Innovation vs Cost Reduction
As the debate around innovation vs cost reduction continues, do companies have to choose one or the other?
We caught up with Ed Fuchs, who has been in the procurement space for over 25 years.
Procurement people are often accused by other functions of being focused purely on cost. Do procurement people know how to innovate and can it be trained?
“Innovation isn't a person or a function, it's a mindset. When the business asks a function to start innovation most of the time nothing materialises. Innovation affects the total internal value chain, and everybody involved. It's all about creating the innovation mindset; a way of thinking openly to the world around you, which sparks new ideas and gives energy to take action.
Therefore, the question is more around have you got the right balance of skills inside your team. The obvious answer is ‘yes we can innovate’; the innovation mindset is a process but it depends on how you look at what you want to do inside the business and the overall direction it's taking.
Procurement people know how to innovate, absolutely, and any process can be trained with the right skills. You do need a slightly creative, entrepreneurial spirit as a background, and if as procurement leaders you can identify that skill and mindset then you can start putting different teams together that will allow you to access creative ideas across your value chains.
This creative strain also assists in the standard procurement strategic sourcing activity. If you’re going through the initial analysis and you’re working out what you want to do with a material group, you need to be quite creative to understand what your strategic levers are inside that category. If you have that skill set, you can apply it to a number of areas.
The perception that procurement people are a little too focused on cost isn’t a good representation, because procurement’s role is to be focused on the business strategy. Strong procurement organisations usually sit inside relatively large consumer group or manufacturing organisations, and they are borne out of a need to focus on and consolidate the cost base. The team’s first view is to look at cost and then to bring in innovation with the wider business, often leading to the procurement organisation being labelled as cost focused.
If you have a greenfield site you can build a strategy that’s aligned to say ‘we’ll look at cost to start with, but that will then generate innovation’. Integrating this into the organisation early will allow you to develop savings with innovative thinking, and innovative thinking is a source of cost reduction as well. They go hand in hand and they’re in sync together; you need to view it as an organic cycle to get the best of both worlds.”
Does innovation naturally assume stronger supplier involvement than cost reduction and do we need to be good at SRM before we can be good at innovating?
“You can invent alone, but you can't innovate alone. You can analyse costs alone, but you can't reduce costs alone. Think about the number of people it takes to get develop concepts, whether these are cost focused or growth focused, from idea to market launch.
You need strong supplier involvement in both innovation and cost reduction processes. It’s slightly longer and more protracted in innovation, simply because those new ideas are harder to get to market than in cost reduction, which is analytical rather than creative. Having said that, the trial protocols will need to be similar unless new technology is required.
To sustain structural cost reduction rather than just going after price, you need to be able to analyse all the different elements of the value chain and have strong relationships to work on it collaboratively; not only with the supplier, but also with your own operations and supply chain teams. This means you may require someone else to handle the relationship, depending on the project. I’ve had occasions when we’ve been working on structural cost savings on a chocolate product, and I’ve handed it to the R&D lead inside the business to lead that relationship, as he was more equipped to have the necessary interactions to push the cost down than the procurement team.
Does leading with innovation rather than cost reduction take more time, and if so do we need to drop other activities to find time to innovate?
If there’s no urgency, innovation is considered as playtime. Most people in the business focus on business of today, and innovation will only pay off tomorrow. You need a strong business mindset and long term view to persevere, otherwise you may find yourself pressured to focus purely on cost.
Innovation can take more time if you don't drive urgency; if it’s disruptive innovation you need to test things more rigorously than in structural cost reduction, as you are more than likely building from scratch, to minimise the risk and perception to consumer or customer. However if you’re managing a structural cost reduction, for example removing a process, that needs testing too. I’ve experienced a complete process being removed from the value chain to generate further cost savings because the perceived user value isn’t there. In my mind that’s using an innovation process to achieve cost reduction.
Do we need to drop other activities to find time to innovate? It depends on the maturity of the category, though I would say combine it and address the projects together. The agenda inside the business will decide what becomes the priority, but my experience tells me that they will love both!”
Should this time be built in from the beginning?
“I think it comes down to where you are strategically and the maturity of the business; are you on more of a cost savings agenda than an innovation agenda? Real innovative leaders give both focus and freedom. As leaders make sure that your teams focus on the right priorities and know what to expect from them.
The procurement manager will go through the strategic sourcing process to prioritise those projects that fit in with the business agenda and draw in those stakeholders to work on it. This will give you a logic and combine your priorities. If you’re removing a process to create innovation, this creates a disruption, from which you may get further cost savings, and that cycle keeps going. You’ll find that the natural momentum will come with the team-work.”
To create a balance between innovation and cost reduction, does procurement require a wider cultural mind-set change and if so how do we create a corporate culture to advocate this?
“Culture is an interesting aspect to consider, and it sits with the leadership. It’s a balance of ethics, behaviours and goals that the company has at the time. To create the right type of culture for performance it helps to work with the leadership team of any department. You need to ask some basic questions: what do you want to achieve over the next planning horizon? How ambitious do you want to be, and what level of performance do you want to achieve? What do the financials look like with the stakeholders and suppliers? What are the big items that the team want to achieve? How do we create the right environment and mindset, to create the ying and yang of cost and growth?
This approach worked brilliantly for some of my previous teams. We pulled the global leadership team together in procurement and defined what we wanted to achieve over the next three years. It was cost reduction heavy, but that was right for the organisation in its maturity stage. It had just acquired and put together 25 different businesses, and we needed to understand what synergies we could get from this. Synergies from a material savings perspective, but also from a supplier relationship perspective. What had we learned from our own manufacturing sites, and what could we share across those different sites to get more business benefit?
We formed a team direction and strategy and we ran at it, aggressively, with a single focus. This drove what was a very cohesive team when we supported each other. We were hitting challenging timelines, and this formed the right type of culture to drive cost reduction as well as finding innovation when dealing with the different stakeholders. Because we had created the support network with a collaborative attitude, we were pulling a team together to drive the agenda for the organisation and that was a very strong culture that supported our performance. But watch out, the team culture cannot survive on its own if it doesn’t fit with the wider business culture!
It’s about what you want to achieve together, and for us it came back to cost reduction and innovation being a constant cycle. I do believe that it’s about the fundamentals of getting the cycle working, which is about pulling the right teams together, and pulling in the right skills within those teams so they can have the right technical skill set and the right clarity of behaviours. There’s a significant amount of work that goes into identifying the right skills: have you got enough consultants, consultancy collaboration skills and technical skills?
The great thing about the procurement field is that the team dynamics are always changing as the external environment changes. Some examples that are already happening include 3D printing, which will result in smaller component order quantities and revolutionise tool costs, and Amazon B2B and similar models, which will simplify corporate in-directs. As artificial intelligence evolves, research and insights will become commoditised. Such technology changes will drive the next cost reduction and innovation in that space.”
After completing a strategic review of ARYZTA’s investment in Groupe Picard, Ed Fuchs left to co-found Folium Food Science, commercialising a bio technology which precisely manages microbial populations. This disruption innovation has the potential to transform food, animal and crop health.
Original article published in Procurement Leaders