Procurement Intelligence
Business Intelligence methods for Procurement Performance Measurement
Author:
R.F. Terlien
Procurement Intelligence
Business Intelligence methods for Procurement Performance Measurement
Groningen, September 21th, 2005
Technology Management
Faculty of Management and Organization University of Groningen
Author:
R.F. Terlien ronald@terlien.nl
Supervisors:
Prof. Dr. D.J.F. Kamann (University of Groningen) Prof. Dr. E.O. de Brock (University of Groningen)
Drs. J.C. Paalvast (Cognizant Technology Solutions)
The author is responsible for the contents of this thesis; all rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the author.
Management Summary
This thesis is written as the final course to complete my master’s degree in technology management at the University of Groningen. It describes a research project executed at Cognizant Technology Solutions.
Purpose of this project is to explore whether business intelligence methodologies can contribute to procurement performance measurement or procurement intelligence.
The following research question is formulated for this project:
“How can Business Intelligence support management in improving control over procurement?”
Several concepts are explored in order to find a fitting answer to this question. First theories concerning business intelligence, including a methodology to implement business intelligence are explored. This is followed by an insight into procurement theory, performance measurement and procurement performance.
Next to theory, a practical analysis has been executed. The practical analysis consists of interview with internal experts (consultants working at Cognizant) and external experts (procurement and business intelligence experts working in the field). Main purpose of the practical analysis is to validate the usefulness of research on procurement intelligence and to explore if business intelligence methods potentially could prove a valuable asset. Also it is explored how organizations in practice organize their information requirements analysis and how they formulated their performance indicators. Finally the experts were asked to give information regarding common pitfalls and problems in business intelligence implementations. The most important results of the research project are:
Business intelligence methods could play an important part in performance
measurement or intelligence projects on procurement. A structured method defined by
Philips & Vriens (1999), called the business intelligence cycle, gives possibilities to
Lack of data integrity and data quality are common problems in organizations. It is vital that organizations pay more attention to this problem. In this case too it is better to prevent than cure.
Defining performance indicators is considered a difficult task by many organizations.
Suggested top-down approaches to extract performance indicators from organizational goals often don’t work because of a discrepancy between what one wants to measure and what one can measure with the data available.
Instead of performing a top-down analysis to define performance indicators and information requirements a combination between top-down and bottom-up is suggested in this thesis. This enables companies to get the best of both worlds.
The reliance on merely financial and administrative systems as data sources to use for performance measures on procurement should be avoided. The intelligence will become much more valuable if the data sources are adjusted to the information requirement instead of the other way around.
Cognizant should explore the possibility of offering its clients standardized solutions for contract and invoice management and digitalized storage of contract and invoice data.
It has become clear that implementation of procurement performance measurement
and intelligence applications require large organizations for reasons of economies of
scale. Cognizant should focus only on organizations that fit this profile.
Preface
This thesis is the closure of my academic education. It describes the research project conducted at Cognizant Technology Solutions in Best, the final exam for a master’s degree in Technology Management at the University of Groningen.
I would like to take the opportunity to thank both my University supervisors. Bert de Brock for his dedicated efforts to put and keep me on track. He literally went through great lengths to visit me in Best, and took the time to motivate and guide me, especially during the early stages of the project. Professor Kamann for his guidance during the end game of my research-project. It was a big relieve that he was willing to take over for Professor De Brock during his unforeseen absence.
I am most certain I would have never been able to finish this project without the guidance of Joost Paalvast, my supervisor at Cognizant Technology Solutions. Joost, thank you for all the hours you spend listening to me (and my complaints) and for all the energy you put in giving me the right input on Cognizant and Procurement.
My gratitude goes to the people at Cognizant for giving me the opportunity to do my research project amongst them. A special thanks to the Indian colleagues, Sarav, Vishnu and Annil, I enjoyed spending time with you and listening to your stories about India.
I would also like to thank Peter de Bruin, Guido Winnik and Rachid Rusch for taking the time to tell me about procurement at their respective companies.
And last but not least, Malou, thank you for continuously pushing me to continue this project.
