Dries Verhaeghe procurement service provider Modelleren van commodity strategieen in een Academiejaar 2009-2010 Faculteit Ingenieurswetenschappen Voorzitter: prof. dr. ir. Hendrik Van Landeghem Vakgroep Technische bedrijfsvoering operationeel onderzoek Master in de ingenieurswetenschappen: bedrijfskundige systeemtechnieken en Masterproef ingediend tot het behalen van de academische graad van Begeleider: Ian Rex Promotoren: dr. ir. Sofie Van Volsem, prof. dr. El-Houssaine Aghezzaf
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Dries Verhaeghe
procurement service providerModelleren van commodity strategieen in een
Academiejaar 2009-2010Faculteit IngenieurswetenschappenVoorzitter: prof. dr. ir. Hendrik Van LandeghemVakgroep Technische bedrijfsvoering
operationeel onderzoekMaster in de ingenieurswetenschappen: bedrijfskundige systeemtechnieken en
Masterproef ingediend tot het behalen van de academische graad van
Begeleider: Ian RexPromotoren: dr. ir. Sofie Van Volsem, prof. dr. El-Houssaine Aghezzaf
Dries Verhaeghe
procurement service providerModelleren van commodity strategieen in een
Academiejaar 2009-2010Faculteit IngenieurswetenschappenVoorzitter: prof. dr. ir. Hendrik Van LandeghemVakgroep Technische bedrijfsvoering
operationeel onderzoekMaster in de ingenieurswetenschappen: bedrijfskundige systeemtechnieken en
Masterproef ingediend tot het behalen van de academische graad van
Begeleider: Ian RexPromotoren: dr. ir. Sofie Van Volsem, prof. dr. El-Houssaine Aghezzaf
Foreword
This master’s thesis would not have been possible without the care and help of a select
group of people. I would like to use this foreword to convey my deepest appreciation for
their time and effort.
First of all, I want to thank my thesis promotors Sofie Van Volsem and El-Houssaine
Aghezzaf. Whenever I needed their advice, they were always there for me. Their input was
essential in the construction of this thesis. I also want to thank my mentor Ian Rex. He
was always available to share his experience and professional view on the supply market,
which facilitated my introduction to the company, the life of a professional, and supply
management.
Special thanks goes out to GIS Europe. They were an outstanding host. The hospitality and
kindness of all staffmembers was heartwarming, motivating and undoubtedly contributed
to this master’s thesis. I want to give a special shout-out to Vincent Vermeire. Being in
the same office for most of the time gave me the opportunity to stalk him with tons of
questions. His input gave me an excellent idea of how things really work at the firm.
Finally, I wish to thank both my parents and friends. They have always supported me in
the pursuit of my dreams, even in the difficult periods of this past year.
i
Toelating tot bruikleen
The author gives permission to make this master dissertation available for consultation and
to copy part of this master dissertation for personal use.
In the case of any other use, the limitations of the copyright have to be respected, in
particular with regard to the obligation to state expressly the source when quoting results
from this master dissertation.
Dries Verhaeghe
August 20th, 2010
ii
Modelleren van commodity
strategieen in een procurement
service providerdoor
Dries Verhaeghe
Summary
The goal of this thesis is to develop a model that can guide supply management improve-ments at a procurement service provider. The model should center around commoditystrategy development, as research has demonstrated that it’s the key process in procure-ment. The Belgian company Global Integrated Supply Europe is chosen as the referenceprocurement service provider.
The thesis commences with an extensive literature review. Literature points out that theKraljic portfolio method and the Michigan State University Purchasing Model are the twomost used models. They are both extensively discussed in the literature study. However,after review of both models, it can be concluded that neither is fully and solely applicableto a PSP.The constructed commodity strategy development model consists of nine steps. Theyshould be executed consecutively. Also, because commodity strategies should be reviewedregularly, they are presented in a cycle.
Because of the large scope of the thesis, the model has been kept qualitative. It is afoundation for further research into the several parts of the model.
Keywords
Supply management, procurement, commodity strategy, PSP, SME
Promotoren: prof. dr. El-Houssaine Aghezzaf, dr. ir. Sofie Van VolsemBegeleider: Ian Rex
Masterproef ingediend tot het behalen van de academische graad van Master in de inge-nieurswetenschappen: bedrijfskundige systeemtechnieken en operationeel onderzoek
Vakgroep Technische bedrijfsvoeringVoorzitter: prof. dr. ir. Hendrik Van LandeghemFaculteit: IngenieurswetenschappenAcademiejaar: 2009–2010
iii
Development of commodity strategies at a procurement service provider
Dries Verhaeghe
Supervisors: Sofie Van Volsem, E-H. Aghezzaf, Ian Rex
Abstract: This paper describes a framework for the improvement of supply management of SME procurement service providers. It focuses on the development of commodity strategies, the most important procurement process. The result is a development cycle, consisting of nine steps.
