Autumn, April 2014

Procurement-Led Innovation

Innovating for greater productivity

 What’s one challenge the Mining and Oil & Gas industries have in common? They need to innovate, says a new study.

The Faculty, in conjunction with the Australian Government’s Department of Industry, selected the Mining and Oil & Gas industries for a recent study into current practices. Data was collected from over 60 articles, almost 100 survey responses, and interviews with leading Procurement functions (from primarily large ASX 100 listed organisations). Participants in the surveys and interviews ranged from Chief Procurement Officers to Procurement Specialists. The findings are as summarised.

External shocks = innovation
Nothing causes a leap forward quite like an external shock.  With the current worldwide situation, Australian industry “is under significant pressure with declining yield rates to find productivity gains and cost efficiencies,” says Matthew Bonwick - Consultant, The Faculty, who led the study. This is particularly strong in the Mining industry, which is acutely aware of an impending crisis.

Facilitating innovation – convincing vs.  implementing
68% of the study’s participants in Mining and Oil & Gas believe that innovation is of ‘critical’ importance. But it’s one thing to convince – and another to implement change. 75% of respondents report that implementation has yet to reach desired levels. “This is due to a lack of collaboration and  alignment across procurement and supplier relationships that negatively impacts business case approval rates,” states Bonwick.

What’s innovation worth?
Businesses tend to focus on measuring business-as-usual priorities easily measured in dollars (such as improving cost efficiencies/productivity). Suppliers running best practices attach a dollar amount to their innovation. This is required to help sell innovation internally within the customer’s business.

Business as usual
The Mining industry reports that a majority of innovation is lost in ongoing supplier management; Oil & Gas see it lost in ongoing contract management. For suppliers, both industries agree that the largest area of potential loss is in strategic sourcing. The industries know innovation is needed: a full 82% of participants say they’re aware that supply/demand for innovation is available in the market. However, businesses tend to only ask for innovation once a large external shock occurs.

Five steps to drive innovation
Procurement needs to focus and encourage innovation. How can Procurement implement change? The following are five steps to get started:
1.    Facilitate cross-functional collaboration (without trying to own/sponsor innovation)
2.    Integrate key innovation phases into existing procurement processes
3.    Conduct regular supplier meetings, thereby enriching Supplier Relationship Management
4.    Reducing Procurement ‘red tape’ for new and existing suppliers
5.    Leverage internal Risk Management/Legal capability to ensure innovation is occurring within existing business parameters

“Building trust and confidence amongst both parties through demonstrated partnerships lays the foundation for future, and larger, success,” says Bonwick. “Procurement’s cross-business position is advantageous in supporting clear ownership, facilitating alignment and building momentum for innovation projects.” With Procurement leading the way, supplier innovation will be able to drive the productivity improvements currently needed.