Groningen, September 2005
Ronald Terlien
Table of contents
Management Summary 3
Preface 5
Table of contents 6
1 Introduction and structure 9
1.1 Introduction 9
1.2 Structure 9
2 Company Profile 10
2.1 Introduction 10
2.2 Cognizant Technology Solutions 10
2.2.1 Introduction 10
2.2.2 Company Structure 11
2.2.3 Facts and figures 12
2.2.4 Onsite / Off-shore development model 13
2.3 Cognizant Technology Solutions Benelux B.V. 13
2.3.1 Introduction 13
2.3.2 Company Structure 14
2.3.3 Facts and figures 14
2.4 Procurement Solutions 14
3 Problem Description 16
3.1 Introduction and motivation 16
3.2 Problem statement 16
3.2.1 Introduction 16
3.2.2 Research Objective 17
3.2.3 Research Question 17
3.2.4 Sub-Questions 18
3.2.5 Scope 19
3.2.6 Prerequisites and constraints 20
3.3 Research Methodology 20
3.4 Research Model 20
4 Business Intelligence 22
4.1 Introduction 22
4.2 Terms 22
4.2.1 Introduction 22
4.2.2 Business 22
4.2.3 Intelligence 22
4.3 Definition of business intelligence 24
4.4 The BI-cycle 26
4.4.1 Aiming – what to measure? 27
4.4.2 Searching – how to measure it? 27
4.4.3 Analysis – actual measuring! 29 4.4.4 Distribution – communicate results to stakeholders 29
4.5 Lessons learned and conclusion 29
5 Procurement performance 31
5.1 Introduction 31
5.2 Procurement 31
5.2.1 Introduction 31
5.2.2 Tactical Procurement 32
5.2.3 Order function 33
5.2.4 Potential savings 33
5.2.5 Cognizant’s vision on procurement 34
5.3 Performance Measurement 35
5.4 Procurement Performance 36
5.4.1 Introduction 36
5.4.2 Reasons to measure the performance of procurement 37 5.4.3 The concept of procurement performance 37
5.5 Lessons learned and conclusion 40
5.5.1 Introduction 40
5.5.2 Procurement theory 40
5.5.3 Cognizant’s vision 40
5.5.4 Performance Measurement 40
5.5.5 Procurement performance measurement 41
6 Practical Reflection 42
6.1 Introduction 42
6.2 Information requirements 42
6.3 The importance of procurement performance measurement 44 6.4 Possible problems in implementing BI for procurement 44
6.5 Lessons learned and conclusion 47
6.5.1 Introduction 47
6.5.2 Information requirements 48
6.5.3 The need for procurement performance measurement 48 6.5.4 Pitfalls and lessons learned in implementing business intelligence projects 49
7 Procurement Intelligence 50
7.1 Introduction 50
7.2 Procurement Performance Measurement or Procurement Intelligence 50
7.3 Business Intelligence on Procurement 50
7.3.1 Aiming and searching 51
7.3.2 Analysis 53
7.3.3 Distribution 53
7.3.4 Business Intelligence for Procurement Performance Measurement 54
8 Recommendations and conclusion 55
8.1 Introduction 55
8.2 Conclusion 55
8.2.4 What is procurement performance? 57 8.2.5 Why is it necessary to measure the performance of procurement? 58
8.2.6 What is control? 58
8.2.7 Which data-sources are necessary to generate the required information to measure
the performance of procurement? 58
8.2.8 What possible problems can arise? 59
8.2.9 Conclusion to the main research question 60
8.3 Recommendations 61
8.3.1 Introduction 61
8.3.2 General recommendations 61
8.3.3 Recommendations to Cognizant 62
8.3.4 Further research 62
References 63
Appendix I: Verslag brainstormsessie 17-11-2004 I
Appendix II: Uitwerking interview met Dhr. P. de Bruin (ENECO) IV Appendix III: Uitwerking interview Dhr. R. Rusch (UWV) V
Appendix IV: Uitwerking Interview Guido Winnink VII
Appendix V: Quality Standards (CMMI) VIII
Appendix VI: Purchase Intelligence IX
1 Introduction and structure
1.1 Introduction
In this introduction the structure of this thesis will be explained, this structure is described in the next part of this chapter.
This thesis has been written as a final assignment to achieve a masters degree in Technology Management at the University of Groningen. The research project it describes is performed at Cognizant Technology Solutions. The topic it deals with is business intelligence methods applied at Procurement Performance Measurement.
1.2 Structure
This thesis is divided into eight chapters. In chapter 2 it starts with a description of the company at which the research project is executed. Next in chapter 3 the reasons and motivation to undertake this research project are described, followed by the research objective, research question, sub-questions, the research methodology, and a research model.
The next two chapters each describe a theoretical concept. In chapter 4 the concept of business intelligence is described, followed by the concept of procurement in chapter 5. The sixth chapter continues with a practical analysis followed by a combination of theory and practice in chapter 7.
Answers to the sub-questions posed in chapter 3 will be given in chapter 8, followed
by recommendations and the conclusion.
2 Company Profile
2.1 Introduction
This chapter describes the organization within which the research is conducted. The first section deals with the international organization, Cognizant Technology Solutions. First there is some general information about the history of the company, followed by the company structure and the facts and figures.
The second section is about the Dutch branch of Cognizant, its products and its services.
2.2 Cognizant Technology Solutions
2.2.1 Introduction
Information about the company, its structure and the facts & figures are described in this section. Each of these three topics is discussed in a separate sub-section.
In 1994 Cognizant was founded as the in-house technology development center for the Dun and Bradstreet Corporation. After the split-up of the Dun and Bradstreet Corporation in 1996, it became part of the Cognizant Corporation. In June 1998 the Cognizant Corporation was again split-up into many different companies and Cognizant Technology Solutions (CTS) was formed as a division of IMS Health. Also in June 1998, CTS completed its initial public offering and got a listing on the NASDAQ under the symbol CTSH. In November 2002 IMS Health divested its majority interest in CTS.
As of January 2005 Cognizant is the first and only offshore firm to be included in the NASDAQ-100 Index.
The vision and mission of Cognizant:
“To be the most preferred software services partner for Fortune 1000 and blue chip customers, worldwide.
To co-source perfectly engineered software solutions that add competitive advantage
to our clients, through long-term partnerships.”
Cognizant focuses on delivering IT-solutions addressing the business needs of its clients. Application management, development, integration, infrastructure management, business process outsourcing and consultancy are among the services Cognizant provides to it clients. For all of its activities Cognizant puts its onsite/offshore outsourcing model to use, this means that 30% of the work is done by employees working onsite in close contact with the client. The remaining 70% is outsourced to Cognizant offshore development centers in India.
2.2.2 Company Structure
This section describes the overall Cognizant company structure. Cognizant is a matrix organization.
