The Conflicted Role of Purchasing in New Product Development Costing

Abstract

As organizations are increasingly challenged to find new sources of profit improvement, cost reduction becomes a top priority on the business agenda. Expectations for cost reductions are ongoing and influence both new and existing products and services. The costs for new product and service introductions are managed differently than ongoing cost reductions. Purchasing plays a central role, with different goals, in cost control for new products and services versus ongoing cost savings. This research uses a case study methodology to understand the conflict purchasing faces in managing both new product costs and ongoing cost reductions. Due to goal incongruence between new product development and ongoing savings initiatives, purchasing may act in its own best interest, rather than in the best interest of the organization or team. This is both a contracting and an information uncertainty problem, creating an opening for passive opportunism by purchasing. Thus, agency theory and information processing theory (IPT) are combined to examine how information uncertainty can be reduced and contractual goal alignment improved in these situations. The outcome of this research is to expose potential goal misalignment between new product development cost processes and ongoing cost savings, and suggest theoretically grounded methods for reducing the potential conflict.