Improving the supply base

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Faculteit Bedrijfskunde

Improving the supply base

The approved supplier portfolio

Sjoerd Trompetter Student number: 1095986

University Supervisors:

Prof. Dr. D.J.F. Kamann Dr. J. T. van der Vaart

Company X Supervisor:

L. Warnaar

Groningen, August 2004 Rijks University, Groningen

Technical Business Studies

The author is responsible for the contents of this thesis; the copyright of this thesis lies with the author

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Faculteit Bedrijfskunde IMPROVING THE SUPPLY BASE

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Preface

This is the report of my Master Thesis project of my degree Technical Business Studies at the Rijks University of Groningen. From February ’04 until July ’04 I performed a research project at the Euro Supply Management (ESM) department of Company X Foods Europe in Vlaardingen.

This research project aims to look for improvements in the supply process of dairy materials for Company X Foods Europe. Problems with approving suppliers and the approved supplier base, identified by the ESM-Dairy Group, formed the starting point for this research.

During the past six months I have learned a lot about Supply Chain Management and Purchasing, of what my knowledge before this study was minimal. The combination of studying the theory of purchasing and at the same time experiencing the practice in Company X was very interesting for me.

I have enjoyed it to be able to work for six months in a very international environment with people from different countries and backgrounds. The travelling that came with this was a nice beneficiary as well.

I would especially like to thank Leen Warnaar for supervising and coaching me all these months and for giving me the opportunity to fulfil this research. I would also thank Prof. D.J.F Kamann for supervising my research, providing me with fresh insights and for making sure that I kept a clear view of the situation.

Sjoerd Trompetter Vlaardingen, August 2004

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Executive Summary

This study aims at improving the supply of Dairy ingredients for Company X Foods Europe. Problems with approving suppliers and the approved supplier base, identified by the ESM-Dairy group, formed the starting point for this research. The main problems are that for a number of ingredients there are not enough suppliers approved, for a number of ingredients the preferred suppliers are not approved and for a number of ingredients the specifications are not complete and are not signed by the supplier. The scope of this research is limited to the Dairy Purchasing Group, however the findings of this research can be useful in the other ESM Purchasing Groups as they face similar problems.

The main research question of this study is formulated as the following:

In what way can ESM-Dairy optimise their approved supplier base in order to secure the supply of specified products, generate cost savings, facilitate innovation and reduce complexity?

This problem was approached by a Business Process Redesign method that through systematic redesign aimed to identify and understand existing processes and to adapt these processes to deliver the desired outcomes. First the As-Is situation was studied, entailing the current goals, policies and organisation structure. Secondly, the goals where evaluated and adjusted and policies to realise those goals were determined. Thirdly, tensions between the new goals and the current organisation structure where identified and the requirements for the new organisation were determined. Finally, the new organisation was described and recommendations to the Dairy Purchasing Group were made.

In the study of the As-Is situations of ESM-Dairy the following observations were made and problems were identified:

• The approved supplier portfolio is for a large part an inheritance of the pre-ESM era and is not optimal at the moment.

• There are currently too many suppliers supplying to ESM-Dairy.

• There are currently too many different ingredient specifications.

• There is no clear guideline for the number suppliers to approve per ingredient.

• There is no clear guideline for the kind of relationship to pursue with different suppliers.

• Supplier approvals are organised separately per Sourcing Unit and there is no standard procedure for supplier approvals.

• ESM-Dairy uses a Kraljic matrix to classify their ingredients not always correctly. The Kraljic matrix is an efficient base model, but it does not capture all elements necessary for assessing the optimal approved supplier base.

• There is no clear specification management strategy.

• E-procurement has been introduced, but the added value so far has been minimal.

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• Tasks and responsibilities that concern more than one Category or Business Group are not always clear.

After the study of the As-Is situations the To-Be goals where formulated. The function in the organisation has not been changed. Additional focus on control and flexibility were identified as internal goals. In order to make an adequate product classification and to determine the desired supplier base strategy the Purchasing Cube was introduced. This, Cube in combination with the goals of ESM-Dairy, resulted in a guideline for the MGMs to help them decide the number suppliers to approve and the kind of relationship with suppliers to pursue. This model provides a helpful guideline but is based on theoretical aspects and in practice critical incidents from the past and subjective factors can lead to deviant behaviour.

To realise the To-Be Goals a several policies have been suggested:

• Standardisation and harmonisation of ingredients

• Reduction of the supply base

• Approval of additional suppliers

• Value creation through suppliers and innovation

• E-procurement

The priority of ESM-Dairy should be first on standardisation of ingredients and then on reducing the supply base. Finally, extra suppliers can be approved to realise the desired portfolio. Innovation is only interesting for a number of dairy ingredients. ESM’s main focus should be on cost rationalisation, problem solving and communication with suppliers and users. Joint value analysis is interesting for the more complex ingredients (figure 7.2). ESM can also create value for their suppliers and can benefit indirectly from that.

In chapter nine, tensions between the To-Be Goals and Policies and the As-Is Organisation have been identified. These tensions set the requirements for the new organisation design. The main tensions are:

• Sourcing Units do not benefit directly from approving additional suppliers but are responsible for the testing.

• No one is currently responsible for cross-Category harmonisation and centralised supplier approval

• There is no clear specification management strategy.

• Suppliers are approved seperately per SU and there is no clear strategy for supplier approval and no standard way of testing.

• There is no uniformity of information throughout the organisation.

• The company structure complicates communication.

Bikker’s six process criteria will be used to match the Policies to the organisation structure. These six criteria are effectiveness, productivity, flexibility, quality of work, innovative strength and control. For the

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design of the To-Be Organisation, the As-Is organisation was the starting point and the To-Be goals and Policies formed the objective of the design. The tensions and requirements gave direction to the design.

First, the organisation of the purchasing function was discussed. ESM should benefit more from the centrally organised purchasing by cross-Category standardisation and central supplier approval. Local and Category managers should be involved in these processes. ESM should facilitate communication, solve problems and look for constant improvements. A better documentation and transfer of information can improve the continuity within ESM.

