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Suppliers base funneling

Development and implementation of a sup- plier base rationalization method

Under supervision of:

Prof. Dr. D.J.F. Kamann Dr. J.T. van der Vaart Ing. W.K. Kloosterman

Research performed by:

Selmar Vincent Westra

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Suppliers base funneling

Development of a supplier base rationalization method

Master thesis research on the Strategic Sourcing Department from Cordis Europa N.V.

Author:

Ing. Selmar Vincent Westra

First supervisor University of Groningen:

Prof. Dr. D.J.F. Kamann

Second supervisor University of Groningen Dr. J.T. van der Vaart

Supervisor Cordis Europa N.V.

Ing. W.K. Kloosterman

Groningen, May 23, 2005

The author is responsible for the contents of this thesis; the copyrights are deposited with the author © 2005

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“With regard to excellence, it is not enough to know, but we must try to have and use it”

Aristotle (circa 340 BC), Nichomachean Ethics

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PREFACE

Performing a research at Cordis has resulted in an interesting and turbulent period for me. In a large company with lots of opportunities and lots of high priority projects it can be troublesome to find the time to answer my questions. However I did receive full cooperation and people have been very supportive to me and my research. I am grateful for this and I would like to thank everybody for that. Secondly I would like to state that it is my ambition to continue this good relationship with you all, because Cordis is currently my employer.

Besides this general acknowledgement I would like to mention the names of the people that gave a special contribution. First of all I would like to thank the initial buyers; Hans Schoonbeek, Henk Beukers, Ludolf Onnes, Karel Weyzig, Mark-Olof Dirksen, Stefan Spekreijse, Han Post, Jan Win- ters and Pieter van Bolhuis. Special thanks goes to Willem Kloosterman, my internal supervisor and Peter Verkaaik, the purchasing director. I would also like to thank my academic supervisors;

Prof. Dr. Dirk-Jan Kamann, for the introduction with the Cordis problem owners, his many contribu- tions to the subject related theory and for his suggestions and critics on my thesis and Dr. Taco van der Vaart for his support during this research, especially for pointing out the relation between the Kraljic Matrix and the Power dependency theory. From Cordis also Geert-Jan Douma for his input on the BPCS package and Suzanne Bloemsma for her useful suggestions on my thesis. My family and future in-laws for their interest in my progress and finally my sweet girlfriend Joanna for her love, patience, support and suggestions.

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SUMMARY

Reducing the number of suppliers is a widely described trend in purchasing. Cordis Europa N.V. In Roden judged their supplier base was too big and they assumed that this large supplier base causes numerous problems and missed opportunities. The Non Inventory and Capital (NIC) buy- ers from the Strategic Sourcing Department initiated a master’s graduate project to test this hy- pothesis and perform a research and an improvement on The Cordis NIC supplier base. The re- search is performed from June 2004 until January 2005. This thesis will describe the research and its results

Cordis Europa N.V. is a manufacturer of high quality medical products required for the diagnosis and treatment of circulatory diseases. Cordis was founded in 1959 and is currently three countries on two continents. Recent developments are the announced merger with a former competitor;

Guidant.

The current strategic sourcing department is a result of a reorganization early 2004. Before this reorganization the department concentrated on operational and tactical activities. After the reor- ganization the strategic side of purchasing gained the attention it deserves. This implied a larger need for management information. The former purchasing department operated in a subservient way and did not have influence on all purchases; this resulted in a proliferated supplier base with mostly unknown suppliers. The research on the supplier base should assist in increasing control on the purchases and the supplier base. The following objectives and sub questions where formu- lated:

Problem statement:

Cordis Europa N.V. is not able to manage and control its NIC supplier base and it has no available method and strategy to improve that

Objective

An optimal and manageable NIC-supplier base for Cordis Europa N.V. With supplier strategy, logi- cal content, improved efficiency and identified suppliers

Research sub questions:

Method

1. How should a supplier base be optimized

2. What methodology is available for a supplier base optimization

3. Which elements should be present in a supplier base optimization method Optimal supplier base

4. How can the supplier base manageability be improved,

5. Which elements should be present in an optimal and manageable supplier base 6. Which elements should be present in a Commodity Strategy

7. How can efficiency be improved, what handling can be simplified automated or terminated 8. What operational activities can be reduced and how can they be reduced

9. What savings can be made (hard and soft)

A first exploration made clear that there was not much clearly applicable method available for a supplier base optimization, therefore this research obtained a dual goal, one an optimal supplier base and two a supplier base optimization method. Both where initiated simultaneously by examin- ing and analyzing the current situation with regard to the supplier base and by studying the current available methodology and theory. The current supplier base appeared to be a derive from a very rigid ERP package called BPCS. It contained a lot of illogical entries and it missed a lot of impor- tant data. The current available theory provided some guidelines for an optimal supplier base, but it missed a clear optimization method.

After this analyzing phase, the observed shortcomings and critical notes where used as input for the proposed and implemented improvements. The conclusion withdrawn from the research with regard to the optimization method is that a supplier base should be optimized by funneling on

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three levels; first a gross filter should funnel all double suppliers, next a session to eliminate illogi- cal entries should be made and for the remaining suppliers a commodity designation should place the suppliers in a suitable group and the commodity strategy steps should determine if suppliers should be maintained or not.

The supplier base itself became able to provide important information, because it is redesigned into an intermediate MIS. This automatically updated version of the new enhanced supplier base provides significantly more information. Secondly the optimization process itself resulted in a 100%

identified supplier base. There are no unknown suppliers left. Furthermore this research concluded that the incoming number of invoices could and should be reduced by making agreements with the companies that are responsible for the majority or by eliminating suppliers in these categories.

Monthly bills should be negotiated with the remaining suppliers. The same principle is applicable for the number of purchase orders. These orders should be entered with as much items at one time as possible. The suppliers that cause most operational activities are identified as a result of this research. The supplier base optimization method developed for this research is performed as well. It resulted in a few sessions which reduced the number of suppliers from the original 1400 active suppliers to 507 in March. The remaining number of suppliers can be further reduced when initiated projects are finished. The author of this thesis estimates that as a result of this research the total number of active suppliers could be approximately 400 by the end of this 2005.

