Companies in all industries are facing a greater need for innovation. The statistics speak for themselves – the world’s top 1,000 research and development (R&D) spenders increased their financial commitment by 11.4% year-on-year in 2018, to $782bn.
Amazon spent 41% more than in 2017 while the average yearly increase for top-20 spenders was 7.3%, according to analysis from consulting firm Strategy&, a PWC subsidiary.
These developments are a consequence of the new reality that organisations face in product and service development. Because competition is intensifying, the time to transform innovations into marketable products is decreasing.
Disruption can come from any direction, adding pressure to create the ‘next big thing’ before another provider does. Procurement can and should be an integral part of countering these pressures.
Because not every organisation has Amazon’s deep pockets, resource-efficiency is key to success for most. Procurement teams engage in supplier-enabled innovation (SEI) activities of varying intensity and should use this to help organisations achieve efficiency. The function is also in a good position to promote company-wide innovation.
Leveraging suppliers’ innovation capabilities extends internal R&D teams and diversifies the approach to innovation, which will relieve pressure on internal resources.
Integral to SEI is the use of market insights, allowing procurement direct access to them, and maintaining close supplier relationships that enables the function to gauge what’s hot. Being truly resource-efficient in innovation is about being selective with projects that are chosen. Procurement teams are well placed to help make informed decisions using their market view.
Procurement Leaders is looking at how organisations across industries achieve all of this. The first output from our research is an article on supplier incentivisation, which is a vital topic because in many industries the pool of innovative suppliers is limited and competition to partner with them fierce. It is procurement’s responsibility to ensure these suppliers view the buying organisation as a customer of choice.
The sources from which teams unearth innovation is another priority research area for Procurement Leaders. In the most advanced functions, this tends to manifest itself as a formal scouting programme.
As one director from an electronics manufacturer points out, compared to R&D teams, procurement is better placed to own scouting activities. They say this is because cross-functional collaboration skills teams are vital to procurement and teams know precisely how to connect internal stakeholders with the right external solutions. In one biopharma company, innovation is a core behaviour across the organisation and procurement contributes by identifying improvement opportunities from the business strategy and communicating those to suppliers. More to follow on these topics.
In Strategy&’s research, a limited number of companies achieved ‘high-leverage innovator’ status based on their relatively low R&D spend but superior financial performance. In 2017, the most recent survey year, these companies recorded 2.6 times greater than average sales growth, suggesting R&D budget alone is not the answer to becoming an innovation powerhouse.
It is not difficult to see procurement being an influential driver of high-leverage innovation across the business. With all the discussion about R&D departments stretched to their limits and CEOs desperate for anything that creates competitive advantage, not leveraging supplier-enabled innovation is a missed opportunity for the function. Procurement Leaders will continue to help CPOs and their teams tap into new ideas and diversify their sources of innovation.
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