Some fundamental questions.. Innovation in Procurement Professor Danny Samson University of Melbourne Agenda 1. Raising the innovation motivation and capability of procurement activities 2. Developing an innovation development strategy for procurement 3. Evaluating/ screening innovative procurement ideas (so you can effectively prioritise!)
Some fundamental questions.. • How important is it for your organisation to be innovative in procurement? 1..2..3..4..5..6..7..8..9..10 (1 means very low, 10 means very high) • What is your organisation’s procurement innovation capability: 1..2..3..4..5..6..7..8..9..10 • What is your importance minus capability?
Innovation What are the challenges of innovation? • Time lags and value creation (discounted cash flow) • Risk/ Uncertainty • Newstream versus mainstream management • Product lifecycles We are interested in SYSTEMATIC INNOVATION, not the occasional lucky break
Innovation What are the benefits of innovation? • First, financial! • Second being a ‘first mover’ gives a strategic advantage • Third it gives a reputation advantage (grow and deepen ‘customer’ relationships) • Stimulates creativity for staff, and employee satisfaction
Innovation Innovation = Invention + Exploitation Is inventing the light bulb enough? No - it must pass the eight tests of a new innovation
NSW Procurement of Public housing maintenance services • Context: 122,000 dwelling units, 500,000 people • State pays for all maintenance of assets: poor condition, many tenants don’t care, very large costs (increasing fast) • Outsourced to service providers (cost plus, schedule of rates) • Process: Tenant phones provider, provider sends tradesman to fix leaking taps, stove hotplates, screen doors, fence palings, etc. • Costs are out of control, tenants and service provider not controlling these. • Analysis: tenants are not in any way incentivized to contribute to property condition, or cost control. Neither are service providers. All risk is Department’s too.
NSW Procurement of Public housing maintenance services • Solution: inside the box, tighter cost control, would provide only marginal improvement • INNOVATION was required: what is best practice? Studied best practice in overall maintenance policies (other sectors too) • Solution: – Share risks and incentives – Measure property condition, rates, costs – Improve tenant accountability – Move from purely reactive to include preventive maintenance (twice a year handyman visit) – Restructure from cost plus to competitive market of fixed price – Standardise fixtures (stove, paint, carpet, etc ) – One off investment to lift property standards (asset quality) – Restructure the portfolio (to finance the innovations): an innovation!
NSW Government Procurement of Public housing maintenance services • Solution: inside the box, eg tighter cost control, would provide only marginal improvement…… • INNOVATION was required: what is best practice? Studied best practice in overall maintenance policies (other sectors too) • Solution: – Share risks and incentives, with suppliers… alignment of interests! – Measure property condition, rates, costs – Improve tenant accountability – Move from purely reactive to include (proactive) preventive maintenance (twice a year handyman visit) – Restructure from cost plus to competitive market of fixed price – Standardise fixtures (stove, paint, carpet, kitchen etc ), centralise control – One off investment to lift property standards (manage the politics!) – Build relationships with suppliers, tenants (stakeholder relationships) – Restructure the portfolio (to finance the innovations): a $ innovation!
Victoria: Transport Accident Commission (TAC) • Was buying in legal services from many providers: slow, very expensive (many millions $) and variable in quality! Poor outcomes. • Solution: inside the box, eg provider performance management, incremental improvement • INNOVATION was required: instead of buying services in, we insourced it! Created TAC Law, a captive law firm. Central, insourced expertise. • Solution: – Much cost reduction – Better outcomes – Faster service – Created a centre of expertise
8 Tests of New Products/ Services 8 tests of a NEW IDEA Apply these to procurement! • Function test: Does the new product /service /technology/ method perform the function? • Marketing Test: Will it sell? • Operations test: Can it be mass produced? • Management and key personnel: Do we have the people to make this work successfully? • Financial Test: Will it provide a return on investment? • IP Control Test : Do you have control over the intellectual property? • Strategic coherence test? Does this new initiative fit our strategy? • Is there a new 8th test? Sustainable development!
Innovation and Value Creation Connections in the organisation make the difference Delivery, installation, commissioning and CUSTOMER after sales service and support must all REQUIRE- meet or exceed the MENTS customers expectations. The production PRODUCT process must be PRODUCTION DESIGNS & capable of meeting SERVICES the design specifications. Also, the design should facilitate ease of production and take advantage of production systems, technologies etc.
Innovation and Value Creation Connections in the organisation make the difference Delivery, installation, CUSTOMER commissioning and after sales service and It starts with REQUIRE- support must all meet or knowing the exceed the customers MENTS customer expectations. requirement! The production PRODUCT PRODUCTION process must be DESIGNS & capable of meeting SERVICES the design specifications. Also, the design should facilitate ease of production and take advantage of production systems, technologies etc.
Innovation and Value Creation Connections in the organisation make the difference Delivery, installation, commissioning and after Innovation: lead CUSTOMER sales service and the customer support must all meet or REQUIRE- exceed the customers requirement to a MENTS expectations. new place! (Of higher value) The production process must be capable of meeting the PRODUCT PRODUCTION design specifications. DESIGNS & SERVICES Also, the design should facilitate ease of production and take advantage of production systems, technologies etc.
Dimensions of innovative space Nature and extent of innovation high Perceived extent of change low Product Service Process Business Model What is changed
A range of options: extent of innovativeness New to the world products/services New to the market products/services New product/service line in a country Additions to product service lines Product improvements/revisions New applications for existing products/services Repositioning of existing products/services Cost reductions for existing products/services
Growth of the company Systematic Innovation Capability in procurement 1.What is it? 2. Where is your organisation, on this curve? Time
Growth of the organisation The Innovative organisation The Flexible organisation The Quality organisation The Efficient organisation Time
Business Building Blocks: The connections matter! STRATEGY OPERATING PRACTICES What is your competitive positioning? What is key do delivering the strategy? MEASURES OF BEHAVIOUR PERFORMANCE AND CULTURE Are we measuring Do they drive the and reporting the operations in the right right things? REWARDS & (strategic) direction? RECOGNITION Do they reinforce the strategy?
Business Building Blocks: The connections matter! PROCUREMENT STRATEGY PROCUREMENT OPERATING PRACTICES What is your competitive positioning? What is key do delivering the strategy? MEASURES OF PROCUREMENT PROCUREMENT BEHAVIOUR PERFORMANCE AND CULTURE REWARDS & Are we measuring RECOGNITION Do they drive the and reporting the OF operations in the right right things? PROCUREMENT (strategic) direction? Do they reinforce the strategy?
Business Building Blocks: The connections matter! PROCUREMENT STRATEGY PROCUREMENT OPERATING PRACTICES Innovation in What is your procurement? competitive positioning? What is key do delivering the strategy? Set up and resource for Innovation in MEASURES OF procurement practices! PROCUREMENT PROCUREMENT BEHAVIOUR PERFORMANCE AND CULTURE REWARDS & Are we measuring RECOGNITION Do they drive the and reporting the OF operations in the right right things? PROCUREMENT (strategic) direction? Measure/ KPIs for Do they reinforce Innovation in Behaviour/ culture of the strategy? procurement practices? Innovation in Recognise/ Reward procurement practices! Innovation in procurement practices?
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