Considering the financial impact of this research it can be stated that it is hard to quantify savings for Cordis so far, but a world wide benchmark performed by Robert Monczka (sheet Purspective 2005) describes that an optimal supplier base results in a 6% cost saving, a 21% logistics saving and a 18% quality saving.

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INHOUDSOPGAVE

PREFACE...4

SUMMARY...5

1 INTRODUCTION...9

PART 1: PRELIMINARY EXAMINATION... 10

2 GENERALBACKGROUNDCORDISEUROPAN.V.... 11

2.1 Introduction... 11

2.2 Company nature... 11

2.3 History... 11

2.4 Company structure... 11

2.5 Strategic Sourcing... 12

3 METHODICALFRAME... 15

3.1 Introduction... 15

3.2 Methodology... 15

3.3 DOV... 15

3.4 Process Excellence... 15

3.5 A comparison: DOV vs. Process Excellence... 16

4 OUTLININGTHERESEARCH... 18

4.1 Introduction... 18

4.2 Reasons For Research... 18

4.3 Problem exploration... 18

4.4 Problem definition... 20

4.4.1 Problem statement... 20

4.4.2 Making it operational... 21

4.5 Approach... 22

PART 2: RESEARCH... 24

5 CURRENTSITUATION... 25

5.1 Introduction... 25

5.2 The BPCS ERP package... 25

5.2.1 Shortcomings and critics on the BPCS package... 25

5.3 The current supplier base... 25

5.3.1 Description... 25

5.3.2 Supplier base entries... 25

5.3.3 Supplier base management... 25

5.3.4 Origin of the proliferating supplier base... 25

5.3.5 Shortcomings of the current supplier base... 26

5.4 Current supplier selection procedures... 26

5.4.1 Request to add a supplier... 26

5.4.2 Complexity matrix... 26

5.4.3 Supplier Risk Assessment... 26

5.4.4 Supplier Improvement Plan... 26

5.4.5 Supplier selection procedure critics and shortcomings... 26

6 CURRENTAVAILABLETHEORYANDMETHODOLOGY... 27

6.1 Supplier base optimization theory and methodology... 27

6.1.1 Reasons for and risks of supplier base optimization... 27

6.1.2 Optimization methodology... 29

6.2 Supplier differentiation theory and methodology... 30

6.2.1 Pareto analysis/ ABC analysis... 30

6.2.2 Pareto/ABC-analysis critics and shortcomings... 31

6.2.3 Purchasing portfolio; Kraljic matrix... 31

6.2.4 Critics on and shortcomings of the Kraljic Matrix... 33

6.2.5 The Cube... 34

6.2.6 Critics on the cube... 34

6.2.7 The Account portfolio and the confrontational matrix... 35

6.2.8 Critics on and shortcomings of the account portfolio and the confrontation matrix36 6.2.9 Confrontation model 2; the windmill... 37

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6.2.10 Critics on and shortcomings of the windmill... 37

6.2.11 Power dependency portfolio... 37

6.2.12 Critics on and shortcomings on the power dependency model... 38

6.2.13 Recommendations on a portfolio analysis... 39

PART 3: RESULTS AND IMPROVEMENTS... 40

7 SUPPLIERBASEOPTIMIZATIONMETHOD... 41

7.1 Introduction... 41

7.2 The supplier base funneling method... 41

7.2.1 Double vendor names... 42

7.2.2 Low spend or no spend suppliers... 43

7.2.3 Cordis personnel (declaratives)... 44

7.2.4 Preventing the supplier base from Growing... 45

7.2.5 (Super) commodity strategy... 45

8 THEENHANCEDANDOPTIMIZEDSUPPLIERBASEWITHADDITIVEINFORMATION. 47 8.1 Introduction... 47

8.2 The new enhanced supplier base... 47

8.3 Commodities and super commodities... 48

8.4 Pareto chart (ABCD analysis)... 48

8.5 Dual perspective purchase portfolio analysis... 49

8.5.1 The Kraljic matrix... 50

8.5.2 The Account portfolio and confrontational windmill... 52

8.6 Intermediate MIS... 52

8.7 The optimized Cordis supplier base... 53

9 POTENTIALSAVINGS... 55

10 CONCLUSIONS,RECOMMENDATIONSANDEVALUATION... 56

10.1 Conclusion and recommendations... 56

BIBLIOGRAPHY... 59

LISTOFFIGURES... 61

LISTOFTABLES... 62 APPENDIX A. THE VOC MODEL... ERROR!BOOKMARK NOT DEFINED. APPENDIX B. RESEARCHOUTLINE (+GANTT-CHART)... ERROR!BOOKMARK NOT DEFINED. APPENDIX C. PARETO CHART... ERROR!BOOKMARK NOT DEFINED. APPENDIX D. ABCD ANALYSIS... ERROR!BOOKMARK NOT DEFINED. APPENDIX E. SUPPLIER MANAGEMENT AND PURCHASING PROCESS FLOW... ERROR!BOOKMARK NOT DEFINED.

APPENDIX F. REQUEST TO ADD A SUPPLIER QUALITY CRITERIA... ERROR!BOOKMARK NOT DEFINED. APPENDIX G. COMPLEXITY MATRIX... ERROR!BOOKMARK NOT DEFINED. APPENDIX H. SUPPLIER APPROVAL MATRIX... ERROR!BOOKMARK NOT DEFINED. APPENDIX I. SUPPLIER BUSINESS ASSESSMENT... ERROR!BOOKMARK NOT DEFINED. APPENDIX J. COMMODITIES AND SUPER COMMODITIES... ERROR!BOOKMARK NOT DEFINED. APPENDIX K. SUPER COMMODITY STRATEGY... ERROR!BOOKMARK NOT DEFINED. APPENDIX L. EXAMPLE SWOTANALYSIS... ERROR!BOOKMARK NOT DEFINED. APPENDIX M. SUPPLIER BASE SIZE THROUGHOUT THIS PROJECT.... ERROR!BOOKMARK NOT DEFINED. APPENDIX N. PROGRAM FOR AUTOMATIC UPDATE INTERMEDIATE MIS... ERROR!BOOKMARK NOT DEFINED.