The sales organization is divided into geographical regions, for instance Continental Europe, United Kingdom and United States of America, that each has its own responsibility for profit (profit centers), customer acquisition and account management.
There are global verticals responsible for domain knowledge, these are:
•
Banking
•
Health Care
•
Information Services and Media
•
Insurance
•
Retail
•
Telecom
•
Other Financial Services
•
Consumer and Packaged Goods
•
Transportation and Logistics
•
Services
•
Travel
•
Manufacturing
Global Horizontals are responsible for competencies, delivery and research and
development. Examples of Horizontals are:
•
CRM
•
ERP
•
Microsoft.NET
Next to the regional sales organization, the horizontals and verticals, Cognizant has Global Resource Management, responsible for project staffing, training and career development. All this is depicted graphically in the following picture:
Figure 1: Organizational Diagram (Cognizant Internal Publication, 2004)
2.2.3 Facts and figures
This section contains the most important facts and figures about Cognizant worldwide.
Revenues in 2003 amount a total of $ 368.2 million, revenues for 2004 indicate have grown to the amount of $ 586.7 million. At the end of 2003 the total workforce of Cognizant amounted 9,200 people by the end of 2004 this number has grown to approximately 17,000 employees. For 2005 it is expected another 8,000 employees will be added to the workforce.
Cognizant’s headquarters are situated in New Jersey (U.S.A.). It has thirteen offshore
development centers in India and near-shore centers in Canada, Arizona (U.S.A.), The
Netherlands, China and Switzerland. Sales offices are present in the United States of
America, Canada, United Kingdom, Germany, Switzerland, Singapore and The Netherlands (Cognizant Benelux). This research takes place at the one of these so- called sales offices, Cognizant Benelux.
Quality is one of Cognizant most valued principles. Cognizant’s development process is certified at P-CMM level 5 since 2002 and SEI-CMMi level 5 since 2003 by KPMG. More information about CMMi and P-CMM can be found in Appendix V.
2.2.4 Onsite / Off-shore development model
Cognizant’s projects are executed in accordance with it onsite/offshore model. The project team is divided into two teams, one team is working onsite with the customer, and the other team is working offshore from one of the development centers in India.
The division in workload is about 30% onsite and 70% offshore. By working onsite Cognizant beliefs it “... gains extensive knowledge of its clients’ systems and works closely with management and the company’s IT staff to speed the time to benefits of strategic initiatives, ensure quality and oversee the smooth and efficient transfer of knowledge.” (2003 Annual Report, The Power of Being Cognizant)
2.3 Cognizant Technology Solutions Benelux B.V.
2.3.1 Introduction
In December 2003 the Netherlands based company Infopulse was taken over by Cognizant. Its name changed to Cognizant Benelux and mid 2004 it was placed under the direct responsibility of the new Vice-President Continental Europe. As of December 2004 all former Infopulse companies are merged in the entity Cognizant Technology Solutions Benelux B.V. This section gives some background information about Cognizant Benelux and prior activities undertaken by Infopulse.
The former Infopulse was active in software development and ICT consultancy for the
financial market and procurement solutions. Being Cognizant it continues to be active
in these markets, though new projects in other Cognizant markets are being prepared
at the moment. As this thesis is about Procurement Intelligence the focus of the
section will be on Procurement Solutions. In the past, Infopulse has been active in
based bank.
Being Cognizant, the company strives to apply its experience in Procurement solutions to other customers. In line with this goal this research is conducted.
2.3.2 Company Structure
Cognizant Benelux falls under direct responsibility of the Vice-President Continental Europe (Geographical Region) and is responsible for Business Development in The Netherlands, Belgium and Luxemburg. Because Continental Europe is culturally different from the United Kingdom and the U.S.A. and also because English is not the native language, the choice has been made to put the project lead at the local office to add local Dutch project members to the Onsite teams. This is unique from a Cognizant perspective since in other projects the project lead is offshore and Cognizant’s onsite employees all originate from the offshore development centers. By using the onsite/offshore model in this way Cognizant ensures both local presence and domain knowledge for its projects.
2.3.3 Facts and figures
Cognizant Benelux is active at two locations in The Netherlands, in Amsterdam for Trading and Financial services and in Best for Procurement Solutions and other types of software development. The total number of employees in 2004 was around 40 people.
Customers of Cognizant Benelux are among the larger banks in the Netherlands and smaller trading houses.
Financial information about Cognizant Benelux is not at hand.
2.4 Procurement Solutions
The former company Infopulse had a strong focus on procurement solutions. After becoming Cognizant, this focus is still very much present. The procurement services provided by Cognizant are the following:
•
Procurement Quick Scan
By filling out this scan one can quickly determine the maturity of the procurement organization.
•
Procurement and Spend Management Solutions
The application Purchase Intelligence (developed by Cognizant) gives the means to analyze data integrity, to define a spend cube and to generate reports and analysis on a continuous basis
•
Data Warehousing and Business Intelligence
Cognizant has years of experience in delivering data warehousing solutions.
By combining this expertise with the experience in the area of procurement
Cognizant is able to implement Business Intelligence solutions for
procurement.
3 Problem Description
3.1 Introduction and motivation
This section describes why this research project will be conducted and what its goal is.
This research was conducted within the Cognizant Technology Solutions organization and has resulted in this Master’s thesis.
