Factors influencing performance concerning
contract compliance at Sara Lee International in
Europe
- How to optimise compliance to preferred suppliers? -
Master Thesis International Business & Management
– International Financial Management -
Factors influencing performance concerning contract compliance at
Sara Lee International in Europe
- How to optimise compliance to preferred suppliers? -
An assessment at Sara Lee International
Report as result of a graduation project, conducted from September 2007 till May
2008.
Author:
Sibrecht de Jong
Under authority of:
Sara Lee / DE
Utrecht, the Netherlands
Company supervisor:
Drs. L. Cooijmans
Manager Procurement Processes
Under supervision of:
University of Groningen
Faculty of Management and Organisation
Groningen, the Netherlands
University of Uppsala
Faculty of Business Studies
Uppsala, Sweden
First supervisor:
Dr. B. Crom
University of Groningen
Department of Accounting
Second supervisor:
Dr. M.P. van der Steen
University of Groningen
Department of Accounting
Second supervisor:
Ph.D. G. Gunnlaugsson
University of Uppsala
Abstract
Executive summary
The objective of this research is to provide clear insight into the main problem in relation to contract compliance at the procurement department of Sara Lee International (SLI). Procurement is defined by Harink (2003) as ‘all activities targeted at controlling and managing incoming goods and services’. Contract compliance is defined by Vahrmeijer (2007) as ‘the percentage of spend of total spend that can be allocated to contracted items at preferred and contracted suppliers’. The advantages that can be obtained through full contract compliance are cost advantages through the creation of scale economies and better negotiable conditions, while risks can be lowered by contracts which include clauses that cover delivery, quality, prices, responsibilities, etc. A calculation conducted within SLI showed that if contract compliance would increase from X% to X% it would result in a saving of € X per percentage point, resulting in a total saving of € X. The current situation regarding contract compliance at SLI is rather poor with a total contract compliance of X% in February 2008, which leads to the following research question:
RQ: Which factors, both positive and negative, influence motivation and in turn performance on contract compliance of PO creators and category managers at the procurement department of Sara Lee International within Europe?
Contract compliance is defined separately for category managers and PO creators: • CM (contract) compliance: The act of defining and contracting preferred suppliers.
• PO (contract) compliance: The act of purchasing contracted items at contracted suppliers. The scope of this study includes both the purchasing of direct products (products used to produce the end product sold by the company) and indirect products (facilitating products and services that are not directly used for the production of end products sold by the company; office furniture, lease cars, computers, etc.). Furthermore, the scope of the study is geographically limited to Europe due to the accessibility of data. The data sources used in this thesis are both qualitative and quantitative. Besides academic literature and data from data sources within SLI (secondary data), questionnaires and interviews are used to gather primary information. First, behaviour influencing factors (BIFs) are gathered from theory and are tested in the practical research environment of SLI. According to theory there are certain factors (BIFs) that influence motivation and hence performance. This leads to the following conceptual model (Figure 1).
The behavioural model of Hansen & Wernerfelt (1989) serves as the basis for the theoretical model which presents all the behaviour influencing factors that are statistically and qualitatively tested by this study. The behavioural model presents a vast number of BIFs, which are divided into environmental, organisational, and people factors. The BIFs from the behavioural model are supplemented by other influencing factors that have been retrieved from theory and from interviews with the procurement department and other departments within SLI. All these BIFs are combined and a selection is made which factors are statistically and qualitatively tested within the empirical situation of SLI. First the hypotheses are statistically tested by the Spearman Correlation test. Moreover, qualitative exploration provides additional argumentation for the level of influence of the BIFs on contract compliance. The final list of BIFs is presented in Figure 2.
Contract Compliance - PO Creators
To purchase contracted products from preferred (contracted) suppliers at contracted prices - Category Managers
Conclusion of contracts with preferred suppliers Behaviour Influencing Factors (BIFs) - Environmental factors - Organisational factors - People factors Motivation - Intrinsic - Extrinsic
Coetsee (1999) believes that in order to improve employee performance within an organisation, resistance needs to be diminished while commitment needs to be enhanced. Commitment, according to Coetsee (1999), consists of five factors: Knowledge, Information, Empowerment, Rewards & Recognition, and Shared Vision. Based on these five elements of commitment, a number of hypotheses are established. These hypotheses propose positive relations between the BIFs as presented in Figure 2 and contract compliance, meaning that if the BIFs are positively implemented, or if their value increases, the level of contract compliance also increases. The BIF work experience, however, forms an exception since a negative relationship is expected and proposed; saying that more work experience should result in a lower level of contract compliance.
The questionnaire concerning CM compliance is sent out to a target group of 45 with a response rate of 27 (60%). The questionnaire regarding PO compliance is sent to a target group of 126 with a response rate of 59 (47%). In addition, four category managers and four PO creators are interviewed to gather additional valuable insights.
The hypotheses are statistically tested by the Spearman Correlation test. However, due to unmet assumptions concerning normality, heteroscedasticity and multi-collinearity none of the relationships proposed by the hypotheses are significant for CM compliance, and thus no conclusions can be drawn. For PO compliance, only three hypothesised relationships are significant. Therefore, it can be statistically concluded that skills, IT-applications and work experience positively relate to PO contract compliance.
Based upon the additional data from both the questionnaires and the interviews the remaining hypotheses are answered as well, and the following factors are found to influence contract compliance, herewith answering the main research question:
• Knowledge influences both CM and PO compliance through skills. Work experience only seems to influence PO compliance.
• Information influences both CM and PO contract compliance through IT-applications, communication systems and policies.
• Empowerment influences both CM and PO compliance through executive support and external compliance. The impact of executive support is larger in the case of CM compliance, while the effect of external compliance is greater with PO compliance.
Figure 2 Final list of BIFs (source: Hansen & Wernerfelt (1989), Kreitner, Kinicki & Buelens (2002), Kulp et al (2006), van Weele, Rozemeijer & Rietveld (1998) and interviews within SLI)
Behaviour Influencing Factors (BIFs) ORGANISATIONAL FACTORS Information (IT) Applications Communication Clear policies Empowerment Executive support External compliance Rewards & Recognition Monitoring Rewards Shared Vision Supervision Feedback Other Identifying suppliers New items Suitableness of items PEOPLE FACTORS Knowledge Skills
External dimensions (work experience/ educational background)
Other Attitudes
Relations with suppliers Internal dimensions (age/
gender)
External dimensions
• Rewards & Recognition do influence both CM and PO compliance through monitoring and rewarding systems, though, to a rather small extent. Caution is required when implementing a rewarding system in both cases since incorrect implementation can be perceived as unfair and can result in resistance.
