Bolster CPG Procurement with Patent Analysis

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APICS Magazine 2018
By Sue Hope

In this era of data-driven decision-making, strategies focused on competitive sourcing, procurement and supply chain are largely built on analysis of suppliers alongside the general economic environment. Robust tools, data analytics and artificial intelligence (AI) are being leveraged to support this work. One of the more interesting tools is patent research and analysis, which can be used to make procurement and strategy-related decisions and as a catalyst to derive dynamic insights — from early indications about future strategies of competitors or suppliers to innovation trends within a category.

A patent is a government license that gives the holder exclusive rights to a process, design or new invention for a designated period of time. In this article, the term also involves an application for a patent currently under prosecution, as well as a patent family, which is a collection of patents filed in different countries. Patent research involves analyzing patents in a certain market space or assigned to a particular company or group of companies in order to

• understand the innovation landscape
• derive competitive intelligence
• pre-empt future moves
• benchmark products and strategies.

There are significant benefits of patent analysis in new product development and market entry, sourcing strategy, category strategy, and direct cost savings in the consumer packaged goods (CPG) sector.

New product development and market entry

CPG companies can use patent research to assess the competitive environment and best inputs when developing a new product. Areas of focus on include

• exploring proprietary technologies in the field
• identifying the most suitable raw materials and ingredients for a product
• understanding potential barriers to market entry
• gathering insights into what is coming in relation to future product innovations across the market
• benchmarking a company’s current position against the competition.

Use case: A leading U.S.-based juice manufacturer was evaluating the launch of a new product and focused on its medicinal benefits. The business therefore wanted to understand the landscape, entry barriers and competitor activity in this area. Decision-makers also wanted to establish if there was a continuing demand trend for products with medicinal benefits.

As an innovative way to get the required insights, an analysis of the patent landscape was performed, covering about 2,000 patents filed over the last decade across the market. Proprietary technologies and products in the category, as well as upcoming technology trends, were flagged, and the potential business opportunities were highlighted. Patents filed by key competitors also were studied to understand the claims made about the medicinal benefits of their products and their overall business strategies.

Exploring how both large global and smaller regional players were developing products with medicinal benefits highlighted different strategies based on size. The global companies seemed to be investing more and broadening the scope of their patent-protected technology by using a variety of fruits and vegetables. For the smaller businesses, a much more focused approach — using a specific fruit for a specific product — was the trend.

The juice manufacturer therefore could

• progress with its own strategy, ensuring
• that it did not infringe upon competitors’ intellectual property
• work to minimize barriers to entry while taking advantage of the market opportunities
• understand possible acquisition targets, such as those relatively small and focused companies, where it could leverage their patented technology to enter the market.

Sourcing strategy

Patent research also can help companies spot early signals about whether they need to change a supplier or a sourcing destination. For example, if a particular raw material or product is disclosed in patents from a new geography, perhaps it makes sense to explore new suppliers or producers from that region. Patent analysis also can reveal innovative alternatives, such as a completely different raw material or a new, potentially better producer of a similar crop.  This is especially useful in situations with commodity price volatility or products that face significant supply risks.

Use case: A global food and beverage company wanted to be apprised of the latest technologies and products being developed by its ingredient suppliers. Leaders also were interested in tracking developments for specific ingredients, such as emulsifiers and food colors. The production of the food color procured by this business is heavily dependent on weather conditions in a relatively remote location in Peru. Hence, the company also wanted to identify new partners and more profitable sourcing destinations that could mitigate some of its current supply risks.

A deep dive into the patents filed by the firm’s incumbent suppliers over the last five years revealed the new technologies and products they were developing. There also was an analysis of patents filed pertaining to each color and emulsifier in general. The analysis showed that the current supplier base was developing new variants of emulsifiers with improved properties, such as shorter setting times and a granular form with anti-lumping properties. They also were patenting more cost-efficient processing techniques.

In addition, patent filings showed that there were alternative, more attractive, plant-based food colors available — something that could make its product more conducive to the prevalent consumer demand for natural food. New ingredient suppliers and manufacturers in China, identified from the patents filed by them, also were flagged.

These insights helped the business make informed decisions by

• providing a new price negotiation lever, as the incumbents were developing more cost-effective production methods
• potentially changing contracts to the shortlisted Chinese manufacturers that could offer more competitive prices and at scale
• potentially eliminating risks associated with weather-
• dependent supply inputs from a remote geography
• lowering price volatility risks, with alternative sourcing locations and new production methods.

Category strategy

In the face of immense cost pressures and ever-increasing competition, packaging has become a key competitive differentiator and focus for CPG companies. Unlike in the past, the lowest-cost option may not be the best, considering today’s wider business objectives, such as ethical sourcing and brand value. Therefore, companies are increasingly looking at value-based sourcing, which balances differing business imperatives.

Patent research has helped CPG businesses define more effective sourcing and production strategies through several factors:

• As consumers are drawn to compostable, green packaging and environmentally friendly products made of sustainable materials, patents can help identify the polymers and barriers (along with their suppliers) that can be used to manufacture biodegradable and edible packaging.
• More and more CPG businesses are investing in technology that can make their packaging innovative and smart. Examples include innovations such as sun-protection cream tubes that tell users when to reapply or food packages that can actually heat their contents.
• Patents can help track the activities of material manufacturers and packaging companies that may be developing or modifying packaging polymers and recyclable materials.

Use case: A U.S.-based health food company sought to introduce environmentally friendly, clear packaging for its snack bars. Decision makers aimed to identify the latest materials that could be used to develop transparent films that are biodegradable, compostable or recyclable. The business also wanted to identify suitable technology developers and suppliers to help achieve its sustainability goals.

An analysis of about 1,500 patents filed in the last decade revealed that polylactic acid was the most disclosed biodegradable or recyclable polymeric material used in clear packaging, multilayer film structures with improved barrier layers were being developed to enhance properties such as strength, and oxygen and moisture barriers were specific qualities required for the snack bars. Based on the patents filed by film packaging manufacturers, the two developers of this technology were deemed suitable for the partnership and confirmed.

Direct cost savings

Tracking suppliers’ patenting activity also can help save direct costs, either by renegotiating lower price points for contracts with suppliers whose products are going off-patent or by restructuring the supplier base wherever the procured products are likely to get patent protection. In addition, patent research enables more informed engagement with suppliers, rather than a one-way relationship. Ensuring organizations are aware of all aspects of a supplier’s business means they can identify potential areas of mutual interest and collaborative innovation opportunities, thus driving new value.

Use case: A prominent skin and hair products manufacturer wanted to look at negotiation levers for one of its inputs — a specific surfactant for sulfate-free applications. It came from a single supplier, in large quantities and at a very high cost. As part of building the negotiation toolkit, an analysis of the supplier’s patents revealed that they were nearing expiration. After these patents expired, many more suppliers could use the technology to produce the surfactants, thus reducing the market price. The company used this scenario to negotiate a new deal, achieving millions of dollars in cost reduction. Beyond this, the intelligence opened discussions about potential co-development opportunities in the future.

Find the right suppliers

Use of patent research and analysis in procurement and supply chain functions is currently quite limited, but it can be an invaluable resource for effective decision-making across key strategic areas. Patent data can help forward-looking procurement leaders gain a better understanding of their supply base and product categories, giving them a competitive advantage and enabling them to drive real business impact.

CPG companies must constantly innovate and add value. As procurement takes on an ever-greater strategic role in supply chain, patent research can support organizations in all sectors by revealing smart future strategies, providing valuable insights, and becoming a key competitive differentiator.