Evaluation of the cross-divisional
potentials of savings resulting from
an optimized materials management
organization
Master thesis
Confidential
Any information obtained in this report about
hanseWasser Bremen GmbH is proprietary
and shall be maintained in confidence.
Name student
Kristina Kolle
Student number
s1677896
Company
hanseWasser Bremen GmbH
Department
Materials Management
Adress
Schiffbauerweg 2, 28237 Bremen, Germany
Internet
www.hansewasser.de
University
University of Groningen
Adress
P.O. Box 72, 9700 AB Groningen,
Netherlands
Department
Faculty of Economics and Business
Internet
www.rug.nl
Supervisors (Company)
Dipl. Ing. Uwe Mustermann Division manager ´Central Services`
Kay Bindel
Managing Director AMConsult
Supervisors (University)
Executive Summary
In order to be able to focus on its core business, hanseWasser requires efficient and effective materials and service management processes. This research project was instigated by the desire to obtain an overview of the financial potential through process and organization improvements in the materials management department at hanseWasser. The main objective of this research was to find out if, how, and by how much the efficiency of the current materials management processes can be improved to save on administrative expenditures. The research question was formulated as follows:
‘Which materials management processes have potential for efficiency improvements and deliver the highest possible financial effects for the organization?’
The research question was approached through the application of the POP-model (policies, organization, processes). The model advocates a relationship between the congruence of the different POP-elements and the effectivity of the organization. The comparison of the ideal and the current state of the POP-elements at hanseWasser allowed the analysis of gaps and potentials for improvements. First, the field of materials management was defined in the context of hanseWasser’s business environment. In its operational activities, hanseWasser resembles a service organization or a manufacturing organization with passive manufacturing operations. The materials management at hanseWasser was found to be rather responsible for the timely supply of maintenance materials and services than for the internal or external transportation. Therefore, the ideal company strategy, procurement strategy, organization, purchasing portfolio, and processes were designed for the procurement function. The matching of these elements with the current state of the materials management department revealed large gaps. These can be traced back to an unclear communication of the procurement role and strategy, as well as a missing link between the organization set-up and task distributions within the procurement organization. Areas of improvement were found to be:
• Low internal recognition of the procurement function within the organization;
• Mainly operational purchasing activities, and lacking task specifications;
• Procurement decisions are often taken by the technical departments without involvement of the materials management department;
Acknowledgements
This practical investigation is marking the final part of my master study in Business Administration at the faculty of Economics and Business at the University of Groningen. The thesis was written as part of a consultancy project carried out by the consulting firm AMConsult on behalf of hanseWasser Bremen GmbH, Germany. Writing this thesis required a lot of involvement and perseverance. It also required the help of many people, and I would like to take the opportunity to show my appreciation to those who helped me to bring this research to a successful ending.
First and foremost, my gratitude goes to Kay Bindel, my internal supervisor at AMConsult, who gave me the opportunity to carry out this research and whose optimism during the entire research project was very contagious. Furthermore, my thanks goes to Andreas Pohle and Marcus Bojack who were also there to answer my questions, and of course Mrs. von Oehsen and Mr. Niehaus of hanseWasser Bremen GmbH who contributed to this research. Of course, I want to thank my colleagues of
AMConsult in Bonn, Germany for their warm welcome and for integrating me into their team during my
visits.
Also, I would like to thank my supervisors of the Faculty of Economics and Business of the University of Groningen. My first supervisor, Prof. Dr. D.-J. F. Kamann who contributed with advice on the structure and methodology for his helpful comments and constructive criticism, and my second supervisor, Dr. N.D. van Foreest, for his spontaneous availability.
Last but not least I owe gratitude to my friends and family who have always supported me with advice and help. My special thanks goes out to my sister and my best friend, who have both supported me all the way through my studies, as well as the final thesis phase.
With this thesis, also my time being a student has come to an end. It means moving into the working world, which certainly is a new challenge. I will always remember my (short) time in Groningen with much pleasure.
Kristina Kolle
Table of Contents
Executive Summary
Acknowledgements
Introduction
8
Chapter 1 The Organization
10
1.1 The German Sewage Disposal Market
10
1.2 Introduction to hanseWasser Bremen GmbH
13
1.2.1
Company History and General Information
13
1.2.2
Core Business and Product Portfolio
14
1.3 The Materials Management Organization
15
1.3.1
Materials Management in a Service Organization
15
Chapter 2 Research Outline
18
2.1 Problem Analysis
18
2.1.1
Reasons for Research
18
2.2 Problem Statement
19
2.2.1
Objective of Research
19
2.2.2
Research Question and Preconditions
20
2.2.3
Phase Model of the Research
20
2.2.4
Sub-questions
22
2.3 Methodology
23
2.3.1
Type of Research
23
2.3.2
Data Collection and Data Sources
24
2.3.3
Structure of Thesis
25
Chapter 3 Theoretical Embedding of the Materials Management Function
26
3.1 Classifying Materials Management and Logistics
26
3.1.1
Strategic Relevancy of Materials Management
28
3.2 The Advent of Strategic Procurement Management
30
3.2.1
Procurement vs. Purchasing
31
3.3 Stakeholder Interests in Procurement
33
3.3.1
The Maintenance Department: Interests and Tasks
34
3.4 Summary and Concluding Remarks
37
Chapter 4 The Materials Management Function – The Target State
38
4.1 Developing the Ideal Company Strategy for hanseWasser
38
4.1.1
The POP-Model
38
4.1.2
Determinants of Corporate Strategy
39
4.1.3
The Ideal Company Strategy for hanseWasser
40
4.2 The POP-Model for the Materials Management at hanseWasser
42
4.2.1
The Ideal Procurement Strategy
43
4.2.2
The Ideal Procurement Portfolio
44
4.2.3
The Ideal Procurement Policies
48
4.2.4
The Ideal Procurement Organization
49
4.2.5
The Ideal Procurement Processes
52
4.3 Summary of Results
55
Chapter 5 The Materials Management Function – The As-Is State
57
5.1 Applying the POP-Model to hanseWasser
57
5.1.1
Company and Procurement Strategy
57
5.1.2
The Procurement Organization
59
5.1.3
Current Procurement Portfolio
61
5.2 System Embedding
65
5.3 Tracking the Different Purchasing Processes
67
5.3.1 Example 1: General Supplies
67
5.3.2
Example 2: Technical Demands
68
5.4 Summary of Results
71