Companies are facing a declining economy and are drastically trying to cut costs throughout their business. Also in the procurement domain many savings can be realized. To realize these savings one must be “in control” of its process. To be in control one has to know what is going on and a pro-active stand is required. One of the services offered by Cognizant Benelux is to provide organizations with the means to control their procurement process. The goal of this research is to identify how to generate useful information in a Business Intelligence system for procurement.
The scope on procurement in this thesis is limited to the procurement of NPR-items (non-production related), items that are used to support the primary process and not to be used in the primary process. Examples of this category of products are office equipment (pencils, paper, desks etc.) and services ranging from cleaning services to ICT services and outsourced activities. This scope is chosen because the sourcing of production related items is mostly done by using ERP-systems (Enterprise Resource Planning Systems).
3.2 Problem statement
3.2.1 Introduction
The purpose of the problem statement is to bring structure to the research process.
According to Verschuren a problem statement defines why a research project is undertaken and what is being researched. The ‘why’ is formulated in a research objective and the ‘what’ in a research-question. (Verschuren, 2002)
The research question is divided into various sub-questions each obtaining only one aspect of the research.
For purposes of planning and research control it is necessary to set the scope of this
research project and to setup some constraints.
3.2.2 Research Objective
The function of the research objective according to Verschuren is to control the process of obtaining knowledge; it is the foundation of the Research Question. Also it gives a means to evaluate the research. The third function of the research objective is to give the motivation why the research should be conducted. (Verschuren, 2002)
The research objective formulated for this research project is:
“To determine in which way Business Intelligence can support management in improving its control over procurement and increasing the performance of procurement.”
Business Intelligence – The process of gathering and processing strategically relevant information. (Philips & Vriens, 1999)
Control - “Control is any form of targeted influential action”. This means that any action that is willingly undertaken trying to influence a system is a form of control.
Control can be effective (the goal is realized) or ineffective (the goal is not realized).
(De Leeuw, 2002: p. 151-157)
3.2.3 Research Question
The research question has, according to Verschuren, three functions. Firstly it creates a tension that should lead to action. Secondly it gives a first impression of what is being researched. And lastly, it does not only show what is not known but also what is known. (Verschuren, 2002)
The research question formulated for this research project is:
“How can Business Intelligence support management in improving control over procurement?”
3.2.4 Sub-Questions
To structure the process of answering the research question and to make this process transparent, a number of sub-questions have been posed all closely related to the central research question. By combining the answers to the sub-questions we can formulate a valid conclusion to the central research question posed above.
•
What is Business Intelligence?
Define the concept of business intelligence. Business Intelligence is one of the main concepts in this thesis. This sub-question will be discussed in chapter 4.
•
What is procurement?
Another important concept in this thesis is procurement. This sub-question is directed at procurement. What is procurement in the context of this thesis?
This sub-question will be discussed in section 2 of chapter 5.
•
What is control?
By defining control it is possible to define improvements in control. This sub- question is in effect already answered in section 3.2.2 since it is a term of the research objective.
•
What is performance measurement?
This research question is directed at using business intelligence for procurement performance measurement. In the research objective the assumption is made that improved control is related to increased performance.
To measure the effect of control measures it is needed to measure the performance of procurement. A change in performance gives information about the effectiveness of control measures. Before focusing on the performance of procurement, performance measurement needs to be defined.
This sub-question will be discussed in section 3 of chapter 5.
•
What is procurement performance?
After defining performance measurement in general, this concept will be used
in the context of procurement. This sub-question is used to define procurement
performance. This sub-question will be discussed in section 4 of chapter 5.
•
Why is it necessary to measure the performance of procurement?
We need to determine the necessity of this research project. Do companies need to measure the performance of procurement? This sub-question will be discussed in chapter 6.
•
Which data-sources are necessary to generate the required information to measure the performance of procurement?
It is useful to determine what kind of data-sources are generally used to measure the performance of procurement. This information is gathered by taking interviews and from theory. This sub-question will be discussed in chapter 4, 5 and 6.
•
What possible problems can arise?
Both in the theoretical research and from practice, examples of best practices and common mistakes can be found (for both business intelligence implementations and procurement performance measurement systems). This sub-question makes sure an inventory of problems and pitfalls is made from practice and theory; it will be discussed in chapter 6.
3.2.5 Scope
The scope of the research project is defined in this section. For each of the concepts the scope will be written down.
Procurement
As stated before the definition of procurement in the context of the thesis is limited to
NPR-items (Non Production Related Items) only. The reason for this delimitation is
that Cognizant’s Procurement Solutions is focused at NPR-procurement.
focuses on the business aspects of business intelligence and specifically not on the technical aspects.
3.2.6 Prerequisites and constraints
This section defines the prerequisites and constraints applicable to this thesis and the research project.
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The duration of the internship is 6 months
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The research project needs to be relevant both from a business and an academic perspective
•
The management of Cognizant needs to commit resources and support to the project
•
The project needs to meet the requirements set by the faculty of Management and Organization of the University of Groningen
•
The thesis is written in English
•
Appendices regarding Dutch sources are written in Dutch
3.3 Research Methodology
The used methodology will is described in this section. The type of research conducted is ‘explorative’. The primary goal is to explore the different aspects stated in the research objective and to draw a conclusion based on the results. The conclusion will be made in the form of statements and assumptions. The research process is not planned in great detail in advance.
The method of data collection is both theoretical research and interviews. Theoretical research implies using existing theories from literature and setting up a framework.
