In keeping with one of SI’s major themes for 2011 on Next Generation Sourcing, today we are going to discuss the recent Transform white paper from Purchasing Practice (a strategic procurement advisory company). Entitled The Brave CPO: Leading on Innovation, the white paper defines the CPO’s role in innovaton with respect to business strategy and procurement strategy and discusses how the CPO can leverage external innovation networks.

The white paper starts off by discussing the need to understand the company’s growth strategy, which generally falls into the Market Penetration, Market Development, Product Development, or Product and Market Development buckets, and how Procurement can help. According to the white paper, innovation is increasingly sourced external to the organization, placing the skills and responsibilities of the procurement function right at the heart of its process. This is a very important, but overlooked point. As companies continue to outsource more and more of product design in addition to manufacturing to strategic suppliers, the importance of Procurement and Supply Management to successful innovation increases exponentially. It’s literally the difference between smashing success and abject failure.

Plus, without Procurement’s help, as they are in the best position to understand supplier capabilities, the business won’t be able to answer the critical questions necessary to select the growth strategy. Specifically,

1. Target customers can only be identified once the organization is sure it can provide the products or services they require.
2. Products and Services can only be selected once the organization knows that it can offer those products or services at a profit (which can only be known once cost is known).
3. Product and Service Delivery can only be determined once the efficiencies and costs of the different options (which will often include 3PL or third party support) are determined.

Then the white paper discusses some core innovation drivers, which generally fall under business, market, technology, and environmental categories. These drivers fit nicely with CAPS recommendations for creating tomorrow’s value, as outlined in SI’s post on VFS Level 3. Especialy since a good innovation strategy optimizes costs and resource utilization, improves organizational flexibility, and promotes sustainability in the long term.

After addressing the innovation drivers, the paper moves on to a discussion of the Procurement innovation strategy (and the need to connect it to the organizational growth plan). A good strategy is one that reduces costs through cycle time reduction, exclusive knowledge or intellectual capital, preferential access to scarce resources, increased agility, environmental friendliness, or sourcing innovation, since cost reduction is always a concern of CXOs and increases the chances of organizational support across the board. The strategy is often identified through an analysis of the organization’s competitive priorities to determine which one Procurement can make the greatest contribution to.

Once the Procurement innovation strategy is selected, it’s then up to the CPO to make it happen. This will require proactive leadership as the CPO must convince the C-suite it’s the right way to go and the team that their effort will pay off in the end. In addition, the CPO must define, commit to, and meet targets, metrics, and budgets to gain the respect the Procurement department will need for continued success over the long term. In addition, CPOs must make sure the right organizational, procurement, and individual capabilities are in place for success.

Finally, the white paper discusses the concept of Innovation Centered Procurement, which is Purchasing Practice’s equivalent of CAPS Value Focussed Supply, The MPower Group’s Next Practices, Tompkins’ Associates Supply Chain Value Creation Framework, Bravo Solution’s High Definition Sourcing, and Greybeard Advisors’ Next Level Supply Management. Since it’s not much different from the other frameworks, we won’t discuss it in detail, but will suggest that you definitely add this white paper to your Next Generation Sourcing library. To obtain a copy, send an e-mail to info <at> purchasingpractice <dot> com with the subject heading “Leading on Innovation“. The discussion of high level enablers and leveraging external innovation networks is a must-read for anyone trying to take their supply management organization to the next level.