Chapter 6 Analysis of Savings Potentials
73
6.1 Performance Measurement and Related Definitions
73
6.1.1
Performance Measurement in Procurement
73
6.1.2 Selection of a Performance Measurement Method
75
6.2 Qualitative Analysis with the POP-Model
79
6.2.1
Critical Evaluation: Target vs. As-is State
79
6.2.2
Summary of Results of Qualitative Analysis
83
6.3 Quantitative Analysis
84
6.3.1
Quantitative Analysis of Process Costs
84
6.3.3
Limitations of the Quantitative Analysis
92
6.4 Derivation of (Cross-Functional) Savings Potentials
92
Chapter 7 Conclusions and Recommendations
99
7.1 Conclusions
99
7.2 Recommendations and Further Research
101
Introduction
The growing importance of procurement for the long-term competitiveness of any organization calls for a revisited understanding of the procurement function as well as the supplier-customer relationship. Procurement is increasingly gaining recognition beyond a sole buying responsibility, and traditional procurement concepts, aimed at short-term material cost reductions, lose importance. In line with the continuous search for opportunities to improve processes, managers have recognized the need for accelerated and more efficient procurement cycles to reduce operating expenses. The traditional purchasing process is characterized by an intricate information gathering, complex process chains and a large share of manual tasks. The manual processing and distribution of inquiries, tenders, technical drawings, contracts and other correspondence costs time, money, and work. The amount of resources and times required to manage these activities connected to the procurement of essential inputs are substantial, and redundant processes increase internal lead time and process costs.
In order to operate efficiently, every organization must individually adapt its procurement strategy to its particular business environment. To lay the foundations for the realization of available potentials, also the organizational set-up and the processes must be aligned. Efficient procurement operations as a means for improving business performance are particularly important for organizations operating in industries that cannot easily expand their customer base. Private wastewater treatment organizations, such as hanseWasser Bremen, operate within a tight cost corset and strict legal regulations. About 85 percent of all annual costs are tied up by depreciations, personnel and interests, and value-adding products and services are limited to non-core activities. Water treatment facilities count among the most expensive and most intricate infrastructural facilities. Against this background the implications for the materials management and especially the procurement function become visible. A company whose main asset and task is the upkeep of the flawless functioning of technical equipment can draw high profits from a well organized procurement function.
This has been recognized at hanseWasser and time and effort are being spent on reorganizing the materials management processes to increase efficiency and lower operating costs. Unaffected by these internal efforts, this thesis will shed light on how the materials management department should ideally be organized in order to contribute to the profitability of hanseWasser Bremen. By means of comparing the ideal and the current state of the organization and processes in the materials management department, conclusions are drawn with respect to the potential for savings. In the future, the overview of potential financial effects can serve as the decision-making basis for further restructuring efforts.
Chapter 1 The Organization
In this chapter the company hanseWasser Bremen will be introduced. First of all, the German wastewater disposal industry in which hanseWasser operates will be highlighted. After that, hanseWasser’s company history, organizational structure, core business and product portfolio will be elaborated upon. Finally, the special role of the materials management function in a service organization will be discussed.
1.1
The German Sewage Disposal Market
In order to grasp the context of the main business field of hanseWasser, first an excursus on the current situation on the German wastewater treatment market will be provided. The information was gathered through interviews with the spokesperson of the German Association for Water, Wastewater and Waste (DWA), employees at hanseWasser, as well as from publications of the Federal Statistical Office.
According to federal and state law, in Germany water supply and wastewater disposal are sovereign tasks that are to be executed by statutory corporations (e.g. municipalities) as part of the obligation to provide services of general economic interests (European commission 2002:44). Since these services are matters of concern of the local communities, they fall under the municipalities’ right of self-government according to Article 28, paragraph 2 of the German Basic Law (ATT et al. 2008:8). These are services which are linked to specific obligations of general interest, and which are connected with the duty of providing for proper fulfilment at all times and all places within the respective municipal draw area (AöW 2008). Therefore, water supply and wastewater disposal services are notably committed to the sustainability concept as well as to environmental protection (Article 20a German Basic Law). Public bodies organizing the water disposal are obliged to operate cost-covering, and thus non-profit oriented, to keep the disposal charges for the citizens at a stable level.
According to the German Association of Energy and Water Industries (BDEW), Germany counts around 6.400 water supply and more than 6.900 public wastewater disposal organizations (BDEW 2008:13). In 1996, the German “competition policy” was amended leading to the deregulation of the territorial protection of the gas and energy market. Attempts of enforcing the same for the water market were blocked by the German parliament. For the time being, the supply and disposal of water thus remain locally restricted. The territorial protection is justified with the sensitivity and significance of the infrastructure for the public supply and the dangers connected with a failure of the systems. Sewage disposal and the water supply are limited locally (“natural monopoly”) due to extensive infrastructural investments.
public organizations. Related to the water output, public forms of business organization in the water supply account for 36 percent while the share of private forms of organization amounts to 64 percent (BDEW 2005). In contrast, the share of private forms of business organization in wastewater discharge lies at an estimated 10 percent and in wastewater treatment at 12 percent (each related to the inhabitants covered; BDEW/DWA survey 2003). These figures are not limited to completely privatized companies, and include all private forms of organization, such as public and private law associations. According to sources at hanseWasser, only three to four completely private companies exist in the wastewater disposal sector. Based on the number of public wastewater organizations, the largest share is held by state-run utilities as well as by municipal utilities (see figure 1.1).
