How to get over the wall in product development
Early buying decisions can have crucial impact on the success of new products
Gordon Graff -- Purchasing, 6/2/2005 6:00:00 AM
Until about 10 years ago, corporate purchasing divisions devoted exclusively to product development and design were a rarity. Today, they are commonplace, especially in the chemical and pharmaceutical industries. The main reason, say industry executives, is that competitive pressures no longer allow companies the luxury of a leisurely product-development process. If developers don't get a new product to market quickly, someone else will beat them with a similar product. And that necessitates the right buying choices early in the game for laboratory equipment, contract-research services, and specialized engineering and design expertise. Purchasing deals related to environmental, regulatory and safety issues must also be nailed down early to avoid costly delays.
For materials-based companies, "the number-one issue in development is speed-to-market," says Al Cotton, a spokesman for Nypro, a plastics design and processing firm headquartered in Clinton, Mass. The speed issue, he adds, is at the root of the recent reorganizations of purchasing departments to make them more responsive to R&D and design concerns. The old paradigm, where product prototypes weren't necessarily the finished version, and modifications could be made later on, has been scuttled due to time constraints, Cotton asserts. Today, he says, "you have to make a prototype from the very beginning that is the same thing you'll be trying to sell five years down the road" to millions of people. "So a lot of upfront thought" has to go into purchasing for these prototypes.
"We used to have a system that I would call 'over the wall' product design," says Richard A. Hughes, vice president for global purchases at consumer products giant Procter & Gamble. Under that practice, he explains, formulators, R&D managers or engineers in the company who had discovered something promising would throw it "over the wall" to the purchasing department with instructions to source and buy the necessary supplies or services. After many back-and-forth discussions between the development and purchasing staffs, which Hughes says usually took "months and sometimes years," buying decisions would be made. Aside from the resulting delays, he adds, this process often left unanswered such key questions as whether the product had the optimal design and whether consumers could afford it.
Beginning about 15 years ago, P&G gradually dismantled the wall separating product development and purchasing. "We decided to let the purchasing people work with the formulators at the bench, or with the engineers," says Hughes, "to help design something that our suppliers could supply and consumers really wanted and could afford." But even with this change, the purchasing staff's time and attention was constantly diverted by the procurement needs of ongoing commercial production. So about 10 years ago, P&G's purchasing organization carved out departments that focus exclusively on R&D, engineering and other "up-stream" (developmental) activities. Doing this, says Hughes, "enabled us to accelerate the path of new product development."
At Novartis Pharmaceuticals, which also has a purchasing staff devoted solely to various R&D and product development functions, Steven Chyung, vice president for strategic sourcing, says this arrangement has several advantages. First, it allows purchasing to leverage its buying power across the entire company for each category, whether it be laboratory reagents or advanced computers. Secondly, it enables certain employees to become experts in different product and service categories and tailor their procurement strategies accordingly.
Members of the P&G upstream purchasing group are spread around the world and are responsible for such activities as development of new compounds, formulations, test methodologies, and packaging. They maintain a liaison with downstream purchasing staff, which handles buying and logistics related to factory production of commercial products.
Some of the upstream purchasing people are recruited from P&G's R&D or engineering departments. Others have business backgrounds and absorb the required technical knowledge as they go along. A typical hire for the upstream purchasing group, says Hughes, has at least five years of experience with the company, usually involving some buying activities.
While P&G encourages its upstream purchasing employees to master the technological intricacies of new product development, they also must bring a "commercial perspective" to the process, notes Hughes. The ideal arrangement, he says, is a partnership between the purchasing staff and the scientists and engineers they work with, where each is aware of the needs and concerns of the other.
Over time, P&G has developed large lists of core suppliers for various phases of its developmental activities. These are usually vendors the company is familiar with and has rated as superior in technology, innovative in capabilities and commercial savvy.
Depending on the nature of the product under development and the business objectives, P&G may strike various deals with its suppliers. In some cases, the company may contract out research on a pay-as-you-go basis. In other cases, it may offer a supplier future contract manufacturing business for a new product in exchange for the supplier's work in developing the product. Sometimes a contractor is too small to fill commercial-size orders for a product it helped develop, so by prior agreement, P&G may offer it business on another product elsewhere in the company.
Novartis, meanwhile, assigns about a half dozen of its purchasing staff to service the needs of the Cambridge, Mass. headquarters of its worldwide research organization, known as Novartis Institutes for Biomedical Research (NIBR). Projects at the facility, opened in March, 2003, include functional genomics, discovery chemistry, oncology, and basic research in diabetes, infectious diseases and cardiovascular diseases.
