FORMATIVE ASSESSMENT 1

[100 MARKS]

Read the case study below and answer the questions that follow INNOVATIVE SUPPLIERS AND PURCHASING FUNCTION INTERACTION

Since the 1990s, companies have been seeking both to outsource functions and to reduce costs, which explains the growing importance of the purchasing function or department. This trend must now reconcile another imperative how to intensify innovation, particularly in a context of open innovation in which the company identifies innovative suppliers, collaborates with them, and adopts their proposals (absorption capacity). Purchasing departments are increasingly gaining more importance in the boardroom as financial constraints on organizations grow, especially since the global financial crisis of 2007-2008, while it has long been considered an administrative function in the service of factories (Trehan, 2014). If the purchasing function was underestimated in the past, the direct impact on companies financial results is well known today. With margins decreasing, the purchasing managers capacity to reduce costs has become visible in a strategic way. Under the metaphorical concept of cost killing, new financial strategies have emerged that have transformed the purchasing manager into a cost-killer hero.

Indeed, as new technologies and business models emerge, being open to innovation is seen as an imperative, sustainability is now seen as both a challenge and an opportunity, and the Internet of Things is gaining ground. Since the service economy is growing and customers demand better value proposals and improved service, the innovation process is becoming essential to providing a timely response to the market with new or improved service solutions (Hidalgo, DAlvano, 2014). The creation of value through innovation has become increasingly important for business in a volatile global environment characterized by increasingly short products and consumer demand for new knowledge, products, and services (Johannesen, Olsen, 2010 Tidd 2001). As services become more important for society and customers demand more complex and personalized solutions, researchers are dedicating more time to understanding their innovation processes (Hidalgo, DAlvano, 2014).

Furthermore, an open innovation era (Chesbrough, 2006) as a new paradigm for innovative firms underlines the fact that buyers have become the architects of industrial exchanges and have taken on the risks involved in such a strategic role (Hatchuel, quoted by Calvi et al., 2010). While the prime focus of purchasing is often to improve a companys cost position, suppliers and external partners are increasingly invited to contribute to innovation and value creation. Under an open innovation paradigm, they are in the front line. Supplier collaboration and strategic sourcing stimulate such innovation (Luzzini et al., 2015). Supplier collaboration can have an effect on companies innovation performance, as well as the enabling characteristics of their purchasing function (McMullen et al., 2014). Companies develop their ability to innovate with existing or potential supply chain members, and the role of purchasing is gradually adapting to this new context.

Purchasing is often a primary interface between the company and its suppliers, who can greatly affect the companys innovation effort. Also, purchasing knowledge is an important enabler of supplier collaboration and strategic sourcing (McMullen et al., 2014 Luzzini et al., 2015). The study specifically investigates suppliers and purchasing contributions to a companys innovation performance (Luzzini et al., 2015). At this point, addressing cost as the sole criterion is no longer efficient. The purchasers proactive ability to absorb innovation, or not, at the fuzzy front end of the supply market becomes crucial. The choice made at this point influences the purchaser companys innovation issues. This idea fits Cohen and Levinthals absorptive capacity theory. On the other hand, the ability to absorb external knowledge has become a major driver for innovation. For large R&D-intensive firms, the concept of open innovation in relation to absorptive capacity is relatively well understood (Spithoven et al., 2010). As the purchaser role lies in the limited space between his or her companys expressed needs and suppliers offers, it appears necessary to question a procurement strategy if the purchasers focus is driven by innovation issues rather than an established strategy that focuses only on the cost. In this paper, we aim to bring clarification to this point on the basis of a theoretical background that focuses on the purchasing functions interaction with suppliers innovations, and the way companies could implement a new approach to their procurement strategy under an innovation perspective.

Extracted from: https://www.cairn.info/revue-journal-of-innovation-economics-2019-1-page-171.htm

QUESTION 1 (25 Marks)

With reference to the case study provided, critically discuss how the procurement strategy, which predominantly has access to innovative suppliers (IS), a performance driver.

QUESTION 2 (25 Marks)

As extracted from the case study, under the metaphorical concept of cost killing, new financial strategies have emerged that have transformed the purchasing manager into a cost-killer hero. Using relevant examples, comment on why purchasing function managers are considered as cost-killer heroes.

QUESTION 3 (25 Marks)

Considering the case study provided and using relevant examples, critically discuss what purchasing innovations entail and provide advice to purchasing managers on the strategies that they can implement in enhancing them.

QUESTION 4 (25 Marks)

Indeed, as new technologies and business models emerge, being open to innovation is seen as an imperative. Sustainability is now seen as both a challenge and an opportunity, and the Internet of Things is gaining ground.

Examine how sustainability is seen as both a challenge and opportunity for the procurement function.