Innovation Driven Procurement

Innovation Driven Procurement (IDP) January 2009

Corporate mission, vision and strategy statements stress the importance of innovation as the engine for growth We deliver innovation by investing in world class strengths in end-user insights, technology, design and superior supplier networks Philips Source: corporate websites Capgemini Consulting Supply Chain Management • Proprietary and Confidential 2 -Innovation Driven Procurement-

An example of an innovative company: Procter & Gamble Open Innovation initiatives connect external parties to contribute to new product development Open Innovation with P&G P&G’s Innovation Net Mechanisms Consumer An internal network of 70 technology Insights entrepreneurs who think up scenarios and write technology briefs R&D Customer Suppliers’ research teams work in P&G labs Labs Teams and P&G researchers work in supplier labs Interactive prototyping tools to co-invent new product packaging with consumers. Networks connect companies that have a science or technology problem. Trade Employees A network that links over 800 retired but high Suppliers performing scientists and engineers from over 150 companies. Results Since 2000, share price has doubled and R&D investment as a percentage of sales is down Venture Suppliers from 4.8% in 2000 to 3.4% in 2006 Capitals Launched 100 new products, 35% of which originate externally, up from about 15% in 2000 45% of the initiatives in product development Contract Labs Research have key elements discovered externally Institutions Increased product hit rate to more than 90%, from 70% in 2001 through open innovation Source: (a) “Why companies should have open Innovation”, HW Chesbrough, (2007); (b) “Connect and Develop: Inside P&G’s new model for Innovation”, HBS 58 (2006); (c) Company website Capgemini Consulting Supply Chain Management • Proprietary and Confidential 3 -Innovation Driven Procurement-

The Innovation Driven Procurement (IDP) Strategy based on the Corporate and Procurement Strategy will transform procurement into a true business partner From Strategy to IDP Corporate Procurement It is essential to align the Procurement Strategy with the overall Corporate Strategy to ensure Procurement’s efforts are focused appropriately and are consistent with the fundamental direction of the business. This is what makes Procurement Strategy a service provider for the business. Corporate Procurement Whereas innovation is often stressed in Corporate Strategy Strategy Strategy and open innovation is embraced by many successful companies, many struggle to translate this into the Procurement Strategy. Let alone providing procurement services satisfying the business’ innovation needs. IDP The translation of the Corporate Innovation Strategy into a Innovation Driven Procurement (IDP) Strategy provides focus for procurement. Mechanisms such as those shown in the P&G Innovation case need to be formalised and embedded in the organization. IDP will transform Procurement from Innovation Support a service provider into a business partner. initiatives services Depending on the IDP strategy, new roles and services will be provided by procurement. This can have an effect on the entire procurement function, mainly impacting tactical procurement operations such as sourcing, demand management and supplier relationship management. Capgemini Consulting Supply Chain Management • Proprietary and Confidential 4 -Innovation Driven Procurement-

Innovation Driven Procurement is one of the crucial aspects in adding value to your business if innovation is part of your Corporate Strategy IDP in procurement development Over the past decades, the increased importance of the procurement function has set a development in motion. Nowadays, most •Value extraction companies have spend management strategies, Value focus and creation allowing them to leverage economies of scale and managing demand in the organization. Procurement maturity level IDP Most have gone further with involvement of the •Performance enhancement business in the procurement processes. This Product focus process focus makes procurement a reliable •Supplier involvement service provider responding to business demand and mitigating risk and costs. •Eliminating deficiencies Some have successfully gone further recognizing suppliers as a key actor of the end product. This Process focus goes beyond responding to business demand with •Business involvement procurement services, mitigating risk and costs. It means pro-actively providing value added services that will help the business reach the corporate •Consolidation goals. Spend focus •Compliance IDP services are focused on future client demand and (potential) markets. It encompasses a procurement function which is embedded in new product development, which uses its extensive market knowledge to scout for new opportunities Transactional focus •Negotiation beyond direct business demand, and may even spur new directions for the company. Capgemini Consulting Supply Chain Management • Proprietary and Confidential 5 -Innovation Driven Procurement-

IDP includes mechanisms both internal and external to the product chain for Procurement to contribute to Open Innovation IDP based on Open innovation Product chain internal mechanisms Connecting existing suppliers with engineers Searching and stimulating new developments within the existing supply base Set up joint development programs, co-creation, partnerships Provide toll gate services for new technologies throughout the innovation funnel P&G case example: strong internal networks and close collaboration with suppliers Product chain external mechanisms Scouting for new developments outside the existing supply base and in completely different markets Creating flexibility in supplier segmentation and dependency Building scenarios of future markets with boundary spanning networks Connecting with new ventures inside & outside the product chain Changing the market focus or future market P&G case example: prototyping, networking with consumers, engineers and entrepreneurs Source graphic: Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis, Sept 27, 2004 Capgemini Consulting Supply Chain Management • Proprietary and Confidential 6 -Innovation Driven Procurement-