The interviews are meant to collect the opinion of experts in the field. This is done by taking face-to-face interviews. The information gathered will be used to specify the requirements for a Business Intelligence framework for procurement.
3.4 Research Model
The research model is created to visualize the area in which the research is conducted,
to specify which is in and out of scope for the research project.
Figure 2: Research model
The figure is a control system (De Leeuw, 2002). Control is defined by De Leeuw as follows: “Onder besturing moet worden verstaan enige vorm van gerichte beïnvloeding” which roughly translates into “Control is any form of targeted influential action”. This means that any action that is willingly undertaken trying to influence a system is a form of control. Control can be effective (the goal is realized) or ineffective (the goal is not realized). (De Leeuw, 2002: p. 151-157)
The arrows indicate information exchange. Management in this case is controlling the Procurement function. De downward arrow is control executed by management on procurement. The upward arrow is information flowing back to management, for example on performance, this gives management a means to see whether or not their control measures are in fact effective.
BI serves as a means to channel and filter the information from procurement to management.
The objective of the research is “to determine in which way Business Intelligence can support management in increasing its control over procurement in order to increase the performance of procurement”. This can be realized by altering the elements within the dotted square. The items outside the dotted square are constant and are not subject to change in this research.
Procurment Management
Business Intelligence
Procurement function
4 Business Intelligence
4.1 Introduction
Business Intelligence (BI) is one of the business hypes of the nineties. There are numerous different definitions and interpretations of BI. Examples of BI implementations vary from competitor intelligence programs to customer intelligence.
A Dutch supermarket company successfully introduced a discount system involving a card scan monitoring every single purchase made by its customers. This system enables the company to successfully determine the needs and possibilities for each of its stores.
This chapter will describe Business Intelligence in the context of this thesis. A definition will be given that is relevant for this research project. Also the process to create Business Intelligence will be explained.
4.2 Terms
4.2.1 Introduction
The concept of Business Intelligence consists of two terms, business and intelligence.
To get an idea of the meaning and the impact of the concept both will be explained in more detail.
4.2.2 Business
Business is applicable to activities, doing business, and the entity business, in which business is more or less the same as company. The context in which business intelligence operates is the area of internal and external organizational processes and everything related to those processes.
4.2.3 Intelligence
The origin of intelligence is military. In the context of intelligence agencies, one
government tried to find out as much useful information about the enemy army and its
possibilities as possible. The literal meaning of the word intelligence in English is:
“the ability to learn or understand or to deal with new or trying situations”.
1This translation is more or less the same as the definition given by Rodenberg (2004).
His vision of intelligence is: Intelligence is joined, interpreted knowledge directed at the future. To visualize the concept of intelligence and the different stages between data and intelligence, Rodenberg has developed the intelligence pyramid.
Information Knowledge
Intelligence
Strategic impact / decision-making
Action
Data
Figure 3: Intelligence Pyramid, Rodenberg (2004)
The pyramid visualizes the stages between data and action. In the opinion of
Rodenberg information is structured data. By analyzing and sharing information it is
possible to generate knowledge. This in turn can be used to create intelligence if this
knowledge is actually used towards realizing a goal in the future. Intelligence can have
an impact on strategy and decision-making, but is still useless unless it is actually put
into action. The following table gives definitions of all stages in the pyramid.
Stage Definition
Data “Data items about things events, activities, and transactions are recorded, classified, and stored but are not organized to convey any specific meaning.
Data items can be numeric, alphanumeric, figures, sounds or images.” (Turban, E. and Aronson, J.E., 2001 p. 131)
Information “Information is data that have been organized so that they have meaning for the recipient. They confirm something the recipient knows, or may have ‘surprise’ value by revealing something not known.” (Turban, E. and Aronson, J.E., 2001 p.
131)
Knowledge “Knowledge consists of data items and/or information organized and processed to convey understanding, experience, accumulated learning, and expertise as they apply to a current problem or activity. Knowledge can be the application of data and information in making a decision.” (Turban, E.
and Aronson, J.E., 2001 p. 131)
Intelligence “Intelligence is joined, interpreted knowledge directed at the future.” Rodenberg (2004) Decision Making “Decision making is a process of choosing among
alternative courses of action for the purpose of attaining a goal or goals” (Turban, E. and Aronson, J.E., 2001 p. 33)
Table 1: Definitions
4.3 Definition of business intelligence
There are two perspectives of business intelligence. The first perspective is the technical perspective dealing with questions related to information technology used for business intelligence implementations. Examples are questions related to database architecture, data extraction methods, data views, etc. The second perspective is the business perspective. This deals with questions related to application of business intelligence in a business context. This thesis will focus mainly on the business perspective since the research question focuses on a business problem.
Next to this division into two perspectives there are also two views on business
intelligence, a product and a process view. The product view defines business
intelligence as the product of analyses and interpretation of information; an example is
a report or analysis from the information system. The process view defines business
intelligence as all the steps needed to obtain the intelligence product. Basically the difference is that the first does not incorporate the steps needed to obtain intelligence and the second does include those steps.
In this thesis business intelligence is viewed as a process, a process with organizational goals as input and intelligence as output.
A definition by Vriens and Philips (1999) states that business intelligence is “the process of acquiring and processing of information for strategy forming of organizations”.
The definition of Business Intelligence as a process is sufficient in the context of this thesis, but the limitation to strategy forming in organizations does not suffice for the scope that is defined earlier and it also does not include recent additions to BI theory and practice.
