Daily Archives: March 2, 2008

Innovation IS A Growing Problem in Procurement

I was very pleased to see a recent article in the Supply Chain Management Review that said it will be necessary for procurement professionals to develop new ways to define and identify needs inside their organizations, to assess the capabilities of the organizations’ internal resources to meet those needs, and to match them against all available external resources.

The article makes two interesting observations. First, that executives in industries such as automotive and pharmaceutical, where R&D expenses are rapidly rising and where returns have been steadily decreasing, have started looking to their suppliers for innovation in component designs, in quality processes, and in manufacturing processes. Second, that R&D managers who try to utilize seeker-solver networks often make costly mistakes with poorly constructed challenges. (Either the challenges are too tightly defined, with inherent biases that lead to the same dead ends, or their definitions are too loose.) In both cases, R&D managers are “reinventing the wheel” in procuring services and making expensive mistakes as a result. And even when they make slow headway, they lose process capability when managers retire or transition out of the R&D organization.

The article suggests that firms use knowledge brokering and procure solutions by finding them instead of creating them. They indicate that the knowledge brokering cycle – where you capture good ides, keep them alive, and imagine new uses for old ideas – has been used successfully used for years by contract design firms (such as IDEO and Frog Design). The argument is that since knowledge is unevenly distributed, reusing mature ideas in different contexts is more cost-effective than inventing the same ideas from scratch.

The article also endorses “open innovation” – the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation, respectively – as the internet has added a powerful twist to the open innovation concept that can significantly reduce the cost of innovation by pairing corporations (seekers) with R&D challenges and external scientists (solvers) who can approach problems from many different angles. Since somebody “out there” may already have solved your problem (or at least have the wherewithal to do so easily), and might be willing to do so at a fraction of what it would take to replicate the solution in-house, it pays to take a shot at seeking them out.

Then the article points out that there is a persistent limitation to knowledge brokering and open innovation – they do not engage the procurement professionals whose job it is to help define make-or-buy parameters. In addition, even though procurement is charged with managing the inflows and outflows of goods and services, they are traditionally not tasked with managing the inflows and outflows of knowledge. Furthermore, procurement is still charged with price reduction, and not revenue generation.

The answer, of course, is to recognized procurement as drivers of revenue through innovation – and not just drivers of cost reduction – and to forge links between procurement, R&D, and HR. Then, procurement needs to start launching experiments, track results and build bridges, and begin to lay the foundations for an innovative culture.