Water is an emotional subject and therefore fears are associated with the privatization of such an important resource. One fear is that the public eye loses control over water resources and that necessary investments in the maintenance of expensive infrastructure will perish in the prospect of fast earnings (Bättig 2003:2). The large differences in the degree of private organizations between the water supply and wastewater disposal sectors are grounded in existing legislation. While both are sovereign tasks, the contamination of water is prosecuted more strictly than impurities of drinking water. In the wastewater treatment process, the contamination of wastewater is an imminent danger however, and can be disciplined by fees amounting to millions. As a consequence, companies restrain from engaging in this business field.
To a large degree, the hesitant attitude towards privatization is also based on contorted competitive conditions: while public bodies are exempt of turnover tax (VAT), private operators are required to pay them. Although the European Union had been discussing a general taxation of public and private water disposal services for years (Board of Trade 2003), the German Parliament has declared the correctness of existing jurisdiction in 2006. In addition, the wastewater disposal charges of private organizations are not allowed to surpass the level of charges of public bodies. Hence, while receiving the same income of wastewater charges as public operators, private operators are required to generate additional profits to cover turnover taxes as well as any desired net profits. In order to justify their existence financially, private organizations thus have to work more efficiently and
Interests 11% Others 4% Municipal utility 39% Institution under public law 8%
Special purpose and water association 17% State-run utility 32% Interests 11% Others 4% Municipal utility 39% Institution under public law 8%
Special purpose and water association
17% State-run utility
32%
profitable than public bodies. Until this competitive discrimination in favour of public operators will be abolished by law, further privatization attempts are unlikely in the wastewater disposal industry.
Nonetheless, bodies providing wastewater disposal are increasingly using entrepreneurial instruments, even if the undertaking itself has a public legal form. In some cases, municipalities have converted their water companies into private legal entities to be able to act more flexible on the market (Atzmüller & Hermann 2004:107). Also, cooperation is one instrument to improve efficiency and effectiveness towards a sustainable water management. Cooperation can take place between two water supply utilities, between two wastewater disposal utilities and/or and between a water supply utility and a wastewater disposal utility (Ludin et al. 2000:13). A restricting factor in the communal cooperatives is the length of the subterranean water feeding pipes from the municipality to the treatment facility. Once these exceed a certain length, the transport time will be too long which can cause an ecological collapse of the wastewater. The wastewater then blocks the feeding pipes and can no longer be channelled into the treatment facilities.
Private wastewater utilities on the other hand, are mainly active by means of management or operator contracts. An operator contract is a contractual agreement between the owner and the operator of a certain facility in which the operator agrees to cover all activities required for a smooth operation of machines and the plant as a whole in accordance with the economic plans of the owner. For operator models the municipality puts out a contract to tender, to receive bids from interested organizations. In all cases the type of operation mode chosen is usually attributable to the operating costs.
Cost structure in the wastewater disposal
A main characteristic of the wastewater disposal industry is the comparatively large percentage of fixed costs (e.g. for the maintenance of the mains). Approximately 75 to 85 percent of all incidental disposal costs (e.g. depreciation,
interests, personnel) accrue independently of the amount of wastewater discharged and treated (DWA/BGW 2005:3). Wastewater technology includes durable assets whose acquisitioning and manufacturing costs are usually spread throughout the entire useful economic life (mains: ~50-80 years, treatment plants: ~15-20 years). As illustrated in figure 1.2, depreciation and personnel costs form the largest
cost pool in the calculation of the sewer charges. Interests amount to 20 percent of all costs, while energy and materials costs as well as maintenance costs each accrue to 6 percent. About 3 percent
are allotted to the treatment of sludge, and disposal charges payable by wastewater disposal organizations (DWA/BGW 2005:4).
In the case of non-public operations, cost management is practiced through long- term service agreements. Contract durations of twenty to thirty years are common as short-term contracts usually do not offer large enough total savings to cover capital investment needs. The kind of operating and capital changes required to generate 20 percent and greater savings in operating costs take time to implement. Long-term contracts allow both sides to share and spread risks most appropriately and efficiently, and implement a broader range of cost saving measures (Moore 2001:2).
The situation on the German wastewater market can be summarized as being highly regulated and cost-intensive and only moderately interesting for private companies due to territorial protection and long-term contracts. While the water supply sector has opened up to private forms of business organization, strict legislation largely reserves the wastewater disposal to public bodies. As long as German legislation will keep up the obligation for private organizations to pay turnover taxes, it is unlikely that more private organizations will enter the market.
After describing the general market situation, attention will be directed to the company under investigation in this thesis.
1.2
Introduction to hanseWasser Bremen GmbH
Being the first entirely privatized wastewater disposal company in Germany, hanseWasser Bremen GmbH1 has been offering its services on the open market since 1999. Keeping in mind the information provided in the previous paragraph, in the following the organizational development of hanseWasser Bremen will be described, followed by an overview of its core business and product portfolio.
1.2.1 Company History and General Information
Until the year 1992, all waste disposal activities in Bremen were managed and provided for by the communal ‘Disposal Services Bremen’ (BEB). In 1992, all tasks related to the wastewater disposal were migrated to the associated company ‘Wastewater Bremen’. Due to large financial arrears, the city of Bremen decided to privatize the company in 1999 and rename it to “hanseWasser Bremen”. The privatization of the wastewater disposal was an experiment and not grounded on experiences of other municipalities. In the same year, all remaining formerly communal public utilities were privatized and clustered in a stock corporation, the swb AG. Against the background of the energy market opening, the areas of energy generation, mains, and sales were spun off as legally autonomous subsidiaries.
1
Figure 1.3: Structural embedding of hanseWasser Bremen As part of the privatization, hanseWasser was created to take over the wastewater disposal services from “Wastewater Bremen”. Within the scope of a public private partnership (PPP), hanseWasser now has two shareholders: the Free Hanseatic city of Bremen (25,1%), and hanseWasser Ver- und Entsorgungs-GmbH (74,9%) which is an investment company of swb AG (51%) and Gelsenwasser AG (49%). The company structure is visualized in figure 1.3. The corporate organization of hanseWasser is locally based in Bremen.
