Does price have to stifle innovation?

It’s one of the oldest and most hotly contested debates in procurement. Does price stifle innovation? The discussion cuts to the very core of procurement’s raison d’être.

Over the past decade the media has heralded the success of the procurement function by documenting its transition from the ‘spend police’ to becoming a strategic business partner. But there is criticism the function’s move into more strategic projects has come at the expense of its performance in managing costs.

The question remains: should procurement be focused on establishing a culture of savings and thrift across its organisation, ensuring maximum profitability? Or does it need to release the reins a little and allow creativity and innovation to flourish?

This question is one of the key topics to be debated by the profession’s top thought leaders in front of a global digital audience at the Big Ideas Summit 2015 on 30 April.

The benefits of cost control are clear to see and what’s more they are easily measurable. By instilling a cost-conscious mentality a company can ensure that its expenses are lowered and purchasing policies are not abused.

When costs are controlled, the task of budgeting and reporting is also infinitely more straightforward. Cost controls mean that companies understand what they’re spending and have a good perception of the goods and services they will receive in return for this spend. Companies that control their spend are generally better able to manage their financial positions.

Despite the clear and measurable benefits of cost control, there is a school of thought that suggests the function needs to loosen its grip on costs. 

In his paper The Fatal Bias - London Business School Fellow Jules Goddard contends there is a perilous bias within many top management teams towards the invariably losing strategy of cost competitiveness.

Speaking ahead of his role as chair of The Big Ideas Summit 2015, Goddard says: “Too stringent a focus on cost-cutting has the unforeseen consequence of cutting revenues and therefore margins at an even faster pace.”

As procurement strives towards its role as a strategic business partner, the function needs to enable a more creative approach to the way it solves problems. If, as we so often say, procurement should be the source of strategic competitive advantage for firms, then we need to empower the function to achieve its potential.

This, proponents like Goddard argue, involves slackening costs constraints not only internally, but also externally with our suppliers. We need to provide the space and encouragement for our staff and suppliers to develop new ideas and approaches to business problems.

The very nature of creativity and innovation makes it difficult to measure and quantify and this flies in the face of a cost control culture. For every successful innovation it’s possible that 10 other projects may have failed, providing no return on investment. But, the impact of a truly innovative supply chain initiative could lead to a business impact that far outweighs the potential benefits of strict cost-control.

Clearly, there is a balance to be reached between innovation and thrift. Rio Tinto CFO Chris Lynch, like many in the mining sector, is facing tough financial conditions at the moment and significant pressures to reduce operating costs. Lynch will debate the cost versus innovation topic with Goddard at the Big Ideas Summit where they will examine the importance of market conditions, process maturity and timing in procurement strategies.

Innovation in procurement and supply chain management is the ultimate goal for every organisation, but there needs to be an equal driving force towards optimum value rather than just the final price or cost.

The critical success factors for procurement innovation aren’t something that can be achieved in isolation and require strong governance and solid internal support structures to enable creative strategies to be developed and implemented, especially in today’s economic climate.

Lisa Malone is general manager – Europe at Procurious

Chris Lynch, finance director and CFO, Rio Tinto, will present on 30 April along with Jules Goddard from London Business School, at The Big Ideas Summit - the world’s first digitally-led think-tank for procurement and supply chain professionals, powered by Procurious. To hear more from these cost leaders and to participate in Big Ideas Summit as a digital delegate for free visit www.bigideassummit.com

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