Secondly, a framework was developed for central or local supplier approval based on how important the SU thinks the approval is and the financial impact of the ingredient. The approval process and the ways of testing ingredients should be standardised throughout SU’s and Categories. Motivation and controlling of the SU’s in the approval process is important.

Thirdly, ESM should develop a clear specification management strategy and should approach specifications for different ingredients differently. The Purchasing Cube can provide a good framework for a differentiated strategy.Finally, the policies discussed should result in clear norms and targets that need to be controlled. These targets should be constantly revised and adapted to the changing environment and to ESM’s function in that environment.

Recommendations

After these conclusions, a number of recommendations to the ESM Dairy Purchasing Group can be made:

¾ The Purchasing Cube and the guidelines developed in this study can provide a helpful framework for determining the number of suppliers to approve per ingredient and for the kind relationship to pursue with the different suppliers.

¾ Approving additional suppliers reduces the risk for an individual supplier not being able to fulfil its obligations. Geographical spread of suppliers reduces the risk of an entire market being affected.

¾ The ESM-Dairy Group should first standardise its ingredients, then reduce its number of suppliers and finally approve extra supplier.

¾ ESM-Dairy should benefit more from centralised purchasing and the responsibilities for cross- Category standardisation and central Purchasing need to be determined.

¾ Supplier approval should be organised following the matrix in figure 10.1. The approval process and the ways of testing need to be standardised.

¾ ESM-Dairy needs to develop a differentiated specification management strategy. The Purchasing Cube can provide a helpful framework for this.

¾ ESM-Dairy should set clear targets, control these targets and evaluate the targets regularly.

If these policies and organisational changes are successfully executed, the approved supplier base of the ESM-Dairy Group will be optimised. These changes can also lead to a reduction of administrative work

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for the ESM-Dairy Group leaving them more time for creative purchasing activities such as finding product and process improvements and solving problems. This can be a good step in the direction of realising a World Class Supply Chain.

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List of Figures

FIGURE 2.1THE GROWTH PROGRAMME STRATEGY... 3

FIGURE 2.2COMPANY X FOODS DIVISION... 4

FIGURE 2.3PORTER’S VALUE CHAIN... 5

FIGURE 2.4 THE PURCHASING FUNCTION... 5

FIGURE 4.1BIKKER’S IST/SOLL ANALYSIS... 15

FIGURE 4.2SIMPLE ANALYSES OF GOALS (IN ’T VELD,1998) ... 16

FIGURE 5.1SUPPLIER APPROVAL PROCESS... 21

FIGURE 5.2 ORGANISATIONAL CHART COMPANY X ... 26

FIGURE 6.1 SUPPLIERS AND SPEND... 30

FIGURE 6.2THE KRALJIC MATRIX... 32

FIGURE 6.2DAIRY INGREDIENT PORTFOLIO... 34

FIGURE 7.1 THE PURCHASING CUBE (KAMANN,2000)... 39

FIGURE 7.2PURCHASING CUBE WITH PRODUCT COMPLEXITY (KAMANN,2000) ... 40

FIGURE 8.1SINGLE AND MULTIPLE PLANTS PER SUPPLIER... 50

FIGURE 8.2VALUE THROUGH SUPPLIERS... 51

FIGURE 10.1CENTRAL OR DE-CENTRAL APPROVAL... 60

FIGURE 10.1 THE PURCHASING CUBE... 67

FIGURE 10.2 THE PURCHASING CUBE WITH COMPLEXITY SLICE... 68

FIGURE 10.3 CENTRAL OR LOCAL SUPPLIER APPROVAL... 69 FIGURE B1ORGANISATIONAL CHART ESM DAIRY PURCAHSING GROUP...ERROR!BOOKMARK NOT DEFINED. FIGURE C1THE DUPONT ANALYSIS...ERROR!BOOKMARK NOT DEFINED.

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List of Tables

TABLE 6.1 APPROVED SUPPLIERS... 29

TABLE 6.2 THE TOTAL SPEND VS. NUMBER OF SUPPLIERS... 30

TABLE 6.3STANDARDISATION POTENTIAL... 31

TABLE 6.4DAIRY INGREDIENTS... 34

TABLE 7.1NUMBER OF SUPPLIERS... 41 TABLE A1STAGES OF DEVELOPMENT...ERROR!BOOKMARK NOT DEFINED. TABLE A2ESM STAGE OF DEVELOPMENT...ERROR!BOOKMARK NOT DEFINED. TABLE D1:AUDIT FREQUENCY...ERROR!BOOKMARK NOT DEFINED. TABLE E.1OVERVIEW OF PORTFOLIO MODELS...ERROR!BOOKMARK NOT DEFINED.

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List of Abbreviates

EDI Electronic Data Interchange ESGM Euro Supply Group Manager ESM Euro Supply Management GMO Genetically Modified Organism HPC Home and Personal Care Division ICF Frozen Foods Category

ICFE Ice Cream and Frozen Foods Europe ICI Ice Cream Category

JVA Joint Value Analysis LSM Local Supply Management MGM Material Group Manager R&D Research and Development RTD Ready-To-Drink Category SCC Spreads and Cooking Category

SKU Stock Keeping Unit

SU Sourcing Unit

QA Quality Assurance

UBFE Company X Food department Europe UPA Company X Purchasing Agreement UPC Company X Purchasing Contract

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1 Introduction

In 1998 Euro Supply Management (ESM) was founded to centralise purchasing within Company X Foods Europe. Euro Supply Management is responsible for the purchasing process of all production items for Company X Foods Europe.

In order to guarantee the high quality of their ingredients Euro Supply Management (ESM) wants to approve suppliers before they can supply to Company X. At the moment, for a lot of products there are not enough approved suppliers and the most preferred suppliers are not approved. This study aims at improving the approved supplier base for the ESM Dairy Purchasing Group. The process for approving suppliers will be evaluated in this study, as well as the ideal approved supplier portfolio and ways to realise that portfolio.

