Firms Must Be Good Customers Too

Economic gloom has descended on the developed world in the past two months as bad news story has followed bad news story. Western businesses are clinging to two fairly sage assumptions with almost religious fervor: first, that worries about a developed world recovery are overblown (respected commentators still think a double-dip recession unlikely); and, second, that emerging market growth will make up for any shortfall in their more traditional markets.

The best way to drive growth in both developed and emerging markets is for firms to establish new sources of revenue, and that requires lots of new product, service, and business model ideas. Of course, this has an impact on the R&D function but other less obviously relevant functions are also feeling the pressure. In particular, heads of procurement tell us they are being asked to help drive innovation. Bolstered by a great 2009 of driving down costs as far as they would go, good chief procurement officers (CPOs) are responding to these requests, and using them as an opportunity to further establish Procurement’s influence in the organization, by sourcing innovative ideas from their firm’s supply base. And the best way for them to do this is to establish their firm as a ‘customer of choice’ among the suppliers most likely to give them the best ideas.

The Pressure on Procurement to Help With New Ideas

Procurement clients tell us that the need to find innovative ideas among their supply base has crept to the top of the priority list in the past 12 months (see chart 1). This is understandable; top tier suppliers harbor a lot of useful and unique knowledge about their customers’ business, products, and industry. Making use of suppliers’ perspective and expertise can unlock profitable innovation.

Chart 1: Helping introduce new products is key for Procurement Respondents were able to select more than one option

As the CPO of a consumer products company puts it:

“Innovation will be a key driver of our top line growth. I firmly believe that Procurement is uniquely positioned to understand our business partners’ needs and suppliers’ capabilities [for meeting those needs]. If we marry these pieces of knowledge, we can bring innovative ideas to the table.“

A New Meaning to Customer-Centric

So, if the CPO and his team need to find innovation in the supply base, where should they start?

Surveys of sales executives run by one of our sister programs, the Sales Executive Council, show that customers of choice are 82% more likely to receive ideas for product and service innovation from suppliers than less preferred customers. Therefore, to assist a firm’s innovation efforts, the Procurement should help their firm become a ‘customer of choice’ with their best suppliers. The Procurement Strategy Council’s 2006 research dived into this as it looked to help procurement functions and their firms generate more influence with their suppliers, and to get both sides to collaborate more effectively.

PSC clients should revisit our more recent webinar on the research to understand our latest thinking on the topic and find out what we’ve seen and heard in our network lately. They should also see how Kraft assesses potential ideas from its suppliers and how one other major consumer company ensures that its suppliers are fully aware of the criteria it uses to judge useful ideas that it can then turn into profitable innovation.