Keywords: Supply management, procurement, commodity strategy, PSP, SME
I. INTRODUCTION
Currently, there are two procurement models that are popular: Kraljic’ portfolio method and the Michigan State University Purchasing model. While the former receives more attention in Europe, American purchasers seem to rely more on the MSU model [1]. The MSU model distinguishes fourteen processes within procurement. Case studies using this model have demonstrated that one of these processes, commodity strategy development, should be the foundation of all supply management improvement initiatives. However, unlike the other thirteen processes, commodity strategy development itself is not well researched. This may be due to the fact that this process has a linking role. The other processes could be seen as the sections of commodity strategy development. This research focuses on the development of commodity strategies at PSPs, as it’s a prerequisite for supply management improvements. In a first stage, the two popular models are evaluated. Next is the development of the new framework.
II. REVIEW OF KRALJIC AND MSU
In this stage, the two popular models are evaluated to see whether they are applicable to procurement service providers. They are applied to an example PSP, Global Integrated Supply Europe. This Ghent-based company will serve as the reference PSP throughout this article. Kraljic' model demonstrates that differentiating strategies based on the commodity’s supply risk and profit impact can be of great value to supply management [2]. However, when solely this model is applied to assess and improve supply management of
procurement service providers, there will be difficulties. Three criticisms can be given. First, this model is fairly static. Products aren’t able to move around Kraljic’ matrix. Second, the model dictates that every product should be assessed and put into the matrix, which may form a problem for procurement service providers. They don't have stable procurement schedules. Spot buys are still an important part of the business, making the product base not only unpredictable, but also varied and very large. Third, unlike MSU's purchasing model, this isn't a holistic model. It does not take the procurement process itself into account. The MSU model is a holistic model. It tries to capture all aspects or processes that make up procurement [3]. When the reference PSP is assessed on all fourteen processes using the MSU self-assessment tool, it scores an average of 1.1 out of 10. This score is low, but should not be solely attributed to weak performance of GIS. It’s an indication that the model is not completely fit for procurement service providers. First of all, two processes are not applicable to PSPs. These are supplier integration in new product development and outsourcing. Of the remaining twelve processes, only four scorecards are completely applicable. This means that a score of 10 can be reached. These processes are commodity strategy development, supply base optimization, strategy alignment and IS/IT. For the other eight, it would be impossible to ever get the maximum score. Because the scoring system uses an incremental scale, it can be assumed that some conditions that don’t fit within the PSP context, cannot simply be left out of the scorecards. Thus, for those eight processes, the self-assessments are deemed unreliable. This means that neither model can be completely or solely used to improve supply management at PSPs.
III. MODEL DEVELOPMENT
The commodity strategy development process should consist of four big steps: definition of the corporate objectives, definition of the commodity, development of the strategy, and the execution. Because of the ever changing client and supplier base, a periodic review is recommended and these four steps should be seen as a cycle.