According to Rodenberg (2004) BI is a process “… used to disclose, structure, control and manage the internal information streams in organizations”.
This definition also is too limited for the scope of this thesis given the fact that not only internal, but also external information can be very relevant for strategic and other organizational issues.
A definition given by the Brock (2004) of Business Intelligence: “The process of targeted and proactive acquisition of data, to be transferred into information, distributed as knowledge to be used in decision making.” He adds that decision- making in this case can be both operational, tactic and strategic. Data are in this definition both internal and external and both qualitative and quantitative.
This last definition encompasses issues that are not embedded in the other two
definitions; its vision on BI is broader and is not limited to strategic processes and the
use of only internal sources. This last definition of BI will be used throughout this
thesis.
4.4 The BI-cycle
It is clear now intelligence is to be produced from data within and outside the organization. In most cases this “warehouse” filled with data is so large that it is not always clear what data is really relevant. The data most of the time is enclosed by a number of internal and external sources that are not always accessible or relevant.
Next the data that is usable must be analyzed and interpreted before one can speak of intelligence.
To create usable information and intelligence out of data the BI-cycle (Philips &
Vriens, 1999) is used.
Philips & Vriens argue that, although it is not clear at first glance what data are relevant, a pre-selection is required to prevent one from “drowning” in an excess of data.
Within the BI-cycle this pre-selection is done in the stage “aiming”, the other stages are in order: searching, analysis and distribution. This is graphically depicted in the following model:
Figure 4: Business Intelligence Cycle (Philips & Vriens, 1999)
It is important to keep in mind the stages in the model are not per se sequential, it is very well possible to feed back to prior stages. The four stages of the cycle and their respective problems are explained next.
Searching Defining and executing
searching activities Aiming
Determining the information needs
Analysis Interpretation of data;
producing intelligence Distributing
Getting the Intelligence at the right spot and using it
4.4.1 Aiming – what to measure?
During the aiming stage the information requirements are determined, Philips (1999) states that the information requirements should be strategic, but as stated before, tactic and operational activities can also be supported with Business Intelligence. The requirements emerging from these activities will be taken into consideration in the context of this thesis.
The aiming stage takes place in two steps. First it is determined about what information is needed (Philips & Vriens [1999] call this step: inventory of environmental data). This can take place in the form of a classification of data. The next step is to determine what one exactly needs to know, filling the data classes with the appropriate data.
A way to structure data is the use of key performance indicators (KPI’s). “A performance indicator is a variable that expresses quantitatively the effectiveness or efficiency or both, of a part or whole process, or system, against a given norm”
(Lohman et al, 2004 p 268). By formulating the organizational goals in terms of measurable variables that indicate performance (effectiveness and efficiency; a more complete definition of performance, as well as a definition of efficiency and effectiveness will be given in chapter 5) of certain sub-processes one can determine exactly what kind of data are needed. The variables to be measured determine a specific data requirement.
4.4.2 Searching – how to measure it?
The second stage, searching, encompasses the preparation and execution of the search process. During the preparation it is necessary to determine how to collect data; which sources are available? How can these sources be used? Which technologies are used?
As stated earlier in the definition of business intelligence, both internal and external sources are possible. The accessibility of sources is not always guaranteed. Both internal and external sources can contain classified information; and could in that case not be available for general use in business intelligence. It is required to determine in this stage whether or not certain complications are in place.
There are several classes of sources. To give an idea of the possibilities a number of
Internal vs. External sources
Internal sources are data sources we can find within the organization. Examples are data warehouses containing administrative data, invoices, but also all digital and printed documents.
External sources are sources outside the organization. Examples are databanks at research institutes and libraries, statistics and forecasts from government and independent specialized organizations.
Primary vs. Secondary sources
This is related to the origin of the source. Is the data within the source originally from this source then the source is called primary. If the source is passing through data from other sources it is called a secondary source. The difference is that secondary sources can be interpretative and therefore not objective. Examples of primary sources are annual reports, interviews and personal opinions as long as they are not originating from another source. Examples of secondary sources can be newspapers and magazines as long as they report data from other sources.
Open vs. Closed sources
As stated before not all sources are available or accessible. Open sources are sources available to all. Closed sources are restricted to personnel with security privileges, or sources at other companies not accessible from the outside. In the searching stage we need to take into account these restrictions.
Information carriers
There are a number of ways to store information. This can be varying from paper to digital carriers and even knowledge within people. To be able to analyze data with bi- tools the data has to be digital or digitalized.
Technology choices
Apart from the 4 criteria of sources, choices regarding technology to be used are also
made during this stage. The number of BI-software developers is enormous. But every
BI-application makes use of certain tools.
4.4.3 Analysis – actual measuring!
The third stage of the cycle is analysis. During this stage the actual intelligence is produced. According to Philips and Vriens (1999) the following sub-stages are part of analysis.
1. Categorizing
2. Condensation (remove excess data for a better overview e.g. by making graphical depictions and tables)
3. Drawing conclusions, adding meaning to information by interpretation 4. Developing scenarios about competitors
5. Researching own possibilities
6. Giving recommendations for future actions
As can be seen this list is limited to Competitor Intelligence (point 4); this thesis takes a broader scope of business intelligence into account. In the context of procurement Point 4 will be replaced by: “Developing scenarios about procurement”.
The possibilities during this stage are largely dependent on choices made in the area of technology. It is possible that certain analyses cannot be executed within certain configurations.