HanseWasser runs and maintains a 2.300 km long sewage network and annually processes around 55 million m3 foul- and rainwater in its two clarification plants in and around Bremen. In 2006, hanseWasser had 395 employees and generated net sales of approximately 85 million Euro. Based on a
service level contract, hanseWasser is responsible for the disposal of wastewater of the city of Bremen as well as of several other neighbouring communities until the year 2028. Within the scope of the contract, hanseWasser has agreed to keeping up the functionality of the mains and other subterranean installations by yearly investments of 14 million Euro. All superterrestrial installations, such as pumps and power plants, are property of hanseWasser. After expiration of the service level contract in 2028, all capital assets, thus the mains, will be returned to the city of Bremen and the disposal services will have to be reorganized (Annual Report 2006).
The organization structure, which is provided in Annex A, is based on two divisions: the Engineering division and the Finance division. The technical division is subdivided into the business units Mains (N), Waterworks (W) and Wastewater Discharge/Customer Service (KB). Finance covers the business units Central Services (ZD), Sales (VK), and Accounting (FR). The divisions are each managed by an allotted managing director. Furthermore, each business unit is divided into departments and managed and controlled by a divisional manager. The division managers report their performance directly to the managing director of their respective area.
1.2.2 Core Business and Product Portfolio
include the disposal of sewage sludge, engineerial services in the planning and project management of sewage networks, and site development. Furthermore, hanseWasser offers a product called “Full Service Canal”, which provides a comprehensive service package, such as the cleaning, inspection through video analysis, and strategic investment evaluations for public and private sewage systems. In total, the additional services already contribute approximately 15 percent to the total turnover.
After describing the market environment and the company background at hanseWasser, the focus will shift to a more operational perspective. Due to the large amount of fixed costs, the materials management takes in a special role in the wastewater disposal industry. The special status will be evaluated in the following to bring out the relevance of the main topic of this research.
1.3
The Materials Management Organization
Contrary to a manufacturing organization, the purification process at hanseWasser requires no continuous supply of raw materials apart from the wastewater which automatically enters the process. The resulting consequences for the materials management function within hanseWasser and the major tasks and responsibilities will be described in this paragraph.
1.3.1 Materials Management in a Service Organization
Materials management tasks such as planning, sourcing, purchasing, moving, and storing of materials are typically found in a manufacturing company converting raw materials and components into consumer and industrial goods. HanseWasser on the other hand is a utilities company with a fixed infrastructure and facilities network whose main task is the disposal and purification of wastewater. In that context, hanseWasser can be defined as a service organization.
The water purification process at hanseWasser is fully automated and requires no continuous supply of raw materials. In a simplified form this process is visualized in figure 1.4.
In order to protect water from contamination, hanseWasser is not allowed to discharge wastewater unless the pollutant load is kept as low as possible using the best available techniques (Section 7a, §1, Federal Water Act (WHG)). Due to the criticality of the functioning of the facilities for maintaining the productivity and security of the operations, the continuous monitoring and maintenance of the sewage network and the treatment facilities takes priority within hanseWasser. Maintenance measures are defined in the context of the DIN-standard 31051:2003-06 („Fundamentals of maintenance“) as the optimization of the rate of wear to prevent the occurrence of system failures. European and German legislation set high requirements with regard to the quality of drinking water.
Figure 1.4: Simplified wastewater treatment process
Cleaning process
Waste water Clean water
Regular maintenance of critical equipment is necessary to safeguard the smooth flow of the water purification processes and comply with the strict legal regulations concerning the purity of drinking water (DIN 2000). Non-compliance with the tolerance values as dictated by the German Drinking Water Ordinance2 (section 2, §5 and §6, TrinkwV 2001), general requirements for drinking water (section 1, §5 and §6, TrinkwV 2001) or both (§7, TrinkwV 2001) will be sanctioned by fines amounting to millions and/or the shut-down of the facilities3 (Höll & Grohmann 2002:663). The compliance is supervised by the technical departments that are responsible for diagnosing materials or system failures. Depending on supplier warranty requirements and the level of difficulty, repairs can be conducted internally by hanseWasser technicians. The supply of replacement materials and external services is ensured by the purchasing department.
This has consequences for the prioritization of the materials management activities at hanseWasser. While manufacturing companies are dependent on a regular supply of (raw) materials, hanseWasser requires a timely availability of replacement parts and maintenance resources to safeguard the functioning of its facilities. The scope of the term materials management therefore needs to be expanded to include the management of (external) services and resources. Materials management tasks at hanseWasser are a consequence of two main materials and service groups:
• Directs: All new or replacement products or services acquired or provided by hanseWasser
used within any maintenance or productive process;
• Indirects: All products and services acquired by hanseWasser which are not used in any
maintenance or productive process and not intended for sale, e.g. office materials or computer services.
The ability to plan the materials management activities distinguishes the two groups and has consequences for the prioritization of the different materials management tasks. Direct materials and
services are requisitioned either by the maintenance department as a result of planned or unplanned
maintenance activities or by the respective departments in combination with planned investments. The planning of both long and short-term maintenance activities and the inherent demands is conducted by the maintenance department. While hanseWasser has a storage strategy in accordance with critical materials demands, services cannot be kept in stock. The locations where maintenance activities take place change and the planning of materials and resource demands is subject to a number of unknown variables. Many materials management activities regarding direct demand occur reactively, in response to unplanned failures. Of the purchasing volume of all maintenance activities in 2006, 63 percent were spent in repairs and corrective maintenance. In these cases, materials management is limited to ad-hoc purchasing to provide for the logistical availability of goods and services for the respective requisitioners.
