chain system?

RQ 2: What are the impacts brought by different channel leadership (supplier-led versus manufacturer-led) in the innovation platform?

RQ 3: Which kinds of products need strong co-innovation in product development?

In this paper, we examine the effects of collaborative innovation on innovation-led games in a supply chain system. We consider supplier-led (SL) and manufacturer-led (ML) innovation games, respectively, and evaluate the value creation from innovation-led games and co-innovation.

This paper has three major contributions. First, we analytically determine the dominant value of product innovation in co-innovative supply chain systems. We find that in both SL and ML innovation games, if the manufacturer has sufficient resources and capability to invest in product innovation, it is optimal for the manufacturer to invest in product innovation, but the supplier is not always willing to do so. Second, we derive in closed-form the optimal value creation of ML innovation in supply chain systems. The product with higher innovation level will be provided under ML innovation. When selling technological and innovative products (with a larger profit margin ratio), the manufacturer invests more in product innovation. When product innovation efficiency is high, the manufacturer's profit is convex in the profit margin ratio, but when product innovation efficiency is low, the manufacturer's profit is concave in the profit margin ratio. Third, we identify the optimal value creation of joint pricing and innovation in a supply chain system. When the wholesale price is sufficiently small, the optimal value creation of endogenous pricing is significant for both suppliers and manufacturers under both the SL and ML innovation scenarios. From our analytical findings, we discuss the practical implications of innovation leadership, process innovation, product innovation and product selection for collaborative innovation in Nike. Fourth, to strengthen the analyses and for robustness checking, we extend the model by considering the case with the process-product innovation dependence. We find that all of the basic model's analytical results remain valid under the “process-product dependent innovation” extended model. We surprisingly find that in the supplier-led innovation game, product innovation is independent of the “coefficient of process-product innovation dependence”, but in the manufacturer-led innovation game, product innovation is increasing in the “coefficient of process-product innovation dependence”. This is mainly because the supply chain structures are different in the supplier-led and manufacturer-led innovation games in terms of product innovation. All these findings not only significantly contribute to the literature but also provide important guidance to practitioners on the optimal collaborative innovation in the information age.

This paper is organised as follows. In Section 2, we review the relevant literature. Section 3 introduces the base model. In Section 4 we analyse two innovation-led games and compare their performance. Section 5 studies the value of innovation-led games and Section 6 discusses innovation-led games with joint pricing and innovation decisions. Section 7 extends the model by considering product-process dependent innovation. Section 8 concludes the paper with general remarks and future research directions. All of the technical proofs are provided in the Appendix.

Section snippets

Literature review

The literature review mainly focuses on analytical works and has three parts: downstream innovation, upstream innovation, collaborative innovation and platform operations in supply chain systems.

The analytical model

We consider a B2B supply chain system in which there is one upstream supplier (e.g., Esquel and Flex) and one downstream manufacturer (e.g., Nike). The supplier and manufacturer co-develop a product X that has several innovative elements in a collaborative innovation platform. The platform can be developed by one member in the supply chain or co-developed by two members. The supplier is responsible for process innovation to optimise the production system, reduce unit production costs and

Innovation-led scenario

In this section, we study the innovation-led scenario, i.e., the leader (of the Stackelberg game in game theoretical analysis) who decides the innovation level first. We examine two scenarios. One involves SL innovation, where the supplier is the innovation leader and the manufacturer is the follower, and the other involves ML innovation, where the manufacturer is the innovation leader and the supplier is the follower.

The value of Co-Innovation

In this section, we examine the value of co-innovation, i.e., where both the supplier and manufacturer commit to investing in process and product innovation, respectively. We compare the cases in which the supply chain has co-innovation and the supply chain only has a single innovation (i.e., either product innovation only or process innovation only). We use NS and NB to denote the single innovation cases (NS for product innovation only and NB for process innovation only).

For the NS case, we

Optimal pricing and innovation

In this section, we consider that both the retail price and product innovation effect are endogenous and decided by the manufacturer simultaneously. As in the above section, we consider two cases, the SL and ML innovation games. We use the similar approach of backward induction to derive the optimal results in Section 6.1 Supplier-led innovation, 6.2 Manufacturer-led innovation.

Process-product innovation dependence

In this section, to strengthen the analyses and for robustness checking, we extend the model by considering the case with the “process-product innovation dependence”. The process-product innovation dependence implies that the impact of process innovation depends on product innovation. For example, Flex produces sports shoes for Nike with a special knitting machine that can reduce labor input and material usage, and enhance product appearance (Bissel-Linsk 2017). We consider the effective

Conclusion

Collaborative innovation is critically important in supply chains to improve channel performance. In this paper, we analytically investigate the effect of a co-innovation platform in a supply chain system which consists one upstream supplier (e.g., Esquel) and one downstream manufacturer (e.g., Nike). The supplier and manufacturer co-develop a collaborative innovation platform under which a product with several innovative features in terms of product and process design are co-created. The

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    The authors sincerely thank the guest editors for their kind invitation to develop and contribute this paper. The paper is partially supported by National Natural Science Foundation of China (grant no. 71871051, 71832001). The first author Bin Shen is partially supported by Alexander von Humboldt Foundation and wants to thanks TUM School of Management, Technical University of Munich for hosting him as the Humboldt Fellow.

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