Step 1: define the objectives When strategies are constructed, they should cascade from the vision and mission statement down to corporate objectives, and further down to commodity strategies [4]. Commodity strategies are basically the lowest level in the strategy hierarchy. In the mission and vision statement of GIS say that the company wishes to become the number one outsourcing firm for non-strategic goods through integrated supply by 2011. Optimized supply management is mentioned as one of the means. Step 2: define the commodity The case studies and Kotter’s model for change demonstrate that a common ground is very important. That’s why this foundation must consist of a gathering of facts only. Commodity managers must determine which information they need, and if/how they can get it. Research has identified six types of information concerning commodities: customer demands, product group characteristics, supply market characteristics, value chain characteristics, value chain characteristics of the competitors and supplier characteristics [5]. These items should be scored on availability and importance, and summarized in a template. Second, the schedule stability must be assessed. Research has demonstrated that the implementation of new procurement strategies in SMEs should start with schedule stability. For each product, the demand must be assessed. Third, the importance of the product group must be determined. The classification can be done using the matrix from Kraljic’ portfolio method. A pareto analysis can be used to determine the profit impact and the number of capable suppliers as a an indicator for the supply risk. To determine this number, a supplier selection method must be constructed. Step 3: Strategy development First, the commodity objectives should be set. This requires an assessment of the PSP’s strength in comparison with the supplier’s strength. Much like in step 2, another 2-by-2 matrix can be used. This matrix can be put inside each quadrant of the portfolio matrix from step 2. The result is a 4-by-4 matrix with 16 different scenarios. As not all scenarios are advantageous for procurement service providers, the responsible commodity managers must select their objectives carefully. Second, based on the scenario and objectives, the key performance areas must be chosen. The case studies and an internal discussion at GIS show that the processes of strategic cost management, supplier relationships and world class supply base are priority processes, with commodity strategy development as their foundation. These can be seen as key performance areas. Third, the goals must be set. To each key performance area measureable key performance indicators are attributed. Commodity managers must be sure to make a distinction between lagging and driver key performance
indicators. The driver indicators are dig ‘deeper’ and drive the lagging indicator. For example: a key performance area can be strategic cost management. The lagging key performance indicator can be the total cost of ownership. The driver key performance indicators can be price and stock levels. Before a goal can be chosen, a gap analysis must be performed. This can be external, with benchmarks as reference or internal, with the corporate objectives as reference. Step 4: Execution First, a plan must be made, focused on the goals. Second, the plan should be executed. As PSPs buyers usually work with a lot of freedom, careful consideration should be given to change management. Kotter’s eight-step change model is recommended.
IV. CONCLUSION No model could be found that was adequate to use for supply management improvement in SME procurement service providers. A four step model, with nine aspects, has been conceived. This commodity strategy development framework should guide commodity managers, as they design their strategy. Because of the large scope of this thesis, the model has been kept qualitative. This allows future research into the different aspects of the model. Also, the literature is extensive, so it can be used as a handbook for commodity managers, containing the most prominent knowledge and best practices.
REFERENCES [1] Brigitte Faber, Nico Lamers, and Reinder Pieters. Models for decision making in purchasing: Kraljic versus monczka. International symposium on logistics and industrial informatics, 2007. [2] Peter Kraljic. Purchasing must become supply management. Harvard Business Review, 1983. [3] NEVI. De basis: het msu-model. www.purchasingexcellence.nl. [4] Robert Monczka, Robert Trent, and Robert Handfield. Purchasing and supply chain management. South-Western, 2002. [5] Robert Monczka, Kenneth Peterson, Robert Handfield, and Gary Ragatz. Determinants of successful vs. non-strategic supplier alliances. Decision Science Journal, 29(3), 1998. [6] Douglas Perkins and Angappa Gunasekaran. Improving the effectiveness of purchasing in a small company. Production planning and control, 1998.
0 No or little evidence of any decision making process on insourcing/outsourcing
1 Ad hoc approach, specific crisis related decisions and implementation, key person focused, capacity driven, with limited review measures. Purchasing only involved in execution/implementation.
2 Systematic, cross-functional decision making process on current core & non-core competencies: based on internal information and short-term objectives. Little evidence of a structured implementation process.
3 As per 2, but based on internal and external information. Purchasing is already involved in decision making process to provide input and knowledge about the current supplier base.
4
As per 3, but based on current and future requirements: decisions are clearly taken with knowledge of own and current supplier’s long term strategies and capabilities (with benchmark studies about competitors’ decisions if appropriate)
5
As per 4, but insourcing/outsourcing decisions are taken with knowledge of current and potential supplier’s short and long term strategies and capabilities. Potential suppliers are identified through market research and supplier assessments
6
As per 5, and insourcing/outsourcing decisions are clearly based on integral cost & cash flow calculations (including fixed corporate and factory/site overhead costs). There is a clear view on all costs and there is an evaluation of all cost elements before and after in/outsourcing. Evidence of clear objective setting and measurement.
7 As per 6, and there is some evidence of a structured implementation process. Well-defined outsourcing agreements are available which cover all relevant issues. Some targets are set.
8
There is a formal and regular insourcing/outsourcing decision making process (as per 6) and there is a formal implementation process. Evidence of a joint planning with clearly defined milestones, based on a clear work breakdown addressing transformations in both the Order Realization and Product Creation Process.
9
As per 8, and there is a formal post decision review process with executive follow-up of targets based on analysis of measures and corrective actions. Evidence that targets and objectives have been achieved.
10 Cross-organizational decision making process (total supply chain focus): globally established core competencies (internally and at customers and suppliers).
