“Innovation has nothing to do with how many R&D dollars you have. It's about the people you have, how you're led, and how much you get it.” - Steve Jobs

September 27, 2016

THE SOURCING OF INNOVATION AND INNOVATION IN THE PROCUREMENT ORGANISATION   

 

Introduction

The use of the word ‘innovation’ has even surpassed the use and abuse of terms like ‘partnership’ and ‘value’. This article will discuss the specific role of sourcing in bringing these three concepts together.

Let us start with a definition: “Innovation is the implementation of a new product or process that has been further developed or significantly improved in the business world.”

  • The word ‘implementation’ in the definition above is used to specifically differentiate the term ‘innovation’ from ‘invention’.

  • The term ‘improved’ highlights the fact that competitiveness, thanks to innovation, is greatly improved because it no longer depends solely on economies of scale but relies, instead, on ‘applied creativity’.

  • Innovation implies change and change often creates discomfort. The word ‘improved’ underlines that while ‘change’ is perceived as uncomfortable, innovation always adds value and is an improvement of the status quo.

In The Pyramid of Needs (a tool we use in Method P#1 to collect and classify the user requirements), Innovation is at the fourth level, this means that before focusing on innovation the procurement team must also assure to other more basic requirements.  

The creative process is almost always a consequence of an external input. It is, therefore, always important for a company to allow open interaction with the external world so that new ideas can be properly channelled into the business. Procurement should play a key role in managing this interface with the external world.

 

‘Process innovation’ can address both the activities of line functions (inbound logistics, operations, outbound logistics, operational marketing and sales, post sales service, etc.) as well as the activities of support functions (Finance, Planning, Control, Administration, Strategic Marketing, R&D, HR, IT, Procurement, R&D).

Encouraging innovation in an organisation however, does not guarantee innovative behaviours; there should be systems and processes in place to stimulate innovation and ensure a receptive environment for creativity and to ensure these ideas can be capitalised on.

Modern procurement functions should be a key channel to the market.

This article proposes a roadmap to integrate the ‘innovation’ in the supply management process of the organisation that aim to increase the ‘Sourcing Maturity Index.’ (an indicator of the level of competitiveness of the procurement function.)

The steps will be: (see Fig. 2):

  1. Strategic Alignment: Understanding corporate strategy and defining procurement strategy

  2. Transformation design: Designing all the structural levers (skills development plan, new organisation, IT systems plan, Metrics, Processes) for a competitive procurement function

  3. Transformation implementation: run the transition to completion of the new procurement function enabling capability to be a key player in the scouting and sourcing of innovation for all the others functions.

Strategic Alignment

What are the elements of strategic thinking we need to reach Strategic Alignment?

I suggest five elements:

  1. System Perspective: the understanding of the external, internal and business ecosystem.

  2. Focus Intent: the identification of goals and defining plans for their achievement.

  3. Intelligent Opportunism: to take advantage of new opportunities that may emerge in a rapidly changing environment.

  4. Realism: to make the best of what is available.

  5. Hypothesis driven: to accommodate both creative and analytical thinking. Hypothesis generation poses the creative questions. Hypothesis testing follows up the critical question by evaluating the hypothesis with an analytical approach based on facts and data.

Strategy is primarily a military concept and some characteristics of  “strategy” in the business context are that it:

  • Defines the long-term direction of an organisation affecting operational decisions

  • Defines how to achieve an advantage over competitors

  • Matches the resources and activities of an organisation to the environment in which it operates

  • Builds an organisation’s resources to create opportunities to capitalise on them

  • Requires main resource change for an organisation

  • Strategy is affected not only by environmental forces but also by the value and expectations of those who have power in the organisation.

 

In Method P#1 we use the following definition:

“Strategy is the direction and scope of an organisation over the long term that achieves advantage through its configuration of resources within a changing environment and to fulfil stakeholders’ expectations. Tactics are the short-term decisions made in response to changing circumstances in order to make use of currently available resources to achieve limited goals”.

 

In the case of ‘innovation’ for procurement this can be applied in two directions. 