In chapter two an overview of Company X will be given. The role of Euro Supply Management (ESM) within Company X will be described and the Dairy Purchasing Group will be introduced. In Chapter three, the problem of this study will be described; the goal of the research defined and the problem statement will be formulated. Chapter four describes the approach to the problem and the methodology used. In chapter five and six, the current situation is evaluated. The current goals, policies and organisation structure will be described in these chapters, as well as the current approved supplier portfolio. In chapter seven new goals will be formulated, a new classification of products will be introduced and the desired approved supplier portfolio will be determined. In chapter eight, policies to realise these goals will be discussed and in chapter nine tensions between these policies and the current organisation are described. These tensions will set the requirements for the new organisation described in chapter 10. Finally, in chapter 11 recommendations and conclusions will be made.

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2 Organisation overview

In this chapter an overview of the organisation will be given. The role of Euro Supply Management (ESM) within Company X will be described and the Dairy Purchasing Group will be introduced. Finally, a short introduction to the European dairy market will be given.

2.1 Company X

Company X was founded in 1930 with the merger of the British Lever Brothers Limited and the Dutch Margarine Union. At the time, international mergers were unusual, but the owners of the two companies realised that bringing together complimentary businesses with strong global networks would create new opportunities. The companies were competing for the same raw materials, were both involved in large- scale marketing of household products and used similar distribution channels. Between them, they had operations in over 40 countries. In the Thirties, Company X introduced improved technology to the business. The business grew and new ventures were launched in Latin America. The entrepreneurial spirit of the founders and their caring approach to their employees and communities remain at the heart of Company X's business today.

Company X’s mission is to meet everyday needs of people every where-to anticipate to the aspirations of their customers and to respond creatively and competitively with branded products and services that raise the quality of life.

The overall internal goal of Company X is “to be the best Food Company in the world”. The strategy to achieve this goal is “to grow through innovation”. This is the road to sustainable, profitable growth and long-term value creation for the shareholders and employees.

Today Company X is active worldwide in foods, personal care and home/industrial care products and operates in more than 90 countries in all parts of the world. The worldwide turnover in 2003 was over €48 billion of which almost one third came from countries outside Europe and North America. Every day, 150 million people use Company X products to feed their families and to clean their homes. Employing 247,000 people, Company X has two parent companies - Company X NV and Company X PLC – which, despite being separate businesses, operate as a single unit with the same board of directors. Company X's corporate centres are London and Rotterdam.

From 2000 onwards the corporate strategy ‘Growth programme’ is focused on making the organisation less complex and more effective (figure 2.1).To keep up with consumer needs and to increase operating margins, Company X wanted to reduce its 1600 brands to 400 by 2004. Leading brands have moved from 75% of sales in 1999 to 93% in 2003. By consolidating its brands, Company X plans to focus on stronger product innovations, strengthening marketing efforts, building a World-Class Supply Chain, and simplifying business processes. Dubbed Company X’s Growth programme strategy, the company has already

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saved € 1.6 billion via global procurement efficiencies and management expects to save an additional € 1.5 billion by the end of 2004 from restructuring and simplifying processes.

FIGURE 2.1THE GROWTH PROGRAMME STRATEGY

As it enters the final year of its Growth programme programme Company X has recently unveiled its new mission taking it beyond 2004: Company X will build its business by focusing on bringing vitality to life, meeting the growing consumer needs for:

• Healthy life-style

• Convenience, time being an increasingly precious commodity

• Indulgence, with products offering more variety, sensuality and enjoyment.

Company X’s new mission will be “to add Vitality to life. To meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.”

The world Company X operates in is changing. Consumers are increasingly bringing their views as citizens into their buying decisions, demanding more from the companies behind the brands. They want companies and brands they can trust. Company X’s goal is to strengthen its business and reputation, so that its brands are better understood and trusted throughout the world. Therefore the local companies will use the Company X name by 2005, and over the next few years it will be put on all product packaging.

Company X’s operations are organised into two global divisions: Foods and Home & Personal Care with activities at both the regional and global levels. Within the Company X Foods division there are eight regional Business Groups including Company X Food department Europe (UBFE) that was established after the merger with Food department in 2000 and Ice Cream and Frozen Foods Europe (ICFE) (Figure 2.2). Within these Business Groups there are a number of Categories that produce various products. These Categories each have a number of factories (Sourcing Units) and operate throughout different countries (Operating Companies).

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FIGURE 2.2COMPANY X FOODS DIVISION

2.2 Euro Supply Management

In this paragraph Euro Supply Management (ESM) will be introduced. First the history of ESM shall be described. Then, the position of ESM and the ESM Dairy Group will be discussed. Finally a short description of the European dairy market will be given.

2.2.1 History

Company X Foods Europe implemented the ‘Growth programme’ strategy through focussing on their so- called core brands, and especially for the Supply Chain through reducing the purchasing cost. In this corporate strategy, cost reductions in the supply chain can be invested in the development of the core brands and so form ‘Fuel for growth’ for these brands. This led to the establishment of the Euro Supply Management (ESM) department within Company X Foods Europe around 1998.

Euro Supply Management (ESM) was founded in 1998 in order to centralise the purchasing for ingredients in Europe and is responsible for the purchasing process of all production items for Company X Foods Europe. Euro Supply Management (ESM) gradually took over responsibilities from Local Supply Management (LSM), until LSM finally was completely replaced by ESM in April 2004. Within the Company X Foods Europe the result of the reduction of autonomy of the Sourcing Units is also observable. The Sourcing Units loose their autonomy on brand management, innovation and supply chain management.

The ESM department focuses on purchasing in nine product groups within Company X Food department Europe (UBFE), namely; Co-Packing I&II&III (finished products), packaging I&II&III, Ingredients I&II&III, Dairy and Meat. The Dairy group also purchases for the two Ice Cream and Frozen Foods Europe (ICFE) Categories, Ice Cream and Frozen Foods.

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2.2.2 Position of Euro Supply Management

As can be seen in figure 2.3, Porter’s diagram of the value chain (Porter, 1980) positions ESM within the Company X Food department Europe (UBFE) and the Ice Cream and Frozen Foods (ICFE) organisation.

In an organisation Porter distinguishes between primary activities (incoming- and outgoing logistics, production, sales and services) and secondary activities (infrastructure, human resource, technology and purchasing). Porter sketches procurement as a secondary or overall supporting activity, which inter-links with all primary activities. This is also the role of the Euro Supply Management department within UBFE and ICFE.