0 No Commodity Strategy Development process visible/ in place.
1 Some evidence of Commodity Strategy Development within the purchasing department. No documented strategy. No communication towards key stakeholders.
2
Multi-functional Teams in place to develop Commodity Strategies. People in place to set the charter for those teams, to co-ordinate decisions across different teams, to consciously evaluate the appropriate level & place in the organization (cross-functional, cross-site, cross-business), and to decide on appropriate participants. Evidence of minutes of meetings. Commodity Strategy Development is based on the identification of internal purchase item requirements. Focus on (short-term) costs and volume leveraging.
3
As per 2, but Commodity Strategy Development is also based on thorough understanding of supplier market structure & trends (documented), including current and potential suppliers’ business situation, capabilities and performance.
4 As per 3, and based on the identification of external (customer) requirements. Focus on long term requirements and capabilities.
5
Formal, structured and documented Commodity Strategy Development Process in place, based on total internal & external requirements identification (as per 2, 3 & 4) including a formal evaluation process for prioritizing on quality, cost, delivery, technology, service and environmental requirements. Detailed action plan available showing tasks, accountabilities, timing and critical path actions. Little evidence of communication with key stakeholders and breakthrough goal setting
6 As per 5, but based on alignment of internal (customer) and external (supplier) future technology roadmaps.
7
As per 6, but including SMART (specific, measurable, time-driven) breakthrough goals, aligned with the business and purchasing objectives. Structured follow-up and review of targets with corrective action planning. Evidence of achieved and improving results.
8 As per 7, and with regular communication of the commodity strategies towards key stakeholders (internally and externally).
9 As per 8, and Commodity Strategy Development Process includes benchmarking (to determine World Class levels) and internal & external (across industry, incl. competition) gap analysis.
10
As per 9, and involvement of suppliers in Commodity Strategy Development Process for strategy definition, goal setting and risk/award assessment. Formal Supplier Market Risk Assessment (SMRA) is an integral part of the Commodity Strategy Development Process.
Conclusions: Supply Base Optimization and Management
0 No/little analysis of the supply base, no supply base improvement process in place.
1
There are some initiatives to optimize the current supplier base (e.g. supplier reduction plan available) based on qualitative perception of performance and basic evaluation of costs and risks. Basic differentiation is made between key and non-key suppliers.
2
Formal and documented Supplier Selection process in place, focused on current needs and capabilities. Differentiation is made between commercial, preferred and partner suppliers. Little evidence of differentiated actions in line with this distinction.
3
As per 2, and basic Supplier Rating System in place: at least quality and delivery performance of key suppliers are measured. Little evidence of formal communication towards key stakeholders and no improvement actions planned.
4 As per 3, but Supplier Rating System is completed with a basic Supplier Categorization System (e.g. green -continue-, yellow –potential or actions required-, red –eliminate-) which supports a supply base optimization plan.
5
As per 4, but supplier list is extensively analyzed based on turnover and risk. Documented evidence of the Pareto (80-20) Analysis and Portfolio Analysis. There is little evidence of differentiated actions in line with these analyses.
6
As per 5, but there is clear evidence of differentiated Supply Base Management on the basis of Portfolio/Pareto analysis. Documented evidence of differentiated strategy/actions towards commercial, preferred and partner suppliers.
7
As per 6, but Advanced Supplier Rating system in place: covering on-going production and product creation, criteria are weighted (aligned with business objectives), multi-functional involvement, objective measurement. Evidence of improving results and achieved targets. Information is communicated towards suppliers, and discussed in regular improvement meetings. Following information is available for all key suppliers and communicated towards stakeholders: current status, performance and improvement actions.
8
As per 7, but regular assessments take place for all key suppliers (e.g. process capability studies and profile update processes) in order to clearly understand and communicate current and future capabilities of suppliers (in relation to current and future needs of the business).
9
As per 8, and time and resources are available for fundamental Market Research, based on full understanding of business requirements and supplier base. Documented evidence of market research planning and execution.
10 Differentiated commodity strategies in place (at least score 7 in element 2) in order to optimize the supplier base and to maximize performance with the correct number and correct suppliers.
0 No identification/recognition of business needs for Supplier Partnerships
1
Formal definition identifies for which categories of suppliers to establish Supplier Partnerships and comprises long term relationships, interdependency and trust development. Formal process in place to identify the criteria and objectives for each alliance, in line with business objectives.
2 Documented and structured process in place to identify, assess and select potential partners against alliance criteria (as defined per 1). Little evidence of formal communication framework and common goal setting.