  • To transform the procurement organisation acting on the structural levers (and IT technology is one of them)

  • To contribute to the sourcing of innovation

 

Transformation Design

Transformation design starts from the analysis of the ‘as is’ situation of the five structural levers. For the ‘to be’ element of the plan the structural levers should be identified whilst ensuring alignment with the Procurement Strategy. The ‘gap analysis’ will be the input for the ‘roadmap’ (transformation plan) to move from the present situation to the desired one. (Fig.3)

 

The design of the different structural levers has to be conducted in parallel. The change of one lever will have influence on the other levers and therefore it is important to proceed step by step. Method P#1 proposes the following sequence for the steps: First, the skill development plan v1’and the ‘metrics design v1’. As a next step, there is the ‘process design v1 ’, and in parallel ‘IT systems design v1’ and ‘organisational structure design v1’. After the first iteration, you can follow version 2 and so on until the final design.

 

Skills Development Plan: The Key Words are ‘Awareness’ and ‘Integration’

Experience has taught us that we need to begin the transformation with the development of  “consciousness”  by raising awareness and to move the key managers from ‘unconscious incompetence’ to ‘conscious incompetence’. This is the most difficult step for many projects. The key word is ‘integration’. Robert A. Lutz, chairman of General Motors said “I was amazed at the lack of functional integration in the companies I worked for. I just couldn’t understand why there was so little real communication between the design, engineering, manufacturing and procurement organizations.” (source: Straight to the Bottom Line). As companies optimise their supply management, it becomes clear that shareholder value is driven through the combination of processes that are focused on creating value for the end customer. Loosely coordinated functions focused on the optimisation of their individual objectives cannot compete with a supply chain operating as an Interfunctional team.

 

Metrics

It is not easy to improve if we do not measure our evolution. At the beginning we will decide to use very easy metrics (KPIs) and as soon as the maturity of the organisation progresses, we will design and use more complex ones. The urgency of this activity is related to the need to motivate personnel and keep them moving in the right direction.

 

Process Design

To design a chart with the procurement sub-process can be of help in this phase because it is easy to understand and is also a good tool for communication with non-procurement participants.

 

Information Technology System Design

IT procurement systems are strong enablers to force change but we need to select them only when we have at least a high level understanding of the desired user requirements and process. Pre-configured IT systems are useful because they already have embedded detailed processes derived from best practice. A typical error is to manage the change project focusing solely on IT technology and start the use of the new system with limited training of the personnel. Digitalization of the procurement process gives the opportunity and time to procurement professionals to focus on the management of strategic activities and generate more value.

 

Organisation Design

Method P#1 puts organisation design as the last step. Starting with organisation design as a first step can create resistance and conflict, but according to our project research in many cases companies still favour this as the first lever to be used in transformation. Sourcing is a process with many stakeholders (it is too important to be left solely to the procurement function). Stakeholders must be integrated into the new structural levers and not be passive observers of it.

The integration during the design is accomplished in the following ways:

  • Definition of key stakeholders

  • Definition of the stakeholders’ needs

  • Identification of how they are behaving today in the supply chain arena

  • Define how they need to behave relative to the potential supply chain impact

  • Define the new organisation and sell the behaviour we need to achieve

As with any negotiation, the most difficult point is to understand the real needs of the other stakeholders involved in the negotiation. Stakeholders must recognise the impact of  improved supply chain performance within their own domain. If the company is not culturally ready for change and a strong Chief Purchasing Officer (CPO) is recruited into the organisation, a special effort will be required by the CEO to support the transformation.

One approach is to engage the key managers (CFO, Head of Business Units, CTO, etc.) during the implementation of the transformation to make them ‘the business champions’ of the new sourcing projects. This approach brings fast results but needs a very strong leader at the top of the company and a CPO with a credible track record of success.

Many CEOs put emphasis on good supply management, but the real commitment is evident when they choose their CPO. In the last years, companies that have experienced the most pain did the most external recruiting. There are many factors to consider when designing the ideal profile, but the most important is the candidate’s attitude toward innovation and leading people. The new CPO has to be a team leader able to attract and retain a cast of talented people and to work as an innovation leader with their peers.

History shows us that investing in Research and Development is useful but on its own it is not enough to foster innovation and that, in reality, it is more important to create the right business ecosystems and develop  organisational solutions such as the creation of ‘Interfunctional buying centres’.

 

Transformation Implementation

For this part, there is not a common rule. The skills needed to achieve excellence in implementation are the ability to lead the transformation (leadership skills) while keeping the organisation performing in the operational activities (management skills).

The new leader will:

  • Have cross- functional work experience (this is much more important than having many years only in procurement!)

  • Be credible with key internal stakeholders

  • Have high energy and strong work ethics

  • Be a strategic thinker and be capable of moving beyond the traditional CPO role

  • Have the courage to make unpopular decisions that are good for the business.

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