Procurement Functions: Its Evolution
Conventionally procurement departments focus on delivering savings, contract coverage and operational supply risk mitigation by regularly sourcing categories. Considering the same, procurement’s natural involvement in innovation is limited to work on cost/ risk reduction by sourcing and contracting suppliers which means that procurement is involved once all specifications are set in stone and the innovation is ready for ramp-up. Although working in team structures, silo-thinking remains prevalent. The assignment to procurement usually happens well after supplier involvement by R&D and beyond a point where a significant impact can be made on cost reduction and value creation of the product making it too late to deliver new innovations or significantly increase in development speed.
The solitary variables remaining are cost and risk reduction, and even these have been conceded. Procurement can no longer fully influence cost or risk as the specifications are largely set, and suppliers have been deeply involved in the design process. Furthermore, traditional procurement targets (such as savings, continuity of supply, contract coverage and compliance) conflict with project targets thereby compromising on the value of the end products for the customer. Delays in the innovation project are likely to occur through these or other conflicts.
Leaders in the market have recognized that 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
Supply Chain Innovation
Innovation can greatly influence supply chain performance and the five aspects of the supply chain that can be innovated to meet consumers’ needs and save on costs are:
- Design for Manufacture: Design the product to make it easy to produce, thereby reducing the costs of manufacturing.
- Design for Assembly: Design the product to minimize the number of components, easing the assembly process. Often, these results in building subsystems that are easier to put together.
- Design for Product Serviceability: Design the product for ease of assembly, disassembly and component reuse. These products are often easier to repair, compared to products that are assembled with bigger components, making individual parts more difficult to access.
- Design for Six Sigma: Design the product to eliminate failures, improve consistency and reduce costs. For example, an appliance manufacturer decides to use one type of electric cord – instead of a dozen types – across all of its products. Standardizing parts throughout the supply chain is a good example of design for Six Sigma.
- Design for Environment: Design the product to reduce its environmental impact throughout its lifecycle. This might be accomplished through less packaging, a more efficient supply chain or by recycling waste along the way.
Supply chain and innovation might seem like two different activities, but in fact, they generate significant interaction. Once a product is designed, the supply chain comes into source materials, manufacture the product and get it to the market. As products move through the four life cycle phases, successful supply chain services are flexible enough to react to the rapidly changing needs.
Innovation Process and Organization
When we look at those who are innovators in their respective industries, three distinct types typically surface:
- Fast Innovators – These innovators like to get products to market very quickly. They react immediately to competitor actions and increase profits by turning ideas into marketable products. Their supply chains must also be fast and capable of sourcing materials, producing and delivering products very rapidly.
- High-Quality Innovators – These companies take a more cautious approach, emphasizing getting high-quality products to market while increasing customer satisfaction and loyalty. Mistakes are few, and the supply chain strategy is designed to minimize failures, not for speed.
- Efficient innovators – These firms fund new design, development and fulfilment projects with the lowest possible cost. Products are developed less quickly and at lower prices. Often, these are products the market has already responded to. Their supply chain is in place and ready to minimize or maximize the economy of scale, to minimize costs.
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 model the characteristics of 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 extra resources will be needed with different skill sets. The people needed to conduct IDP will have stronger competencies 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.
Innovation is essential to satisfy growth in a sustainable way, to remain competitive and, importantly, maintain cost control. Traditionally, departments responsible for innovation such as R&D and Marketing have worked independently from the rest of the organisation. There is now a need for functions such as procurement to become more innovative to improve top and bottom line performance. Going back to procurement basics, such as closer working with partners to define requirements and ensuring a low cost of acquisition through improved processes and training, has ensured sound foundations on which an environment for innovation can be built. The maturity of the purchasing function also has an important role to play in innovation. As a procurement function matures, the level of cross-functional collaboration increases, its knowledge of the constantly evolving supply market improves and the vision of future trends and suppliers develops.
In a business context, innovation is the application of a new idea or process to create value unique to that organisation. Application of new thinking in conjunction with continuous improvement can mean the difference between beating the competition or survival. The innovation process requires tight internal and cross-functional collaboration. Therefore, the involvement of functions other than the departments traditionally in charge of innovation, e.g. R&D and marketing departments, is the key to success.
Providing the right skills and training is also critical. In addition, the purchasing function’s knowledge of the supply market, its vision of future trends and suppliers’ innovative solutions as well as its transversal position are assets to share with the other innovation stakeholders. Cross-functional collaboration is the bedrock on which to build solid foundations for purchasing’s contribution to innovation. Whilst one function makes savings/improvements and meets their objectives, the effect may have negative implications to the performance of other functions, potentially wiping out the initial savings gained.
