The Value of Procurement in Product Development

Spend Matters welcomes another guest post from Becky Partida of APQC.

To keep pace with business demands, the procurement function continues to adopt more strategic tasks that extend its capabilities beyond simply purchasing. Shifting the focus to what the business needs to accomplish its goals allows procurement to consider elements such as supplier quality and reliability and to interact with other areas of the enterprise.

One way in which the procurement function can deliver additional value is through participation in the development of new products. According to APQC’s Open Standards Benchmarking in product development, 86 percent of responding organizations involve the procurement function in new product or service development. Specifically, 39 percent involve the procurement function extensively, and 47 percent involve the procurement function to some extent.

In a recent study of how top-performing organizations manage purchasing through product categories, APQC found that best-practice organizations involve procurement early in the product development process. By offering its unique perspective before product development choices have been solidified, procurement can lead the organization to choices that carry long-term benefits. In the product development process, the procurement function can evaluate proposed materials for new products and potential sourcing countries based on factors such as the amount of materials needed and the respective duty rates of potential sourcing countries.

In some industries, it may be possible for product development teams to tweak aspects of the design to take advantage of similar materials with an overall lower price or from a more reliable sourcing location. For instance, a company producing an article of clothing may be able to specify a different type of cloth to obtain the best value.

In addition to global trade considerations, some industries have stringent product quality demands either from regulatory agencies or customers. In such cases, it is critical to bring sourcing teams into the loop as early as possible regarding changes to materials. The complex products produced by these industries may require specialized materials not readily available on short notice. Any changes to materials later in the development process can result in increased direct costs as well as delays in product launch that can impact product revenues.

ATMI, a provider of technologies for the semiconductor, life science, and display industries, is one organization that incorporates sourcing activities early in its product development process. Supply chain identification is included as early as the third stage of its six-stage process. The organization defines scorecard criteria for supplier identification between development stages, with a focus on supply assurance and supplier capabilities. Having the procurement group involved early in the product development process works well for ATMI because, given the highly specialized materials it uses, it would be difficult to find an alternative supplier once a product was developed and sourced.

Procurement involvement in the development of new products can lead to improvements in the development process itself. As the figure below shows, organizations that involve the procurement function in the development of new products or services have larger percentages of these projects launched on time and on budget than organizations that do not involve the procurement function. Of the organizations that do involve procurement, those with extensive involvement have more new product or service development projects launched on time than organizations that have only some involvement of the procurement function.

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As APQC’s research and benchmarking data shows, organizations that involve the procurement function when developing new products can address any potential sourcing issues early on, design products to maximize procurement resources, and make improvements to the product and service development process overall. The potential benefits of involving procurement product development illustrate the strategic value that can be provided by the procurement function when it expands beyond its traditional purchasing role.

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