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1 INTRODUCTION

Trends in management and organizations are often discussed or described. The knowledge com- munity of purchasing forms no exception to this rule. Supplier Base reduction is a subject that can be found in many articles and therefore it can be seen as a trend. Cordis Europa N.V. has asked the author of this thesis to perform a supplier base optimization for a graduation research. This thesis describes the attempts to find or define methodology for a supplier base optimization and it describes the approach, the findings and the results of the actual optimization performed on the Cordis Europa N.V. supplier base.

The Research objective of this thesis is:

Objective

Develop and implement method for an optimal and manageable enhanced NIC-supplier base at Cordis Europa N.V. With logical content, improved supplier recognition and improved efficiency The research is performed following the Process excellences steps; Define, Measure, Analyze, Improve/Innovate and Control. The structure of this thesis is derived from these steps.

Chapter 2 presents a general description of Cordis Europa NV. The company nature history and organizational structure will be illuminated. This chapter will be concluded with an introduction to the department that was subject for this research; the Strategic Sourcing Department.

Chapter 3 describes the theoretical frame; a comparison of two research methods will be made and finally the choice on the applied method will be explained. Utilizing this method to outline this research is what will be described in chapter 4. The chapter will start with an oversight of the rea- sons for research, followed by a problem exploration, the problem definition and the operationali- zation of the problem. When this information is presented, the chapter will be concluded with a description of the more detailed research approach.

Chapter 5 and 6 will describe the current situation of the problem area and the current situation with regard to available theory and methodology. This will cover the measure phase and a part of analyze phase from process excellence.

In chapter 7 the first result of this graduation research will be presented. It will describe a clearly visualized supplier base optimization method. This method is developed by studying available the- ory and methodology and searching for an optimal combination of existing elements developed supplements.

Chapter 8 will present a second result; the enhanced and optimized supplier base. In this chapter results of the utilization of the methodology from chapter 6 and 7 will be described. The actual Cordis supplier base after the improve/innovate phase will be described. Following the commodity strategy, the Pareto analysis results, the portfolio analysis results, the intermediate MIS will and the optimized Cordis supplier base will be described.

Chapter 9 will shortly illuminate some information on savings or potential savings and finally chap- ter 10 will present the conclusion of this research

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Part 1: Preliminary examination

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2 GENERAL BACKGROUND CORDIS EUROPA N.V.

2.1 Introduction

A graduation research for a masters’ thesis in the work field of Technology management is hard to perform without a company or an organization that provides a business case. This research was conducted at Cordis Europa N.V. in Roden, the Netherlands. The following paragraphs will shortly describe the company’s nature, history, and it will give an impression of the Strategic Sourcing Department (SSD).

2.2 Company nature

“Cordis a Johnson and Johnson Company” is a manufacturer of high quality medical products re- quired for the diagnosis and treatment of circulatory diseases. Technological innovation and a deep understanding of the medical marketplace and the needs of patients have made Cordis the world’s leading developer and manufacturer of products for interventional medicine. The company is established in the United States (Miami, Puerto Rico and Warren), in Mexico (Juarez) and in the Netherlands (Roden).

The core activities of Cordis are:

• The development of new products.

• Production.

• The distribution of products.

Other important actors in this market are Boston Scientific and Guidant. Recent announcements have made clear that Guidant is in a process of becoming a member of the Johnson and Johnson family as well, so Cordis and Guidant will be joining forces in the future.

2.3 History

Cordis was founded in Miami by Dr. Wm. P. Murphy Jr. in 1959. The medical device corporation rapidly gains recognition for being a pioneer in innovative devices and products for interventional vascular medicine and electro-physiology. The name Cordis stands for “concerning the hart”.

In 1969 the European factory in Roden was build. It started as a production and sales site, but strict US legislations and developments on the European market made it profitable to start with research and development of new products in Roden. From 1992 the Roden site started producing new balloon catheters. For this successful product line they also became responsible for further development.

In 1996 Cordis Corporation merges with Johnson & Johnson Interventional Systems Co. to form Cordis Corporation, a Johnson & Johnson company.

A recent important development was the Cypher™ stent, a drug-eluting stent to evaluate the risk of in-stent restenosis. In 2002 Cordis receives approval in Europe for the Cypher™ stent; in 2003 Cordis received FDA approval to market its Cypher™ stent in the United States.

The objective of Cordis is to become number one in the area of treatment and diagnosis of heart- and vascular diseases. This should be realized by continuously cooperating towards operational excellence (the best possible result).

2.4 Company structure

Cordis has two business units: Cordis Cardiology for cardiovascular disease management and Cordis Endovascular for the treatment of peripheral vascular and obstructive diseases. Cordis Ro- den is managed by site management. This means management is responsible for all general and operational issues related to the plant in Roden. The site management consists of the leadership team members (LT) and it is led by the chairman. The directors of the main departments all form

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part of the management team. Every department has a few sub departments led by department managers. The sub departments are divided into groups. Cordis is made up of the following main departments:

1. Operations (production) 2. Engineering

3. Strategic Sourcing

4. Supply Chain Management (distribution centre) 5. Safety and Environment

6. Regulatory Affairs 7. Quality Assurance 8. Information Management 9. Human Resources 10. Finance

11. Materials Management 12. Research and Development

In the next paragraph the strategic sourcing department will be further illuminated because this is the department where this research was initiated.

2.5 Strategic Sourcing

Strategic Sourcing (SSD) is the department where this research was executed. The department is physically in Roden, but organizationally it operates under supervision of the head office in Miami, (see figure 1). The physical presence in Roden also implies serviceability towards the Roden site, this means there are numerous communication lines to strategic sourcing and the local director is a member of the Roden leaderships team (LT).