• Shared Vision increases both CM contract compliance and PO contract compliance through stimulating supervision and feedback.
• Other Influential Factors concern identifying suppliers, new items and suitableness of items, which are only applicable in the case of PO compliance. These three items, however, all seem to influence PO contract compliance. In addition, a positive attitude increases both CM and PO compliance, while relationships with suppliers mainly influence PO contract compliance. Age only seems to influence contract compliance in the case of PO creators, with a higher age level resulting in higher PO compliance.
Preface
This report represents my master thesis which reflects seven months of work and research during my internship at Sara Lee International. Finding a suitable topic at the start of my internship seemed difficult, but after a few weeks of looking around, listening carefully and talking with my colleagues, it came to my attention that the subject of ‘contract compliance’ was a current issue both at Sara Lee and within the entire procurement world. I am very glad I choose this topic since I consider it to be a very interesting topic. And as I went along with my research I discovered the importance and the relevance of the subject within Sara Lee International. I feel that my research is very much appreciated.
Although my internship at Sara Lee was not the first time for me to get in touch with the professional business world, it has been an experience that is not at all comparable to my previous internships. First of all, the working environment at Sara Lee is very comprehensive and international, which definitely brought an extra dimension to my experience. Moreover, my supervisor, Leon Cooijmans, has involved me in many activities and gatherings through which I got the opportunity to learn a lot of different aspects of the procurement side of a company. This has definitely attracted my attention and I now know that procurement is where I would like to start my working career.
I would like to take the opportunity here to say thanks to all my colleagues and other interns at Sara Lee for showing interest in my research, for their cooperation by filling-out the questionnaires, cooperating in the interviews, providing me with important new insights into the subject and for making me feel at home during my internship. I would like to show my special gratitude to my university supervisors Ben Crom from the University of Groningen and Geir Gunnlaugsson from the University of Uppsala, and to my company supervisor Leon Cooijmans. I would like to thank Ben and Geir for their interest in my activities at Sara Lee and for their support, commentary and interesting viewpoints during my research period. In addition, I would like to thank my second supervisor, Martijn van der Steen, for reviewing my final thesis. I would like to thank Leon Cooijmans for the special feedback sessions on Friday afternoons over a cup of coffee or tea. He has provided very useful insights and feedback, and I appreciate the time and effort he has put into supporting my internship and thesis. Furthermore, I would like to thank him for the great time we had during the teambuilding activities of ice-skating, bowling and claying.
This thesis constitutes the end of my master studies in International Financial Management at both the University of Uppsala and the University of Groningen. It has been a great experience and I look back at a very instructive and joyful time in my life. Therefore, I would like to take this opportunity to express my thanks to my boyfriend Marcel who has been very supportive and loving during my graduation period and for having faith in me. I really appreciate the time and effort he has put into reading through my draft documents and offering feedback. In addition, I would like to thank my parents for supporting me during my entire study period.
Table of Contents
Abstract ...I
Executive summary ... II
Preface ... V
Table of Contents ... VI
1
Introduction ... 1
1.1
Introduction...1
1.2
Project Environment ...1
1.2.1 Sara Lee International (SLI) ...1
1.2.2 Procurement Department SLI ...2
1.3
Problem Indication...4
1.4
Research Objective ...5
1.5
Research Questions ...6
1.6
Research Conditions ...7
1.7
Structure of Thesis...7
2
Methodology ... 9
2.1
Introduction...9
2.2
Conceptual Model ...9
2.3
Research Design ... 10
2.4
Data Collection ... 10
2.5
Data Analysis ... 12
2.6
Summary ... 13
3
Theoretical Background ... 14
3.1
Introduction... 14
3.2
Contract Compliance ... 14
3.2.1 Types of Compliance Management... 15
3.2.2 Contract Compliance and Organisational Performance ... 16
3.2.3 Benchmark Studies... 17
3.3
Behavioural Model ... 18
3.3.1 Behavioural Model of Hansen & Wernerfelt ... 18
3.3.2 General Behaviour Influencing Factors... 18
3.3.3 Motivation ... 19
3.3.4 Controlling Behaviour ... 21
3.3.5 Sub-Conclusion ... 22
3.4
Additional Behaviour Influencing Factors (BIFs) ... 22
3.4.1 Causes of Contract Non-Compliance... 23
3.4.2 Factors present within SLI ... 24
3.4.3 Additional BIFs from the Organisational Climate... 24
3.4.4 Sub-Conclusion ... 26
3.5
Theoretical Model... 26
3.5.1 Inclusion Behaviour Influencing Factors... 26
3.5.2 Differences in BIFs between Category Managers and PO Creators ... 27
3.5.3 Theoretical Model... 28
3.6
Hypotheses... 29
3.6.1 Grouping ... 29
3.6.2 Hypotheses ... 30
4
Research Environment... 33
4.1
Introduction... 33
4.2
Current Level of Contract Compliance... 33
4.2.1 Contract Compliance of PO Creators ... 33
4.2.2 Contract Compliance of Category Managers ... 35
4.3
Current Situation Concerning BIFs... 36
4.3.1 IT- Applications... 36
4.3.2 Performance Measurement and Rewarding Systems ... 37
4.3.3 Policies... 38
4.4
Consequences of Contract Non-Compliance for Financial Shared Service Centre 38
4.5
Summary ... 39
5
Results and Analysis Contract Compliance of Category Managers... 40
5.1
Introduction... 40
5.2
Statistical Analysis ... 40
5.2.1 Assumptions ... 40 5.2.2 Testing Hypotheses ... 425.3
Further Analysis ... 43
5.3.1 Knowledge... 43 5.3.2 Information... 44 5.3.3 Empowerment ... 455.3.4 Rewards & Recognition ... 46
5.3.5 Shared Vision... 46
5.3.6 Other Influencing Factors... 46
5.4
Summary ... 47
6
Results and Analysis Contract Compliance of PO Creators ... 49
6.1
Introduction... 49
6.2
Statistical Analysis ... 49
6.2.1 Assumptions ... 49 6.2.2 Testing Hypotheses ... 506.3
Further Analysis ... 52
6.3.1 Knowledge... 52 6.3.2 Information... 53 6.3.3 Empowerment ... 546.3.4 Rewards & Recognition ... 54
6.3.5 Shared Vision... 55
6.3.6 Other Influential Factors ... 55
6.4
Summary ... 56
7
Conclusions and Recommendations ... 58
7.1
Introduction... 58
7.2
Conclusions ... 58
7.3
Recommendations ... 62
7.3.1 Recommendations CM Compliance... 62 7.3.2 Recommendations PO Compliance ... 63Epilogue ... 65
Abbreviations ... 66
References ... 67
Appendices ... 70
Appendix A: SLI Procurement Organisation Chart... 70
Appendix B: Overview Respondents Questionnaires and Interviews ... 71
Appendix D: Interview Schedules... 79
Appendix E: Minutes of Interviews ... 81
Appendix F: Detailed Figures ... 95
Appendix G: Assumption Tests CM Compliance... 97
Appendix H: Factor Analysis CM Compliance ...100
Appendix I: Spearman Correlation Test CM Compliance ...102
Appendix J: Assumption Tests PO Compliance ...103
