Innovation - a critical step in supply market assessments?
With procurement increasingly involved in supplier innovation, the case for supply market assessments to include suppliers track records in innovation could be building.
Sourcing the right products at the right price and on time has always been a core function of procurement, but as buyers, category managers and procurement heads know, their teams can build even more value into the supplier relationship. How they set their stall out at the offset might just be the key.
As described by CIPS, market analysis helps procurement understand how the supply market works, the direction in which the market is going, the competitiveness and the key suppliers. This can help the buyer to improve and shape the strategy and tendering process and align their behaviour in order achieve better value for money, reduced prices or, importantly in this context, an improved service.
With supplier-led innovation shown to increase profits, enhance environmental records and cut costs, this is arguably as vital to a future relationship as the supplier’s financial performance and place in the market.
When automobile giant Ford announced that it needed to reduce its window trim cost, it asked its suppliers for answers. Suppliers created a new resin which slimmed down the manufacturing process, cutting out 2,700 gallons of diesel fuel and 60,000 pounds of carbon dioxide by removing 19,200 truck miles transporting the parts between factories. Both helpful to the environment and cost saving, the project would not have been achieved if Ford had not had innovation-focussed suppliers on board in the first instance.
An effective supply market analysis should give procurement professionals a thorough understanding of the supplier market and where their organisation would fit in, in size and financial terms. The established steps are:
The supply market assessment starts by defining the supplier market. This could be done by opting for a national, European or worldwide base but will probably depend on the sector and supply chain in question. Within this it makes sense to list all available partners and not just existing suppliers. These should be listed alongside their revenue and profits. This establishes a base of who is out there and how big they are in their market.
The next step is to establish how important your organisation’s business could be to the supplier by setting down your available spend next to their business revenue. This will inform negotiations and give you an indication of where you will sit in the scheme of things if you select any given supplier.
Product and pricing
Procurers then need to get hold of relevant information about the supplier’s products,services and pricing, including speaking to suppliers directly, to establish whether these match their needs and expectations.
Understanding the potential levels of risk in the category is also key. Issues like availability and production schedules need to be evaluated to understand the possible range of outcomes from working with each supplier.
The innovation question
Supplier innovation has the potential to be game changing, so assessing whether suppliers have the potential to bring this to the relationship could be the final stage of the process. This would involve researching the innovations and R&D history of the supplier base, through a combination of online research and direct questioning of suppliers.
Innovative suppliers are proven to help reduce development resources and can help create price premiums, but to achieve this procurement needs to recognise its role in making it happen from the start. Ensuring that everyone sees the function as profit enhancing and not just cost cutting has to be an essential part of this.
As procurement builds a strong category management understanding, its inclusion of innovation in its supply market assessment will help it to play a pivotal role in improving profits and business practice in an organisation.