FIGURE 2.3PORTER’S VALUE CHAIN

Procurement entails all activities, focused on the control and steering of the stream of incoming goods.

Purchasing includes specifying what needs to be bought, selecting a supplier, contracting, ordering, controlling and evaluating (figure 2.4).

Van Weele (2003) makes a distinction between two purchasing functions:

• Initial purchasing, which involves specifying, selecting and contracting of suppliers. This is the sourcing function in figure 2.4.

• Operational purchasing, which involves ordering, controlling and evaluating. This is the ordering function in figure 2.4.

FIGURE 2.4 THE PURCHASING FUNCTION

Euro Supply Management (ESM) is mainly responsible for the sourcing function. The factories (Sourcing Units) do the ordering process themselves.

Purchasing has two main aspects: availability and cost. Besides these two aspects, Euro Supply Management (ESM) is also responsible for searching for improvement opportunities. Internally, ESM

Specify Select Contract Order Control Evaluation Supplier Customer

Procuremen t Purchasing

Source Order

Inbound

logistics Operations Outbound logistics

Marketing

& Sales Service Procurement

Technology development HR management

Infrastructure

Margin

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inter-links with other departments by communication. ESM has the role of combining often-conflicting desires into ingredients and realistic product improvements. Externally, ESM is the link between the market and the company. It is the responsibility of ESM to access the market for opportunities to improve the company. This can be realised through product improvements but also through process improvements.

Company X strives to achieve a World-Class Supply Chain. In Keough’s concept on the stages of development of the purchasing function (1993), this is the final stage. In this last stage of development, factories are working with a small number of suppliers that belong to the best in the industry. The purchasing function has its focus on the selection and benchmarking of suppliers, the integration of suppliers into their own production system and the provision of technical and logistic support to their suppliers. Continuous improvement is the catchword for both parties. In Appendix A Keough’s model is described more comprehensively and is the development of the purchasing function of Company X evaluated. Company X wants to realise a World Class Supply Chain within the next two years by establishing a global buying programme and establishing a World Class Manufacturing programme.

Although Company X is on the right path, to achieve a World Class Supply Chain a lot of work still has to be done.

2.2.3 ESM Dairy Group

Within Euro Supply Management the Dairy Purchasing Group focuses purchasing on cheese and dairy products for all European factories. The Dairy Purchasing Group is a part of the Company X Food department Europe (UBFE) division, but also purchases dairy products for the two Ice Cream and Frozen Foods Europe (ICFE) Categories, Ice Cream and Frozen Foods. ESM purchases around 600 different dairy products such as milks, cheeses, yoghurts and butters both in powder and fresh form. These products come from 167 different suppliers from different countries throughout Europe and the rest of the world.

ESM buys ingredients for more than 55 different Sourcing Units in 16 countries in Europe. ESM-Dairy’s total spending in 2003 was over 250 million Euros for 240 million kilos of dairy products. 55% of these purchases were for the UBFE division and 45% for the ICFE division.

The Dairy Purchasing Group exists of eight people: the Euro Supply Group manager, four Material Group Managers, a Technical Adviser, a Commercial Assistant and a Secretary. An organisational chart of the ESM-Dairy group can be found in Appendix B

The four Material Group Managers (MGMs) all have their own portfolio of ingredients they purchase. The portfolios are divided in the following way:

1. Cheeses and cheese powders

2. Cream liquids, bulk liquids, butter and fresh dairy products 3. Milk powders, whey powders, buttermilk powders and lactose

4. Whey protein concentrate, butter & cream powders, creamers, caseinates, dairy preparations and yoghurt & quark powders

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2.3 The dairy market

The European dairy market is undergoing substantial changes and will be facing a number of challenges in the years ahead. Changes in dairy policy with new WTO negotiations on their way, potential new EU entrants, changes in consumer demand and also in the conditions that govern supply and demand, changes in farming structures and in trade are all forcing Dairy companies to reconsider their strategies

The European dairy market is currently in transition. Companies are joining forces and acquisitions are being made. Eastern European companies are entering the Western European markets and vice versa.

Prices in Eastern Europe are on the average lower and Western Europe companies are becoming active in Eastern Europe. Euro Supply Management is taking great care in shifting their supply base for safety, risk and quality reasons but is looking with great interest at the developments.

The primary drivers of growth have been the southern and eastern European countries; in mature markets such as Germany, France and the UK, producers are increasingly being forced to be innovative with products and packaging

In the last 30 years the dairy industry has gone from supplying commodities, such as milk and butter, to offering lifestyle products with a high added value factor such as probiotic butter and yoghurt drinks. The variation in dairy products has increased drastically and there is a constant innovation and development of new products to satisfy the increasingly demanding consumer. Two key consumer trends have emerged:

those looking for healthy products, such as virtually fat free and probiotic products and those seeking indulgent desserts. The dairy industry has developed a wide range of products to serve these trends

Dairy products play a major role in the western diet and overall consumption is at an all-time high and is still growing.

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3 Problem description

In this chapter the problem of this study will be described and defined. The definition of the problem will serve as a guideline to set the boundaries of the study. First, the goal of this research will be determined and the relevance of the study will be demonstrated. Then, the problem will be formulated and finally, the scope of the study will be given.

3.1 Goal of the research

A hierarchical decomposition principle will be used to determine the goal of the research. Hence, the Company X goals will be stated first. Secondly, the Euro Supply Management (ESM) and the ESM-Dairy goals will be determined. From those goals, the goal of the research will be formulated. These goals were found on the Company X web-site, in various internal documents and through observations and interviews.

The mission of Company X is stated as the following:

Our purpose in Company X is to meet the everyday needs of people everywhere – to anticipate the aspirations of our consumers and customers and to respond creatively and competitively with branded products and services that raise the quality of life.

This is for Company X their road to sustainable and profitable growth for their business and long-term value creation for their shareholders and employees.

Company X’s strategy is to focus research & development and marketing on their top performing brands, that is, those brands that are most in demand from consumers. Through extensive knowledge of trends identified today, Company X wants to continue developing their brands to meet the needs of consumers tomorrow.