Appendix K: Factor Analysis PO Compliance...106
1
Introduction
1.1
Introduction
This chapter explains the research objective and introduces the content and structure of this study. First of all, the company profile of Sara Lee International (SLI) is presented, followed by a description of the procurement department of SLI. Secondly, a problem indication of the situation at the procurement department of SLI is provided on which the research objective is based. The research objective leads to a key research question, which is split up into several sub-questions which are answered throughout this study. In the end these sub-questions lead to an answer to the main research question. Paragraph 1.6 discusses the research conditions under which this study is performed. This chapter ends with an overview of the structure and content of the remainder of this thesis.
1.2
Project Environment
This research is executed by order of Sara Lee International which is a full subsidiary of Sara Lee Corporation. Sara Lee Corporation is a global manufacturer and marketer of high-quality, brand-name products for consumers throughout the world, with its headquarters based in Downers Grove, Illinois, USA. Sara Lee Corporation has settlements in 39 countries, but sells its products in over 180 countries across the world. In fiscal year 2007, Sara Lee Corporation obtained a net income of 504 million USD, with an increase in net sales of 7.1% up to 12.3 billion USD. Sara Lee Corporation consists of three key businesses; Sara Lee Food & Beverage, Sara Lee Foodservice, Sara Lee International (see Figure 1.1), and is well-known for brands like Douwe Egberts, Senseo, AmbiPur, Zwitsal, Prodent, Sanex, etc. Together with Nestlé, Procter & Gamble and Unilever, Sara Lee Corporation is among the key players in the global Fast Moving Consumer Goods (FMCG) sector.1
1.2.1 Sara Lee International (SLI)
Sara Lee International (SLI) is a full subsidiary of Sara Lee Corporation and originates from collaboration between the Dutch firm Douwe Egberts and American based firm Sara Lee Corporation. In 1753, a gentleman named Egbert Douwes opened a shop in Joure, in the North of the Netherlands, selling mainly coffee, tea and tobacco. Mr. and Mrs. Douwes had a son who was christened Douwe Egberts, and whom inherited the business at the age of 25. The grocery shop was growing and Douwe Egberts expanded the business by selling regionally instead of locally. Due to
1http://www.saralee.com/InvestorRelations/FinancialInformation/~/media/50411252C0814FFE822AB42236B5D 58B.ashx
Figure 1.1 Organisation structure Sara Lee Corporation
Sara Lee Corporation
Sara Lee International Sara Lee Foodservice
North America
International Bakery Sara Lee
this expansion the name ‘Douwe Egberts’ acquired recognition and became a brand name. In 1919, the firm Douwe Egberts opened a coffee factory in Utrecht, expanding its business nationwide. By 1968, Douwe Egberts accounted for over half of the Dutch coffee and tobacco exports, and in 1973 Douwe Egberts moved across the Dutch border by opening a coffee roasting plant in Belgium. In 1978, Douwe Egberts started collaborating with the American firm Sara Lee Corporation which sold various food products since 1939. This collaboration and a number of acquisitions lead to the establishment of Sara Lee/DE in 1984. In the years that followed, Sara Lee/DE took over many other coffee- and coffee-related brands, and also expanded to other product segments like the household and body care segment. Today, Sara Lee / DE is called Sara Lee International and employs 18.000 employees and covers 45% of the total business of Sara Lee Corporation. Its headquarters is situated in Utrecht, the Netherlands. Besides Utrecht, SLI is also present in Amersfoort, Den Haag, Joure and Nieuwegein within the Netherlands.2
The three current business segments of SLI are International Bakery, International Beverage Coffee & Tea and International Household & Body Care. Firstly, International Bakery is mainly situated in Spain, and sells a variety of bakery and dough products to retail and foodservice customers, mainly in Australia and Europe. 86% of the sales of bakery products are generated in Western Europe, and contain brands like Bimbo, CroustiPate, Ortiz and Sara Lee. Bakery obtained net sales of 799 million USD in 2007. Secondly, International Beverage Coffee & Tea sells major coffee brands all over the world, mainly in Australia, Brazil and Europe. Coffee & Tea sells brands like DE, Pickwick, Van Nelle, Senseo, etc., and 84% of the sales in this segment occur in Central and Western Europe. International Coffee & Tea had net sales of 2.617 million USD in 2007. Thirdly, International Household & Body Care sells products in four main categories: air care, body care, shoe care and insecticides. 69% of the segments’ sales can be contributed to Western Europe, covering brands like Sanex, Zwitsal, AmbiPur, Kiwi and Vapona. Household & Body Care obtained a net sales volume of 2.042 million USD in 2007.3
1.2.2 Procurement Department SLI
Jeroen Harink (2003) defines procurement as ‘all activities targeted at controlling and managing incoming goods and services’. The concept of procurement is therefore much broader than only purchasing goods and services, and also entails the sourcing, contracting and relationship management of suppliers. Within procurement goods and services can be divided into two groups; direct procurement and indirect procurement. Direct procurement concerns all goods and services needed for the primary production and transformation processes of the core goods and services produced by the company. Indirect procurement concerns goods and services that are not directly related to the goods and services sold by the company, but are of a more facilitating kind. (Harink, 2003) Within SLI direct procurement is concerned with purchasing goods like coffee, tea, household and body care products, and bakery products. Indirect procurement concerns products and services like office supplies, lease cars, IT products like computers and software programs, real estate, etc. The past decade, SLI has gone through many changes, among which the centralisation process of the procurement department. Previously, the procurement department was decentralised and the cost savings that could be realised through adequate purchasing were underestimated. Therefore, drastic changes were introduced in order to reduce purchasing spend and transactional costs (van Weele, 2002). The current level of spend at Sara Lee International is 2.2 billion Euros. Centralisation of the procurement department of SLI has lead to a classification between direct and indirect purchasing. Both direct purchasing and indirect purchasing have been divided into several product groups. Each product group (for example HR & Professional Services), in turn, can be divided into multiple categories (for example travel or temporary labour). (See Appendix A for the organisation chart). Moreover, several purchasing functions can be distinguished at SLI. The first purchasing function discussed here is the category managers (also referred to as category owners). Category managers take responsibility for their own product category. They have to source and contract the best suppliers for the products within their product category. Each product group (consisting of multiple product categories) is lead by a procurement manager who manages and
