In the latest column in this series, Aran Puri asks: What does purchase want from R&D and NPD?
Purchase departments play a vital role in the new product development (NPD) and launch process, so it’s amazing that this important role is never acknowledged. Its contribution is only recognised when problems are encountered and things go wrong.
When asked for comment, several senior personnel involved in the purchase process agreed with the above statement. They bemoan the fact that purchase is considered a secondary service and only involved in the R&D and NPD process when it is completed. They are then given details of the raw materials and their suppliers when they start preparing for pilot and production stages.
In order to understand the underlying reason for this disillusionment it’s important to recognise and appreciate the important area in which purchase plays a key role. Poor choice and selection by R&D of raw materials or their suppliers can have an adverse effect on the NPD process, especially during the final stages of the project when it is too late to change and therefore leaves the purchase department team very little flexibility to remedy the situation.
Highlighted here are the areas where purchase encounters key challenges and problems:
Single source raw materials
Many raw materials, in particular actives, are exclusive to a single supplier. This creates a serious difficulty for purchase since it feels that its hands are tied and its ability to put pressure on the supplier to negotiate better terms to correct situations when problems are encountered is restricted. The famous saying about not keeping all your eggs in one basket rings hollow if there is no other source!
Price vs quantity
Pricing negotiations by the purchasing team are linked to order size and quantity. The prices quoted at the onset of the project to R&D can only be indicative since they are often unaware of the projected turnover of the final product and therefore the final raw material requirements. This can result in dissatisfaction and conflict.
Minimum order quantities (MOQ)
One area of problems highlighted by many is the issue of MOQ.
In order to create a point of difference and support marketing claims, R&D often uses small levels of ingredients in its formulations. This creates a buying problem for purchasing since in many cases the annual requirement is below the MOQ of the raw material supplier. Furthermore it creates a lot of additional work and is a very inefficient use of purchase resources when R&D insists on using small amounts of many different materials in a variety of different formulations.
Lead time
R&D and NPD are often so engrossed in their creativity with the new project that important downstream logistics issues such as lead times is the last thing they think of when selecting a new raw material. Yet these are vital issues which should be discussed at the outset of the project design and not when it is too late and the products are ready for production.
Just in time & variation in demand
Even the most carefully planned production schedules based on anticipated demand can be undone due to fluctuation in demand. It is therefore vital that raw material suppliers are able to satisfy demand created by these challenges at short notice. Risk of problems of this nature is greatest with overseas raw material suppliers with a long supply chain operating via distributors or agents and purchase needs to be consulted before R&D decides to commit them to a supplier and the entailed risk.
Shortages
Raw material shortages put maximum pressure on the cordial relationship with the supplier. This creates a unique challenge if it is a single source raw material. No raw material supplier knowingly creates this problem but some suppliers are more prone to it than others. A potential problem some time ago with a leading silicone supplier threatened to play havoc with the industry.
Quality issues
The quality of materials is another source of problems, especially when fluctuations in quality occur. This should be another factor to consider when selecting a raw material selection at the onset of a new project development.
Alternative suppliers
Evaluating alternative suppliers is a very effective tool in the armory of purchase. It expects enthusiastic support and co-operation not just from the technical QC but from R&D to gain approval for an alternative. However this is not always forthcoming since R&D is incentivised by other priorities and cost saving is not targeted as an incentive.
To quote one purchasing director: “Purchase hates surprises, particularly if R&D springs a new obscure supplier, which involves a full approval process and plays havoc with their tight lead time. This is aggravated further if the new supplier insists on payment terms not in line with the company standards or even worse on pro-forma terms since it is the start of a new business relationship. The final straw that breaks the camel’s back is if the annual quantities required are very modest and much less than the MOQ of the supplier.”
Purchase resents having to pick up the pieces and being made a scapegoat for problems not of its own making but created by R&D and the NPD team because of poor and uninformed selection of raw material from unreliable suppliers.
The show must go on, and purchase comes under enormous pressure to ensure that the production and the supply chain never get disrupted through shortage or non-availability of raw materials. It expects support from all other associated departments by better decision making to ensure that they are not placed in this situation.
Purchase is constantly under pressure. It is incentivised by the saving it makes and is given annual targets to meet. This is even more pertinent in the present economic climate. The job involves putting pressure on raw material suppliers to offer better prices and terms, something for which it seeks, but does not always get enthusiastic support from R&D and NPD teams, who are more focused on keeping their relationship with the suppliers sweet to get better service and early access to new raw materials.
Purchase directors are always looking for creative ways to boost their departmental capabilities. One interesting initiative is that they are starting to experiment by bringing in chemists in purchase functions to enhance the technical capability to replace raw materials with equivalent, more cost effective alternatives. Having chemists working in purchase reduces the total reliance on R&D endorsement and R&D support in efforts to second source.
In fairness and to get the right balance I must point out that the problems highlighted above are not endemic. There are many examples of enlightened companies where purchase departments form a vital part of the NPD project team. As a new product progresses from inception to culmination, purchase is involved, especially where it involves selecting new raw materials and new suppliers.
To quote one example, L’Oréal is one of the leading cosmetic multinationals in the world. It owes its success to great and creative management throughout its various departments, and this includes purchase. Interestingly L’Oréal’s global director of purchasing, Eric Bollens, comes from an R&D background, as do several members of his team. Raw material suppliers speak very highly of their professionalism and expertise.
We all know that problems, challenges and issues are never one sided and I will address the response of R&D and NPD in my next column
The primary aim of my columns is to raise the issues and give all players food for thought. The first step to resolve any problem is to relate with and appreciate the viewpoint of the other side. Imagining and initiating creative solutions to these will be your contribution to the advancement of this vital relationship.
