The idea that suppliers should work much more closely with customers to give them better value is no longer a new one, as anyone who regularly follows the automotive industry knows. Yet close partnerships of this kind are still not at all common, largely because, until quite recently, integrating the information systems of two or more companies was a lengthy, expensive, and technically difficult process.

Fortunately, the recent widespread adoption of enterprise resource-planning systems, and the still more recent rise of the Internet, have made it much easier and cheaper for customers and suppliers to exchange data. Does this development prefigure the emergence of closer, more committed relationships? Closer, yes; more committed, no. In the world of electronic commerce, customers can easily find the best price and will choose their suppliers on that basis—unless they want (and are willing to pay for) something beyond it. Suppliers that can credibly promise to improve their customers’ performance can avoid the commodity trap and reap cost benefits. The means to this end is supply-chain innovation.

Improving your customers’ performance

In the past, suppliers reengineered only their end of the supply chain, by reducing obsolete inventory or inventory in general, cutting throughput times,...