Wednesday, 4 March 2009

Does procurement contribute to innovations in practice? Not much, yet...

Welcome to our Blog, which we have launched to discuss one of the key future roles of Procurement. In most organizations innovation is the area of R&D or Marketing, or a combined responsibility of marketing and R&D. When Innovation is mentioned, no one thinks of Procurement. But why not? Procurement has the ideal position in the firm to fulfill a pivotal role between suppliers and the organization, when looking to suppliers as a source for innovation.

This gap became all too clear from research carried out by Capgemini in the Netherlands, in collaboration with Utrecht University (Master Thesis Strategic Procurement and Innovation, written by Casper ten Kate).
How can procurement contribute to innovation?

Twelve case studies of different organizations and market sectors show three determinants of a procurement contribution to innovation:
· The level of strategic procurement
· Supplier involvement
· Procurement integration within the company
Out of the thesis can be concluded that the factors mentioned above indeed enable a procurement contribution to innovation.

Case analysis showed four patterns in relation to the contribution of procurement to innovations:

Pattern 1: Companies achieving a contribution to innovation by procurement
Companies with pattern 1 have obtained a high score for ‘the level of strategic procurement’, a medium to high score for ‘supplier involvement’ and a medium to high score for ‘Procurement integration within the company’. Companies in this pattern have a procurement function in place acting on a high strategic level, and combined with relatively high supplier involvement and procurement integration scores, they are already making a contribution to firm innovation by procurement (1 company in this research) or do this to some extent (2 companies in this research). This pattern fits with the hypothesis, that relatively high scores for the three determinants correspond with a high or above average contribution of Procurement to innovation.

Pattern 2: Companies without innovation via procurement.
Companies with pattern 2 have obtained a low/very low scores on all the three determinants. There is no basis for procurement to be able to contribute to the company’s innovations. The companies within this pattern are still in the process of defining their the procurement function and its position in the company. The majority of their procurement activities are operationally oriented, there is a little room for long-term issues or carrying out a procurement strategy. They do not have a clear overview or understanding of their supplier base, which makes it difficult for them to deal with suppliers in another way than solely transactional. Due to not clearly defined procurement function, the procurement function is not integrated in the company. All this results in no or very little contribution to firm innovation by procurement. Two companies within this research fitted in this pattern.

Pattern 3: companies stuck in the middle.
It’s in the name; companies with pattern 3 obtained scores between pattern 1 and 2. These companies have medium score for ‘the level of strategic procurement’, a medium/low scores for ‘supplier involvement’ and ‘Procurement integration within the company’. Companies in pattern 3 have a clearly defined procurement function in place, albeit not on the highest strategic level. Furthermore, these companies involve suppliers to a certain extent and there is some procurement integration in the company. They have thus far been unable to achieve a contribution to the company’s innovation by procurement. Five companies within this research fit into this pattern.

Pattern 4: companies with entrepreneurial procurement.
Companies in pattern 4 have obtained a medium/low score for ‘the level of strategic procurement’, and high scores for ‘supplier involvement’ and ‘Procurement integration within the company’. The companies in this pattern show an above average contribution to the company’s innovations. The companies in the thesis with this pattern are relatively small, with relatively small procurement staff compared to the companies in pattern 1. This is the reason for the medium score on strategic procurement, but due to the size of the company these procurement departments have close lines to the rest of the organization. This explains the high scores for ‘supplier involvement’ and ‘the extent of procurement within the company’ and this leaves room for procurement to play an entrepreneurial role and thereby contribute to the innovation within the company. Two companies within the research fitted in this pattern.

From the research it can be concluded that the contribution of Procurement to innovation is low in practice. Only 1 procurement department of the 12 major Dutch companies has a sustainable contribution to the company’s innovations. Two others have an just above average score, but a sustainable base to develop a high level contribution to the company’s innovation by Procurement in the future.

A new business model: Innovation Driven Procurement.
The next generation Procurement, is an accepted party in the area of innovation. This is what we call: Innovation Driven Procurement. For companies Innovation Driven Procurement will become one of the key competences to keep the pace of innovation high enough in the ever faster changing world. Organising for Innovation Driven Procurement poses new challenges and a different business model of the collaboration between procurement and the functional departments and external partners.

For becoming more successful in the contribution to innovation, Procurement should stop thinking in “transactions” and start thinking in “Business Models”.

Written by: Ronald Geerts & Robbert den Braber

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