Can procurement lead innovation projects in an organization? Well, yes. Of course, procurement professionals will not go to the labs and do experiments. Instead, we will call our best friend to help: our supplier.
The format of this article is a bit different, as it is done in a more academic style. But the topic is so interesting that I believe it was worth sharing with you.
The idea of early involvement of procurement in innovative activities is not new. As Hilst and Calvi (2017) summarize, the concept of Early Supplier Involvement and New Product Development (NPD) has been around for more than 25 years. For example, Williams and Smith (1990) argued that purchasing shall be fully involved in the new product development process. As per them, purchasing has the opportunity to learn from the suppliers and communicate with fellow purchasers from other companies and have the latest market information. Furthermore, they communicate internally with different departments like marketing, finance and production, which makes them a facilitator of information throughout the organization. Their research revealed that one-third of innovative ideas come from either the supplier or analyzing the competition, which arguably is generated through the purchasing team. However, Hilst and Carvi (2017) conclude that even today the way procurement is involved in the innovation process is not very well defined and the procurement team is not properly utilized for this task.
Supplier-buyer cooperation in New Product Development
Patrucco, Luzzini and Ronchi (2016) define the ways of supplier cooperation in NPD as supplier development, supplier involvement and supplier integration.
Supplier development is defined as an attempt by the buyer to bring the supplier to the needed production standard.
The next level is supplier involvement, where both parties share information to achieve synergies and avoid capacity, capability or process issues.
The final level, supplier integration, brings suppliers into the NPD team, where they contribute in various ways, from suggestions up to the development of different subsystems or parts needed for the new product.
While 90% of the innovation result in a rather small, incremental increase of properties of the product, the remaining 10% result in a five to ten-fold increase in product performance (Picaud & Calvi 2015). These innovations can be defined as radical or discontinuous innovations.
Not every company has the financial capacity or human resources to create radical innovations in-house. The ones that can are chemical and pharmaceutical companies. In this case, the procurement shall constantly interact with the R&D department to be aware of new technologies or innovations. Then they can buy in the needed new technology, instead of doing all in-house, which significantly reduces the time and cost associated with the innovation (Picaud & Calvi 2015). Even when the innovation is developed in-house, still suppliers need to provide either the raw materials or components needed for the production. Here, described for example by Luzzini et al. (2015), purchasing focuses on supplier collaboration and strategic sourcing. Basically, the purchasing team invites suppliers to contribute to the new product development process. Therefore, the purchasing strategy is in line with the innovation strategy, but not participating in the strategy creation. Hence, as per him, the purchasing team needs to acquire the needed technical knowledge to be able to transfer the strategy to the suppliers and to be able to select suppliers who could potentially provide the innovations needed.
The second option is often used by planes- and carmakers. They utilize their suppliers to bring in innovations. In the case study presented by Hilst and Calvi (2017), an automotive producer has created a joint R&D / procurement division. The strategy of both departments is shared, allowing the purchasing team to look out for a potential supplier whose innovation could potentially be bought in. Once they find something that could be interesting, the project manager and technical team get involved. The supplier gets involved early in the new development stage, and this brings more efficiency to the process. Moving forward, the company can get a costing in the early phase, allowing an early “make or buy “decision or moving the project in a different direction if the new idea proves too costly.
The situation where the procurement needs to take over the project is when the majority of innovation is created by the supplier. In the aerospace industry innovations, usually, take a lot of time and resources and require a multidisciplinary team. Malhotra et al (2011) explain the usage of the Virtual cross-value team for rapid technological innovations. They used the case of Boeing- Rocketdyne to showcase how a team that worked at different companies. He explains further that, as the team came from three companies, firstly a set of agreements and framework contracts were agreed on. They never met in the same room and spent less than 15% of their working hours on the project itself. At the end, they managed to finalize an innovative product in 10 months instead of six years, using 50% of the traditionally needed engineering hours. The production cost was reduced from $7 million to $0.5 million, and it had superior reliability. It was a great success, but this was a highly technical based team. An attempt to replicate the same way of work with purchasing teams did not yield the same result. In the case of a Virtual purchasing team brought together after the merger of Daimler and Chrysler, the project did not result in any improvements. The culture and processes of both companies were very different. They argue further that “For the virtual team to have such a shared understanding usually requires that members start with a common set of norms, context, and problem definitions, either because they have worked together previously, or they have worked in the same organization, product line, industry, or discipline.”
How procurement should handle innovation projects
Unfortunately, as research from Wax Digital (2016) reveals, procurement professionals are not very often leading the innovation process. Or, to put these statements into numbers, while 75% of the respondents in the survey have been involved in new product development, only 26% were leading the process (Allan, 2016). Secondly, even 80% of the respondents believe that their role in innovation is very important, the first innovation priority for 57% of the respondents is an improvement in Supplier Relationship Management, while the second innovation priority is about sourcing suppliers for product innovation. One of their conclusions is that innovation is exactly the opposite of the risk aversion strategy that most procurement professionals have. And secondly, procurement is more focused on improving business processes rather than R&D and high-risk projects. Clearly, procurement has to take a much bolder approach in the future instead of focusing on steady slow incremental improvements.
A good idea of how modern procurement shall handle innovation is given by Nair (2013). He argues that procurement teams who want to transform shall take lessons from Steve Jobs and his success with Apple. The first lesson would be to focus on. Instead of trying to extract value from internal and external stakeholders, negotiations of terms and conditions etc., the team shall focus on one area that can bring the maximal result. Secondly, the team must constantly innovate. It is a quite counter-intuitive for many purchasing professionals, used to push cost and efficiencies down. This approach has its limitations, while innovations affect both the bottom and top line, with absolutely no limits in profit. And finally, the procurement shall get out of the back office and market itself. Resulting in increase the motivation of the team and as well increase of the stakeholder’s trust in the team, bringing more communication and cooperation, ultimately resulting in more innovations.
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Picaud, K., Johnsen, T., & Calvi, R. (March 2015). The role of the purchasing department in discontinuous innovation: Findings from a pilot study. Audencia Nantes School of Management, ESC Rennes and IAE Savoie Mont Blanc, IREGE, France, (pp. 1-15).
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