3 As per 2, and partnerships agreements are available, including documented evidence that you work on a partnership program (commitment to work on issues as per 4 to 10).
4
As per 3, and executive focal point at both companies to lead and manage the relationship. Some efforts to discuss the supplier alliance as a separated agenda point and to start joint improvement programs. Multiple-level communication in all functions is established, including a formal communication framework.
5 As per 4, and partner is integrated in Product Creation Process.
6 As per 5, and shared objectives are set for current projects. There is a joint objective setting and joint planning process in place. Little evidence of alignment of future strategies and objectives.
7 As per 6, and value chain cost are jointly analyzed. Open door policy to share cost calculations and cost breakdowns.
8 As per 7, and clear evidence of a joint aggressive continuous improvement agenda, based on self-assessment benchmarked against World Class. Continuous review of partnership against objectives
9 As per 8, and joint/mutual education and training program in place. Evidence of achieved targets and improving results.
10 As per 9, and there is a formal alignment of future technologies, objectives and strategies. Complete openness to share future product and technology information.
Conclusions: Supplier Integration in Product Creation Process
0 No or little evidence of supplier integration in PCP. No PCP policy available.
1 PCP policy/procedure available, including role of purchasing and determining tasks and responsibilities at every milestone for purchasing and suppliers.
2 As per 1, and formal make/buy decision making process in place to identify project needs for external technologies & capabilities. Evidence of purchasing involvement in the PCP from early start (in pre-concept phase).
3 Selection of suppliers is based on clear understanding of (development & process) capabilities against those needs identified per 2. Further (process) assessments if necessary.
4
As per 3, and formal decision making process to determine moment of supplier involvement, based on degree of development responsibility and development risk. Some evidence of target setting and contracting (at least non-disclosure and intellectual property agreement).
5 As per 4, and project objectives are clearly set (including timing, quality and costs), and translated into purchasing and supplier objectives. Development contracts available in which supplier objectives are defined.
6 As per 5, and regular meetings are scheduled. Cross-functional multiple-level communication established to address project objectives (more than product functionalities). Resident Engineering organized if appropriate.
7
As per 6, and supplier performance is measured and reviewed against expectations. Corrective actions are planned and implemented if necessary. There is a formal advanced supplier rating system for supplier performance in PCP. There is evidence of improving results and achieved targets.
8 As per 7, and an open door policy of sharing appropriate technology roadmaps, costs and customer information is practiced. Evidence of key supplier involvement in pre-concept stages of development.
9
As per 8, and internally/externally linked information systems (e.g. extranet. EDI, CAD/CAM, databases, PDI) facilitate information exchange in order to reduce throughput time and development costs. There is a formal post-review process in place to evaluate development projects with the supplier and to determine future improvement programs.
10 As per 9, and preferred supplier lists are available per technology cluster, supported by worldwide searches, continuous industry monitoring, and joint technology roadmap discussions.
Conclusions: Supplier Integration in Order Realization Process
0 No/little evidence of actions and programs to improve the order realization process and to integrate suppliers into the ORP.
1
Evidence of internal optimization of the production planning process. Formal internal communication is organized involving marketing, manufacturing/logistics, and purchasing to align market demand, production capacity and supply.
2 As per 1, and there is an automated integrated scheduling and order processing system in place to optimize internal information exchange.
3 As per 2, and there is evidence of targets for reduction of lead times and throughput times as part of the purchasing improvement plan (only internally discussed).
4 As per 3, and there is evidence that key first tier suppliers are involved in the requirement planning and scheduling process. Automated forecasts are shared with those suppliers.
5
As per 4, and there is evidence of an active process to reduce incoming good inspection and some evidence of leading edge supply (e.g. ship-to-stock, ship-to-line, automatic bar coding) resulting in less process steps and lower inventory levels.
6 As per 5, and there is evidence of cross-organizational teams (buyer and supplier) to reduce inventories, lead times, and throughput times. Evidence of an action plan, implementation of actions and review of targets.
7 As per 6, and information systems allow information sharing externally with multiple tier suppliers and customers (e.g. extranet, EDI)
8
As per 7, and there is a comprehensive alignment and integration over the full supply chain with both multiple tier suppliers and customers for planning, inventory reduction, invoicing, etc… (e.g. self-billing, supplier held inventory, kanban outside organizational borders)
9
As per 7, and there is evidence that supply chain capabilities are maximized through optimal design of systems and procedures resulting in practices such as reliance on actual consumer demand and limited forecasting to drive order realization, very low inventories in basic forms located with second and third tier suppliers, fully integrated enterprise requirements planning (ERP) and quick response systems.