Confidential

Figure 1 Organization chart strategic sourcing department

In figure 1 the department is separated in Components NIC and Other. The Components group represents all the bill of material items. The goods purchased for this group are mostly ordered through automated Materials Requirement Planning (MRP) packages and the Strategic Sourcing Department delivers input on supplier issues, supply issues, vendor rating and the whole purchas- ing process as can be seen in figure 2. The NIC group represents the majority of the supplier base. NIC stands for Non Inventory and Capital. In this organization all non bill of material prod- ucts are NIC. This means for example every machine, tool, computer or every piece of office sup- ply. In fact all purchased goods that are not placed under product related metals, product related plastics and chemicals, product related packaging, or product related Original Equipment Manu- facturers (OEM) are considered NIC. The NIC supplier base is a more precise designation of the research area, but this will be further specified in chapter 4. The category Other seem a category that is very broad, but in this case it refers to all goods delivered through intercompany (J&J) rela- tions and all OEM products, meaning al complete products that Cordis supplies to customers with- out adaptations.

The current Strategic Sourcing Department (SSD) originated from a reorganization that took place late 2003. The department became responsible for all tactical and strategic purchasing processes.

The operational activities became the responsibility of the Order Desk (materials management) and Accounts payable (Finance). Before the reorganization the purchasing department ap- proached their activities purely on a subservient way, new insights and trends were not all imple- mented yet and purchasing was more or less synonym to ordering. Of course there was some strategy, but a structured strategic purchasing process was not implemented. The new department consists of people with a variety of backgrounds all relevant for the goods being purchased and some people with purchasing experience. The new strategic sourcing director started with the as- signment to form the department into an organization fit for its new tasks and secondly his new role meant he had to assure the renewed department granted the recognition it needs throughout

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the company. The first year all newly recruited purchasers and the more experienced purchasers were further trained on, amongst others, purchasing theory and negotiation skills.

The differences in approach between the old department and the renewed department can be visualized by looking at the purchasing process according to Kamann as presented in figure 2 (Ka- mann 2000).

Figure 2 Operational and initial purchasing (Kamann 2000)

The initial processes (colored Grey) roughly cover the work field of the new strategic sourcing de- partment the operational activities (colored Lila) roughly cover the work field of the old department.

Currently the operational activities are the responsibility of the order desk and the finance depart- ment. Under notification that expedition is a separate department as well.

The renewed department devoted itself to achieve a higher level in purchasing and supply man- agement by following an improvement recipe called “Michigan State University Purchasing Model”;

Also known as the “Purchasing Excellence model” (Ederveen et al 2004). The Global Procurement and Supply Chain Benchmarking (GEBN), started by Robert Monczka Phd in 1993 provided the data for this research. The benchmark was performed at 150 participating companies. The re- search attempted to reveal the differences in approach and the critical success factors. The result is an integral framework which sketches the route to what is called `Purchasing Excellence`. The steps described by Dr Monczka are a compilation of well known purchasing issues and ideas. The adoption of this plan by Cordis has led to one of the causes for a research on the supplier base, but that will be further illuminated in paragraph 4.2. The recipe suggests 8 strategic processes (See figure 3) leading to a continuous improvement towards what is called “Purchasing Excel- lence”. For all processes different measures and parameters determine how well the performance is compared to best practices from a worldwide benchmark (Ederveen et al 2004).

Becoming aware

Market scanning Specification Supplier selection

Tending/

Contracting

Ordering Expediting Registration Pay Evaluation

Operational purchasing Initial purchasing

Authorization

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Develop Commodity/

Article Group Strategies

II

Integrate Suppliers into the new Product/

Process Dev. Process V

Integrate Suppliers into the Order Fulfillment Process

VI Establish and

Leverage a world- class Supply Base

III

Insourcing/

Outsourcing I

Develop and Manage Supplier

Relationships IV

Supplier Development and Quality Mgt

VII Manage Costs

Strategically across The Supply Chain

VIII

INTEGRATED, ALIGNED AND

GLOBAL

Critical integrated Supply chain processes

Figure 3 Strategic processes, Robert M Monczka PhD

Many companies have adopted Monczka’s idea and it is promoted by national and international purchasing organizations. It covers an area far wider than the scope of this thesis therefore its fur- ther relevance on this research will be acknowledged where applicable; however in most situations the choice is made to study the actual source material. In the following chapters of part one the theoretical frame will be presented, the problem will be explored and research will be outlined.

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3 METHODICAL FRAME 3.1 Introduction

In this section the research methodology will be clarified. The methodology should provide struc- ture to this research and makes it reproducible. To select an appropriate method, the qualifications of two methods will be reviewed and compared.

3.2 Methodology

Given the fact that this research is performed at a company and it, consequently, is provided with a clear business objective, the search for research methodology can be restricted to practical re- search methods. De Leeuw (2001) describes the roll of methodology as critically reflecting and guarding the research structure, the defensibility, the quality, the multiformity and the reproducibil- ity (de Leeuw 2001).

For this purpose, the methodology should fulfill the following qualifications:

• Assure reproducibility of the research

• Assure thoroughness of the research

• Stimulate multiform perspective

• Minimize omit of relevant perspectives and sources

For practical research De Leeuw (2001) distinguishes policy supporting research and problem solving research. In this case the research is problem solving. De Leeuw further presents the DOV model (Diagnose, Design and Change) to perform a solid research.

A second method, especially developed for practical research is the Process Excellence method.

This method is based on the six-sigma approach (Pande, et al, 2000). Without attempting to be exhaustively in finding all possible research methods, both DOV and Process Excellence will be illuminated and compared. Finally one of them will be selected and applied for the following part of this thesis.

3.3 DOV

DOV stands for “Diagnose”, “Ontwerp” and “Verandering”, which is Dutch for Diagnose, Design and Change. Logically these three form the steps the model presents to perform the research with.

Next the steps will be discussed shortly.

Diagnose

This step is meant to disentangle the problem with a multiform scope. The first step is analyzing the primary process of the problem area. The second step a conceptualization of the problem. Fi- nally a clear problem definition is formulated.

Design

The design phase consists of two parts. First the direction of the solutions is determined. This is a further analysis of the problem, meant to pinpoint the exact flaw and obviously to determine what the solution roughly looks like. The second phase is the design of proper measures that can be taken to solve the problem.

Change

In this step the prepared solution is implemented. This should be done be developing an imple- mentation plan and by designation of an implementation team. Finally the whole process should be closed by an evaluation.