4.4.4 Distribution – communicate results to stakeholders
The fourth and final stage is distribution. The purpose of this stage is that the right intelligence is delivered to the right persons and departments. This is the stage in which decisions regarding presentation and interfacing of intelligence are taken, the stage in which the intelligence is put into action. Decisions taken earlier in the BI- cycle largely determines what can, and what cannot be done during this stage. Finally it is important to realize that although the quality of the intelligence can be very good it will still be useless if it is not put into action in the right way.
4.5 Lessons learned and conclusion
In this chapter the definition of business intelligence is determined. The definition
used throughout this thesis is the following:
information, distributed as knowledge to be used in decision making.” (De Brock 2004)
It has also been determined that the conditions set by De Brock, decision-making can be both operational, tactic and strategic in this case, are essential. In the definition used data are both internal and external as well as both qualitative and quantitative.
The choice made by De Brock is clearly different than the definitions used by Philips
& Vriens (1999) and Rodenberg (2004). It gives the possibility to entertain the option of applying business intelligence to other levels than strategy.
Apart from setting the definition this chapter encompasses a description of the method used by Philips & Vriens (1999) to apply business intelligence in organizations. This particular method, known as the business intelligence cycle divides the business intelligence process into four separate stages that can be executed sequentially as well as continuously.
The four stages are aiming, searching, analysis and distribution that respectively deal
with “what needs to be measured?”, “how does one want to measure?”, “actually
measuring” and “the distribution of the intelligence product to the people who need
it”.
5 Procurement performance
5.1 Introduction
In this chapter the concept of procurement performance will be defined. Before this can be done procurement itself needs to be described. In the first section the concept of procurement is defined, the second section is about performance, the third and last section concludes with an integration of both, procurement performance.
5.2 Procurement
5.2.1 Introduction
Procurement is the function within a company responsible for the purchasing of all goods, services and materials. Its goal is to realize a price as low as possible against the highest possible quality (Porter, 1980). As mentioned before, the scope of the thesis is limited to the procurement of NPR-items (Non-production related). Items that support the production process rather than items that are used in the production process. According to Van Weele (2001) the procurement process consists of the following activities:
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Determining specification of needs
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Selection of the most suitable supplier
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Contracting the supplier, including negation of conditions
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Ordering of needed items
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Expediting and evaluating
•
After-care and evaluation
Figuur 5: Procurement process (Van Weele, 2001)
Procurement is a very important activity within companies. A very large part of costs consists of procured goods and services. According to Van Weele (2001) this can be up to 60% for industrial companies. The fact that a large part of costs are related to procured goods and services means that the procurement function is a potential source of profit.
To give a better understanding of the procurement processes both tactical and operational procurement will be discussed in more detail. After this the opportunities of cost savings will be further explored.
5.2.2 Tactical Procurement
Tactical procurement consists of the stages specification, selection and contracting.
There are no actual transactions during the tactical procurement process. During the transaction process three stages are executed. These stages are (in order of execution) specification, selection and contracting.
Determining specification
This stage encompasses the specification of needs. After determining the procurement needs it is necessary to determine which products are to be produced and what products are to be outsourced.
Selecting supplier
Once the specification stage is completed the most suitable supplier is selected based on criteria defined in the prior stage.
Determining specification Internal
customer
Selecting supplier
Contracting Ordering
Expediting and evaluation
Follow-up and
evaluation
Supplier
Tactical Purchasing Order function
Procurement
Contracting
During this stage the selected supplier is contracted. Delivery conditions are negotiated. Most of the time contracting is conducted in the form of an ‘umbrella’
agreement. An ‘umbrella’ agreement is an arrangement in which the product range which will be bought from a supplier is established; this includes the price per product. In addition the buyer can negotiate a bonus from the supplier tied to the total purchasing turnover for a certain period. Also several other terms and conditions can be negotiated ranging from order routine to delivery conditions. (Van Weele, 2000:15)
5.2.3 Order function
The order function is the operational stage in the procurement process. In the order function the actual purchase orders are placed with the suppliers contracted during the contracting stage.
Ordering
As mentioned before the purchase orders are placed with the suppliers during this stage.
Expediting and evaluation
During this stage orders are monitored. Also part of this stage is making sure orders are delivered at the right time in the right place.
Follow-up and evaluation
This stage encompasses a final check of the process. Did everything go in accordance with the terms and conditions negotiated in the contracting stage? When problems have occurred this is the stage in which contact is made with the supplier.
5.2.4 Potential savings
According to Van Weele (2001:16, 2000:21) there are several ways in which
purchasers can contribute to cost savings for the company, both direct and indirect.
of quality and shortening production runtimes.
Standardization
By limiting the number of interchangeable products the total number in stock can be declined. Also standardization makes it possible to order the same product with more suppliers which is enables the purchaser to make use of its buyer power (possibly resulting in lower prices).
Stock reduction
By lowering the amount of products in stock, investments in working capital and warehousing space can be lowered.
Product- and process innovation
According to Van Weele the purchasing function should play an active role in working together with its suppliers to innovate products. Also the order process could be subject to innovation. By lowering process costs there can be savings realized.
Lowering the costs of quality
By selecting a supplier with products of good quality internal costs related to quality can be lowered. The company could for example stop or reduce checking the quality of products on delivery.
