19 November 2009

It's time organisations stopped thinking that only they can come up with good ideas. Richard Brass finds that suppliers can be a rich source of innovative ways of working

When business is booming, procurement can largely just get on with it. Barring serious supply shortages that can send input costs soaring, in boom times purchasing generally escapes the corporate limelight while executive attention is focused on producing the goods and getting them out into a thriving market.

But a downturn is a different story. As buyers know, at times like these the managerial spotlight turns on procurement to find the margin-driving cost cuts that just might save the organisation's bacon.

If it were simply a matter of hitting suppliers with price reductions and longer payment terms, that would be no problem. But in a recession as severe as this, taking it out on suppliers could drive them over the edge, turning a cost-cutting exercise into an expensive scramble for replacement supplies and making you few friends.

That's one reason the perennial topic of innovation is more important now than ever. So how do you get hold of the fresh ideas that will help you through tough times? Having already shaken up their own brains and teams for ideas, many procurement professionals are looking in both directions along the supply chain - seeking new ideas from suppliers and internal customers.

But, while the idea of "innovation" may be as universally beloved as motherhood and apple pie, actually finding and applying it can throw up all kinds of barriers.

BARRIERS TO BREAKTHROUGHS

One such challenge is the widespread and resilient idea that nobody else should be telling you how to run your business.

"Looking for innovation from a supplier is an acknowledgement that maybe the supplier's got better ideas than the business," says Larry Beard, procurement director at airport company BAA. "I've been in businesses where the premise has been that we don't need to ask them because we know what's best."

That's a significant hurdle, but Beard believes overcoming it and looking to vendors for ideas can produce significant benefits. "Where suppliers have an enormous advantage over people internally is that in most cases they're dealing with your competitors and they're also dealing with many other sectors, so if you are receptive they can bring those ideas to the table."

Uncertainty about innovation within procurement is a problem Alan Braithwaite has frequently encountered in his work as visiting professor of logistics and supply chain management at Cranfield School of Management and as chairman of LCP Consulting.

"For a lot of companies it's quite threatening as a concept, because it very often implies quite radical change," he says. "But really big innovations in the supply chain come along now relatively infrequently." Not that organisations can't continue to innovate, he adds. E-business, supplier collaboration and total cost of ownership are no longer new ideas, "but they are still innovative for many companies in terms of applying them. Taking good practice and applying it more widely and with more rigour is the big step change that's still available to most businesses."

Many buyers, consultants and academics share the view that the fi rst step towards tapping your suppliers for innovation is by establishing broad, open relationships.

"Procurement is a bit mechanistic and process-driven, and of course that's the last thing innovation is," says Stephen Wills, AXA UK director for procurement.

"While you develop a process with it, in reality it's all about relationships."

The best way to start working innovatively is to establish yourself in the business, he says, and show you understand how the business works. "From then you work with the supplier, discussing ideas - not just about managing the contract you've put in place and the service agreement, but how you can take that to the next step."

Those discussions, says Nick Pye of Mangrove Consulting, need to be aimed at understanding exactly how your relationships with your suppliers affect them. "One of the general principles of innovation is understanding what it's like on the other side of the fence," he says.

"So when procurement people are talking to suppliers, one of the key routes to innovation will be trying to think about how they fit into their suppliers' lives, how important they are relatively and how much pain v pleasure they get from them."

He recalls several clients who are "almost treating their suppliers as customers" and carrying out research into their concerns. "I think that creates a much better relationship and that will get the most out of suppliers."

Shirley Cooper, procurement and supply chain director at Computacenter UK and president of CIPS, believes getting that flow of ideas involves a simple change in the way of viewing the people you work with on both sides of the supply chain. The key step, she believes, is looking beyond your own immediate needs.

"You've got to think about what matters to other people and not just to yourself. Purchasing people are frequently asked just to buy, to save the business some money, but actually they've got to start asking questions that will allow their suppliers and their own staff to be innovative."

Getting together with suppliers and customers to understand their specific, real-world needs, she says, plus asking the right questions, can produce significant results. "An example of that is to think about somebody who's asking you to sort out the travel budget. Think wider than that. Instead of just doing it the way it's always been done, ask what it is they actually want, and then you can think of new ways of doing that. Ask them where they're travelling to and why, and then you can move them into the new way." She says that this is what a lot of her customers are doing - using technology to cut out travel, buying smart interactive boards and audiovisual technology - all of which, one could argue, is part of the travel budget.

"But if you haven't asked the right questions, you're just going to repeat what was there before, instead of bringing time, change, savings and a new way of thinking," she adds.

SYSTEMATIC IMPROVEMENT

For some buyers, looking elsewhere in the supply chain for innovation has been turned into a regular process. Universal Music has built a system for exploring needs and ideas from both suppliers and internal customers and bringing them together to find fresh ways of doing things.

"Purchasing gets typecast in terms of cost control and cost-cutting, whereas actually what we're looking for is different ways of bringing value into the business," says Paul Denyer, head of group purchasing at Universal.

