Innovation procurement and value creation

Back view of young man framing picture with fingersInnovation has become a buzzword for companies worldwide. Mention the word ‘innovation’ and most people begin envisioning extraordinary inventions created by solitary geniuses. Simply put, innovation is about unique ideas and/or knowledge that can be translated into new, usable products and services. This requires a great understanding of the need gap towards which the innovation is targeted. In this blog post, Ram Sarvepalli, Partner & Deputy Leader, Advisory Services, EY examines the benefits and value that a proactive approach to innovation procurement can bring to the table.

In the backdrop of heavy emphasis on dynamic transformation, organizations have begun engaging in ‘innovation procurement’. This practice refers to a way of buying goods and services that stimulates the supply chain to invest in developing innovative solutions to meet the unmet needs of an organization. For example, to develop its product AquaSure, India-based Eureka Forbes sourced an integrated, multi-stage technology from US-based Argonide Corporation that allows for chemical-free filtration of water.

Connecting suppliers to innovation

It is not sufficient for companies to operate in silos to identify unmet needs and pursue innovation alone. The most innovative organizations collaborate with external stakeholders to implement an idea that is truly relevant. Suppliers are one such stakeholder group with large innovation potential. Suppliers tend to be familiar with the needs and demands of their customers, i.e., companies. A study indicates that the involvement of suppliers at the early stages of the product lifecycle can help companies reduce product development costs by 18% and improve their time-to-market by 10%-20%. For example, half of Unilever’s innovation pipeline now comes from its suppliers.

The global automotive sector is a prime example of collaborative innovation between companies and their suppliers. Indian automotive players are no exceptions to this trend. Companies such as Tata Motors and Mahindra & Mahindra* have sought inputs from technology suppliers and design consultants and integrated them into their products. This was a more cost-effective approach and allowed the companies to carve out distinct brand identities.

Unleashing the bargaining power of the companies

Companies need to better articulate their demand for innovative solutions to their suppliers. They should communicate what they need, and not what they think they can get or afford. This assures suppliers of a future market for their newly developed solutions. Consequently, it can stimulate them to invest in innovation and develop better goods and services to offer to their customers, i.e., companies.

However, companies need to reorient their thinking to drive innovation in the supply chain. They will need to estimate what they want not just now, but also in the future. Organizations need to be willing to reinvent their planning and procurement processes. The design of the procurement process must answer questions such as what kind of innovation, how radical is the innovation and is there an existing market for such innovative products and services. Companies will also have to put in extra effort to understand factors that motivate suppliers.

Setting expectations with the suppliers

While procuring goods, companies should try to refrain from providing detailed specifications, as this will stifle innovation. Instead, they should consider outcome-based specifications such as a step change in customer experience to give room to suppliers to think innovatively. For example, while sourcing coffee machines, the specification can be as broad as getting the best tasting coffee. Also, companies should base their purchase decision on a product’s value over its lifecycle and not merely on price.

Involving the end user

The end users of the products and services, i.e. final customers, are rarely involved in the procurement process. This is despite the fact that this group is the most informed about its unmet needs and issues with existing products and services. Companies need to consult their final customers to ensure the relevance of new products and services to them. For instance, a supplier of ultra-efficient lighting systems to a hospital was able to make improvements in the product by organizing its demonstration, inviting feedback and suggestions from staff, and developing information boards at the client location.

Procuring innovation in the public arena

Innovation procurement is not restricted to the corporate world but can be functional in the public arena as well. Public procurement of innovation (PPI) is when public authorities act as a launch customer for innovative goods or services created by companies. It presents a win-win situation for all stakeholders. For procurers, it ensures product development tailored to public needs. In the case of suppliers, it promises benefits such as economies of scale and wider market size. This approach can drive the uptake of innovative products and services, especially in markets dominated by the public sector. It can also help tackle societal challenges such as health and well-being, food security, and sustainability and climate change. This is of particular relevance in countries such as India, where there is scope to further improve efficiency in the delivery of public services.

Within the PPI framework exists the practice of pre-commercial procurement (PCP), which deals with procuring R&D rather than actual products and services. For instance, in 2012, Sweden’s capital city Stockholm launched the innovation competition ITS Innovation Stockholm Kista to incentivize the development of new solutions to ensure the efficient use of transport infrastructure.

Innovation procurement and supplier-driven innovation hold significant value for businesses and the public sector alike. Businesses need to reassess their finances and establish an appropriate vision and values. It also intensifies the need for a culture change and for systems that ensure continuous improvement. Since these innovation approaches are fairly new and untested, organizations are well placed to assess their benefits on a small scale. They can then identify and adopt best practices going forward. It is imperative for organizations to become adept at driving and stimulating innovation in their supply chain, else they risk becoming redundant in a fast-changing world governed by evolved products and out-of-the-box thinking.

*The source has been quoted from the The Hindu Business Line article posted on 4 April 2013.



One thought on “Innovation procurement and value creation

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