It is now four years since the first mention of the fourth industrial revolution with its promise of benefits through adoption of innovations such as artificial intelligence.
World events are unpredictable, however, and in the blink of an eye the focus of Governments, organisations and individuals around the world has shifted to dealing with the economic and social fall-out of the Covid-19 pandemic. Rather than undermining the need to embrace innovation, however, the current circumstances mean that it has never been more pressing.
The UK economy shrank by a record 20% in April 2020 and the Chancellor has warned that we are now facing a “recession like we’ve never seen”. The economic impact of lockdown will force businesses to re-evaluate their costs and the impact is likely to filter down into the supply chain, as buyers challenge their suppliers to reduce prices. This is accompanied by a range of social changes that have been accelerated by Coronavirus, such as increased home working, the demise of the high street and renewed focus on equality and the environment. These unprecedented circumstances need creative solutions, and supply chain innovation can support business survival and future success.
The challenging economic climate is forcing businesses to pursue radical reductions in their cost base. Traditional negotiation can still yield benefits, ensuring that businesses are paying prices that are reasonable in the market. Taking an aggressive approach to price reduction does, however, present significant risks. Many suppliers are likely to be working on thinner margins and financing higher levels of debt; an indiscriminate approach to cost reduction increases the risk of supplier insolvency or unacceptable degradation in quality.
Adopting more innovative approaches to reengineering below the line costs offers the potential to drive cost reduction whilst protecting the resilience of your suppliers. Techniques such as lean thinking and value analysis have a long history of achieving cost reductions in the manufacturing industry and, more recently, across the services sector. Adoption of such structured approaches, in partnership with key suppliers, enables examination of both parties’ costs to identify opportunities to eliminate waste and embrace more cost effective solutions.
Dialogue between counterparts with complimentary skills can result in breakthroughs in product, service or process design. For example, substitution of more cost effective materials might lower the cost of producing a product. Equally, leveraging employee knowledge of ineffective processes can identify focal points to which collective thinking can be applied to identify opportunities to improve productivity. These type of exchanges can also enable businesses to explore opportunities where there is synergy between their respective capabilities and the knowledge or products of one party can benefit the other in ways that have not previously been explored. Ultimately, by sharing the benefits of such
innovation and adopting a long term perspective to key relationships, businesses can ensure that seeking cost reduction is a joint objective that benefits both parties.
Innovation: Market Offering
Current circumstances have also accelerated changes in patterns of consumer and corporate demand. The market for some services is diminishing, with the procurement of tangible goods being replaced by pay-as-you-go consumption models which, coincidentally, have been more readily accessible during the recent lock-down. Routes to market are also evolving rapidly, for example the local high
street is increasingly being eclipsed by online retail. For many businesses this represents a potentially fatal challenge as their offering and approach cease to be relevant in the modern economy and survival depends upon them evolving their market offering and exploring different routes to market.
Innovation provides the basis to achieve quantum leaps in one’s market offering or approach. This is, however, difficult to achieve at a time when cost pressures are reducing the funding available for investment in research and development. Taking a partnership approach to innovation enables businesses to offset pressure on their research and development budget, by securing access to complementary third-party R&D. Development of key partnerships, underpinned by a focus on innovation, has been key to successful adaption of many businesses. For example, pay-as-you-go hosting models, such as Amazon Web Services and Microsoft Azure, have enabled businesses to develop new offerings, leveraging
the ability to process large volumes of data and offer web-based services to customers. Equally, exponential growth in strategic partnerships between retailers and logistics providers, has underpinned the rapid adoption of online retail. Responding to changes in consumer behaviour is increasingly critical, and exploitation of innovative approaches to packaging products or services and to reaching consumers is an essential foundation for future business success.
Innovation: Social Value
In tandem with economic challenges, pressure for social change is accelerating, with renewed focus on inequality and the environmental impact of human activity. Consumer and investor choice is increasingly driven by what they perceive as the values of a brand and companies must consider this if they are to prosper. To assure long term survival and success, businesses need to consider their social contribution and to apply innovative thinking to their business model.
Ethical brands (such as ‘Lush’ and ‘Ben and Jerry’s’) have now been with us for some time, however, wider businesses are increasingly being challenged on their ethical credentials. This requires a different kind of innovation, in the form of genuine reflection on the social contribution of one’s business rather than a monocular focus on financial success. Affiliations with social enterprises provide a means by which businesses can tangibly realise these values, achieving value from their supply chain whilst supporting organisations that benefit disadvantaged
members of one’s community.
Environmental impact can be reduced by approaches such as embracing substitute materials, developing local sources of supply or improving product performance. Ultimately, adapting one’s business model to embrace changing social values is essential to sustaining demand for your products, securing future investment and attracting talented employees.
Innovation: Recommended Steps
Procurement is uniquely placed to leverage the benefits of supply chain innovation, due to its network of business relationships and its role as the gatekeeper for external spend. Procurement practitioners can position their company to benefit from such innovation by:
- aligning with their organisation’s developing goals and understanding the specific challenges it currently faces;
- keeping up to date with rapidly evolving developments in their sales and supply markets
- understanding the value that their company has to offer others (e.g. relative spend with suppliers and capabilities that are complimentary to those of one’s supply chain);
4. considering the strategic match between their company and potential suppliers as part of Strategic Sourcing
- identifying mutual interest with suppliers that could be pursued to improve business outcomes for both parties
- facilitating joint initiatives to optimise costs and business models
- fostering a longer term, collaborative, attitude to key supplier relationships.
Of course, none of this is new. The difference is in the degree to which recent events have accelerated the reliance of our future economic and social success on innovative thinking and genuine partnerships.
Ultimately, innovation not only has the potential to deliver economic and business benefits but is also key to tackling the social and environmental challenges that we currently face.
Appropriately positioned supply chain relationships can enable realisation of the benefits of innovation, whether it is through reduced below the line cost, improved demand through repackaging your services, accessing new routes to market or being a beneficiary (rather than a victim) of changing social and economic patterns.
ABOUT THE AUTHOR
Senior Managing Consultant,
Gill has extensive experience in indirect procurement, including value creation, outsourcing and off-shoring contracts and leadership across a diverse range of categories.
Barkers is a multi-award-winning procurement consultancy offering high quality procurement and commercial services, delivered by committed and experienced practitioners with integrity. We work with clients across a variety of industries including the utilities, financial services, IT and pharmaceutical sectors.
Product service lines include:
- Cost Transformation
- Procurement Transformation
- Digital Procurement Technology
- Supply Chain Management