Much of his department's work is trying to harness ideas from the supply base. Suppliers have a point of contact in Denyer's team, to whom they can put forward ideas. Group purchasing then acts as a conduit to take those ideas to a stakeholder forum, where decisions are made about implementing them.

"It takes a while until purchasing is established with the credibility and links to the wider business so you can make that happen. When suppliers feel they are listened to, they'll keep bringing ideas. What frustrates them is where they don't have visibility of a clear line of communication, and they feel they get fobbed off or are being given lip service. That's why it's important for us to take ideas we think are good through to implementation."

They also do a lot of work with internal customers to understand their priorities, finding common ground with the finance, creative, marketing and promotional teams.

In addition, a "green team" works with all areas of the business to improve environmental efficiency. One example of where the green team has adopted supplier innovation to help the company to reduce its environmental impact is in transport.

Denyer says: "Previously any of our clients phoning up for a taxi would normally be sent the closest car, which might be a hybrid car or not. By working with suppliers, we convinced the business they wouldn't lose anything on service if we implemented change whereby their call automatically defaulted to a hybrid vehicle."

He adds that the proportion of journeys made in hybrid vehicles has increased from 9 per cent to more than 50 per cent.

For Beard at BAA, the test case for any innovation is its effect on the bottom line. "Everything has to translate into a monetary improvement. It might be a process improvement or a new piece of technology, it might be that you increase sales or margin, but there has to be a monetary benefit.

"Then you get visibility in what's being discussed with, say, engineering, marketing or sales. If that innovation hasn't been well received, at least you've got a figure attached to it so you know if it's worth challenging the business and saying: 'Why haven't we taken up this idea?'"

Suppliers also need to be encouraged to bring innovation forward by integrating it into other processes and by offering them some kind of incentive, says Beard. "Ideally you'd like to have some innovation process within a business - although I've yet to find one that's that clearcut - but what we've done as a stopgap is, say when you have your quarterly reviews with your suppliers, they have to put on the table what innovation they have proposed in that quarter, and what the monetary benefit has been. You also need maybe to share the benefits."

Beard points to the example of a diploma in management studies in supply chain, set up in 2007 by Nottingham Trent University while he was at Severn Trent Water, as a way of producing systematic innovation. The course included members of Severn Trent's purchasing, engineering and operational staff, alongside personnel from the company's suppliers and contractors.

"Out of that came enormous amounts of innovation. For example, they looked at how the Japanese operated capital projects, and out of that came software being used over there, which we were the first in the UK to use, and which reduced delivery time by 20 per cent for a capital project."

"Quite a few of the contractors on that course were also working with other water companies and that produced some really simple things." For example, Severn Trent had a unique concrete specification, while every other water company used the British standard. Severn Trent's innovative idea in this case was to bring a commercial standard to its own specifications.

AXA has also taken the route of formal educational structures as a way of generating innovation. It established a Procurement College, which was named the best people development initiative at this year's CIPS Supply Management Awards.

Wills of AXA says this project has produced measurable outputs in terms of getting products to market faster and product design. "These are tangible and measurable. In terms of revenue you can actually put a number to them," he says.

START AT THE BEGINNING

The procurement department at the BBC is another that has placed innovation formally at the centre of its dealings with both suppliers and internal customers. "We're keen for new ideas and that's why we evaluate innovation and weight it so it's part of the tendering process," says Sarah Ellis, head of sourcing for BBC procurement.

"If we spend the time up front, and communicate very clearly with suppliers, we get the very best responses from them. We also encourage our stakeholders to look for innovation."

Working with stakeholders is her starting point, so her team can help them create specifications that are output-orientated.

"For instance, when we've got large tenders coming up, we'll run a supplier briefing to tell them what our objectives are, what the strategy for that particular good or service is, and how we would therefore look for them to incorporate their thoughts in the documentation we send out."

She says it's up to procurement to make sure its stakeholders create very clear documentation and ask the right questions.

"Our pre-quals will be backward-looking in terms of establishing whether suppliers have the right experience and credentials. So when it comes to the invitation to tender, we focus on how they will meet our requirements and drive our business forward."

And, if the barriers to seeking innovation from either side of the supply chain seem daunting, Andrew Douglas, visiting professor at Bristol Business School and a seasoned purchaser, says the key is to remember there's more knowledge out there about what you're buying than you have yourself.

"Suppliers generally know more about what they're selling than the people buying it. And the people who specify and use the goods that you're trying to procure often know more about them than you do.

"Purchasing people need to have the social skills and the gravitas to be seen not just as the gatekeeper in terms of the contract or the process, but as a contributor adding more value."

• Richard Brass is a freelance journalist

KEY TIPS

Overcome attachment to the idea that your organization knows best Build relationships with suppliers and internal customers Establish a clear line of communication into which suppliers can feed ideas Act on good suggestions Attach a financial sum (saving or revenue gain) to an idea to make the case to others Consider incentivising suppliers to come forward with suggestions Encourage all involved to think differently

SMnov2009