The ESM mission, derived from this Company X mission, is defined in the ESM manual as the following:

“To ensure supplies of materials, products, equipment and services at the required times in strict conformity with the agreed specifications at lowest possible total cost consistent with ensuring long term security of supply, and profitable innovation through, where appropriate, a partnering approach. To eliminate waste and mutual avoidable complexity at all levels and be supportive of efforts towards protecting the environment.”

From this mission statement of ESM a number of main goals for ESM dairy can be filtered:

• To secure the short and long-term supply of specified products

• Το generate cost savings

• Το reduce complexity

• To facilitate innovation

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These four goals will be the starting point for this study. In the next paragraph problems in the current supply base that interfere with these goals are identified and a problem definition will be formulated.

3.2 Identified problems

As described in chapter one, Euro Supply Management (ESM) is responsible for the sourcing function within the two European food divisions UBFE and ICFE. This includes specifying the need, selecting suppliers and making the contracts (figure 2.4). The execution of these functions needs to fulfil the goals formulated in the previous paragraph. In order to fulfil these goals, Company X wants to approve suppliers before they supply to factories. ESM only wants to buy ingredients from approved suppliers with signed and agreed ingredient specifications in order to guarantee the high quality of their products and the security of their supply base.

An approved supplier is a supplier that is qualified to supply a specific ingredient to a specific Sourcing Unit (SU). It is not necessary for the supplier to actually supply to a Sourcing Unit to be approved. The approval of a supplier is two folded and consists of the approval of the specific product of the supplier and of the approval of the supplier in general. For the approval of the specific product, Sourcing Units need to test the ingredient before they can use it in their production process. The quality of the ingredients needs to be adequate and the ingredient needs to perform well in the process.

Besides the product specific requirements, Company X also has a number of general requirements for the supplier. It is a worldwide Company X policy to evaluate their suppliers and their production sites. This normally requires a factory audit. Once a factory has been audited and approved, in general, it can supply to all Company X Sourcing Units. Later in this study, the process of supplier approval will be discussed more comprehensively.

Besides approved supplier Company X has also a number of preferred suppliers. A preferred supplier is a supplier with who Company X prefers to do business with for a specific ingredient or group of ingredients.

For each ingredient (group) a number of suppliers are marked as preferred. In many cases the current supplier is not the most preferred supplier to de business with. However, ESM cannot make a contract with a preferred supplier if that supplier is not approved for that specific ingredient for the specific Souring Unit in question.

At the moment there is no supplier (officially) approved or in any case only one or two suppliers approved for a number of dairy ingredients. In many cases, the most preferred supplier is also not approved.

Furthermore, a number of products are supplied without complete and supplier signed specifications.

Besides that, the current method of getting (additional) suppliers approved is not as fast, efficient and robust as ESM would like it to be. This causes a number of problems for the ESM Dairy Group such as a not optimal spread of risk and low flexibility in supplier choice which can lead to negative price effects.

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The main problems will be described below.

Relying on only one supplier for critical materials increases the possibility of an interruption of supply and thereby an interruption of production. The dairy market is a high-risk market where food crises and animal diseases can have large effects on the availability and price of the dairy ingredients. In order for ESM to secure their supply base at reasonable prices it is necessary to have more than one supplier approved for certain products. Porter (1979) warns that “purchasing everything from one supplier may yield that supplier too much of an opportunity to exercise power.” To display this power over the buyer, Porter suggests the supplier can “raise prices or reduce the quality of purchased goods and services.” Suppliers can exert bargaining power by raising prices or reducing the quality of purchased goods and services. Powerful suppliers can therefore squeeze profitability out of an industry. Suppliers try to increase their supplier power by offering unique or differentiated products and by building up switching cost.

Having few suppliers approved causes high dependence of the approved suppliers and limits the flexibility in supplier choice. This makes it more difficult to benefit from competition in the market, price changes and other market developments such as subsidies. Having little supplier choice can also cause low flexibility in capacity. This can even result in shortage of products and deliveries from non-approved suppliers which makes it even more difficult for Company X to guarantee the high quality of their products.

At the moment a number of ingredients are supplied without complete and supplier signed specifications.

This is a very undesirable situation for Company X in case of legal matters and problems with suppliers and is in contradiction with the Company X rules and policies.

Trust and power are important ingredients in buyer-supplier relationships (Parker and Hartley, 1997).

Having only one supplier approved gives the selected supplier more power. It induces a lack of competition, which gives an incentive for bad supplier performance (Richardson and Rournasset, 1995).

Limited trust between buyer and supplier increases this effect. To limit the opportunistic behaviour of a supplier a purchaser can include some form of competition. However, approving a supplier is a substantial amount of work and results in a relationship with a supplier that needs to be managed. This makes having too much suppliers approved undesirable as well.

3.3 Relevance of the problem

A secure supply of materials is very important for Company X. Disruption of supply can lead to stops in production and even to shortages of products in the stores. This can result in enormous losses. The market for dairy products is a relative high-risk market with, besides the (normal) economical risks, the risk of animal diseases such as mad cow disease and foot and mouth disease.

For Company X Foods Europe material costs are a large part of the total cost. Material costs are 38% of the Net Proceed of Sales and account for over half of the cost that can be influenced. The saving potential

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in material costs is high. Savings on purchasing also have a large effect on the efficiency of the company.

With a DuPont-chart, it can be demonstrated that small savings in purchased related costs result in high improvements on the return on investment of a company. In Appendix C it is demonstrated that a 1%

saving in purchasing costs results in a 3.5% higher return on investment for Company X Foods Europe.

On the other hand ineffective purchasing can also lead to bad overall financial performance.

A list of approved suppliers is a formal list of potential suppliers for a specific product or service from which purchasers select a firm to fill a specific purchasing need. Some form of approved supplier list exists in the majority (70%) of all buying organisations (Plank & Kijewski, 1991). Approved supplier lists help organisations to reduce risks in industrial buying, keep suppliers from bothering departments other than purchase for a ‘‘foot in the door,’’ allow negotiation of a better price for orders that would be placed over time, and allow development of long-term buyer–seller relationships.