Demand for indirect materials occurs anywhere in the organization and is covered situatively. The main contribution of materials management for indirect inputs is the provision and updating of the
2
Drinking water ordinance refers to the German Trinkwasserverordnung (TrinkwV).
3
procurement infrastructure, i.e. negotiated framework agreements and catalogue availability for e-procurement.
Chapter 2 Research Outline
This chapter describes the research project conducted at the materials management department of hanseWasser in Bremen. First of all, the background and motives for the research will be explained. Then, the objective of the research and the research questions will be described. After that, the conceptual model and the methodology of the project will be shown and the structure of the report will be discussed.
2.1
Problem Analysis
In order to formulate a thorough problem statement it is necessary to know what the problem exactly amounts to. First of all, a short overview of hanseWasser’s considerations regarding the materials management function is presented. After that, the starting point for this research within hanseWasser will be presented.
2.1.1 Reasons for Research
The treatment of wastewater is a cost-intensive process requiring a lot of energy, human resources and replacement investments. Due to stringent water quality guidelines, materials have a short lifetime and high maintenance requirements. The cost structure of the wastewater disposal business does not leave much leeway as approximately 85% of all expenses at hanseWaser are fixed. Water treatment facilities count among the most expensive and most intricate infrastructural facilities. Against this background the implications for the materials management, and especially for the procurement function become visible. A company whose main asset and task is the upkeep of the flawless functioning of technical equipment can draw high profits from a well organized procurement. According to Johnson et al. (1998:10), procurement has an integral part to play in the composition of a company’s competitive positioning in the markets.
Up until now the materials management function has not been acknowledged the due importance within hanseWasser. This has to do with the task distribution in the technically-oriented water supply business which is characterized by a ratio of approximately 25% commercial and administrative tasks and 75% technical tasks. The prioritization of the technical functions within hanseWasser can have repercussions on the cost effectiveness of the commercial performance. As private organizations such as hanseWasser are required to work profit-oriented, they have to find a healthy balance between technical and commercial requirements and require highly efficient (administrative) processes to manage the technical tasks suitably.
reduction of transaction costs of the following fields: long-term supply contracts, flow and execution of business processes, the organizational structure, skilfulness of the employees, task distributions, process automation and demand planning by means of SAP. An overview of the target areas is provided below.
Even though it is clear that the current situation offers room for improvement, a detailed overview of the savings potential that could be activated is lacking. HanseWasser has formed internal work teams to develop proposals for the amelioration of internal processes in the mentioned areas. For the analysis and review of the organization of the materials management department, hanseWasser decided to hire external support and agreed to an analysis of this topic within the scope of a master thesis project. The research project was thus instigated by the desire to obtain an overview of the financial potential through process and organization improvements in the materials management department at hanseWasser. At the time this research was conducted, the internal process of restructuring business practices was still going on.
2.2
Problem Statement
The problem statement consists of the objective of the research, the research question and the preconditions, and has been formulated in agreement with the needs and wishes of the clients of the process. It constitutes the link between the specific problem in actual practice and the link with theory, which can be considered a thinking tool to formally capture reality.
2.2.1 Objective of Research
The research objective determines the constituent of the investigation, the expected outcome and its relevance. The purpose of this research is to analyze the current working of the materials management function and to evaluate areas of improvement. In order to detect savings potentials, both the organizational structure and the processes will be evaluated and mapped with the ideal target state. Based on a comparison of the current and the target state, existing potentials will be quantified.
In order to be able to focus on its core business, hanseWasser requires efficient and effective materials and service management processes. A contemporary set-up of the organizational structure and well-trained employees can make the materials management department a reliable backbone of the organization. Any financial potential that might be realized from achieving process efficiencies through lower transaction costs could be well spent in the upkeep and maintenance of the technical
1. Implementation of purchasing standards: ~ 100.000 €
2. Implementation of favorable price and delivery conditions: ~ 260.000 € 3. Increase of efficiency of purchasing process: ~ 50.000 €
installations. The main objective of this research is therefore to find out if, how, and by how much the efficiency of the current materials management processes can be improved to save on administrative expenditures. Hence, the objective is formulated as:
Analysis of potential areas for improvement in the materials management at hanseWasser and quantification of potential cost savings.
In the next paragraph this objective will be translated into research questions.
2.2.2 Research Question and Preconditions
Based on the objective, a central research question will be formulated so that by answering this central question the objective can be reached. Therefore, the answer of the central question has to lead to an overview of the potential for process improvement and measures to make the materials management function more efficient. The central question of this research is:
Which materials management processes have potential for efficiency improvements and deliver the highest possible financial effects for the organization?
Preconditions
The preconditions relate to the limitations with regard to the method that will be used and to the limitations that make the research feasible (De Leeuw 1996:90). Since this research project should deliver means to improve the hanseWasser specific process and system constraints, the setting in which these potentials are identified must be considered. More specifically, the preconditions for successfully ending this research project are:
The research has to comply with the requirements of the research organization and the demands presented by the faculty of Business and Economics at the University of Groningen;
The research has to be finished within a period of 5 months;
The proposed means to improve the encountered constraints and to activate the potentials should comply with internal rules and guidelines;
Successful cooperation between researcher and supervisor is necessary;
The cooperation of those persons that have initiated this research and who might be affected by its results;
The answers to the sub-questions should be relevant and connected to the existing problems.
2.2.3 Phase Model of the Research
Orientation Phase
Analysis Phase
Design phase
Company Introduction Company Exploratory Interviews Company Exploratory Literature Research Map Processes of materials management at hanseWasser as-is state Project plan and project definition Analyze business environment target state Analyze literature on materials management and demand planning Gap analysis of target and as-isstate Qualitative and quantitative analysis Derivation of (cross-functional) savings potentials Final report Conclusions and recommendations
Figure 2.2: Phase model of research project
for improvement and savings. For this research the objective is to use the phase model to outline the structure of this thesis. The model therefore includes the fundamental stages that will be passed through to identify potentials and suggest means of improvement. It also serves as a starting point for the definition of the sub-questions. The model is visualized in figure 2.2.