2http://www.de.nl/OverDE/Geschiedenisentraditie/Pages/1753.aspx
supports the category managers within that particular product group. For direct procurement five product groups exist, being: coffee & tea, household & body care, bakery, technical procurement, and vending equipment. Indirect procurement is also divided into five product groups, being: marketing & sales, logistics, facilities, utilities & operations, IT & telecom, and HR & professional services. The procurement manager sets out sourcing and contracting strategies for his or her product group. On top, the Chief Procurement Officer (CPO) coordinates the procurement managers. Outside the procurement department, budget holders and purchase order (PO) creators are situated throughout the entire company. Budget holders manage the budget of their department, and have to control the amount of spend within their department. In practice, budget holders often also determine the suppliers from which they want the PO creators to purchase. PO creators are the actual buyers within SLI. Hence, it needs to be clarified that PO creators are the ones that actually buy the (mainly indirect) products and services, while the category managers source and contract the preferred suppliers. Category managers do not purchase any goods or services. Direct products are mainly purchased by the factories where they are used or transformed into the end product. This study focuses on both direct and indirect items. Figure 1.2 provides an overview of the different purchasing functions and their relations within SLI. The arrows in this figure represent the direction of coordination and stimulation from one function to another. The procurement processes department is a part of the procurement department and, among others, takes care of the visibility and accessibility of the contracts, and processes related to sourcing and contracting preferred suppliers. The concept of contract compliance is discussed in more detail in paragraph 3.2.
In order to simplify what has just been discussed, an example is required. Within SLI every employee needs a fixed range of office supplies to facilitate their work. Take for example a stapler. The category manager within the procurement department which serves the category of office Figure 1.2 Overview purchasing functions and relations within SLI
Sara Lee International
Procurement Chief Procurement Officer (CPO) Other Departments Procurement Managers Category Managers (Sourcing and contracting of
preferred suppliers)
Budget Holders
PO Creators (Purchasing goods and
services) Procurement
Processes Department
Chief Procurement Officer (CPO) Indirect Procurement
Procurement Manager (1) Direct Procurement
Logist. F.U&O IT C&T H&BC BAK Techn. Vend.
M&S HR
supplies, sources and contracts the optimal supplier of staplers. The budget holder of, for example, the finance department has got a budget from which, among others, the staplers and all other office supplies for his or her department need to be financed. The budget holder’s secretary usually buys the office supplies (and he or she therefore can be considered a PO creator). The secretary needs to be aware of the department’s budget in order not to overspend on office supplies. In this example it would be preferred when the PO creator would buy the staplers from the supplier that has been contracted by the responsible category manager. Suppliers that are sourced and contracted by the category managers of the procurement department are called preferred suppliers. If all PO creators within SLI would buy the contracted type of staplers from the preferred (contracted) supplier for staplers, economies of scale can be obtained leading to lower costs and lower risk. Therefore, purchasing preferred goods from preferred suppliers as determined by the category managers of the procurement department is a very important issue. When PO creators purchase preferred products from preferred suppliers this is referred to as buying compliant, or contract compliance.
1.3
Problem Indication
In the past decade, Sara Lee International decided to centralise its international business. In turn, the procurement department of SLI had to centralise its purchasing activities. The centralisation of the purchasing activities has lead to centralised procurement department, which is responsible for the sourcing, contracting and relationship management of suppliers. For sourcing and contracting suppliers, a new SAP IT-application has been introduced which covers the entire process from sourcing to contracting (SAP S2C). This S2C program guides the category managers through the process of sourcing and contracting the optimal supplier, and has as main advantages process standardisation and digital storage of information. The S2C tool, together with the introduction of other information databases and a performance measurement system has lead to the awareness of, among others, the low level of preferred suppliers for which a contract has been concluded and the low level of compliant purchasing.
Let’s look at the first problem stated above; the low level of preferred suppliers for which a contract has been concluded. Among the tasks of category managers is the requirement to provide a set of preferred suppliers for the purchasing activities and to stimulate the budget holders and PO creators to purchase compliant. Four main tasks of category managers are related to compliance, being: collecting contracts and price agreements for all preferred suppliers; purchasing spend should be covered by contracts as much as possible; driving compliance to preferred suppliers up to 100%; and onboard all preferred suppliers to e-invoicing. The last task concerns the process of involving preferred suppliers into electronic-invoicing. E-invoicing means that all invoices are issued digitally from suppliers. There are several applications that provide guidance in this process. OB10 is the e-invoicing application used by SLI. If all preferred suppliers are on-boarded to e-invoicing, greater cost savings through standardisation of processes and lower total cost of ownership can be reached. Every purchase from a non-preferred supplier results in an invoice which is not issued through OB10 and therefore brings along a higher workload and higher costs (paragraph 4.4 provides further explanation on this subject). However, in order for PO creators to be able to purchase compliant, category managers have to provide a clear set of preferred suppliers and preferred goods and services for which contracts have been completed. Until today only a small part of the preferred supplier agreements are backed with a contract and thus many purchases are performed with suppliers of whom no contract is present. Although this problem has been recently acknowledged and contracting is set as a priority for category managers, the amount of existing contracts until today is rather low with X agreements concluded by February 2008. As a result cost advantages are missed, while risks increase. Therefore, category managers have to establish a set of preferred suppliers with whom contracts are concluded for specific products and services.