Beside the natural position of Procurement as the suppliers’ partner, Procurement competences match perfectly with those required for Open innovation Key Procurement competences Open innovation required competences A well developed procurement department Open innovation must be organized and (maturity level of process focus and higher) has facilitated. Open innovation goes far beyond an strategic purchasers who can: internal R&D department developing new ideas. Competences required for Open Innovation are: Challenge business demands Critical view on internally developed specifications Contribute to developments with strong knowledge of the category markets and Boundary spanning communication and products collaboration skills Build up a broad vision on markets Technical and market insight MATCH Develop and leverage relationships between Decision making in the various toll gates in the the business and suppliers innovation funnel Manage an open portfolio of suppliers and Critical attitude towards the status quo, and evaluation their contribution readiness to engage with new parties Challenge suppliers develop more value for the Curiosity and ambition to investigate and realize product chain future possibilities and potential markets Source graphic: Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis, Sept 27, 2004 Capgemini Consulting Supply Chain Management • Proprietary and Confidential 7 -Innovation Driven Procurement-

The IDP strategy impacts upon all strategic and tactical aspects of Procurement • Develop maturity to at least the process focus level • Set up and support for the projects by the responsible • Translate innovation strategy into IDP strategy CXO’s • Align initiatives with the board of management • Set up project organization for multi-functional IDP teams Procurement • Define roles and responsibilities Strategy Development • Evaluate category plans to help identify IDP projects Governance & Organisational Development • Increase weight of multi-functional teams for IDP • Conduct sourcing within IDP teams categories • Specify needs functionally • Increase scope of sourcing strategies • Specify problems instead of solutions • Focus on (future) added value to the product Category Planning chain • Involve legal for good IP structures • Open up portfolio management • Extend supplier management outside the supply base Demand Sourcing Supplier Relationship • Redefine relationships • Fully involve the business in the IDP Management • Deal with IP rights Management teams • Open up networks with the ecosystem • Feed the business with market • Increased partnering, development and co-creation knowledge and developments • Set up networks for new idea creation Supply Planning & Control and scenario building Provision of Goods & Services • Set up internal and external IT People Knowledge & Information knowledge bases • Make use of online tools for networking • Ensure perfect communication within • Connect with suppliers Managing the Enablers IDP teams • Support boundary spanning project • Connect with external knowledge management sources • Communicate success • Select the top resources for IDP projects • Recruit your success and change profiles of strategic purchasers • Develop project management and collaboration skills Capgemini Consulting Supply Chain Management • Proprietary and Confidential 8 -Innovation Driven Procurement-

IDP projects are initiated using the Capgemini Phase 1 approach, with clearly defined activities and milestones 1 Project charter 2 Clear view of 3 Current state 5 Opportunity matrix 7 Business case - Detailed plan corporate mapping - Team set-up targets and - Scope market 4 IDP strategy 6 Pilot project proposed and planned Detail project charter 1. Information 2. Organisation, process and 4. Opportunity collection people assessment creation • Set scope Opportunity • Detailed activity plan Analyse as-is state Workshops Focus • Agree on project Steering Committee decision interviews • Procurement maturity •Translate IDP control 3 Execute IDP Strategy through pilot • Business requirements strategy to activities Kick-off Map •Define to-be state 5 innovation • People 1 and current gap strategy & 2 6 Build the team practices •Compile opportunity • Assign client team overview members 3. Translate Innovation strategy Collect •Select pilot project • Ensure availability Pinpoint value add market data opportunities for •Plan implementation 4 • Schedule activities procurement 5. Build business case Arrange facilities Model Collect Compile • Agree on project costs - additional business 7 budget (e.g. travel benefits data case expenses) 6. Identify implement and embed quick wins 7. Mobilise and communicate The timeline depends on the nature of the assessment, anywhere between 3 weeks and 3 months Capgemini Consulting Supply Chain Management • Proprietary and Confidential 9 -Innovation Driven Procurement-

The execution of an IDP strategy requires top management commitment, strong project management and the availability of top resources Executing the IDP Strategy Steering Committee For the execution of an IDP project, it is critical to CPO, COO, CTO ... have full top management support, for all business lines involved in the project. Regular Steering Project Management Committee meetings will provide management Client project manager buy-in and control. Furthermore, the Steering Capgemini project manager Committee must free up their top resources for the project. Content Team • R&D A key driver of success is strong Project • Business departments Management. Implementing the IDP strategy • Marketing means doing things differently, which requires • Procurement change management both internally in the team • Legal and externally. Secondly, strict time management • (Supplier representatives) and complete openness in communication are • Procurement needed to stay in control over what is a complex • Capgemini consultant project. Envision E the Future As noted before, top resources are needed in the Content Team(s) who can think out of the box, are committed to working together and achieving Establish Expedite E E top results. Facilitation of the teams is ideally done Key Capabilities Growth by procurement Enhance Energize Competitiveness E E People Capgemini Consulting Supply Chain Management • Proprietary and Confidential 10 -Innovation Driven Procurement-

Contact Consulting Services ir Robbert den Braber Senior Consultant Capgemini Nederland B.V. Papendorpseweg 100, P.O. Box 2575, 3500 GN Utrecht - The Netherlands T. +31 30 689 5056 - F. +31 30 689 55 60 Mob. +31 6 15 03 09 01 Robbert.den.Braber@capgemini.com www.nl.capgemini.com Capgemini Consulting Supply Chain Management • Proprietary and Confidential 11 -Innovation Driven Procurement-