The goal of the orientation phase is to explore the organization and context of the project. Before the start of the project, literature research related to the subject was conducted and general documentation related to the company was studied. Then, after the official start at the company, several exploratory interviews have been conducted with the main stakeholders of the project and the company processes were mapped. Also, the role of purchasing within the materials management department and the relationship to other internal stakeholders has been analyzed. Finally, a project plan was set up and the objectives of the project, research questions, and the main deliverables for hanseWasser were defined.
In the analysis phase, literature research into the field of materials management and its bordering areas has been conducted. Also, literature related to the determinants of strategy and the organizational set-up and purchasing processes was investigated. Based on this information and the results from semi-structured interviews, the POP-model has been applied to hanseWasser to derive the ideal policy and organizational structure for hanseWasser. The resulting characteristics were then matched with the current strategy and processes in the materials management department at hanseWasser to discover gaps.
which they were quantified by comparing data from hanseWasser with benchmark data of other organizations. Also, the costs of the separate processes were analyzed by means of assigning costs to separate processes (Activity-Based-Costing). Based on these results, assumptions were made regarding the impact of changed processes on transaction costs and savings potentials for the organization were derived. Finally, conclusions and recommendations regarding the realization of the proposed changes were provided and areas of further research were pointed out.
It should be noted that this research focuses mainly on the design of the processes and the organization as a lever for improvement. While processes undoubtedly have to be embedded in the IT-infrastructure, suggestions as to how this should be accomplished were not the aim of this research. Generally, it is assumed that in order to achieve benefits realization, the underlying processes must be regarded and improved first before the IT-system structure can follow.
2.2.4 Sub-questions
Since the research question is too broad to answer at once, it will be divided into sub-questions that are based on the phase model.
1. How has the terminology of materials management evolved and how can it be classified with respect to the terms logistics and supply chain management?
This question is purely informational of nature and will help to obtain an understanding of the environment of this research. By means of a literature review, it will be shown how the terms have evolved across time and how they can be classified according to their current understanding in literature.
2. How does the ideal target state look like for hanseWasser with regard to the strategy, organizational set-up and the processes of the procurement function?
The target state of the procurement organization will be derived in a step by step process by applying the POP-model by Kamann (2001). The model advocates that the policies (P), organization (O) and processes (P) should be congruent with the strategy and environment for an organization to be effective. The procurement department should reflect the POP-elements of the total organization as procurement can largely contribute to the organization's success. Along with the application of the model, the ideal purchasing portfolio will be determined, based on which the ideal organization and purchasing processes will be developed.
3. How do the purchasing strategy, the organizational set-up and the purchasing processes currently in place at hanseWasser look like and how are they related to the overall company strategy?
situation they are in place, the strategic importance of the processes, and how the different steps are built up. The gathered information will be reviewed in line with the theory of the POP-model.
4. Which type of measurement method is best suited to measure the discovered gaps between the target and the current state in the materials management at hanseWasser?
For this question different performance measurement systems and/or techniques in the fields of procurement will be evaluated. It would go beyond the scope of this project to analyze all available literature in this field, so limits were drawn. This research will be clustered according to three main fields: integral performance measurement systems, cost accounting methods, and benchmarking. The authors that will be studied are Kaplan and Norton (1992), Neely (1999), Elmuti & Kathawala (1997) and Kamann (2001) amongst others. In order to determine the right measurement method the available information or data must be known as well as for what purpose the method will be used, the type of process it will be applied to, and the strategic importance of that specific process. With the help of this information it is possible to determine the appropriate measurement technique for the determination of potentials at hanseWasser.
5. How can results of the measurements be turned into statements of potentials (in €)?
In order to answer the central research question, the determined gaps must be translated into financial figures. The potential benefits from the realization of the targeted changes can only be estimated based on current costs. The current costs can be ascertained through assigning the total costs to the separate process steps by means of Activity-Based-Costing. After the current costs are known, assumptions can be made as to the effects of changes on the time required for the execution of the separate processes. Based on the assumptions, the costs can be recalculated for the processes. The potentials are then the results of the actual and the newly calculated costs.
2.3
Methodology
In this paragraph the design of the research process will be outlined. First of all the type of research will be outlined, after which the data collection methods and sources are discussed.
2.3.1 Type of Research
Scientific vs. Practical researchThe knowledge products this research project has to produce are:
• A theoretical classification of the terms materials management, logistics and purchasing;
• an analysis of the ideal materials management strategy, organizational set-up and processes;
• an analysis of the current materials management strategy, organizational set-up and processes at hanseWasser;
• a gap analysis between the ideal and the current state of affairs;
• an overview of the potentials for improvement at hanseWasser;
The results of the research will be reported to both the central services department and the materials management department.
Problem-solving research
De Leeuw (1996:77) distinguishes five different types of research, namely:
1. Pure scientific research 2. Society relevant research 3. Policy-relevant research 4. Policy-supporting research 5. Problem-solving research
The prototype of scientific practical research is problem-solving research. Problem-solving research is aimed at the creation of knowledge about necessary or in any case sufficient measures to solve management problems. It is, unlike policy-supporting research, integral. This research project will be problem-solving of nature. It aims at giving an answer to the complete need for knowledge in order to solve the problem in terms of a lack of insight into the potential for efficiency improvement in the materials management department (De Leeuw 1996:201).
2.3.2 Data Collection and Data Sources
Research data will be collected by means of both desk and field research. Desk research exclusively makes use of documents. It consists, among other things, of literature study and the analysis of written documents. Written documents are primary data sources, such as for example books, magazines, reports, and minutes. A report from another research project is an example of a secondary data source. Both primary and secondary data sources will be used during this research project.
Furthermore, individual and group interviews can be distinguished. For this research primarily individual, relatively open (semi-structured) interviews will be applied, in which the interviewee has the possibility to put forward matters that can bring about insight for the interviewer.