For the purchaser, the existence of approved supplier lists act both as a constraint as well as an opportunity. The purchasing choices are limited to negotiations with those pre-qualified suppliers. On the other hand, purchasers shape the character of the list and enjoy structured interaction with other members of the buying team who also have input in the decision process. The existence of the list, and how it is managed, has a significant impact on the performance of an organisation and how purchasing is viewed by the rest of that organisation (Plank & Kijewski, 1991).

Traditional versus modern view of efficiency in purchasing

Price has been the principal yardstick by which manufacturers have traditionally selected their suppliers. By spreading their purchases among several suppliers, it is argued that manufacturers can achieve the cheapest prices and the greatest assurance of a secure flow of material. (Dillforce, 1986) By promoting competition among suppliers, customers expect to have a better control of price levels as well as a more reliable supply through diversification of risks.

Such purchasing however does not allow the buyer to benefit fully from all the resources of the supplier.

During the last two decades, many companies have changed their strategy to deepen relationships with their suppliers. In 1987, Morgan observed a tendency among customers to move from an arm’s-length relationship (a number of competing suppliers) towards single sources and even alliances with suppliers.

Today, it is argued that Single Sourcing leads to an increase in the reliability of supply. Purchasing firms that reduce the number of suppliers and try to strengthen their relationships with the remaining ones might be able to establish very efficient logistical systems with their suppliers. Regarding price control, Newman (1988) argues that the price competition perceived when dealing with multiple sourcing is often illusionary.

Price is only one of the costs affected and changed, when purchasing activities are handled differently.

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3.4 Problem statement

In this paragraph the problem will be determined and boundaries for the research will be set. According to De Leeuw (1997) determining the problem is establishing tension between a “desired situation” and a

“current situation”. A problem is a state of difficulty that needs to be resolved.

The effects for ESM dairy described in the previous paragraphs can be captured in three main problems:

1. For a number of ingredients there are not enough suppliers approved 2. For a number of ingredients the preferred suppliers are not approved

3. For a number of ingredients the specifications are not complete and are not signed by the supplier

This research will focus on the first two problems: for a number of ingredients not enough suppliers are approved and not the preferred suppliers are approved. In other words, the approved supplier base for ESM-Dairy is currently not optimal to fulfil the goals of the ESM Dairy Group. An intern from the Ingredients II group will study the third problem of not signed and complete specifications.

Formulation of the problem of research

As stated in the previous paragraph the approved supplier base is not optimal for the ESM-Dairy group preventing ESM-Dairy to successfully realise its goals.

The goal of this research is in line with the above stated ESM-Dairy goals and is formulated as the following:

To find ways for ESM-Dairy to optimise their approved supplier base in order to secure the supply of specified products, generate cost savings, facilitate innovation and reduce complexity.

The main research question of this study is formulated as the following:

In what way can ESM-Dairy optimise their approved supplier base in order to secure the supply of specified products, generate cost savings, facilitate innovation and reduce complexity?

This main research question can be divided in a number of research questions. These research questions provide a framework for answering the main research question.

Research questions:

1. What is an optimal approved supplier portfolio for ESM Dairy?

• What are the current goals of the approved supplier base within the ESM Dairy Group?

• Do the current goals represent the desired function in the environment and, if not, what should the goals be?

• What should the approved supplier be to realise these goals?

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2. In what way (with what policies) can these goals be realised?

3. What is the current status of the approved supplier base of the ESM Dairy Group?

4. What are the current policies of ESM Dairy for improving their approved supplier base?

5. Do the current policies realize the current goals?

6. Which tensions occur between the (new) goals and policies and the current organization and prohibit a successful execution of these policies?

7. How can the current organization be adapted to realize a successful execution of the policies?

3.5 Scope

The scope of the problem is that part of the reality that the problem affects and that should be analysed.

The scope of this research will be limited to optimising the supplier base of the ESM Dairy Purchasing Group. This study will mainly focus on the situation of the ESM Dairy Purchasing Group, the principal of the assignment. However, the findings of this research can be useful in the other ESM Purchasing Groups as well, as most Ingredient Purchasing Groups face similar problems under more or less similar conditions.

This study will be based on theoretical principles that are also applicable outside Company X and can be useful for other companies in other industries as well.

The methods of supplier selection and supplier evaluation are outside the scope of this study. It is assumed that ESM-Dairy has an adequate way of selecting and evaluating suppliers.

Supplier approvals and supplier audits are worldwide Company X policies, and their continued existence lies outside the influence of Euro Supply Management and thereby outside de scope of this research.

Nevertheless, the application and execution of approvals will be evaluated during this study.

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4 Methodology and approach

As stated in the problem description the portfolio of approved suppliers is not as ESM-Dairy would like it to be. This study aims to improve that portfolio for ESM-Dairy. In order to come to a good evaluation of the current supplier base, the process of approving suppliers, problems and possible improvements, an organisation design methodology will be used. Underneath the organisation design methodology is a business process design methodology that is very much process and system orientated.

Business Process Redesign (BPR) is "the analysis and design of workflow and processes within and between organisations" (Davenport & Short 1990). Teng et al. (1994) define BPR as "the critical analysis and radical redesign of existing business processes to achieve breakthrough improvements in performance measures." BPR seeks first to define and understand the current business process ("As-Is") and then, after modelling and analysis, to formulate a future ("To-Be") business process.

In‘t Veld (1998), defines a process as “a sequence of transformations that cause input(s) of the process to be converted into a desirable output”, and a system as “a meaningful set of elements and relations”. The relations represent both interactions between elements and interactions with the environment of the system.

The term desirable in the process definition intends to indicate that there is a purpose for this process. In other words, the process is intended to fulfil a number of goals. The goals of the process should fulfil a central role in the redesign.

In what has become known as the Delft School of Organisational Design the main purpose of the organisation is to manage or control processes that fulfil the needs of society. A key goal of business process redesign is to simplify processes, making an institution's operations more efficient and effective.