Both problems discussed above relate to contract compliance, or better called the lack of contract compliance. Contract compliance refers to ‘the percentage of spend of total spend that can be allocated to contracted items at contracted suppliers’ (Vahrmeijer, 2007). Performance within this thesis refers to the level of contract compliance and is measured separately and in a different manner for category managers and PO creators. For category managers, contract compliance is measured by the amount of preferred suppliers that have been defined and contracted. PO creator’s performance on contract compliance is measured by the percentage of spend allocated to contracted items at preferred (contracted) suppliers. Hence, PO creator’s performance is somewhat dependent on the category manager’s performance of contracting preferred suppliers.
Discussing both problems, it seems clear that contract compliance needs to be increased. But, how can this be done? In order to be able to increase contract compliance, one should first know which factors both positively and negatively influence the behaviour of the category managers, and why they do (not) set-up a clear set of preferred and contracted items from preferred, contracted suppliers. Furthermore, the factors which positively or negatively influence the behaviour of PO creators to purchase (non-)compliant need to be determined. This research studies these behaviour influencing factors (BIFs), both positive and negative, in order to provide a list of factors that should be in place in order to stimulate contract compliance. Improving contract compliance is needed since complying with preferred suppliers will initiate cost advantages and will lower risk. Cost advantages can be obtained through creation of scale economies, while risk will be lowered because all purchases are covered by contracts which include clauses covering delivery, quality, prices, responsibilities, etc. Figure 1.3 provides a graphic overview of the subject and problem of this study.
1.4
Research Objective
This study is performed within the framework of writing a master’s thesis, and is done by order of the procurement processes department of Sara Lee International. This research report is the final product of the study program International Business and Management, specialisation International Financial Management (IB&M – IFM), and answers the main research question which is presented in the next paragraph. This research report provides a clear insight into the main problem in relation to contract compliance at the procurement department of SLI, and offers a number of factors that positively and negatively influence the behaviour of the category managers and PO creators. Thus, recommendations on which factors positively and negatively influence behaviour and in turn how to improve contract compliance by means of anticipating on the factors influencing behaviour are provided, while the implementation process will be left to SLI. The objective of this research is to provide SLI with clear, new insights on which factors positively and negatively influence motivation and subsequently influence performance of the category managers and PO creators concerning contract compliance. A set of possible factors that influence the performance of category managers and PO creators on contract compliance is derived from theory. Accordingly, hypotheses are set-up to test which influential factors are effective within the practical situation of SLI. An analysis of these factors results in recommendations to the procurement department of SLI concerning the improvement of contract compliance. The procurement processes department of SLI can then draw solutions from this report and implement them in order to improve contract compliance. The improvements on contract compliance will accommodate cost savings and risk reduction.
Current performance on contract compliance Behaviour Influencing Factors (See Chapter 3) - Preferred and contracted supplier set is incomplete - Level of internal contract compliance is low - Environmental factors - Organisational factors - People factors - Environmental factors - Organisational factors - People factors - Purchase contracted
items from preferred (contracted) suppliers - Source and contract
preferred suppliers - Stimulate P.O. creators Category Managers
P.O. Creators
Tasks (desired situation)
1.5
Research Questions
The current situation at the procurement department of SLI regarding the performance of category managers has been examined just recently by the introduction of a performance measurement system. The tasks of the category managers mainly consist of activities related to the optimisation of compliance to preferred suppliers. The performance measures show, among others, the low amount of purchasing from preferred (contracted) suppliers by PO creators. The current goal is to improve the level of contract compliance. In order to increase contract compliance, it should first be studied which factors influence the behaviour (or in this case the motivation) of the category managers and PO creators. This motivation in turn has an effect on performance, which in this study refers to contract compliance. Put differently, performance in the case of the PO creators in this study refers to the extent to which purchases are compliant with contracts. In the case of the category managers, performance in this study refers to the extent to which preferred suppliers are identified and contracts are concluded. Factors influencing behaviour can be of various types. Hansen & Wernerfelt (1989) determine environmental, organisational and people factors as determinants of individual behaviour. In chapter 3, a more thorough description is given on the factors that influence the performance on contract compliance. The exact determination of the factors that influence motivation and in turn the performance on compliance of the category managers and PO creators of SLI is captured in the following key research question.
RQ: Which factors, both positive and negative, influence motivation and in turn performance on contract compliance of PO creators and category managers at the procurement department of Sara Lee International within Europe?
An answer to the main research question is reached through answering a number of sub-questions. These sub-questions are divided into three sections: theory, practice, and analysis and recommendations. A short description on each group of sub-questions is provided below.
Theory:
SQ-1: Which factors influence the performance of category managers and PO creators on contract compliance both positively and negatively according to theory?
SQ-2: According to theory, do differences exist between category managers and PO creators concerning factors that positively or negatively influence their performance on contract compliance?
The first two sub-questions are related to the theoretical review in this thesis and determine the factors that might positively or negatively influence performance concerning contract compliance. These questions are answered in chapter 3. In addition to literature review to determine the behaviour influencing factors (BIFs), some interviews are conducted within SLI in order to detect any other BIFs that play a role within the performance on contract compliance. When the factors are retrieved from theory and through interviews, and when possible differences between factors influencing category managers or PO creators are detected, these factors are tested in practice, hence, whether they play a role within SLI. This leads to the following sub-questions related to the practical situation.
Practice:
SQ-3: Which factors – as retrieved in SQ-1 - do positively or negatively influence performance of category managers on contract compliance at the procurement department of SLI?
SQ-4: Which factors – as retrieved in SQ-1 - do positively or negatively influence performance of PO creators on contract compliance at SLI?
Analysis and Recommendations:
SQ-5: Do differences exist in influencing factors between the various product categories, age groups, gender or nationality of category managers and PO creators? And if yes, what are these differences?