For the analysis of the current materials management processes, internal data sources will be applied. Moreover, semi-structured interviews with employees in the involved departments are arranged, i.e. with the materials management and the maintenance department.
2.3.3 Structure of Thesis
The structure of this report, described in figure 2.3, is based on the way this project will be conducted and describes the project process in the most logical way.
After the first and the second chapter, which describe the main part of the orientation phase, the analysis phase is covered in chapters three to five. In chapter three, the theoretical context of the materials management function is scrutinized by means of analyzing important literature. In chapter four, the ideal target state of the procurement strategy, policy and organization is sketched out based on the application of the POP-model (Kamann 2001). The current strategy and processes will be evaluated in chapter five by tracking different types of demands on their process routes from origin to order fulfilment.
Based on the results of the analysis phase, these findings will be critically analyzed with regard to the target state in chapter six and then measured by means of benchmark data. Chapter six will be concluded with an overview of the areas of potential improvements and an estimation of the savings potentials. Finally, recommendations and conclusions regarding this project are drawn in chapter seven.
Figure 2.3: Structure of thesis
Orientation Phase
Analysis Phase
Design phase
Chapter 3 Theoretical Embedding of the Materials Management
Function
In this chapter materials management will be presented in its theoretical context. In order to introduce the field of research, the terms materials management, logistics, and supply chain management will be classified according to their tasks and functions in the organization. Further on, the development of strategic procurement will be described. After this, the difference between the terms procurement and purchasing will be discussed and explained with regard to their strategic and operative activities. Finally, the stakeholders of the procurement function will be introduced and exemplified by describing the conflicting objectives of the maintenance and the procurement departments.
3.1
Classifying Materials Management and Logistics
In the past decades the term materials management has experienced numerous changes of meaning. In the 1950s, Erwin Grochla was the first in Europe to recognize the relevance of materials management as a corporate function. Gradually he expanded his concept towards an “integrated materials management” (Grochla 1978:13) and contributed decisively to the acceptance of its potential for success next to the fields of production and sales. Today Grochla´s concept is partly outdated however due to his very narrow view on ‘materials’ which would not consider investment goods and services as relevant management objects.
Nowadays, the term ‘materials’ comprises all objects relevant for the production of goods and services. It can be sub-divided into classes, such as raw and auxiliary materials, utilities, vendor parts, commodities, services, investment goods, disposal objects, and tools. These input factors are economically scarce, so they are to be managed according to the economic principle. The economic principle states that in an environment of scarcity, inputs and outputs are to be balanced economically in order to reach individual objectives (e.g. profit maximization or utility maximization). The required management tasks encompass the planning, organization, and control of materials. In order to fulfil these tasks, the materials management is to be installed as an additional structural subsystem besides the R&D, production, and marketing functions. It involves all purchasing and provisioning tasks required for the efficient production of goods and services across all added value levels of the company, as well as the inherent planning and controlling measures (Busch 1984:92). The term materials management can be defined as the function of business responsible for “the coordination of
planning, sourcing, purchasing, moving, storing and controlling materials in an optimal manner so as to provide service to the customer, at a pre-decided level and at minimum cost” (Gopalakrishnan &
Figure 3.1: Differentiation of the scope of materials management Disposition Storage Purchasing Internal Transport Distribution Disposal Narrow view Extended view Integrated view To storage location From storage location to consumer Disposition Storage Purchasing Internal Transport Distribution Disposal Narrow view Extended view Integrated view To storage location From storage location to consumer
An integrated materials management forms the highest level of development as it possesses the largest potential for integration with the core functions. The integration of the various functions served by materials management is important to prevent a conflict of interests among each other or with corporate goals occurring as a result of a separate handling (Schönsleben 2007:96). Under a separate set-up, for example, the procurement function might regard discounts as an important factor and purchase large quantities without taking into account its impact on costs of working capital (interests) and costs of the physical stock keeping (building occupancy, personnel) (Wannenwetsch 2002:16). An integrated materials management on the other hand is able to balance the conflicting objectives from a holistic viewpoint so as to achieve optimum results for the organization as a whole (Gopalakrishnan & Sundareshan 2004:6). However, it is not to be understood as a universally applicable organizational model, but rather as a philosophy of active networking between the core functions independent of their organizational structure (Fieten 1994:16).
Through the integration of the distribution function in the materials management, the term logistics has gained importance. Jünemann (in: Ehrmann 1997:24) has formulated the six tasks of logistics as to deliver: “the right amount, the right objects, in the right place, at the right time, in the right quality,
and at the right costs.” Schulte (1991:1) has a more comprehensive understanding of logistics as a
trans-sectional function with the integrated “... planning, design, handling, and control of all flows of
material respectively information from the supplier into the organization, within the organization as well as from the organization to the customer.” According to this definition, decisions are not taken
The positioning of logistics and materials management within an organization depends on various factors. These include the product structure, the core competence of the organization, the contribution of logistics to the organization’s value creation as well as the influence of the logistics function on general management (Wannenwetsch 2002:12). Another influencing aspect is the range of responsibilities of logistics, and the subordination of the different tasks to the logistical performance. For example, in some organizations, logistical tasks are narrowly defined as the picking, packaging and transport of goods, while the materials management might comprise tasks such as quality control, internal transport, inventory management, and goods receipt. The example illustrates that in practice the definition and classification of the terms materials management and logistics varies and tasks might also overlap. The similarity of the definitions and the fields of application prove that in literature no clear demarcation is available for the terms logistics and materials management. Some authors regard logistics as part of materials management (Fieten 1990:9; Hartmann 1991:26), while others define it as a subsystem of logistics (Eschenbach 1990:31; Brecht 1993:258). Again others believe that logistics and materials management should be considered as equals with separate scopes; this can however entail the overlapping of tasks and lead to interface-conflicts (Männel 1990:22).It is sure however that both concepts play a substantial role in the functioning of the internal and external
supply chain which “...covers the management, coordination, and integration of all materials, products, and information flows from upstream suppliers to downstream customers” (Schönsleben
2007:95).