5.2.5 Cognizant’s vision on procurement
Cognizant has a long history in procurement projects with a number of companies. As
such it has developed is own vision on the procurement process. Cognizant strongly
believes Procurement should be a pro-active process. This means that the
procurement organization should actively address the outside world instead of just
waiting for requests from within the organization. According to Cognizant, in addition
to the two procurement processes discussed earlier (tactical procurement and the order
function), three aspects should be enhanced. These aspects are procurement control,
procurement analysis and procurement communication.
Procurement control
This process is directed at stimulating employees working within the procurement organization. Good procurement control makes sure the procurement organization as a whole adds more value to the organization. This is realized by continuously enhancing procurement performance.
Procurement analysis
This process feeds information to the other processes. Data collected in the organization can be combined with data and benchmarking information from outside the organization. The information generated can be used to measure the performance of other processes.
Procurement communication
According to Cognizant it is necessary to communicate the services provided by the procurement organization to make sure these services are used. To realize this, a third process is required; Procurement communication.
5.3 Performance Measurement
From marketing point-of-view, organizations achieve goals by satisfying their customers with greater efficiency and effectiveness than their competitors. In this context effectiveness is the extent to which customer requirements are met; efficiency on the other hand is a measure of economic use of resources while providing a given level of customer satisfaction. (Neely, 1995:80)
This leads to the following definition of performance:
“Performance measurement is the process of quantifying the efficiency and effectiveness of purposeful action.” (Neely, 1995:80)
According to Okkonen et. al (2002:3) the main reason for an organization to measure
its performance is to be able to manage it. They add that performance measurement
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Communicate objectives to employees
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Direct employees effort towards reaching these objectives
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Control whether or not the objectives are met
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Make visible how employees efforts contribute to business objectives
The framework of performance measurement created by Neely (1995:81) shows that performance measurement can be addressed at three levels:
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Individual performance measures
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Set of performance measures
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The relation between the performance measurement system and its environment
This is visualized in the following picture:
Figure 6: Performance measurement system (Neely et al., 1995)
5.4 Procurement Performance
5.4.1 Introduction
This section describes procurement performance. What is procurement performance,
and why should one care to measure the performance of procurement? Next to these
two questions the possible role of business intelligence will be described.
5.4.2 Reasons to measure the performance of procurement
Van Weele (1981: 10-11) gives us a number of reasons as to why one should measure the performance of procurement. The first reason he brings to our attention is that management is interested in the performance of procurement. According to Van Weele this is for reasons of evaluation and control.
Next to this he adds that buyers should have instruments to witness the results of his own actions.
Advantages of procurement performance measurement are according to Van Weele (1981:10-11):
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Continuous reporting about the work done by the procurement enhances the visibility and contributes to acknowledgement of the value of this activity as a management activity
•
It makes it easier to execute a focused procurement policy and gives possibilities to anticipate the future
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It contributes to better control of activities
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It can supply norms for balanced evaluation
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It contributes to better motivation of purchasing personnel
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It contributes to better communication with other departments
Human behavior is influenced by the way in which performance is measured, this accounts for procurement too. Therefore it is necessary to define balanced and measurable norms for the different procurement activities that are interpreted in the same way by all people involved in the process. These norms need to be related to procurement goals where each of these goals has to be translated into measurable variables. Only then it is possible to determine to what extent these goals/targets are realized.
One of the main conditions is that procurement goals need to be in alignment with the organizational goals. (Van Weele, 1981: 11)
5.4.3 The concept of procurement performance
As can be derived from the name procurement performance we are dealing with the
the result of two dimensions, effectiveness and efficiency.
If we apply this to procurement it is clear that procurement performance is the result of the dimensions procurement effectiveness and procurement efficiency. This is also stated by Van Weele (1981:15).
Van Weele adds that procurement actions need to be executed to meet a certain goal.
The priority in this case is to meet the goal. The actions undertaken are effective if this goal is met. A second demand can be stated in terms of efficiency, meaning the goal needs to be realized with the least amount of effort.
According to Van Weele procurement goals preferably need to be formulated in a quantified form. In addition to this the procurement goals need to be integrated into the short- and midterm planning (Van Weele, 1981: 16-17). This contributes to the demand that procurement goals need to be in alignment with corporate strategy.
After first describing procurement in four dimensions, namely logistics, technical,
commercial and procurement department (Van Weele, 1981), later this is changed to a
division in procurement effectiveness (containing the dimensions procurement
material costs, procurement logistics and quality of purchased materials) and
procurement efficiency with the dimension procurement organization. This can be
depicted visually in the following picture:
Figure 7: Key Areas of Purchasing Performance Evaluation; after Van Weele (2001;258, 1984;148)
According to Van Weele effectiveness is related to the goal setting of procurement.
An example is to obtain the right products in the right amount at the right time on the right place for the right price and service level. (Van Weele, 2001: 255)
The four areas in the picture above are the areas on which performance indicators (PI’s) can be applied. Business intelligence methodology also mentions Performance Indicators as a way to measure performance. The next chapter will contain a practical reflection, followed by a chapter in which business intelligence and procurement performance will be combined.
Purchasing effectiveness
Purchasing materials costs/prices
Purchasing logistics
Quality of purchased materials
Materials price/cost control
Materials price/cost reduction
Adequate requisitioning
Vendor delivery reliability
Order policy
Purchasing’s pre-design involvement
Purchasing’s post-design involvement
Personnel
Management
Information systems
Procedures and policies Purchasing Organization
Purchasing Efficiency
