Procurement innovation is a broad term that can encompass many different things. In fact, experts at the Public Spend Forum have identified at least four different aspects of “procurement innovation,” covering technology, strategy, processes and more.
Procurement innovation is also different from purchasing goods and services in an innovative way. As Fairmarkit’s Head of Product, Kelly McStay, wrote, “In order to understand how a procurement department can be a source of innovation for a company, the idea that a procurement department exists solely to save a company money must be changed. A procurement department should be in charge of making sure money is spent wisely, rather than keeping money from being spent.”
Procurement innovation relates to how procurement experts actually complete procurement work in a way that spends the organization’s money wisely to accomplish the overall mission of the business. Here are four aspects of procurement innovation that drive new technologies, practices, and approaches to spending.
Operational procurement innovation
Innovation in procurement operations refers to optimizing procurement responsibilities and tasks. This could include adding new technology and tools to create an end-to-end procurement process (from source to pay to record-keeping). This aspect of procurement innovation includes examining how to improve selecting suppliers, negotiating contracts, and training and hiring the procurement team to improve workflows.
Strategic procurement innovation
Innovation in procurement strategy refers to positioning procurement in a different manner. By streamlining and automating archaic processes, using available data, and recruiting forward-thinking leaders, procurement can transform from an isolated, siloed unit to a trusted and influential business function. This internally-focused innovation requires thinking about how procurement impacts all other parts of the business and integrating it more strategically to boost those parts.
Purchasing innovation
This aspect refers to the purchasing of innovative goods and services to help the business gain a competitive advantage. Companies can utilize procurement innovation in how they source new products, bringing in information technology, equipment, and sustainable items to meet customer needs.
“In recent years, procurement departments all over have been focusing their spending on sustainability,” wrote McStay. “It is critical that your procurement executives can trend forecast, meaning that they must be able to foresee the next major social trends in order to make the proper decisions to keep your brand up-to-date and relevant.”
Purchasing innovation is often more challenging than buying the same product that’s been proven to work. But, continually forcing procurement to evolve can help the overall business adopt a growth mindset.
Supplier procurement innovation
Businesses should collaborate with their procurement partners to find innovative ideas and plans for supplying goods and services. How can they integrate sustainability into their delivery practices? What are some ways they help the business reach customers faster? Building long-term supplier relationships can help businesses continually innovate across the supply chain, improving profit margins along the way.
Key ingredients for procurement innovation
Procurement innovation requires certain conditions. The first is digital transformation. According to The Hackett Group, “84% of procurement organizations believe that digital transformation will fundamentally change the way their services are delivered over the next three to five years. [But] only 32% have developed a strategy for getting there.”
Tools that can accelerate digital transformation will help procurement be more collaborative, effective, and profitable.
The second key ingredient: data. Big data can be used to make existing business intelligence applications more intelligent and deliver greater value. With the right data insights, procurement teams can better understand their needs, improve efficiency and get a leg up on the competition. Big data is critical for strategic and operational procurement innovation — internal processes that will benefit from analytics that lead to smarter decision-making.
And finally, integrating procurement into key business functions takes leadership. Leaders should look beyond bottom-line results and minimizing risk to support specific initiatives that drive business transformation. These leaders can play a critical role in supplier procurement innovation as well as determining what products and services will help the business be more competitive in the future.
How to prioritize procurement innovation
What holds companies back from achieving procurement innovation? Too often, it comes down to tradeoffs and compromises around four things:
- Employee effort needed = time.
- Internal policies
- Management control
- Overall cost savings
If your procurement department is not producing innovative projects or results, it could be because they are stretched too thin managing the large number of suppliers your company has. On average, 20% of a company’s budget is spent on small, infrequent purchases, otherwise known as tail spend. Optimize tail spend and gain control of that 20% so your procurement department can focus on innovation and creativity.
To learn more about procurement innovation, check out our blog, The Source.