3.4 Process Excellence

Process Excellence is a method developed to improve a process. It consists of five phases: De- fine, Measure, Analyze, Improve / Implement and Control. Besides these phases, the method pro-

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vides a multitude of tools, systems and sub methods to assist a researcher. In its origin the six sigma approach was developed to reduce defects to literally six sigma, meaning 99, 9997% yield.

Of course a high goal which should be seen as an end of a series of improvements. The method and much of the tools however can easily be applied in other business researches as well. Below, every phase will be discussed shortly (Rath and Strong 2004).

Define

In the define phase the project’s purpose and scope are formulated. A variety of tools can be used to determine the customer, the customer expectations and the problem tangle. The problems un- derlying internal processes are studied and the related variables are determined. The problem statement and the objective are formulated based on the gathered information

Measure

In this phase relevant information, based on the regarding internal processes and variables, is gathered. The information concerns current process performance, the problem area and possible problem causes. This phase is essential in statistical analysis, which is the origin of the six-sigma approach. The suggested tools are used to present the information in an insight providing way.

Analyze

In the analyze phase, the gathered information is transformed in answers to the problem statement and objective. The problems root causes are identified and confirmed with data. This phase should lead to a full understanding of the problem.

Improve / Implement

This stage is about developing improvements, plan their implementation and actually perform the implementation. The objective is to try out and implement solutions that address root causes. A typical question in this phase is: “How can we fix the problem”.

Control

The control phase includes an evaluation of the solutions and the plan. A before and after analy- sis, a monitoring system and documentation of results lessons and recommendations are part of this finalization.

3.5 A comparison: DOV vs. Process Excellence

In this paragraph the DOV and Process Excellence are compared to expel similarities and to fund a choice for and optimal approach in this research.

The three phases that are distinguished in the DOV-model can be linked to the phases of the PE- model. Table 1 shows which phases correspond with each other. The first three phases of Process Excellence are a more detailed description of the Diagnose-phase of De Leeuw. The Improve- phase (PE) can be compared to the Design-phase of De Leeuw, and Implement, a sub-phase of Improve, can be compared with the last phase of the DOV-model, i.e. the Change-phase. Process Excellence adds one more phase, namely the Control-phase. On a high aggregation-level one could state that both research methods distinguish more or less the same phases.

Table 1: Comparison of the DOV-model and the PE-model De Leeuw (DOV) Process Excellence

Diagnose Define Measure

Analyze

Design Improve Change Implement Control

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The difference between both methods can be found in their background. The DOV-model is based on management-theories, while Process Excellence has a more or less practical background.

Process Excellence is a collection of techniques that can be used during a certain phase of the research. The DOV-model is less detailed than Process Excellence and can be seen as a re- search structure within which the researcher determines which theories apply to solve the prob- lem.

The decision on which research method should be used is significant, however when the chosen research method is approached with a multiform view, strengths from multiple methods can be applied within the chosen method. Nevertheless one must be selected to achieve a solid structure.

The DOV method assures a sound research and it is easily applied in most situations. Process excellence assures a sound research as well, but it also has a structure that stimulates a revalua- tion of the researched problem. The first three steps will often not occur in this exact order, be- cause diagnosis requires analysis and measure and analysis might require renewed diagnosis and measurements. Acknowledging this, it can lead to a revaluation of the outcome of the former step, which supports a thorough research. Also considering the PE tools, which stimulate a multiform scope on the problem and the fact that PE is fully implemented in the Cordis organization it seems the best option.

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4 OUTLINING THE RESEARCH 4.1 Introduction

Following the selected research methodology, the preliminary research can be finished by defining the problem. In the following paragraphs the reasons for research will be represented, the problem will be further explored and finally the observations will be transformed into a problem statement and a research objective.

4.2 Reasons For Research

As stated in paragraph 2.5 the research is conducted at Cordis SSD. The research was initiated by the initial NIC-buyers (Non Inventory and Capital) commodity, based on some repetitive problems related to the purchasing process. The buyers declared they considered the large supplier base to be a problem. They actually stated it was the cause of a lot of problems and missed opportunities.

More detailed, the practical cause to research the supplier base was the size it had and the effort it took to maintain it. The size causes problems with the recognition of relevancy of suppliers, effi- ciency losses and the loss of potential leverage advantages. On a daily bases a purchaser re- ceives calls and mails from suppliers. If the significance of this supplier or the dependency on this supplier is unknown, a purchaser is not able to recognize if he or she should or should not make any effort in reacting on the request. This will most probably lead to a waste of time or maybe an unnecessary annoyance of an important supplier. The large supplier base also causes problems with most reorganization projects or improvement programs on the purchasing department. When- ever a question rises or an improvement is initiated, there will often be a question on the number of suppliers these changes or questions apply to. For example if a project on improved payment terms is initiated, the question if a certain supplier should be contacted needs to be answered for all active suppliers. The right supplier base additives should provide information whereupon these decisions can be made. An optimized supplier base cuts down the number of suppliers that need an answer on this matter.

Another reason for Cordis to initiate this research is the fact that Purchasing Excellence draws at- tention to the supplier base. As stated in paragraph 2.5 SSD is attempting to reach a higher level in purchasing. The processes in figure 3 are monitored and improved by different teams. Steps 2 and 3 imply a more strategic approach of purchasing, by developing commodity strategies and by establishing a world-class supplier base. Both of these processes require a lot of information about the current suppliers, in other words; they need a supplier base enhanced with useful additives.

Additionally for both steps it becomes a question what the right size of the supplier base should be. These issues put forward by the Purchasing Excellence theory, form one of the causes to con- duct a research on the supplier base.

Summarized it can be stated that the reason for research is that the initial buyers feel there should be a smaller, better manageable supply base, with more leverage advantage and less complexity.

The remaining suppliers should be known and rationalized, meaning they should be supplemented with relevant information. In the next paragraphs the problem will be further explored and finally the research objectives will be stated and operationalized.

4.3 Problem exploration

The feeling expressed by the initial buyers, supplemented with the suggestions from the purchas- ing excellence theory might be a reason to perform a research; they do not provide a thorough description of the problem. In this paragraph the problem will be explored to discover what the re- sults of a large supply base are and if it can be considered a problem.

