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Cost Reduction Versus Innovation: Which is Right for Your Business?

Mar 3, 2017

It can be difficult to balance innovation and cost reduction practices. Business often feel as if they are forced to choose between the two and that they cannot fully benefit from both at the same time. However, though cost reduction and innovation bring different things to the table and have different benefits, there certainly exists a possibility for them to coexist within your business and sourcing and procurement strategy.

Innovation will ideally take into account customer needs and the impact of procurement processes and other processes on the customer as well as the business, and should also help to generate new services and improve existing ones. Cost reduction should be the final step in the new project, product development, or manufacturing plans and should focus on mainly on unnecessary costs or costs that are definitely too high so that it does not interfere with production and productivity. Additionally, innovation itself can involve cost-reduction—the two don’t need to be mutually exclusive. Your team, for example, may have innovative ideas related to how to achieve significant procurement cost savings that can be integrated into the procurement strategy.

The way that harmony between innovation and cost reduction is best established and maintained largely comes down to the workforce. A successful procurement team should be concerned with both cost reduction strategies and innovation-related factors and should be trained on both as well. Your team needs to have the right balance of skills, as well as the right mindset and priorities. To balance your team, you should decide in advance what kind of skills you are looking for well before you begin the hiring process; using agencies, consultants, and external contractors can also be beneficial in finding the right staff. If your procurement team has already been established, it may be worth implementing training that will help them learn how to effectively prioritize both cost reduction and innovation in their day-to-day activities and tasks. Innovation is creative and cost reduction is analytical, but there’s no reason why your procurement team cannot involve both types of skills.

This balanced mindset should also be integrated into your procurement strategy, practices, and the procurement solutions that your business chooses to implement. While you should not choose to innovate just for the sake of it, taking innovative changes in low-risk situations is ideal and will allow you to test the waters of innovation and see how your team and your business does. Similarly, you should not just cut costs across the board just because; you need to balance business strategy with creativity and some risk-taking. Start with small innovative ideas that you can scale up based on whether or not they are successful, and eliminate high and unnecessary costs in order to increase your ability to take innovative risks and decrease the consequences and negative effects that your business will face should these endeavors be less successful than planned.

Innovation should be seen as a way of life and a way of thinking for businesses—not just a fun add-on option when you need to ramp up your competitive abilities. Businesses need to stop seeing innovation and cost reduction as two practices that are at odds with one another and work to integrate both harmoniously into their team structures and business practices.

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