Purchasing Innovation VIII: Transforming New Product Development

In the past year, Aberdeen Group has released a number of significant research reports on new product development and innovation, starting with the Product Innovation Agenda Benchmark (September, 2005), continuing with New Product Development: Profiting from Innovation (December, 2005), and, more recently, Procurement in New Product Development: Ensuring Profit from Innovation (March, 2006) and Design for Sourcing: Improving Product Lifecycle Profitability (March, 2006), all authored or co-authored by Aberdeen’s own Mr. Innovation, Jim Brown, their VP of Global Product Innovation and Engineering Research. The last report is co-authored by Sudy Bharadwaj, Aberdeen’s new and improved Mr. Supply 2.0.

Not only did these reports qualify the value of innovation to a company, but they quantified the significant financial benefits of introducing procurement into the process at the earliest stages of New Product Design (NPD). Specifically, when procurement is included in NPD in the design stages, product development cost is typically decreased by 16 to 18%, overall product cost is typically decreased 15%, and revenue is typically increased by 19%. Furthermore, quality is improved (through the elimination of late changes due to sourcing considerations), parts reuse is increased (which enhances supply leverage while reducing inventory and complexity), and time to market cycles are improved by 10% to 20%.

When you consider the intensified cost pressures, reduced product lifecycles, increased product complexity, increased rates of commoditization, tougher competition, and the continual reduction in trade barriers in today’s global marketplace, the need for continued innovation is essential to a company’s very survival. However, when done right, successful innovation can be the key differentiator between survival and massive profitability.

With respect to product development targets, Aberdeen has found that the majority of companies (75%) are not able to consistently hit any of the following five key measures:

  • percentage of products meeting revenue targets
  • cost targets
  • launch date targets
  • quality targets
  • product development cost targets

Classifying companies into laggards (25%), industry norm (50%), and best-in-class (25%), Aberdeen found that the industry norm was only able to hit revenue targets 40 to 80% of the time, cost targets 40 to 80% of the time, launch dates 20 to 80% of the time, quality targets 50 to 90% of the time, and development cost targets 30 to 80% of the time.

New Product Development is more challenging now then ever before since the majority of products require expertise across disciplines and organizational boundaries. Most products are so complex that it often requires cross-disciplinary teams across your supply base to design, prototype, and bring a product to market. Furthermore, innovation, which is as much as broadening the product development view as it is about managing the product lifecycle, requires input from business units including, but not limited to, design and engineering, marketing and sales, legal, finance, and procurement. The process requires a significant amount of coordination, communication, collaboration, and control.

Managing this innovation is no easy feat, but great results are much more likely if you follow the best practices of best-in-class companies that dedicate leadership, centralize control, standardize processes to capture and leverage results, employ technology to facilitate the process, and measure constantly. (For more details, refer to the Aberdeen Group reports referenced above.) A senior manager should be directly responsible for overseeing the full process of identifying innovation opportunities, engineering them, developing them into products, and bringing them to market. Centralizing control allows for the standardization of processes, consistent distribution of best practices, and consistent management of a central knowledge repository. Standardize processes improve efficiency and allow for the capture of knowledge and results that can be re-used in the future. Appropriate technology can simplify coordination, collaboration, and communication and allow everyone involved to focus on innovation, not automation. Best-in-class companies are four times more likely to have Product Lifecycle Management related technology, integrated data and process automation, and collaboration infrastructures than their peers. Constant measurement allows for constant improvement. Best-in-class companies are three times more likely to measure key performance indicators across projects on a monthly basis.

Furthermore, successful innovation incorporates customer needs, evaluates goals in business terms, implements operational improvements that yield tangible results, chooses product opportunities by value and relies on procurement to ensure that product costs and supply risks are addressed up front.

Successful innovation “designs for sourcing“. If you wait until the prototype phase, after engineers have made material and component choices, chances are that all of your designed-in-costs, which the Defense Advanced Research Projects Agency (DARPA) estimates to be 80% of the product costs, will be locked in. Involving procurement early is the key. Otherwise you risk increased direct material costs, unacceptable risk in supply, unexpected component obsolescence, missed regulatory compliance, the inability to expand products into new geographies, the lack of ability to take advantage of sourcing leverage, increased quality inspection costs, raised manufacturing costs, and missed launch dates.

To design for sourcing, the average company, who still operates in organization man‘s world (see Part V), will have to reshape its organizational discipline to one of organizational synergy between networked persons across its business units, and engineering and procurement in particular. Engineers have to be aware of the impact of their decisions on cost and procurement has to be aware of the impact of engineering’s decisions on supply and they both need to work towards selecting the best components for the best products that bring the most value to the company.

For more ideas on how to innovate your purchasing – and your sourcing – see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki.

Still quiet here.sas

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