10 Cross-organizational Supply Chain benchmarking resulting in World Class improvement programs.
Conclusions: Supplier Development And Quality Management
0 No/little evidence of structured follow-up on supplier quality and improvement programs.
1 All key suppliers are externally certified and/or went through a formal qualification process.
2
As per 1, and formal system in place for basic measurement of supplier performance (e.g. supplier rating). Little evidence of communication of these results (towards suppliers) with appropriate analysis and corrective action planning.
3 As per 2, and ad hoc response to supplier problems (e.g. poor quality or late delivery): reactive supplier development.
4
As per 3, and formal complaint procedure in place in order to communicate efficiently internal complaints towards suppliers. Evidence of follow-up of suppliers’ corrective actions based on these complaints and the supplier rating results.
5 As per 4, and supplier visits and/or days are organized for supplier recognition and to communicate structurally business strategy and purchasing objectives. Several formal supplier audits have taken place.
6
As per 5, and there is evidence of process studies and audits at all key suppliers in order to fully understand all suppliers’ current and future capabilities. This information is documented, regularly updated and effectively communicated towards key stakeholders.
7
As per 6, and process control systems have been agreed with all appropriate suppliers. There is statistical evidence of stability & capability from those suppliers or there is evidence that corrective actions are planned.
8
As per 7, and there is evidence of Strategic Supplier Development: pro-active response, concentrating efforts to most important commodities and suppliers. Trained and dedicated personnel is accessible for supplier quality and development. On site supplier assessments have been organized (e.g. industrial supplier scans, quick scans)
9
As per 8, and advanced quality measures are in place: cost of non quality is measured and targets are set and communication towards suppliers and key stakeholders. Evidence of a zero defect program. Evidence of improving results and achieved targets.
10 As per 9, and supplier surveys and joint/mutual trainings are organized to learn in two directions and to establish common improvement programs (with targets and follow-up)
1 Evidence of basic purchase price management: focus on negotiation & leveraging
2
As per 1, but evidence of the structured implementation of the Total Cost of Ownership principle (e.g. in supplier selection criteria). A formal TCO-procedure is implemented for some key components and/or special purchases (e.g. equipment, spare parts)
3
As per 2, but employee suggestion programs and cross-functional teams to discuss cost reduction opportunities (in house Strategic Cost Management). Little evidence of involvement of suppliers and the application of cost models for a.o. supplier selection.
4 As per 3, and supplier contracts (longer term) include improvement incentives or cost-containment (efficiency) targets. Some evidence of joint (supplier-buyer) brainstorming for cost improvement opportunities.
5
As per 4, and evidence of Target Costing in the Product Creation Process: cost down budgeting (starting from the price the customers wants to pay, bringing it down to what the maximum price for a component should be) is implemented for all projects.
6 As per 5, and there is evidence of structural application of several cost models to select suppliers and drive cost structure improvement programs. Evidence that purchase cost price follows at least market price erosion.
7
As per 6, and there is evidence of joint (supplier-buyer) brainstorming for cost improvement opportunities, e.g. cross-organizational Value Analysis/Value Engineering teams, aim&drive programs. Evidence of actions and results.
8 As per 7, and there is a structured and formal organized incentive program to solicit supplier cost reduction ideas, e.g. profit & gain sharing contracts, supplier suggestion programs, idea awarding.
9
As per 8, and cross-functional teams with supplier and customer involvement systematically establish total cost targets and measures. Follow-up (measurement and review) of those cost improvement actions. Evidence that targets are achieved.
10 As per 9, and there is a formal, structured and documented cross-enterprise supply chain cost improvement decision making process in which all suppliers and customers are taken into consideration.
1 Purchasing plan exists but only describes departmental actions to be implemented.
2
Purchasing plan is derived from detailed understanding of the current supplier market structure and opportunities. Categorization systems for General Expenses (NPR/NPI) and BOM (e.g. portfolio analysis) support different actions towards differentiated suppliers.
3 As per 2, but with clear purchasing objectives aligned with business objectives and laid down in overviews such as the balanced scorecard or the Hoshin plan.
4
As per 3, but realization of purchasing plan is part of formal business planning and review process. Purchasing plan is integral part of Business plan. Purchasing objectives are aligned with business and other objectives. Targets are actively pursued and adjusted (when applicable) by Business Management.
