Procurement acting as a wedding planner in connecting supply base capabilities with end customer demand…
Over the last decade we have seen a rise in outsourcing non-core activities: the average percentage of revenues procured externally has risen to over 60%. In addition, companies are increasingly outsourcing critical business functions, including the outsourcing of R&D to the supply base. As a result, the relationship with suppliers becomes more complex. At the same time, companies are finding it more and more difficult to keep up with the pace of innovation through internal R&D alone. Tapping into the capabilities of the market and supply base, is one way of speeding up the innovation process and a reduction in total cost.
The move towards this so-called open innovation creates the need to leverage and manage the innovation capabilities in the supply base, to:
- Deliver more innovations
- Accelerate design and launch cycles
- Improve quality
- Meet intensified cost/risk reduction demands
These do not sound like the traditional, often financial, KPI’s procurement is used to work with, apart from the cost/risk reduction. Next to that, the current economic downturn has only increased the emphasis on traditional KPI’s such as savings. As a result, procurements’ involvement in innovation is quite often limited to work on cost/risk reduction by sourcing and contracting suppliers, once all specifications are set.
Suppliers are involved before procurement is. We see that the hand-over to procurement usually occurs well after supplier involvement by R&D and beyond a point where a significant impact can be made, both on cost reduction and value creation of the product.
Furthermore, in a traditional organizations, procurement targets (savings, security of supply, contract coverage, compliance, and so on) conflict with R&D / Innovation targets which may compromise the value of the end product for the external client.
Obviously, procurement should ensure earlier involvement in this process. However, procurement in its traditional form is not well-equipped to handle the processes found in early innovation stages.
If it still wants to add value by making a true contribution to innovation processes, it needs to redefine its business model.
A business model describes the rationale of how an organization creates, delivers, and captures value. An advanced procurement department focuses on the needs of the external client.
If procurement wants to add value and contribute to innovation, it should match its activities to those stages of early innovation, hence scouting supplier markets, enabling supplier involvement and managing supplier inputs in the project.
For innovation projects the traditional Procurement departments have to transform into Innovation Driven Procurement (IDP) groups. IDP groups are able to support the business strategy in pursuing innovation targets such as:
- Delivering more innovations in less time
- Accelerating design and launch cycles
- Improving product / service price-quality ratio
- Increasing the end customers’ experience / satisfaction
IDP groups fundamentally differentiate themselves on three key dimensions:
1. They are able to help find scarce sources of innovation capabilities.
2. They are involved in innovation projects from start to finish.
3. They are able to manage supplier involvement.
How to start
If it were only that simple.. All of this requires a fundamentally different way of working with procurement as it becomes an integral part of the innovation process inside the company. This has a major impact on the business model of procurement – shifting the customer focus from internal client to external customer, the role in innovation teams and the way procurement organizes:
- Organization & Process: The organization should be equipped to support innovation projects. The processes in each stage of innovation will include scouting technologies, setting up supplier involvement strategies and managing continuous involvement.
- Planning & Control: The performance metrics will transition from cost and risk related KPIs to value and innovation related KPIs.
- Human Resources: The innovation process is new in both workload and content, meaning resources will be needed with different a skill set. The people needed to conduct IDP will have stronger competences in internal and external relationship management, better product knowledge and a strategic mindset.
- Preferred Customer: Procurement will ensure the company is attractive to its most important sources of innovation – changing the partnership, risk/reward and relationship management structures.
So far for theory, show me some proof
In Capgemini’s CPO survey of 2010, almost 80% of the participants responded that top management expected them to improve the overall value contribution of procurement. This means that procurement will need to shift the focus from short-term cost cutting to long-term value-based relationships with suppliers, in order to drive deeper savings throughout the supply chain and to bring true innovation into the company, allowing for top-line growth as well as continued bottom-line reduction.
Based on this CPO need and the above outlined view on Innovation Driven Procurement, we conducted a research that focused on what differentiates recognized innovators from others in the market on the aforementioned 4 themes.
Results of the study
On performance level, we found that firms that include their suppliers in the early stages of innovation projects seem to substantially outperform their peers that do not. Further, IDP needs to be explicitly organized.
Organization & Processes Conclusions
- The role of procurement changes fundamentally towards supporting suppliers in innovating together with the company.
- Collaboration structures must be made explicit.
- In managing the relationship, companies must talk and walk joint targets and shared risk/reward.
- Procurement and R&D should tear down the silo walls and collaborate towards joint goals.
- Companies must be flexible in finding and funding innovation/procurement resources for innovation projects
Planning & Control Conclusions
- To support and measure procurement’s contribution to innovation, companies move away from traditional output-related targets to input related targets.
- Supplier satisfaction and attractiveness are important factors in receiving innovation exclusiveness, innovation resources and resolving bottleneck situations. Measuring this gives more control on innovation success
Human Resources Conclusions
- Companies must make sure their R&D and procurement staff connected firmly.
- The skills required are not traditionally found with buyers, so recruiting buyers with specific expertise should go hand in hand with setting up virtual teams and training procurement skills to selected R&D personnel.
- Managing change and complex relationships is a core element of the new buyer/innovator profile.
Preferred Customer Conclusions
- Suppliers are not attracted only by size and market opportunities, companies can differentiate by creating highly effective open innovation practices and developing shared ownership.
- In staying satisfied similar conclusions can be drawn, but core to a successful and long lasting relationships is chemistry between key actors and tight personal relationships.
- The preferred customer status demands several core hygiene criteria to be satisfied, such as size, stable turnover and top management commitment.
Fore more information, please read this initial report on http://www.capgemini-consulting.com/think/points-of-view/innovation-procurement/