Startups, Procurement and Product Design, a Lesson for Competitors

Author: Ravindran Damodaran

Editor’s note: This article is part of the MyPurchasingCenter content archive. It was originally published in 2016 and appears here without revision.

Not long ago the corporate world embraced the role of procurement in new product development and began to involve procurement specialists in the cross-functional development teams when designing new products, along with other functions of production, sales and marketing, finance. It is, as we now know ‘Integrated Product Development (IPD)’. This approach has been very successful and has resulted in significant benefits to incumbents. According to a recent study by American Productivity and Quality Center, APQC, of companies with launched new products/ services in time and on budget, more than 75% had extensive involvement of procurement in the new product development process.

But in the world of unicorns like Uber and Xiaomi, new startups are galloping by established incumbent product lineups by the day. IPD is not enough to compete in the market. My recent engagements with startup/growth companies demonstrates that product development is at a new level in these setups, where involvement of procurement happens in the product strategy phase—a planning step even before the actual development process. This helped these companies to launch successful new products and versions at a lightning speed since there are almost no feasibility constraints in the development process later.

For corporations to achieve this speed, they need a new approach towards product strategy, an approach that involves revamping three areas which are core to strategy teams: Skills, organizational structure and incentives.

Skill Sets. Often times we see product strategy teams filled with marketers, product developers and market researchers. This is because product development is traditionally considered as a function which is built to ‘meet customer demand.’ While this objective is mostly true, it does not capture the complete picture of a product strategy team. Product strategists should equally be worried about the ‘supply side’ such as supplier location of product components, availability of these components, supplier relationships etc. So, a product strategy team benefits as much from a supply chain professional as it would with the traditional skill sets in marketing and product development. Corporations should pay attention to the benefits such profile diversity can bring.

With supply chain and procurement specialists on the team, product planning can get additional inputs about downstream supply challenges which the product might face in procurement, much ahead of time. This facilitates quick changes to the product strategy where required without having to wait and rework everything if some design is not feasible in the production pilot phase. One way startups bring these broad set of skills in their product strategy team is by hiring ex-consultants who have good business knowledge of various functions including supply chain and procurement.

Organizational Setup. Along with having the diverse skill sets in supply chain and procurement, future product strategy teams should adopt a ‘holocracy’ type of organizational setup. Holocracy teams allow for distributed decision-making while giving everyone on the team an opportunity to contribute in their area of expertise. This fluid organizational structure means that product strategy teams will not only have members with strong skill sets in procurement but they will also now be able to collaboratively work with other members with backgrounds in marketing, product development and market research to develop product strategies which are compatible both from the demand side as well as supply side of the business.

Such cross-functional teams can enable quick and accurate decision making. Successful growth companies such as Zappos are known for adopting this type of organizational structure facilitating interaction across product, procurement, logistics and service colleagues, which help the product strategists to develop feasible innovative solution strategies with great agility.

Incentive Structures. All skills and setups are as good as the incentives for deploying them well. In order to facilitate an early coordination of the procurement team with the product strategy, teams should be evaluated for relevant metrics and incentivized accordingly. Going forward, product strategy plans should also be evaluated and incentivized for ease of procurement of new components, reusability of existing components/ modules etc. along with gain in market share and revenue.

Venture capitalists and startup founders evaluate their product plans not only on market requirements and competitive landscape but also on frugality of these plans (additional purchasing requirements of the new product, ability to use existing suppliers/off-the-shelf items) since they are working in a resource-constrained environment. Corporations can benefit from such frugality as this will free up resources to work on more products than before.

Hurdles

• Change management. Startups thrive on change whereas change is never easy in large corporations. Being able to bring a procurement team onboard with product strategy teams means a fundamental shift from current demand-facing roles to a more diverse supply and demand focused one. Such diversity will bring conflicting business ideas which requires strong leadership with a clear vision to manage and direct the teams.
• Performance measurement. Developing a metric system for the parameters mentioned above can be very difficult especially when product strategy in corporations involve a strategy for a portfolio of products as against just one or two products in the case of startups. Such complexities can be avoided by trying to keep the product portfolio as homogeneous as possible in terms of product functionalities and quality standards.
• Agility in structure. Ironically enough, corporations need to combat the threat of startups from a structured environment. Structure in an organization leads to a decrease in agility thus defeating the very purpose of involving procurement in product strategy for faster product launches. But this hurdle can be overcome by having short-term project teams within the product strategy division that work on a product strategy for a few weeks and dissolve once the strategy is developed. Such setup can bring agility in a corporate environment of boxes and arrows.

In summary, startups provide a good framework for corporations to build an all-inclusive organization where product strategists have a good access to procurement and supply chain expertise from the beginning. It is high time for corporations to revisit their product strategy processes and revamp the teams in a way which make them capable to compete with their startup counterparts who launch new products with much precision and speed.