Procurement’s latest test: Measuring Innovation’s intangible value
By Harish Soundararajan, Principal Manager and Sridevi Akkarajuvenkata, Customer Success Lead
Over the years, Procurement has evolved from focusing only on achieving cost savings to becoming a key driver of continuous business growth.
Indeed, cost savings continues to remain an important goal of global procurement organizations. However, as companies chase the game of value addition, new imperatives have emerged out of complex business landscapes besides cost savings. Procurement organizations must view their roles through the prism of Cost, Speed, Flexibility, Innovation, and Risk.
Everyone understands the basic concept of Innovation, but the challenge is how procurement organizations can use as well as measure the intangible value generated by Innovation across the supply chain.
Procurement leaders across the globe have exhibited their desire to focus on collaboration and on building partnerships with key suppliers. However, only 23 percent of the procurement leaders plan to increase the level of supplier collaboration as a lever to deliver value, a decrease from 26 percent in 2017 and 39 percent in 2016.
Typically, departments such as R&D and Marketing are earmarked for innovation. The trend is now slowly but surely changing: there is now a growing need to share the ownership of innovation across the business, and interestingly, some of the efforts in innovation have been pioneered by procurement organizations.
Gone are the days when procurement was seen merely as a tactical function. The function as a whole is now becoming increasingly strategic in nature. Procurement managers are working on various plans to deliver value to their business stakeholders. Important among them is harnessing innovation across the supply chain.
Contrary to popular belief, procurement organizations do deal with innovation on a regular basis—be it evaluating suppliers to purchase new-age drones or connecting business stakeholders with innovations in the marketplace.
Innovation- what does it really mean?
The internal viewpoints on innovation are:
- An initiative that is new to the organization
- Delivers value beyond the contractual cost savings
- Produces value in terms of product improvement
- Improves process and provides a competitive advantage
Innovation and Procurement
Several procurement organizations have launched a number of innovation initiatives that have resulted in value delivered to business stakeholders.
- Creation of new roles
Some leading companies have created specific profiles such as ‘innovation manager’ within the procurement team. The procurement innovation managers seek out synergies across categories and are essentially specialists working closely with various business functions such as R&D, Marketing, and so on. Their role is twofold. On the one hand, they translate business strategy to suppliers, and on the other, they ensure that what is expected of suppliers is consistent with business priorities.
- Creation of technology platforms
There are companies that create product or technology platforms within procurement to leverage innovation. The organization does not approach a supplier with a single project or category that requires development. They approach them by saying, ’here is our platform, and these are our business challenges across different verticals’. If the supplier manages to find a solution, the potential for the supplier is not in one business but in multiple ones. The return on investment for the supplier becomes much higher.
- Centre of Excellence model
The Center of Excellence (CoE) is established within the procurement organization to exclusively focus on engaging with internal and external ecosystems. Generally, members belong to diverse teams with cross-functional experience.
- Open Innovation Team
Some leading innovation pioneers have a dedicated Open Innovation Team within the R&D team. The procurement innovation managers and R&D team work closely at either the category level or at the leadership level.
Tapping supplier-led innovation
There is tremendous emphasis on supplier led innovation. Organizations have enabled procurement organizations to own the supplier ecosystem and drive supplier-led innovations. Many organizations also believe that suppliers are the most important source of untapped innovation potential. Supplier Relationship Management (SRM) program is essential to harness this route.
Some of the approaches to supplier led innovation are:
- Crowdsourcing Model: In a crowdsourcing model, organizations invite ideas from different suppliers on a common portal, which in turn are analyzed by subject matter experts for validation and feasibility. Most effective ideas are shaped into further business plans.
- Collaboration Model: In a collaboration model, organizations work with multiple suppliers simultaneously towards an innovative solution.
- Co-development Model: Joint business plans with a specific supplier to come up with an innovative solution—either for product or process innovation.
- Transparency in the process: Organizations must maintain transparency in the SRM program with both internal stakeholders and external suppliers. The transparency in the system can act as a feedback mechanism between external suppliers and internal business units and win the suppliers’ trust. Benefit-sharing between the organization and the supplier, including non-financial benefits, must be clearly stated. For example, sharing patent rights while developing an innovative product.
How do we measure innovation?
Organizations, though keen on innovation, are yet to develop robust systems to assess innovation that brings about intangible value.
- Synapse Committee
This ties into one of the roles of the procurement innovation managers. These managers collect ideas and put together (in each of the categories) a so-called Synapse Committee composed of decision-makers from the respective category, such as marketing innovation director, R&D director, or consumer insights director, and they assign some resources to explore promising ideas further.
- Linking metrics to the outcome
Outcomes must have a specific measurable performance indicator that is meaningful and important to a business stakeholder. Each supplier relationship is developed with a specific business outcome in mind. Outcomes must have a specific measurable performance indicator that is meaningful and important to a business stakeholder. Business outcomes drive the relationship process, the course of action, and level of investment through the initiation of projects focused on achieving the outcome.
Procurement organizations must include new KPIs for supplier innovation in the SRM process to measure the current performance of the suppliers and guide them to be innovative.
Innovation focused KPIs
Overall Project Value
It is important for procurement organizations to outline a process to measure innovation as they have the potential to become an effective conduit for flow of ideas between suppliers/marketplace and business stakeholders. Moreover, since procurement teams bring supplier innovation into the organization, any idea acquisition process needs to be integrated into a robust SRM program. Moreover, there has to be an innovation assessment process as well as a procedure to protect intellectual property rights. Innovation brings about intangible benefits—the key lies in measuring those benefits systematically.
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