When implementing the innovation strategy, the company uses either a “top-down” or a “bottom-up” approach. In the “top-down” approach, the management formalises the Innovation policy and regulates the process of finding and implementing new solutions in all divisions, whereas in the “bottom-up” approach, a department itself brings innovative ideas to the management with a proposal to implement it. While developing innovative solutions, the purchasing department communicates actively with Marketing and R&D functions. Marketing keeps track of current market demands for new cars and new technical requirements, while R&D develops solutions for their implementation in particular models with further replication in the entire product line. Together with the purchasing function, the sourcing and supplier selection process is carried out.
Recently, some leading procurement organizations have embraced and pursued the concept of being a key player in seeking, fostering and delivering innovation in collaboration with other functions. From this, these leaders have found that this type of capability requires them to play a completely different game in terms of organization, skill sets and processes.
As companies realign and focus on becoming more open by leveraging a wider knowledge base for sources of innovation, the total supply base – both current and potential suppliers – should be utilized. Companies should consider identifying and developing a supply base with complementary capabilities that drive value through collaboration. From this, a joint development process can emerge to support more innovative products through a more innovative value chain. Consequently, this drives down supply management costs and drives up value for the end customer.
Depending upon the product category, the innovation relationship continues throughout the product/service lifecycle. This process of continuous improvement will continue to yield new ideas and opportunities for further value creation. In short, the key is to find supply partners, jointly develop capabilities and improve products through close collaboration.
Challenges & Solutions to Innovation
The most common challenges affecting procurement are:
It is generally accepted that contributions from other business functions are necessary for innovation to thrive and succeed. Most companies are now starting to drive cross-functional initiatives, creating opportunities for the purchasing function to adopt and contribute to an innovative approach. Below are some of the most popular initiatives:
1. Risks and regulations: the purchasing function can contribute by identifying innovative solutions to transform constraints linked to the control of risk and regulatory compliance into a competitive advantage for the business;
2. Operational excellence: the purchasing function can be a proactive source of creativity and collaboration with internal clients and suppliers to enhance existing processes and reduce costs through the identification and introduction of new materials, technologies and alternative solutions;
3. Differentiation: being involved in the company’s product and service roadmaps and tightening collaboration with internal clients and suppliers to become business partners.
Below are some solutions to remove procurement barriers in the quest for high performance and an improved bottom line.
Solutions to the above barriers are not independent of each other. For instance, collaboration cannot be improved if communication is still poor. Also, speed of decisions cannot improve if the decision makers are not given the correct information based on the knowledge of procurement.
Next Big Thing in Supply Chain Innovation
For the past few years, blockchain technology has been hitting the news regularly, being implemented in everything from real estate transactions to the financial sector. Blockchain technology has evolved since making technological roots in cryptocurrency. It’s a revolutionary method of digital record keeping. Blockchain is well on its way to be the next big thing in supply chain innovation.
Blockchain can improve upon existing supply chain management:
- Building a global supply chain: Supply chains must now work seamlessly around the world. By creating a decentralized database through which all transactions can be tracked, the blockchain makes supply chain management visible and consistent across the globe. Anyone from anywhere at any time can access the decentralized database of transactions.
- Improve the visibility of sourcing: In the blockchain, all transactions are visible, which can help with tracking commodities. In the food industry, it can be used to denote where food has been sourced, and by whom. In industries such as the diamond industry, blockchain could be used to register and validate specific gems. Blockchains can be used to ensure that products are ethically sourced and that they have been acquired from safe, certified sources.
- Improved transparency: Anyone can view the transactions on the blockchain at any time. Vendors and suppliers will see transactions simultaneously resolve, making it possible for them to secure valuable transactions. When used for shipping and logistics, the blockchain can make it easy to track large-scale shipments and individual packages.
- Better sustainability: Blockchain technology is scalable, making it possible to run extensive logistics and supply chain networks on a decentralized network of technology. More importantly, blockchain naturally supports environmentally-friendly, eco-conscious globalization. Today, the consequences of globalization are vast. It’s not always possible for consumers or purchasing agents to know where products are coming from and what it takes to transport them. Through the technology provided by blockchain technology, it is now easier for companies and individuals alike to implement ethical procurement practices.
Leading firms tend to engage in buyer-supplier relationships that move away from a more traditional view on procurement where the supplier persuades the purchaser to buy. Instead, an important aspect is that buying firms persuade the innovative supplier to provide. The objectives of procurement function in these relationships are typically outside the scope of exchange of goods or services. Often the buying firms aim for unique skills or capabilities that suppliers possess. Therefore, a buying firm’s strategy is often not aimed at satisfying or attracting every single supplier.
Most often, the concepts relate to a situation in which buying firms want to attain preferential access to those resources that will give them an innovation advantage over their competitors. Therefore, specific procurement strategies often focus on strategic or key suppliers rather than on suppliers of commodity goods.
Concerning customer attractiveness, the sourcing team considered three issues to be most important:
- potential business opportunities for suppliers,
- reputation for collaboration of the buyer,
- Supplier’s expectation of ease to do business with the given buyer.
Three main drivers for supplier satisfaction were identified as: (1) a durable business approach, (2) a buyer’s relationship performance, and (3) a fit between the firms.