SQ-6: What are the differences and similarities between the factors influencing the performance on contract compliance in theory and the factors influencing the performance of category managers and PO creators on contract compliance at SLI?
SQ-7: What improvements can be made according to the category managers and PO creators that might positively influence their performance on contract compliance? How can these improvements be realised?
Through these sub-questions more detailed information is acquired on how the factors influence performance on contract compliance, whether relations between several factors exist, and if so, what these relationships are. In addition, differences between category managers and PO creators and differences between product categories, age groups, gender and nationality are evaluated. Thus, sub-question 5 is answered in both chapter 5 and 6 of this thesis. The differences between BIFs in theory and BIFs at SLI are discussed in chapter 7, which will answer sub-question 6. The in-depth analysis of this data provides a clear sight on the problem concerning contract compliance and the reasons behind this problem, and leads to the possibility to draw conclusions and recommendations to SLI in order to improve the performance on contract compliance, which is covered in chapter 7. Overall, these sub-questions together lead to an answer to the main research question: ‘Which factors, both positive and negative, influence motivation and in turn performance on contract compliance of PO creators and category managers at the procurement department of Sara Lee International within Europe?’
1.6
Research Conditions
This research is conducted as the finalisation of an academic study and therefore the university has set some requirements regarding form, learning outcomes, credit loans and the involvement of external parties. The final thesis within the master program IB&M – IFM can take the form of a theoretical research (e.g. a literature survey), an empirical research, or an analysis of a problem relating to an organisation (final project). This study is classified as the latter type of research since it relates to the organisation SLI. Completing a thesis is a measure of the student’s individual ability. The student has to demonstrate that he or she is able to work independently and professionally in terms of managing the project and dealing with relational, methodological and content-related aspects and in terms of keeping to agreements. The number of credits (ECTS) awarded for an IB&M – IFM thesis is 25 ECTS. The subject must be relevant to the course being followed and the chosen specialisation (profile). The study program IB&M – IFM requires the master thesis to include both financial and international aspects. This study is conducted by order of Sara Lee International, within the department of procurement processes. The requirements of SLI are that the report should be completed within the period of seven months, and that the research should have practical relevance.
1.7
Structure of Thesis
Introduction and Methodology
Theoretical Practical Conclusions and
Recommendations Chapter 1 - Introduction Chapter 2 - Methodology Chapter 3 – Theoretical Background Chapter 4 – Research Environment Chapter 6 – Results and Analysis Contract Compliance of PO Creators Chapter 5 – Results and Analysis Contract Compliance of Category Managers Chapter 7 – Conclusions and Recommendations
2
Methodology
2.1
Introduction
This chapter discusses the methodology that is applicable to this thesis. Firstly, a conceptual model representing the main concepts of this study and its relations is outlined in the next paragraph. The succeeding section covers the research design in which the type of study is discussed. Subsequently, the way of data gathering is described, followed by a description on the way the data is analysed. The final section of this chapter provides a summary.
2.2
Conceptual Model
Verschuren (1986) studied the function of a conceptual model and often used the term causal model to explain its purpose. According to Verschuren (1986) a conceptual model has three main functions: it clearly defines the research element; it presents the selection of the concepts (variables); it visualises the relationships between the variables. The conceptual model shows and defines the concepts and their relationships from which knowledge is necessary in order to reach the research objective (Verschuren, 1986). Figure 2.1 shows the conceptual model of this study, consisting of three concepts. Contract compliance, as described in chapter 1, is rather low within SLI and can be appointed as the main problem and the dependent variable within this study. On the left side of the model the causal, independent factors of contract compliance are shown; the behaviour influencing factors (BIFs). The behaviour influencing factors are withdrawn from a study and traditional model of organisational climate by Hansen & Wernerfelt (1989), and divided into three types; environmental, organisational and people factors. Combined with literature from the book Organisational Behaviour of Kreitner, Kinicki & Buelens (2002), six causes of non-compliance determined by Kulp et al (2006) and van Weele, Rozemeijer & Rietveld (1998), and interviews held within SLI various BIFs are determined and placed under one of the three types of BIFs. These BIFs are factors that influence an individual’s behaviour and motivation which in turn leads to a certain performance. Figure 2.1 shows the BIFs on the left side of the model, presenting the influence of the BIFs on motivation, and in turn on the performance concerning contract compliance. Motivation can be split up into intrinsic and extrinsic motivation. Intrinsic motivation is the internal motivation of individuals to behave the way they do. Extrinsic motivation is the motivation of certain behaviour through rewards. (Harvey & James, 2005) Both types of motivation lead to a certain performance on, in this case, contract compliance. If an employee is promised to get a bonus if he or she improves his or her performance on contract compliance, this promise might increase the employee’s extrinsic motivation and in turn result in higher contract compliance. In other words, the BIFs influence either intrinsic or extrinsic motivation (or both), which in turn influences performance on contract compliance. This causal model shows that if one can influence or alter the BIFs, it can consequently influence motivation and performance. Therefore, knowledge regarding the BIFs that have a positive or negative impact on contract compliance, knowledge on the easiness to influence, and how to influence these BIFs, results in solutions on how to improve contract compliance. The three concepts shown below in Figure 2.1 are described and discussed in chapter 3.
