Over the past decade, and with significant acceleration spurred by the Covid-19 pandemic, sourcing executives have made significant strides in sourcing diversification and supply chain resilience. However, this progress comes at the cost of innovation, although it continues to be a key priority area for organizations and procurement teams responsible for executing new strategies.
Consulting firm PwC recently surveyed 40 CEOs representing a variety of global companies in a variety of industries. PwC sought to learn more about how these companies are prioritizing innovation as they diversify their supply base(s) and seek to optimize supply chain sustainability practices and outcomes.
Supply diversification and innovation
A significant proportion of companies (80 percent) have shifted order volume from China in the past one to three years through a focused effort to diversify their sourcing portfolio and improve supply chain resilience. Through the move, however, 52 percent of executives say the level of innovation driven by Chinese suppliers is below what it was before the shift in volume and the associated lower availability of funds.
Although innovation has declined, CEOs continue to see it as a priority. Specifically, two-thirds (65 percent) of respondents listed product innovation as a high priority, while an additional 25 percent considered it a top priority. To enable this innovation, procurement managers are investing in technology aimed at accelerating product innovation efforts and expanding collaboration platforms with suppliers.
“Deriving value from sourcing is increasingly based on a company’s ability to innovate pragmatically,” shared a senior apparel executive focused on private label product development. “Costs are rising, competition is rising and our customers expect high quality at low prices. If we’re not innovating, we’re falling behind.”
Most companies (93 percent) point to the great importance of technology in enabling innovation. With this emphasis on technology, 82 percent say they plan to increase their technology spending significantly (21 percent) or slightly (61 percent). Meanwhile, 18 percent plan to maintain their technology spending.
Cooperation with suppliers
Suppliers play an active role in manufacturing technology innovation, with 36 percent of CEOs surveyed saying their suppliers work with them on innovation-focused projects from start to finish. Another area where suppliers are often involved end-to-end is product optimization, with 30 percent working with brands on projects such as improving price or quality.
Among the tools used to accelerate innovation is generative artificial intelligence for the design stage. Generative AI is used much more often internally (83 percent) than in supplier operations (33 percent). PwC spoke to a major supplier to US-based retailers, learning from their head of strategy that “we are cost-pressed today and we see innovation as a path to growth. As we invest in innovation, we expect to expand our target customer base and improve our own profitability.”
To encourage suppliers to partner for innovation, 30 percent of companies are increasing the volume of business with suppliers, while 24 percent are entering into joint partnerships or long-term agreements. The main obstacles companies face in their pursuit of innovation are resource constraints, cited by 45 percent, and technological constraints, cited by 30 percent.
Along with supply diversification, sources of innovation and supplier collaboration are also shifting geographically. There is an opportunity for sourcing executives to invest in innovation through technology, product development and increased collaboration with suppliers.
Three actions executives should consider taking to continue to foster innovation:
- Investing in supplier relationship management
- Develop new incentives to encourage investment in innovation
- Piloting new collaboration tools
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Content contributed by Ron Klein, PwC Director and Head of PwC Operations Transformation Global Sourcing COE.