Novartis uses a "category management" approach to procurement for the Cambridge center, in which the spending is broken down into broad classes. One category involves laboratory consumables such as reagents and equipment that must be re-placed periodically. Another class, says Chyung, in-volves materials and equipment related to strategic technologies—particularly in the genome area—that give Novartis a competitive advantage. Purchases in this strategic area, he adds, might include "sophisticated analytical instruments, computers and robotics equipment."
For the laboratory consumables category, Novartis conducts competitive bidding. Once it has established a relationship with a supplier, the company works out a preferred pricing list for various items. When the company is setting up a new research facility, says Chyung, "we may take that whole bundle of business" and put it out for bidding. Reverse auctions, he adds, are a common tool for equipping a new facility. Outside basic research, Novartis also solicits bids from clinical research organizations for contracts related to product development.
Economics the driver
The increased role of purchasing in product development has not gone unnoticed by suppliers of research-related materials and services. DeWolf Chemical, an East Providence, R.I.-based distributor of specialty and fine chemicals, has traditionally interacted with R&D personnel at first, and only later with purchasing, once a project is well underway, notes Hank DeWolf, president and CEO of the company. "But in many cases," he says "we try to involve purchasing in our transactions from the very beginning, so they understand the value we bring to them. This way they see us as more than just a guy with a product and a price."
These days, however, purchasing departments at chemical and pharmaceutical firms are apt to take the initiative and get involved with suppliers from the inception of the product development cycle. Economics is one incentive for this. "About 80% of the cost of a [new] consumer product is driven in the design phase," says P&G's Hughes. The outcome of spending decisions at this point, he adds, largely determines what the cost of the product will ultimately be in the marketplace.
Beyond cost, there are broader supply chain considerations that bear on the crucial time-to-market issue for a new product. These supply questions are complex and companies have developed systematic ways of dealing with them. Hughes urges his staff to think early about all the possible permutations in the types of materials or services that will be required for a new product, along with all the possible suppliers. Then, furnished with a list of requirements and objectives, the staff gradually whittles down the list. Some materials or certain suppliers are ruled out due to unfavorable economics, inadequate production capabilities, or inability to comply with regulatory, environmental and safety regulations. What remains, well before the product reaches the production line, is a list of fully qualified suppliers. Weighing all the varied sourcing options upfront, Hughes says, streamlines the development process.
Do scientists and engineers mind the presence of purchasing people on their team? It depends, says Hughes. If development work has to grind to a halt while purchasing rounds up appropriate suppliers, then the technical staff views the purchasing department as a hindrance. But as purchasing has gotten involved in projects at earlier and earlier stages, and worked out the sourcing problems in advance, these objections have fallen away, he adds. In fact, Hughes says that purchasing is now viewed as a useful resource by most scientists and engineers at P&G. "We often get calls from an R&D person with a new idea" he says, "asking us to locate the best suppliers" to help launch the project.
In its drug development phase, Novartis' purchasing department also has an early selection process for contractors to conduct required clinical trials for regulatory approvals. While technical competence and cost are clearly prime considerations for final decisions, Chyung says that another very important requirement is the ability to do the work "as quickly as possible. Whatever cycle time we can drive out of the development process has significant financial impact for us," he adds.
Purchasing is also called upon frequently to decide whether development work is done in-house or contracted out. Even if a company plans to do the production itself, it is often wise to outsource manufacturing during the early phases of a product, advises Gregory N. Nelson, vice president and president for services and alternate channels at Nalco Co., Naperville, Ill. "It may take time to build up sales" for a new product, says Nelson, who has held senior procurement posts at Exxon, Union Carbide, Dow Chemical, and Sun Chemical. A lot of companies outsource production during this startup phase, he adds, "and wait until sales reach some critical mass before they sink capital in the ground" for new plants.
Purchasing departments often play a role in negotiating intellectual property rights for newly developed technologies. At P&G, says Hughes, these talks are often part of wider discussions that touch on supply chain, regulatory and safety issues for a new product. How relevant the intellectual property question is in negotiations with an outside vendor depends on the type of service it provides, says Chyung. As a matter of standard practice, he says it is commonplace for Novartis to require its research partners to sign confidentiality or nondisclosure agreements.
Gauging success
Measuring the effectiveness of a purchasing department in new product development can be tricky, since there is often little prior spending information to go on. At Novartis, Chyung says, the purchasing group is typically able to trim 10-20% off the cost of a development-related product or service, based on the difference between initial quotes and final prices the company pays. In the case of laboratory equipment, he adds, current spending can be compared with past spending for the same equipment, if it has been purchased before.
At P&G, Hughes says he gauges his group's effectiveness by how many product innovation projects it gets involved in. Right now, he says, purchasing participates in about 85% of such projects and soon hopes to reach 90% involvement.
For purchasing professionals to succeed in their product innovation tasks, says Chyung, they don't need to know every technical detail of a project. "But they have to have a fundamental understanding of the steps in the development process to figure out how to add value to it."
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