Contract Compliance - PO Creators
To purchase contracted products from preferred (contracted) suppliers at contracted prices - Category Managers
Conclusion of contracts with preferred suppliers Behaviour Influencing Factors (BIFs) - Environmental factors - Organisational factors - People factors Motivation - Intrinsic - Extrinsic
2.3
Research Design
The objective of this study is to provide insight into the factors leading to non-compliance, and hence, being able to withdraw recommendations on how to improve contract compliance at SLI. This study closely reviews the practical problem at SLI concerning contract compliance, and determines the rationales behind non-compliance. Since this study concerns a practical problem that needs to be solved, this study is classified as an applied research. In addition, this study can be considered a causal research. According to Kotler et al (2006) a causal research has the objective to test hypotheses about cause-effect relationships. Since the main purpose of this study is to test hypotheses concerning the behaviour influential factors that lead to contract (non-) compliance at SLI and to determine the existing cause-effect relations between the BIFs and contract compliance, this study can be classified as a causal research. Besides causal research, Kotler et al (2006) also discuss descriptive and exploratory research, but since the aim of this study is neither to solely describe the situation nor to only explore the problem concerning contract compliance, these types of research are not applicable to this study. Moreover, the researcher works independently on the research, and the research environment is non-contrived. The study is conducted within seven months, wherefore this study can be named a one-shot study. (Sekaran, 2003)
The research method of this study is a case study approach, which is typified by Yin (2003) as a research method that investigates a contemporary phenomenon in its real-life context using multiple data sources, trying to answer a ‘how’ or ‘why’ question. Since the research question of this study is concerned with determining the reasons, hence the ‘why’, of the currently low rate of contract compliance within the practical situation of SLI, this study can be called a case study research. Because this study only reviews the problem of contract compliance within Sara Lee International, this research is a single case study. (Yin, 2003)
This study takes into account several purchasing related parties, such as procurement managers, category managers, budget holders, PO creators and the procurement processes team. The decision to take into account all these parties relates to the goal of this study of creating a set of reasons which is as complete as possible, involving all relevant parties. However, the extent of involvement varies between the parties. Furthermore, this research covers both the indirect as well as the direct side of purchasing products and services. PO creators mainly purchase indirect products, and the level of non-compliance is higher in the indirect section. But, direct purchasing also experiences non-compliance and is therefore also taken into account. Moreover, this study tries to be as complete as possible in order to find the reasons behind contract non-compliance so that compliance can be increased in both product segments. Finally, the geographic scope of this study covers SLI in Europe, because SLI is an international firm and both the purchasing staff and the suppliers are situated throughout the world. The scope has been slightly narrowed to Europe instead of the world because of the availability and accessibility of the data and because European procurement is still somewhat differentiated from procurement in other parts of the world.
2.4
Data Collection
This paragraph discusses which type of data is gathered within this thesis and in which way this is done. The data that is collected for this study can be divided into two types, primary data and secondary data. Secondary data is data which is collected and processed by people other than the researcher. Secondary data, therefore, is data from second hand. Primary data, in contrast, is data gathered from first hand, by the researcher herself. Primary data is often gathered when the data needed is not available from secondary sources and concerns data regarding behaviour, intentions, opinions, motivation, etc. The three main ways to gather primary data is through observations, surveys or experiments. (Baarda & de Goede, 2001)
factors are added from the interviews and are especially applicable to the case of SLI. Both sources of data lead to a list of BIFs (see Table 3.2 in chapter 3) with which sub-questions 1 and 2 can be answered.
The data for the practical part of the study, however, is gathered mainly from primary data sources. This primary data is collected through both quantitative and qualitative research in the form of questionnaires and interviews. Quantitative analysis concerns a statistical analysis of data with the aim of generalising and comparing the data. Qualitative analysis, on the other hand, is a way of retrieving more detailed and in-depth information. With qualitative data, fewer sources are utilised, but richer information is recovered to explore the issue without the aim of generalisation. Questionnaires are considered quantitative analysis of data, while interviews are considered qualitative analysis. (Baarda & de Goede, 2001) In addition to the use of primary data during the practical part of the study, secondary data like documents present on the SLI Intranet are also used. These documents are used to collect data to acquire additional information about SLI, and are in the form of reports and presentations. A reason for using multiple data sources and analysis concerns the reliability of the data. When multiple data sources are used and all sources acquire the same information, the reliability of the data is stronger. Furthermore, the combination of both quantitative and qualitative data analysis increases the completeness and richness of the data. First, two questionnaires (see Appendix C), one for PO creators and one for category managers, are set-up on the basis of the hypotheses that are developed in chapter 3. These hypotheses are tested through the questionnaires. As becomes clear by answering sub-question 2 in chapter 3, some differences exist in practice between the factors that influence the category managers or the PO creators. Therefore, the questionnaire is set-up slightly different for each party to meet the differences in their responsibilities. The results from the questionnaires are easily comparable and can be generalised. Subsequently, interviews (see Appendix D for interview questions) are conducted to acquire more detailed information which did not come forward through the questionnaire. Interviews provide more in-depth information, resulting in a broader and completer information base in order to withdraw recommendations. Both the questionnaires and the interviews are providing an answer to sub-questions 3 and 4.
To be clearer, the questionnaires are the first part of the empirical data collection process and are based on the hypotheses which are withdrawn from the theoretical model (see chapter 3). The questionnaires are tested and adjusted twice before they are sent to the actual target group. The target group consists of category managers and procurement managers on the one side, and PO creators and budget holders on the other side. The target groups cover various departments, different countries within Europe, and multiple product groups. The questionnaire for PO creators is initially sent to a target group of 54 persons. Because the number of respondents was relatively small in comparison to the total number of PO creators that are present at Sara Lee International, the questionnaire is sent to a second response group. In total 110 PO creators and 16 budget holders have received the questionnaire at two different time periods. In total there are about 500 PO creators at SLI, and the response rate of the questionnaire was 47%, resulting in a response of 11.4% of the total group of PO creators (see Table 2.1).
The questionnaire for the category managers and procurement managers is sent to the entire procurement department in Europe, thus excluding Asian procurement employees. This group consists of 39 category managers and 6 procurement managers. In total 27 respondents filled-out the questionnaire, reaching a response rate of 60% over the entire procurement group (excluding Asia) (see Table 2.2). A more detailed overview of the target group and respondents of both questionnaires per country and function are provided in Appendix B.
Furthermore, the interviews are conducted in order to obtain more qualitative and in-depth information on the topic. An interview schedule is set-up which is semi-structured, meaning it contains a range of pre-determined questions, but there is space for additional questions and discussion. The advantage of the (semi-) structured interview is the possibility of replication, and the increased convenience of comparing the data. Hence, an interview schedule is created, the interviews are conducted both in a face-to-face manner and through telephone calls, are recorded and the minutes are included in the Appendix E. Interviews are conducted with category managers and PO creators who have not filled-out the questionnaire and with category managers and PO creators as a follow-up after the questionnaire, in order to acquire (additional) valuable insights. In total eight persons are interviewed, of which four PO creators and four category managers, coming from different purchasing functions and different countries within Europe (see Appendix B for a detailed overview of interviewees per country and function).