5
As per 4, but purchasing plan is well communicated towards key internal stakeholders including the central commodity teams (e.g. presentation in development or management team meetings and/or distribution of copies). Little evidence of communication of (parts of) the purchasing plan towards key suppliers.
6
As per 5, with evidence that self-assessment results have been used to determine purchasing objectives and to set priorities for improvement actions in the purchasing plan. Some targets in the purchasing plan are focused on the internal efficiency (e.g. resources, IT, process optimization) and not only on the (external) supplier optimization.
7 As per 6, and purchasing plan is deployed through intensive discussions and approval in multi-disciplinary teams. Top management and key stakeholders buy-in is actively pursued and obtained.
8
As per 7, and relevant parts of the purchasing plan are communicated and discussed with key suppliers (preferred and partner suppliers) via for example the commodity strategy development teams. Evidence that outcome of discussions and targets are used for (future) update of the purchasing plan.
9 As per 8, and Supply Market Risk Assessment is an integral part of the purchasing action plan.
10
As per 9, and purchasing plan is supported by benchmarking of processes: objectives are based on gap analysis with Best-in-Class and competition. All appropriate targets for internal efficiency (e.g. resources, IT, process optimization) are taken into account.
0 No coordination and teaming across functions and organizations. Purchasing performs a clerical/administrative role.
1 Little coordination between purchasing functions of local organizations within BU.
2
The purchasing organization is completely involved in all areas of purchasing spend (all BOM, General Expenses (NPR/NPI) and resale expenditure), timely enough to contribute to the supplier selection and contracting phase. Initial purchasing (upstream activities such as contracting, involvement in Product Creation Process and market research) is implemented as a separated set of activities next to more procurement/ operational purchasing (downstream activities such as expediting and ordering). Little evidence of strategic purchasing activities.
3 As per 2, and purchasing performs a tactical and strategic role. Head of purchasing at sites is member of the local Management Team. Reporting level is first or second level executive at BU and company-wide.
4
As per 3, and some evidence of coordination of purchasing across BU’s. Purchasing is a global versus regional/local organization with some company-wide, cross-location purchasing leveraging throughout the company. Some cross-functional teams to enable purchasing processes.
5 As per 4, and several cross-functional teams are installed at local level to enable supplier evaluation, -selection and -integration in Product Creation Process.
6
As per 5, and strategic purchasing is implemented as a separated set of activities integrated into more initial and operational activities. Typical strategic purchasing activities are formally and structurally performed such as fundamental market/technology research, commodity strategy development and involvement in pre-development.
7
As per 6, and all appropriate cross-functional teams are in place at local and global level and a mandatory part of supplier evaluation/selection and supplier integration process. Steering Group in place to set the charter for those teams, to co-ordinate decisions across different teams, to consciously evaluate the appropriate level & place in the organization (cross-functional, cross-site, cross-business), and to decide on appropriate participants.
8 As per 7, but cross-functional/cross-location teams are also mandatory part of the development process at the supplier (with dedicated supplier development managers).
9 Appropriate external customers and suppliers are member of the cross-functional/ cross-location teams to enable purchasing process as per 7 & 8.
10 Current purchasing organization and structure is perfectly aligned with BU strategies, objectives and structures and fully supports and maximizes strategic, initial and operational purchasing.
0 Initiatives are typically focused at the local site level. Known suppliers are primarily local.
1 Evidence that local buyer has investigated opportunities outside organization/local borders. Awareness about global initiatives by corporate and BU purchasing.
2 As per 1, and there is evidence that international or global purchasing offices have been considered (and used if appropriate), and/or local purchasers abroad support purchasing in less accessible regions.
3 As per 2, and market research and supplier selection process is in place to identify local, regional and global suppliers
4 As per 3, and there is evidence that the local organization has been considering (and participated where possible in) national and global contracts.
5 As per 4, and there is some evidence of the use of IS/IT systems which clearly enable globalization. Reliable global data are available, provided by the system
6
As per 5, and organization structure and reporting relationships are in coordination with global strategy (e.g. lead buyer responsibilities have been defined, local purchasing organizations have been developed). Evidence of involvement in some global teams.
7 As per 6, but all appropriate worldwide councils are established to facilitate learnings and create maximum benefits. An organization has been set up to look with global leadership.
8 As per 7, and there is extensive use of IS/IT systems which enable globalization, including a global databank of supplier profiles.
9 As per 8, and there is evidence of development initiatives for selected/qualified local suppliers in order to become global suppliers (where applicable).
10 As per 9, and sourcing decisions are key issues in the decision making process to determine the set-up of local operations (e.g. satellites, industrial campus).