During the start of this research the total supplier base counted approximately 1400 suppliers and the known NIC suppliers counted approximately 1100. Most of them where related to an amount spend, but from some suppliers only the address was known. From the 1100 NIC suppliers, 855 were not provided with a description of the commodity (product group). Now that purchasing has become strategic (see paragraph 2.5) the inherited supplier base is used to derive information

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from. A function it did not have so extensively before. The lack of information caused problems with a lot of purchasing processes. For instance what suppliers are able to deliver ICT specialists or what suppliers provide other comparable goods or services were questions that could not be answered. All surveys on the suppliers base where time-consuming, because the data was not available immediately. An important problem is that a large supplier base cost a lot of money. A lot of small suppliers, sometimes contracted by non-purchasers, deliver goods unknown to the de- partment. Linking some more data from the ERP package (BPCS) to the supplier base learns that the suppliers provided Cordis with the total amount of 26029 invoices in 2003. It is not hard to imagine that this will result in large administrative costs. Secondly it is more expensive to purchase comparable goods from 10 suppliers then to give a larger bid of all products to 1 supplier. This is known as the leverage effect. Later on it will be further discussed and illuminated. Finally all these small purchases use a certain amount of time from the order desk one large bid would take about the same time, so all small purchases done on the large amount of suppliers cost a lot of time.

The problem can be further disentangled with the following process excellence tools 1. Voice Of the Customer model (VOC) (see Appendix A),

2. The Critical To Quality Tree (see figure 4) and

3. The SIPOC (Supplier, Inputs, Process, Outputs, Customer) (see figure 6).

Figure 4 Critical to Quality Tree Supplier base optimization (Rath and Strong 2001)

One of the first tools that should be used in the define phase is the VOC model. It can be used to determine the needs and perceptions of the projects’ internal customers. The VOC contains a se- ries of statements and their sources. The Critical to Quality Tree (see figure 4) is a tool that aids in translating customer language into the critical to quality (CTQ) requirements on the output of a re- search. In this case it visualizes the requirements and drivers for an optimal and manageable sup- ply base. Within this model the need, its drivers and their CTQs are displayed. The Need is a short

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description of the research objective, the drivers are more detailed descriptions of what should be the result of the research and the CTQs are the elements that determine those results. The re- quirements are derived from the Voice of the customer model by analyzing this data and searching for similarities the figure is divided in yellow and blue-bordered boxes. Yellow corresponds with desirable outputs of this research and blue corresponds with processes already under research in other projects or already implemented on a sufficient level, they will participate in this research only for as far as they influence the others processes. A SIPOC finally helps to conceive a plan on what should be examined. The SIPOC (figure 6) visualizes a process by untwining its suppliers, inputs, processes, outputs and customers. With the output of these three tools the problem state- ment and research objective can be determined.

Studying the statements in the VOC, CTQs and the drivers, it becomes clear that the large sup- plier base does indeed cause some problems. The exact problem definition, objective and sub questions will be formulated in the next paragraph.

4.4 Problem definition

This paragraph will present the researchers interpretation of the problem stated by the company. It should determine the problem with more detail and accuracy. The problem statement is a compre- hensive description of the need formulated in the Critical to Quality Tree

4.4.1 Problem statement

The following problem statement is formulated.

Problem statement:

Cordis Europa N.V. is not able to manage and control its NIC supplier base and it has no available method and strategy to improve that

This results in number of problems:

The NIC supply base is too large to manage; it contains a majority of unknown suppliers and con- tains a lot of suppliers in the same commodity, which results in loss of leverage advantage. Simply reducing the supplier base is not recommended because security of supplies should be guaran- teed and competition effects should not be undermined. To solve this problem, the following objec- tive is abstracted from the Critical to Quality drivers and CTQs:

Objective

An optimal and manageable NIC-supplier base for Cordis Europa N.V. With supplier strategy, logi- cal content, improved efficiency and identified suppliers

To break down this objective in concrete and researchable parts, the following sub questions are derived from the CTQs:

Method

10. How should a supplier base be optimized

11. What methodology is available for a supplier base optimization

12. Which elements should be present in a supplier base optimization method Optimal supplier base

13. How can the supplier base manageability be improved,

14. Which elements should be present in an optimal and manageable supplier base 15. Which elements should be present in a Commodity Strategy

16. How can efficiency be improved, what handling can be simplified automated or terminated 17. What operational activities can be reduced and how can they be reduced

18. What savings can be made (hard and soft)

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4.4.2 Making it operational

Now that the problem is defined, it should be made operational. In other words, it should be trans- lated in a clear approach. This will be done by reviewing and further visualizing the problem by means of a research model and secondly a SIPOC will make clear what actions will be taken for the sub processes in this research.

Brokers

Optimal number

Manageable supplier base

Supplier base Optimization Methodology

Strategy Procedures

Sufficient control measures

Relevant theory

Purchasing theory

Modeling theory + skills

Common sense

Supplier selection procedures

System border

Figure 5 Research model

This research model (see figure 5) shows the relevant objects and indicators in this research. It shows where the research will be performed and what inputs will be examined to provide answers.

The supplier selection procedure is out of scope for active changes, because they are imple- mented simultaneously to this research. However they will be examined and if shortcomings are identified or if recommendations can be made, they will be described in this thesis. In figure 6 the Sipoc shows a further operationalization of the research and a first development of a research ap- proach. The exact approach will be described in the next paragraph.

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4.5 Approach

The former paragraphs have clarified the problem and presented the research objectives. It has become clear that this research should result in an optimal supplier base for Cordis and therefore it should use a comprehensive optimization method. Since a quick scan of the available method already made clear that there is not much available, the second objective will be to develop such a method. To achieve these two goals the research is split in a part to select or develop an optimiza- tion method and a part that implements this method. For this thesis this means the measure, ana- lyze and improve/innovate phase will be performed on both method and the supplier base. Since the results of the method and the objective of the supplier base redesign are similar they will be described simultaneously. However if a section in this thesis is written purely to serve one of the two goals, this will be clearly mentioned.

The project plan of this research can be divided in the five phases distinguished in the Process Excellence methodology. They will be described in the following paragraphs.