According to Peppard et al. (1995) the approaches to BPR can be broadly classified into two categories:

• Systematic redesign – identify and understand existing processes and then work through them systematically to create new processes to deliver the desired outcomes.

• Clean sheet approach – fundamentally rethink the way that the project or service is delivered and design new processes from scratch.

Because in this study the process is already embedded in the organisation the existing processes will be taken into consideration and the systematic redesign approach is chosen.

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4.1 Bikker’s Ist/Soll analysis

For the analysis of this problem is chosen for the Ist/Soll model of Bikker (2002). This model provides a structured approach for the redesign of business processes with a central role for the function of a process in its environment.

FIGURE 4.1BIKKER’S IST/SOLL ANALYSIS

This BPR model approaches the problem based on two main lines as can be seen in figure 4.1.

The first main line concerns only goals and policies. What are the current goals and policies (As-Is Policies) for the system? Here will be evaluated if a change in goals or policies is required. If a change of goals or policies is necessary new policies and strategies (To-Be Policies) will be introduced. Problems (tension) usually arise from developments that call for a change of policy.

The second main line concerns the execution. How are the existing processes executed and are they realising the current policies and goals (As-Is Policies). If not, the development of new processes (To-Be Processes and Organisation) is required. If the creation of new goals and policies was necessary the new situation should fulfil those goals. The demands set by the To-Be Policies usually cannot be met by the existing structure so a change in structure is then required.

Study of the two main lines has to show where tensions occur between the demands of the system and the actual situation and how strong that tension is. These tensions can set the requirements for the redesign of the process (To-Be Processes and Organisation). The constraints of the process will follow out of the study of the As-Is situation. Finally, it will be decided which aspects need to be improved and under which requirements and constraints.

AS-IS BUSINESS POLICIES TO-BE BUSINESS POLICIES

AS-IS PROCESSES AND ORGANISATION

TO-BE PROCESSES AND ORGANISATION

TENSION

CONSTRAINTS

REQUIREMENTS

TO-BE GOALS AND MEANS AS-IS GOALS

AND MEANS

FIRST MAIN LINE: ANALYSIS OF BUSINESS POLICIES

SECOND MAIN LINE: ANALYSIS OF THE ORGANISATION OF PROCESSES

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4.2 Approach

This research study will follow Bikker’s framework discussed in the previous paragraph. Bikker’s first mainline (figure 4.1) will provide an answer to the research question 1 and 2. The second main line of Bikker’s model will provide an answer on the research questions 3 up to 7. The research will follow a number of research steps that will be described below.

4.2.1 Study of the As-Is situation

The first step in this research is the study of the current situation. This step is necessary in order to get a good insight in the goals that are pursued, the ways these goals are pursued, the current organisation of processes and the current approved supplier portfolio. The following steps will be taken:

• Analyze current goals

• Analyze current policies for improving approved supplier portfolio

• Analyze current organization structure

• Describe and analyze current approved supplier portfolio

Starting point for the analysis are the desires of the stakeholders. “Organisations do not have objections, people do.” [Cyert and March, 1963] From the desires, the goals, policy and constraints of the organisation can be derived. (Figure 4.2)

FIGURE 4.2SIMPLE ANALYSES OF GOALS (IN ’T VELD,1998)

Taking this policy framework as a reference, the As-Is Processes and Organisation structure that support these processes are analysed. This entails the current approval process as well as the current approved supplier portfolio. The study of the As-Is Policies and the As-Is Processes and Organisation will be done simultaneously as they are strongly related to each other.

For this study of the current situation a lot information is needed. This information and the insights in the current (As-Is) situation will be gathered in the following ways:

• Direct involvement in (second) supplier approval of a number of ingredients, working with the ESM-information systems and attending the quarterly Dairy Group meetings where all major issues are discussed will lead to a lot of information, insights and observations.

STAKEHOLDERS

DESIRES

CONSTRAINTS GOALS POLICY

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• Semi-structured interviews with members of the Dairy Purchasing Group, Sourcing Unit contacts and others throughout the organisation will provide necessary information and insights.

• Internal documents and manuals and information available on the intranet will be studied and will provide a lot of information.

• An inventory of the all dairy ingredients supplied by ESM, their ingredient specifications, their approved suppliers and their preferred suppliers will be made. This requires closely working together with the Material Group Managers and the Technical Advisor and includes a constant discussion of problems with ingredients. The inventory will give a clear picture of the current status of the approved supplier base and the work will provide insights in the way of working and the organisation.

• The possibility and potential of reducing the supply base will be studied.

• The possibility and potential of standardising ingredients will be studied.

During this study will be evaluated if the execution of the current policies realise the current goals and can gaps in the current approved supplier portfolio be identified. Furthermore, observation and insights will be gathered that can give direction for the rest of the research.

4.2.2 Evaluation of the goals and, if necessary formulation of To-Be Goals

Following the first main line of Bikker’s model the goals of the approved supplier portfolio will be evaluated. The goals that are set should represent the desired function in the environment. Change in the environment can lead to a change in that function and should thereby lead to changes in the goals.

It is of great importance that if the stated goals are realised the desired function in the environment is fulfilled. This can require an adaptation of the current goals. These To-Be Goals will form the basis of the rest of the study.

As a next step, these goals will be translated based on theory available in the literature to a (more concrete) desired situation for the ESM Dairy approved supplier portfolio.

4.2.3 Formulation of To-be policies

After the determination of the goals and the desired situation, ways to realise that situation can be determined. The To-Be Policies are ways to pursue the To-Be Goals. The study of the As-Is situation combined with theory available in the literature will help identifying these policies keeping of course the To-Be goals in mind.

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4.2.4 Identification of tensions

Then can be determined if there are tensions between the current organisation and the To-Be goals and Policies that prohibit a successful execution of these policies. These tensions can be the result of changes in the goals can also already exist in the current situation.

The tensions are the result of the study of the As-Is situation and the To-Be Goals and Policies. These tensions will be used to guide the development of the new process and set the requirements for the new organisation.

4.2.5 To-Be organisation

As a final step the To-Be Processes and Organisation can be developed. This is the actual redesign of the organisation of processes. To match the organisational structure to the policy Bikker’s six key performance criteria will be used. They provide a reference in which both structure and policy can be expressed. The To- Be Process and Organisational structure has to fit the To-Be Policies, the constraints found in the As-Is situation and the requirements based on the tensions identified earlier.

