What role should sourcing and procurement play in new product development (NPD)? And how can it add more value during the innovation and design process? These are among the questions that procurement leaders are increasingly looking to answer as they seek to broaden the scope and business contribution of their organizations.
Behind these questions is a recognition that the function is often not involved early enough in the NPD cycle to influence specifications, costs and supplier selection, or to bring ideas, technologies and expertise in from the supply base when it really matters.
In my previous blog, I looked at how procurement professionals can engage suppliers — especially startups — more effectively for innovation. But these efforts will be in vain unless they are accepted by R&D and engineering colleagues, and play an active supporting role during the NPD process.
This is not only a problem for procurement. Our 2018 Future of Supply Chain survey found that less than a third of supply chain organizations were involved in the development and launch of new products. But as a primary interface with the external market, procurement clearly has a leadership opportunity in this area. Indeed, 40% of respondents to this study ranked earlier procurement involvement in NPD as a top-five value lever for 2019.
Barriers to Entry
What stops procurement specialists from fulfilling this potential? In the view of more than 300 supply chain practitioners who participated in a separate survey we conducted recently, the biggest obstacle is that procurement is “not seen as adding value” — at least, not beyond cost reduction.
Interviews with two dozen executives confirm that the tendency to focus upfront on cost reduction and risk minimization limits the extent to which R&D teams want to involve procurement at an early stage. Less than a fifth are brought in during the idea discovery phase (typically two to four years ahead of a product launch), while less than a third play a role at the concept and testing phase, according to our data.
The cost-first approach is reflected in the way that procurement’s contribution to NPD is measured. More than three-quarters of our sample said they used cost savings and/or cost avoidance as a KPI, compared with just 14% who measured sales revenue for new product launches — the ultimate, and arguably most important, indicator of success.
Four Factors For Success
Changing procurement’s mindset around innovation and NPD, and seeking to shift the perception of the function away from its traditional role as a savings engine are both necessary steps for earlier involvement. Beyond this, our conversations with sourcing, supply chain and R&D leaders highlight four additional success factors:
- Establish the right structure and governance model. Co-locating R&D and engineering staff with those from procurement who have an innovation and development focus is an obvious way of building bridges and bonds between the functions. At British construction equipment manufacturer JCB, a purchasing team sits in each of its dozen business units, and there are matched pairs of engineers and buyers. Weekly meetings between category leaders and engineering heads are used to understand distinct business needs and align around development projects where purchasing input is most relevant.
- Forge a common understanding and mindset. Uniting technical and commercial teams around a common set of issues and objectives, such as the need to exploit next-generation technology, can help to overcome R&D’s reluctance to talk to procurement early in the development cycle. At Vestas Wind Systems, a leading Danish turbine maker, collaboration between R&D, procurement, sales and other functions in developing a modular approach to technology means that procurement is now involved not when technical drawings are completed, but when they are being created.
- Ensure you have sufficient technical credibility. Deep involvement in NPD requires a level of technical knowledge and expertise in the procurement team — a message confirmed by our survey data on the challenges faced. The more technical the product or service is, the harder it is for procurement to play an effective role early in the process. One solution used by high-tech companies like HP is to hire a cadre of procurement engineers with strong technical backgrounds and qualifications. They understand material requirements and component specifications, and can converse intelligently with both internal and supplier technical experts.
- Bring supply market insights to the table. Supplementing this product knowledge with up-to-date information about market trends, supply availability, cost drivers and technology roadmaps equips procurement with valuable intelligence for use in internal discussions (another challenge identified in the chart above). While this external focus may not always translate into category and sourcing managers having exclusive knowledge about the suppliers most capable of meeting specific technical requirements, it should enable them to suggest alternative candidates and applications that may otherwise be overlooked.
Innovation scouting is one mechanism for identifying these potential suppliers. However, only 17% of survey respondents say their procurement organizations use this today. So those leaders that want their functions to get involved earlier, and drive more value, during the NPD process need to look at how to make resources available to support such activities going forward.
As one former telecom CPO notes: “It all starts with supplier discovery. That’s where the investment needs to be.”
Geraint John, Vice President, Supply Chain Research & Advisory, Gartner