Define

In the define phase the problem and the problem area will be explored. By means of a VOC, the views of the internal “customers” will be summarized. The VOC will make clear what; in the opinion of the customer needs to be reviewed and what might be of influence. General interviews, informal conversations and examination will complete the insight in the problem. Finally the gathered knowledge will be transformed into clear conceptual models and clear objectives and sub ques- tions. This phase should result in a good understanding of the problem and its cause. This part of the research is presented in chapter 4 and this written reproduction of the approach and the Gant chart (see appendix D) conclude this phase.

Measure

Even though measure in the original Six-sigma approach (Pande et al 2000) was meant to do ex- act numeric measurements, in the current interpretation of Process Excellence, it is applied with a broader scope. For this research the measure phase should result in a thorough description of the current situation. In this research there are some numeric measurements from the ERP package (BPCS, see chapter 5). Data will be collected with help of a Data collection plan (see Appendix B).

Measurements in BPCS and in excel downloads from BPCS will give insight in the size of the sup- BPCS

(MRP system)

Analytical tools and software (Excel)

Strategic sourcing Literature

Queries

Data

Market knowledge, procedures, external rules Theory and examples

Select data with queries

Data and supplier base additives

Analytical tools and software

Transform data in information

Information and supplier base additives

Scientific researcher

Develop / formulate template / strategy

Strategy Strategic

sourcing Gather and

consume information

methodolog y

Strategic sourcing

Supplier Inputs Process Outputs Customer

Figure 6 The SIPOC

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plier base, the deviation of the spend and the deviation of the suppliers. Furthermore there will be a search for available theory and methodology with regard to supplier base optimization. Since the define phase cleared the fact that there is not much available methodology on this subject, the measure phase will also make clear what the currently available methodology is (see chapter 6).

The ins and outs of the current situation will be determined by means of interviews, examinations and conversations. The Strategic Sourcing Department will have an important role in this process.

The measurements tools will result in more information regarding the size of the problem and the will make the problems objective.

Analyze

After the problem definition and the measurements on its impact and its exact qualifications, the information will be analyzed. This phase, together with the measure phase is used to determine the necessary supplier base additives. It also is also used to determine how current available the- ory and methodology can be used or should be supplemented for a supplier base optimization.

The available methodology on supplier base optimization will be studied in this phase. This should result in a survey off the available approaches on this subject. Critics and shortcomings of all measurements, theory, methodology and data of the current situation will be revealed. Secondly it should result in a complete insight into the current supplier base, its dynamics, and its shortcom- ings. The analysis should provide enough information to form redesign objectives for the improved or innovated supplier base optimization methodology and it should provide enough information to perform the actual supplier base optimization with help from that methodology.

Improve/innovate

This phase leads to the redesign of the problem area. It results in the new optimized supplier base.

To reach this goal another result will be a supplier base optimization methodology which should make clear how the current supplier base will be improved and what practical consequences the supplier base optimization has and what solutions can be found. Mostly the improvements will be found by providing a direct answer to the shortcomings that have been identified in the analysis phase. It is the researcher’s intention to develop or find a clear model that visualizes the supplier base optimization methodology and to restructure the supplier base into an enhanced version with enough management information, no illogical entries and an optimal number of suppliers. Because some of the results of this research are analytical tools, it should be realized that they are results when the chapters in the results section are read. (See chapter 7, 8, 9 and 10).

Control

The last phase recognized in process Excellence is the control phase. For this research this phase is used to determine how the improved situation can be secured. This will result in a couple off procedures and a description of some attitude guidelines. Since the scope of this project is 6 months it will be presented by means of recommendations. Although the implementation of the optimization methodology is in scope and will be described, it is likely the optimization process will continue after these 6 months. (See chapter 10).

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Part 2: Research

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5 CURRENT SITUATION 5.1 Introduction

In this chapter the current situation of the problem area; the supplier base and related subjects will be described. The current situation of respectively the ERP package, the Management Information System (MIS), the supplier base, the supplier base management and maintenance and the sup- plier selection procedures will each be reviewed. Each description will be concluded with a sub- paragraph containing a retrospect of critics on and shortcomings in the current situation. The shortcomings will be limited to those that are relevant for this research, meaning they influence the supplier base manageability and/or they influence the supplier base optimization. These analyses will form the challenge for the “improve and implement” phase. This whole chapter refers to the supplier base optimization; the current situation with regard to available optimization method will follow in the next chapter.

5.2 The BPCS ERP package

Confidential

5.2.1 Shortcomings and critics on the BPCS package

Confidential

5.3 The current supplier base

Confidential

5.3.1 Description

Confidential

Table 2 Supplier Base current situation

Confidential

5.3.2 Supplier base entries

Confidential

5.3.3 Supplier base management

Confidential

5.3.4 Origin of the proliferating supplier base

Confidential

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5.3.5 Shortcomings of the current supplier base

Confidential

5.4 Current supplier selection procedures

Confidential

5.4.1 Request to add a supplier

Confidential

5.4.2 Complexity matrix

Confidential

Table 3: Scoring index complexity matrix

Confidential

5.4.3 Supplier Risk Assessment

Confidential

5.4.4 Supplier Improvement Plan

Confidential

5.4.5 Supplier selection procedure critics and shortcomings

Confidential

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6 CURRENT AVAILABLE THEORY AND METHODOLOGY

Subsequent to the previous chapter, this chapter will present the current situation with regard to the available theory and methodology relevant for a supplier base optimization. The selection of used theories is based on a thorough quest trough available databases, using logical search terms, authors and their references in Dutch, English and German. This chapter will also provide the described theory with a retrospect of critics. Some critics are quoted from other scientist and some are stated by means of this research. The following subparagraphs will present theory and methodology on; Supplier optimization methodology and supplier base differentiation. The meas- ure and analyze phase of process excellence are used to gather information on this chapter. This chapter concludes the research part of this thesis and it will be followed with a section on the re- sults. Chapter 6 also provides a partly answer to research sub question 1, 2 and 3.

6.1 Supplier base optimization theory and methodology

A very important question in this research or in any research is the “Why” question. Why should a supplier base optimization be performed? Other then the reasons stated in chapter 4.2 it is rele- vant to examine if there is any scientific reason to perform an optimization. The other question;

“how” will also be answered, for as far as literature provides the answers.