Concluding: first is evaluated what the current status is and how things are done. Secondly is analysed what the desired function in environment is and in what way that can be realised. Then is identified what in the current organization prohibits a successful realisation of those goals. Finally recommendations will be made how to adapt the organization in order to realise these goals.

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5 The As-Is situation

In this chapter the current (As-Is) situation of the approved supplier base will be described and analysed.

First the current goals of the approved supplier base will be determined. Next the current policies that are employed to improve that supply base and to pursue the current goals will be evaluated. The execution of these policies will be described and analysed. The insights in the As-Is situation are gathered through working direct involvement in (second) supplier approval of a number of ingredients, working with the ESM-information systems on a daily basis and attending the quarterly Dairy Group meetings where all major issues are discussed. Discussions and interviews with members of the ESM Dairy Group and Sourcing Unit contacts also lead to a good insight in the current situation.

5.1 As-Is Goals

For the analysis of the goals, a hierarchical decomposition principle is used starting with Company X NV as the highest aggregation level, zooming in to the ESM-Dairy approved supplier base.

The main goals of ESM-Dairy are already stated in chapter three. From these goals of ESM-Dairy the main goals for the ESM-Dairy approved supplier base can be derived as being:

• Secure the short and long term supply of specified products

• Generate cost savings

• Reduce complexity

• Facilitate innovation

5.2 As-Is Policies

The As-Is Policies are the ways, means and the priorities between the goals that ESM-Dairy currently employs to pursue their goals identified in the previous paragraph. ESM-Dairy currently has the following policies to improve their approved supplier portfolio:

1. Standardisation of ingredients and product substitutions 2. Reduction of the supply base

3. Approving additional suppliers

4. Working with preferred suppliers and relationships with suppliers 5. Sharing information and E-Procurement

6. Innovation through suppliers

5.2.1 Standardisation and product substitution

One of the most influential projects within Company X is known as the growth programme. Within this path reducing the complexity is one of the focus points. Reducing the number of ingredients is an important part of this. One of the ways to reduce the number of ingredients is reducing the number of different stock

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keeping units (SKU’s). Another way is by harmonising the current ingredients and reducing the number of ingredient specifications.

Before the foundation of ESM every Sourcing Unit used its own ingredient specifications. Recently, there have been various projects to harmonise these ”Local” specifications to “Category” specifications. When a group of ingredients is harmonised the products for the different Sourcing Units are compared and grouped. Similar products will get per Category the same specification. Eventually this can also be done between Categories (Cross-Category specifications). Normally the harmonisation requires a tasting sessions and can involve the Category managers, ESM, developers, Quality Assurance and the suppliers.

Harmonisation can simply be a matter of combining specifications. In other cases however, it is difficult to find one specification that meets all requirements of the different Sourcing Units. Sometimes recipe changes are necessary to make the harmonisation process successful. This requires a lot of co-operation from the development and quality departments in the Sourcing Units and sometimes pressure from the management.

Harmonisation projects

For the harmonisation of ingredients a number of projects have been started. These projects are organised per Category and most of them include multi-disciplinary teams that are responsible for the harmonisation.

Not all the harmonisation projects are equally successful. It can be concluded, that projects with a lot of commitment from higher management and with clear objectives are more successful than other projects.

Especially the projects for the Frozen Foods and Ice Cream Categories have been quite successful in reducing the number of products. Harmonisation requires a lot of co-operation and sacrifices from all parties involved.

Product substitution

ESM-Dairy is trying to replace certain products by cheaper products, more standard products or products that are easier to purchase. This can be to achieve harmonisation, save cost, reduce complexity and/ or reduce supply risk.

An example is the substitution of over 10 different creams by only two different standard creams. Another example is the substitution of liquid products by powders to save transport and storage cost.

5.2.2 Reduction of the supply base

ESM-Dairy wants to reduce the number of suppliers. By doing so, ESM strives to reduce complexity and save cost. As discussed earlier, the Dairy Group has chosen a number of preferred suppliers for each ingredient. Material Group Managers should only do business with suppliers that are on the preferred supplier list and keep the number of different suppliers to a minimum. New suppliers should only be approached when relevance is shown, the volume is large enough (over 100k Euro) or in exceptional cases.

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The list is dynamic and can be changed if necessary. In these cases it is the Euro Supply Group Manager who decides.

5.2.3 Second supplier approval

Besides reducing the number of different ingredients and the number of different suppliers ESM-Dairy wants to approve more suppliers per product. Their goal is to have fewer suppliers, but to have more suppliers approved per product. In this way, ESM wants to have more flexibility in supplier selection, reduce risk and increase negotiation power.

The approval of a supplier consists of the approval of the specific product of the supplier and out of the approval of the supplier in general. First the approval of the specific product will be briefly discussed. Then the general requirements for the supplier and the site auditing necessary will be discussed.

Product approval

The Sourcing Unit has to test if the product of the new supplier fits the requirements. Therefore, the Sourcing Units execute the product approvals. Normally, the Quality Assurance department (QA) of the SU does the testing and sets the standards for the tested ingredients.

In order to approve additional suppliers for an ingredient several steps have to be taken. Not all Sourcing Units work according the same procedure, but in general the steps are as in figure 5.1

FIGURE 5.1SUPPLIER APPROVAL PROCESS

1. Contacting of suppliers

The first step in the approval process is contacting a potential supplier. The Material Group Manager selects suppliers that are interesting and competitive and contacts those suppliers. A buying specification is send to the potential suppliers. This buyer specification describes the product but contains no supplier specific information and can be extracted out of the Interspec database. Depending on the ingredient and the situation one or more suppliers are contacted for the approval.

2. Testing

If the suppliers are interested and have a product that can fit the specification a bench sample is sent for testing. This is normally a small sample of one or two kilos that will be tested on colour, taste, by chemical

Contact supplier Contracting and

approval Industrial size test

Bench test

Potential supplier Approved supplier

Improving the supply base

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