Partnering with your customers on R&D.
If you want your customers to see you as a partner, rather than a mere vendor, "let's build this together" is a superior proposition to "buy this from me." And who doesn't want to be viewed as a partner? So it's not surprising that joint research and development projects between customers and suppliers are on the rise. In its simplest form, joint R&D means that customers provide ideas and feedback while a product is being developed. They may also share costs and co-own the resulting intellectual property.
In an uncertain economy, co-development is one way to keep an R&D budget alive, since it distributes the costs between both partners. And partnering allows you to burrow deep into a customer's business and strut your own operational stuff; this might win you more business down the line. Of course, if your operations aren't up to snuff, a client could walk away with no intention of ever calling again. And you will need to be careful if your customers are much larger than you. "A small supplier needs to look out for its own intellectual property and be vigilant that the customer is devoting enough resources to the project," says Benjamin Gomes-Casseres, a professor of international business at Brandeis University and author of several books on alliances.
The rules of engagement will vary depending on the type of business and a project's complexity. Here's how two companies use joint R&D to build lasting relationships with their customers.
For Pieter deJonge, president of Cambridge Fine Foods in Ontario, Canada, co-development means transparency, and transparency is a very good thing. DeJonge joined the company, a private-label manufacturer of frozen foods, in 2003, following years of financial and quality problems there. The $9 million business, which sells to both supermarkets and food-service companies, "was seen as a nonperformer--as not being responsive to customer concerns," deJonge says. Joint R&D has helped him show clients the proof going into the pudding.
Byron Ainsworth, president of Your Grocery Depot in Ontario, has worked with Cambridge to create frozen meals for institutions such as prisons and lumber camps. Ains-worth says he weighs in on taste and texture. "It allows us to see the quality controls they put in place and the integrity of the company," he says. "They are an excellent team--definitely problem solvers."
Cambridge has developed 40 to 50 new products over the past five years, and about 70 percent have been joint productions. DeJonge says partnerships help ensure that a product actually makes it onto grocery store shelves. "If the customer co-developed, I believe there's a much greater likelihood the product will make it to market," he says. "Once they spend some time on the project, there's a greater chance of everyone buying in. If a major hurdle comes up toward the end, they work hard to overcome it."
Co-development at Cambridge often starts before there's even a concept. DeJonge or a member of his team will accompany customers on inspiration-seeking trips to grocery stores and food shows in the United States, Europe, and Canada. "You get instant feedback: 'Yes, that's what I'm interested in.' The retailer is the marketing expert," deJonge says.
During development, more than a dozen samples might travel between Cambridge's R&D kitchen and that of a client. Recently, Cambridge sent one customer a rice-and-beef entrée; the customer disliked the texture of the meat. Both sides researched different cuts, and Cambridge's chefs experimented with them. The client then weighed in on flavors as well as presentation: rice on bottom with meat and sauce on top? Rice and meat separated in the bowl? The resulting dish (rice and meat separated, with sauce on top of all of it) is now one of Cambridge's top sellers to the client. And though the client's exclusive rights to it expired after a year, deJonge is reluctant to show it to anyone else. "Sometimes we make that decision to build stronger relationships with certain customers we believe we can grow with," he says.
The more expensive and complex the product, the greater the risk. The greater the risk, the more attractive joint R&D is. After all, no one wants to spend hundreds of thousands of dollars building a machine no one will buy. Prime Equipment Group, in Columbus, Ohio, manufactures poultry processing machines that cost $50,000 to $200,000 to develop. About a third of the company's R&D involves joint development with customers. Michael Gasbarro, CEO of the $12 million company, says Prime Equipment can catch mistakes much earlier by getting feedback during the development process. "We're probably talking to R&D partners three to four times more than to companies we don't co-develop with," he says.
Cooper Farms, a supplier of turkey products in St. Henry, Ohio, has worked with Prime Equipment on thigh-deboning, gizzard-peeling, and breast-cleaning machines. Sometimes Cooper initiates the project; sometimes Prime Equipment does. Cooper gets the first units made, and the machines are usually available to other customers about six months later. "Working this way has built up a lot of faith in each other," says Dale Hart, general manager at Cooper. "They know what the industry is looking for, and we are happy to be their guinea pigs," Hart says.
Prime Equipment has collaborated with engineers from poultry giants like Tyson (NYSE:TSN) and Perdue on machines that cut up chicken. Recently, the company collaborated with a customer on a machine that scores duck breasts. Both companies assigned project managers and engineers to the job. The Prime Equipment team visited the customer's plant several times to learn about duck processing, and the customer team traveled to Columbus on four occasions to run the emerging product through its paces. The customer that commissioned the duck-scoring machine paid 30 percent of the development costs, which Prime Equipment repaid by giving the customer a discount when it bought one of the machines. Prime Equipment retained the rights to sell the machine to other clients after one year.
That's a pretty typical deal for Prime Equipment. Generally, the more dollars and man-hours customers throw into R&D, the longer they want exclusive rights to the results. If the customer wants to own the machine completely, the charge is much higher--up to 10 times the amount Prime Equipment spends on development. And in that case, the client won't recoup the cost with a discount. "When we do something strictly for one customer, it takes time away from projects we can put into the marketplace for other customers," Gasbarro says. "That's expensive time."