0 No integrated set of supplier / purchasing performance measures.
1
Basic set of supplier performance measures in place: quality, price behaviour, delivery responsiveness and support for on-going production are measured over time against target. Classification system for Purchased Goods and Services is implemented.
2 As per 1, and there is evidence that purchasing measures are aligned with purchasing and business objectives.
3 As per 2, and formal criteria are in place to identify which suppliers should be measured. Feedback about performance against target is provided to key stakeholders and regularly reviewed.
4 As per 3, but measurement data is used to set up common breakthrough improvement plans with suppliers. There are some improving trends in the supplier performance.
5 As per 4, and there is an advanced integrated set of performance indicators in place to measure supplier performance in the Product Creation Process.
6 As per 5, and measures for purchasing process efficiency are in place (for purchasing process optimization). Those measures are visualized, communicated and understood throughout the organization.
7 As per 6, and yearly and regular Self-Assessments are organized to measure supply and purchasing performance against the World Class Excellence Model.
8
As per 7, and qualitative and quantitative total cost-based performance measurement over the life cycle of the purchased item, which includes price behaviour, quality, delivery and supplier non-performance costs, are established and regularly used for sourcing, design and continuous improvement. Results are continuously improving.
9
As per 8, and purchasing performance measures are part of an integral set of business performance measures and reviewed regularly (at least quarterly) and formally at management level (e.g. Business Balanced Scorecard, Hoshin plan)
10 Measurement data are used with suppliers and customers to identify, isolate and analyze the key product cost drivers throughout the Supply Chain.
0 No Purchasing Information System in place. No network connection for the purchasing department in place.
1 There is a stand-alone Purchasing Information System in place for purchasing order processing.
2 Purchasing Information System is part of the integral business information system (e.g. SAP MRP, MfgPro) in order to optimize the complete Order Realization Process.
3 As per 2, and there is an email/internet connection for the purchasing department in place
4 As per 3, and evidence of Purchasing Performance Indicators generated automatically by the Information System.
5 As per 4, and Information System supports supplier involvement in Order Realization Process: cross-organizational links in place such as extranet and EDI.
6 As per 5, and evidence of the use of data warehouses which support strategic purchasing by enabling volume leveraging, standardization and centralized commodity management with distributed procurement as well.
7 As per 6, and Information Systems support purchasing decision making and analysis process (e.g. cost modelling)
8 As per 7, and Information Systems enable supplier involvement in Product Design (e.g. extranet, CAD/CAM links).
9 As per 8, and evidence of extensive use of internet technology opportunities (e.g. E-commerce, supplier search)
10 As per 9, and evidence of a formal and pro-active participation in IS/IT management to identify purchasing needs and implement strategies. IS/IT policy in place, aligned with corporate IS/IT policy.
0 No or little evidence of Human Resource Management support for the purchasing process.
1 Availability of updated purchasing profiles (including function descriptions and skill requirements). Use of these profiles for recruitment.
2 As per 1, and evidence of individual performance appraisal and individual business targets/objectives setting for every purchaser. Little evidence of personal development objectives.
3
As per 2, and there is evidence of a reward and recognition plan related to purchasing performance. Explicit link between the achievement of purchasing objectives and the outcome of performance appraisals (for all people involved in the purchasing process). Reward and recognition plan related to multi-functional/location team performance in place.
4
As per 3, and there is a continuous and formal process in place to review individual skills (required vs. available) and to recruit and/or train to fill the gaps. Evidence of the use of function profiles and Human Resource involvement in this process.
5 As per 4, and there are purchasing specific HRM policies and objectives in place, including succession planning, training and recruitment (at BU and site level).
6 As per 5, and purchasing is formally included in the annual MD review (career path planning) of respective entity.
7
As per 6, and personal development plans are in place (including individual training and career path planning) based on purchasing profiles, gap analysis, and performance appraisal. Regular reviewed with purchasing manager and individual.
8
As per 7, and entity shows active pursuing of career planning across functional disciplines at all levels. Some purchasers have experience outside the purchasing department and some other departments employ ex-purchasers.
9 As per 8, and entity shows active pursuing of career planning across locations and BU’s. Some purchasers have international experience and/or experience in other BU’s and locations.
10 As per 9, and there is evidence of multi-functional performance appraisal. Formal process to set team targets and to review performance against targets regularly.
80
Appendix B
Pairwise comparison of key
performance areas
Figure B.1: Pairwise comparison
81
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