Innovation: Finding the Right Partners
The importance of innovation has gone up on the CPO agenda, mostly driven by shorter development cycles, lower value generation, and growing dependency. Not surprisingly, when asked about their top objectives, CPOs rank innovation second, right after cost
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The importance of innovation has gone up on the CPO agenda, mostly driven by shorter development cycles, lower value generation, and growing dependency. Not surprisingly, when asked about their top objectives, CPOs rank innovation second, right after cost reductions. According to the Institute for Supply Management, companies that leverage their suppliers’ innovative power outperform their peers in top- and bottom-line performance, achieving twice the EBIT, a 5–10% COGS reduction, and a 7–10% revenue boost driven by lower product cost, faster time to market, and higher prices realized. However, in reality, few companies truly focus on innovation in procurement and therefore fail to deliver on this core value dimension. We analyzed the procurement strategies of 23 different companies. Seven do not mention innovation at all, while another 13 mention it only as an important factor but fail to describe procurement’s role and meaning. Only three had a dedicated section on how to deliver supplier innovation, and only one of these three companies involved its business partners in working toward cross-functional value creation.
Starting Position: Procurement Innovation Based on a Company’s Strategic Direction Companies leading in the field of innovation generation combine three core elements in their value generation approach: a clear innovation strategy in procurement, a tailored approach to engage suppliers for innovation, and the smart application of the right innovation levers for suppliers. The innovation strategy in procurement defines the type of innovation needed and is derived from the company’s overall innovation ambition. If, for example, a car company wants to lead in UI/UX, this needs to be reflected in procurement’s ambition to deliver leading innovation in that field. Therefore, the strategy should translate the company’s ambition into a procurement category view, distinguishing between breakthrough and incremental innovation. Breakthrough innovation refers # Springer Nature Switzerland AG 2020 W. Schnellbächer, D. Weise, Jumpstart to Digital Procurement, https://doi.org/10.1007/978-3-030-51984-1_3
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Innovation: Finding the Right Partners
Supplier segmentation yields four clusters of supplier management
Indicative
Critical
Category importance 2. Arm’s length collaboration
1. Strategic collaboration1 Engines
Castings
4. Standardization/outsourcing
3. Focus on cost control
Low
Office material
Small steel parts
High
Low
Category
Supplier competition
Fig. 1 Engagement approach derived by segmenting categories
to a meaningful change in how to do business and produces a substantial competitive edge. Incremental innovations are small improvements that mostly tackle existing product lines to maintain the competitive position, primarily targeting an improved cost basis. Based on the business partners’ needs, a strategy is defined for procurement, distinguishing between categories for breakthrough and incremental innovation. Along with a clear innovation strategy, leading companies develop a tailo
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