Finally, the data acquired through the questionnaires and interviews is (statistically) analysed in order to provide answers to sub-questions 5 and 6, and in order to draw conclusions and to provide recommendations to SLI (SQ-7). The way of analysing the data acquired by sub-questions 3 and 4 is described in more detail in the following paragraph.
Yin (2003) has determined three principles of data collection which increase the level of construct validity and reliability of the data. These principles are considered to be very important in this research and are complied with in the best possible way. The first principle is called triangulation and refers to the use of multiple data sources to verify the data and to increase reliability. When multiple data sources are used and the data is the same for every source used, the data is much more convincing. Therefore, this study uses multiple data sources to verify the data. The second principle of data collection refers to the data organisation and storage. If the researcher organises the acquired data in a logical and structured order and documents it accordingly, succeeding researchers can easily retrieve the data and it becomes easier to conduct a follow-up study. The most important data within this study is attached in the appendices, but in addition all applicable data is documented on a CD-ROM, so others can easily access the data if needed. The third and final principle is to maintain a chain of evidence. In order to increase construct validity and reliability of the evidence, it is important that the research report is easy to follow and it remains clear which steps have been taken by the researcher in order to derive conclusions. (Yin, 2003)
2.5
Data Analysis
According to Yin (2003) “data analysis consists of examining, categorising, tabulating, testing, or otherwise recombining both quantitative and qualitative evidence to address the initial propositions of a study”. This study consists of a theoretical review of applicable literature and an empirical analysis through questionnaires and interviews. By means of the questionnaires and interviews the theoretically determined hypotheses are tested and applied to the procurement department of SLI.
in a separate paragraph in chapter 5 and 6. Analysis concerning the differences in outcomes between product categories, age groups, gender and nationalities are also discussed in a separate section in the chapters 5 and 6.
Within this thesis a number of hypotheses are withdrawn from theory and in turn tested by primary data from the practical situation within SLI. Therefore, this type of research relates to the strategy discussed by Yin (2003); ‘reliance on theoretical propositions’. Since it is impossible to generalise the outcomes of the statistical results of this study to the entire population, the results are validated by means of generalising on the basis of theoretical propositions, which settles the problem of external validity. (Yin, 2003)
2.6
Summary
• A conceptual model (Figure 2.1) is presented showing the dependent and independent variables of this thesis.
• This study is classified as applied research, since it tries to solve a practical problem. In addition, the research method of this study is a case study approach, which is defined by Yin (2003) as a method that investigates a contemporary phenomenon in its real-life context using multiple data sources.
• Both primary and secondary data is collected within this study. Secondary data is mainly collected for the theoretical part of the thesis, while interviews and a questionnaire are used to gather primary information.
• Yin (2003) determined three principles of data collection that increase the level of construct validity and reliability of the data: use of multiple data sources; data should be clearly organised and documented; the researcher should maintain a chain of evidence. This thesis complies with these principles since it uses multiple data sources to increase reliability of the data, all data is stored and organised on a CD-ROM to make replication of this study possible, and this thesis clearly describes every step that is taken in this study to make the research process understandable for the reader.
3
Theoretical Background
3.1
Introduction
In this chapter, the main theoretical concepts as covered in the conceptual model (Figure 2.1) are discussed. These three theoretical concepts are contract compliance, motivation and behaviour influencing factors (BIFs). The following paragraph starts with showing the behavioural model of Hansen & Wernerfelt (1989). This behavioural model is a general model showing the relations between BIFs, individual behaviour and performance. Within this chapter the behavioural model of Hansen & Wernerfelt (1989) is transformed in order to align with the conceptual model as determined in chapter 2. During the transformation several other behaviour influencing factors (BIFs) are added to the model. All the BIFs together have a certain motivational effect (either positive or negative) which ultimately results in performance which in this case concerns contract compliance. The objective of this chapter is to establish a theoretical model from which hypotheses can be withdrawn, and to provide answers to the first two sub-questions:
SQ-1: Which factors influence the performance of category managers and PO creators on contract compliance both positively and negatively according to theory?
SQ-2: According to theory, do differences exist between category managers and PO creators concerning factors that positively or negatively influence their performance on contract compliance?
Paragraph 3.2 describes the concept of contract compliance, covering the types of compliance management and providing definitions on contract compliance for both PO creators and category managers. Paragraph 3.3 introduces the behavioural model of Hansen & Wernerfelt (1989), which serves as a starting point for the theoretical model of this thesis. Additionally, paragraph 3.3 discusses the motivation concept, therewith introducing the first alterations that will be made to the model of Hansen & Wernerfelt to reach alignment with the conceptual model. Paragraph 3.4 introduces a number of other behaviour influencing factors (BIFs) which are withdrawn from academic literature and interviews within SLI. Paragraph 3.5 discusses which of the described factors are included in the theoretical model, which is presented at the end of paragraph 3.5. The theoretical model is an extension of the conceptual model and is based on the behavioural model of Hansen & Wernerfelt (1989). The theoretical model serves as a basis for the empirical study that is executed in this thesis. This paragraph also covers the differences in factors between category managers and PO creators. The succeeding paragraph discusses the hypotheses as withdrawn from the theoretical model. These hypotheses are grouped according to the five elements of commitment (see paragraph 3.6.1) and are tested during the empirical study presented in the following chapters. This chapter concludes with a short summary. In the end, this chapter provides the answers to the first two sub-questions since it discusses all behaviour influencing factors, introduces a theoretical model which presents the applicable BIFs for this study, and determines the differences in BIFs between category managers and PO creators.
3.2
Contract Compliance
First of all, the concept of contract compliance needs to be clarified. Contract compliance is situated at the end of the conceptual model as presented in chapter 2 (see Figure 2.1) and concerns the performance of employees on contract compliance. Within the procurement department of SLI contract compliance is defined as ‘the percentage spend of total spend that can be allocated to contracted items at contracted suppliers’ (based upon definition by Vahrmeijer, 20074). In this context the concept of preferred suppliers also needs to be clarified. SLI defines preferred suppliers as ‘suppliers for which either a contract or pricelist is designated’. The term ‘contract’ as used in this study relates to contracts that are established between a buyer and supplier. The category managers are the ones that need to determine a set of preferred suppliers with whom contracts are set-up. The PO creators in turn are the ones that need to purchase products and services from these
4Definition of Vahrmeijer (2007) has been slightly adjusted after an interview with the procurement processes