3.1.1 Strategic Relevancy of Materials Management
Increasingly, managers view the materials management tasks as intimately linked parts of the supply chain, each with the ability to contribute strategically to the firm’s success. Today’s time is characterized by a fast pace of change and the development of global markets. Both the number of products and services on offer and the speed of change of the customers’ expectations and demands have increased and led to ever shorter product-life-cycles. The goals of satisfying the customer with regard to quality and timeliness and at the same time maintaining or increasing the competitiveness of an organization leaves materials management with the strategic task of harmonizing areas of conflicting interests (Wannenwetsch 2002:15). In this context, materials management noticeably loses its pure provisioning function that it once derived from the production process, while other tasks like make-or-buy decisions gain importance. This shift is related to the fact that in many organizations materials form the largest single expenditure item. An analysis of the financial statements of a large number of private and public sector organizations indicates that materials account for nearly 60 percent of the total expenditure (Wildemann 1996:7). Thus the importance of materials management lies in the fact that any significant contribution through reducing materials costs will lead to improvements in profitability and the rate of return on investment (ROI). A calculatory example (in: Gopalakrishnan & Sundareshan 2004:4) will illustrate the effect:
sales turnover by 30 percent in a specific span of time so that overall profits will reach 1,3 million €. The other alternative would be to reduce the materials costs by 5 percent in a certain time, so as to achieve an increased profit margin of 0,3 million €. In other words, reducing the materials costs by 5 percent would have the same effect as increasing sales by 30 percent. In this context, saving 1 € in materials cost is almost equal to the efforts made for additional sale of 6 €.
Strikingly simple examples such as this one are to be regarded with caution and with respect to the business environment of every company. While an increase of sales might appear unreasonable in light of additional advertising efforts, a reduction of materials costs appears to be an easier option. In the endeavour of cutting materials costs, the consequences of increased administrative efforts and organizational costs are often disregarded however. According to Kamann (2004:1), many companies that have cut materials costs found that the invoiced costs went down indeed, but the organizational costs went up at the same time, thus leaving a net negative result at the end in terms of total costs. Nonetheless, the strategic management of costs for material (and service) inputs under consideration of all materials-related tasks remains an important aspect of an integrated materials management. This is especially true in a business field such as that of wastewater disposal, in which growth potential is limited both by natural and legislative limitations.
Materials management encompasses both strategic and operational challenges: Strategic tasks concern the securing of existing and the creation of new potentials for success; operational tasks refer to making optimal use of the existing potentials. Potentials are sources from which an organization can draw financial (low purchasing costs) and non-financial (good reputation) success (Osburg 1994:27). The materials management function is directly affected by the dynamics of the corporate surroundings, i.e. turbulences on supply markets, changes in law (taxes, norms), or changes in monetary parities (Osburg 1994:31). It is therefore not sufficient to rely on operational success realization alone. Durable success in materials management postulates an optimal use of the existing potentials which are in the first place to be created by strategic planning and decision-making.
A prerequisite for the realization of a strategic process is the recognition of own strengths and weaknesses and the involvement of senior management which has the role of initiating and enforcing the implementation of changes. A Delphi-study conducted by the Schmalenbach Society confirms that restricting the materials management function to operational tasks is the reason why many market opportunities remain unexploited and why acquisitions of inapt and infunctional materials and equipment occur (in: Eschenbach 1990:37). The goal of the materials management function is therefore to minimize all costs related to the acquisition and supply of materials and services. This includes the direct and indirect purchasing, storage, transport, and disposal costs (Wöhe 2005:540). Purchasing, as an input-function to the materials management, takes a special role because it largely influences the final cost structure of a product which has direct consequences for the financial performance of an organization.
3.2
The Advent of Strategic Procurement Management
In line with materials management, the role of purchasing has experienced a fundamental change in many organizations during the past two decades. Traditionally, purchasing has had a rather obscure position in most companies, and was considered to be dealing with purely operational issues, such as placing orders and receiving deliveries from suppliers (Hines 1996:3). Nowadays however, the role of purchasing among organizations’ activities has become more and more important. Gadde and Håkansson (1993) argue that the importance of purchasing has grown in several industries as a result of increasing specialization. The more developed a society becomes, the greater the degree of differentiation and the more specialized units in organizations can be anticipated. In other words, the needs of the customers have become more sophisticated and therefore the offerings provided by companies are more differentiated as well. As the customer requirements are not only diversifying, but also tightening in relation to the quality and added value of the end products, companies are increasingly faced with the need to improve their performance across a variety of categories, including purchasing (Trent & Monczka 1998:4). Thus, the purchasing function has to be more sophisticated in order to ensure the effectiveness of the company.
In this context, purchasing can be seen as having evolved from a mere buying function to playing a relevant strategic role in many organizations (Gadde & Håkansson 1994). Within the scope of an integrated materials management, the strategic relevance originates from the location of the purchasing function on the input-side of the flow of goods (Wannenwetsch 2002:46). Since the typical manufacturing firm spends approximately 60 percent of each sales Euro on purchased components, materials and services from external suppliers, final products are significantly affected by the performance of external suppliers in terms of cost, and quality (Wildemann 1996:5). This is equally true for the wastewater industry whose processing quality depends on the maintenance activities performed by mostly external suppliers.
The purchasing function is largely responsible for (1) determining the characteristics of purchased materials, components, and services, (2) selecting suppliers capable of providing the required items at adequate levels of quality and price, and (3) managing the transaction so that the goods or services are delivered in a timely manner (Burt 1989:47). Purchased items can be classified into four main categories (PWC 2008):
1. Direct materials, such as parts and materials that are components of the company's product; 2. Indirect materials, which are necessary for operating the company but are not components of
the product, such as maintenance, repair, and overhaul (MRO-) supplies; 3. Capital goods, such as plants and machinery;
4. Services, such as travel or contingent staffing.