6.1.1 Reasons for and risks of supplier base optimization

Searching trough scientific publications, literature and other written sources, on of the first things that become clear is that supplier base reduction has been, or still is a trend under companies (see amongst others; Christopher and Jüttner, 2000, Raia, 1994, Stundza 1994, Miller 2000 and Cous- ins 1999). In literature supplier base optimization or rationalization is often used as a synonym to supplier base reduction. This research defines the three as following. A supplier base reduction is obviously a process of reducing the total number of suppliers. A supplier base rationalization and supplier base optimization can be interpreted as adding information on the supplier base and im- proving efficiency based on this information. Most companies have data regarding the addresses, phone numbers, fax numbers and bank accounts per supplier. For strategic purchasing more data is required. For instance the total spending per supplier or per commodity is very interesting. When this and other useful information is available, the supplier base optimization can continue. With regard to this information, one focuses of this research has been on the possible additives on the supplier base.

The question why a supplier base should be optimized can be answered in more than one way there are a couple of reasons and numerous advantages. Lysons and Gillingham describe two reasons to optimize a supplier base (Lysons and Gillingham 2003);

• The need to control cost and procurement processes. A large number of suppliers will en- tail higher administrative costs. Electronic procurement will usually lead to a rationaliza- tion of supplier bases by integrating business processes and data with key suppliers and facilitating collaborative relationships;

• The need to eliminate suppliers incapable of meeting purchasers’ performance require- ments or from whom few purchases are made.

From a purchasing perspective a smaller supplier base represents a dilemma. Considering the chances in modern purchasing, where globalization and increased competition demands more and more from purchased goods, it seems logical to attempt on a big and differentiated supply base.

More differentiated suppliers will result in more choice which means smaller gaps with optimal quality. Also more suppliers will provide harder competition, resulting in lower prices (also see Gadde and Håkansson 1994). Opposite of the previous is a smaller supplier base, which offers a smaller variety of options, but it also allows purchasers to develop closer relations with suppliers and larger bids for the remained suppliers. A larger bid leads to more leverage advantage. When a supplier participates in R&D activities, problems in later states can be counter parted. Secondly a smaller supplier base can help reducing the large flow of invoices and administrative handlings (Also Steele, 1996 and Van Weele, 1997). Third as stated by Christopher and Jüttner, there is a limit to the extend to which multiple supplier relations can be effectively managed (Christopher and Jüttner 1999)

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Lysons and Gillingham further state the aim of supplier base optimization as leveraging the buying power of an organization with the smallest number of suppliers consistent with security of supplies and the need for high quality goods and services at competitive prices. Trying to create a short overview of the advantages and disadvantages, the following are determined. According to Lysons and Gillingham all the advantages of supplier base rationalization include:

• Savings in administrative costs.

• Up to 80 Percent of supplies met by approved vendors

• The development of long term partnerships and supplier associations

• Improved standardization

• Elimination of maverick purchases

• Lower total production costs.

Kamann (sheets 2001) and Kamann 2003) adds

• Gaining leverage advantage This means placing larger bids at fewer suppliers making it more attractive for suppliers to make better proposals

• More time for other activities. Freely interpreted this means; Purchasers can spend time that would have been used for tactical or operational activities for other (perhaps more strategic) activities.

Spekman (1999) even formulates saving opportunities as following:

• Rationalizing the supplier base reduces the absolute number of transactions and the as- sociated costs

Finally Raia (1994) ads:

• Gained commitment of remaining suppliers

• From a quality standpoint. If multiple sourcing increases the risk of variances then con- versely, single sourcing minimizes that risk.

On the other hand there are the risks of a supplier base optimization. Lysons et al identify the fol- lowing:

• Over dependence on a single supplier

• Danger of supply disruption due to strikes, production breakdowns, floods or similar natu- ral disasters, disruption of suppliers’ supplies.

• Loss of supplier goodwill

• Reduced competition

• Failure to seek new or more competitive suppliers.

Cousins (1999) describes the following problem

• A risk occurs when firms reduce there supply base without realizing what effect it may have on the market itself. A supply base reduction can result in inflexibility. “When there are fewer qualified suppliers they cannot reach in the short term when demand cranks up”

Steele (1996) also acknowledges the advantages and the risks of a supplier base optimization. He presents a future scenario where control is regained with a small supplier base and future devel- opments lead to high performance from all suppliers in the future (Figure 7) (Steele 1996). Accord- ing to Steele the risks appear when a reduced supplier base itself becomes the objective.

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Now

Short term goal

The future

Many supply sources, performance variable

High performance from a few

High performance from all possible sources

Figure 7 Supply base future scenario (Steele 1996)

A last research worth mentioning is this section is performed by Kekre et al (1995). Kekre et al have attempted to find empirical evidence of support the hypothesis that fewer suppliers improve the quality of a companies products. They performed their research on the PIMS database; this database has information on various strategic, financial and operational decision variables for 2700 businesses. Kekre et al attempted to single out the relationship between quality and avail- ability of alternate sources. They specifically searched for products with restricted availability and state that an exogenous shortage of supplies will adversely affect quality because of opportunistic behavior of the supplier. Their results do seem to proof the purchasing strategy of dealing with fewer suppliers significantly improves quality (Kekre et al 1995).

Summarized it can be stated that a supplier base optimization is acknowledged by the scientific community as useful or even advisable, however it should be performed with great precaution and it should not obstruct business continuity. It is crucial to determine the importance of and the de- pendency on a certain supplier. Therefore it is the author’s opinion that a supplier base should be enhanced with the desired additives. The information should be analyzed and used to develop strategies on how to manage and optimize the supplier base.

6.1.2 Optimization methodology

So far the reasons and risks of a supplier base optimization are clear. The “How” question how- ever has not been answered yet. This chapter attempts to give a survey of the currently available methodology. A clear methodology designed for exactly the purpose of a supplier base optimiza- tion seems to be unavailable. However there are some clues on how it could be done. Monczka (1999) states that supplier base optimization mostly results in a reduction of the total number of suppliers. “The optimization process is a very basic activity that most firms can or should perform”

according to Monczka. He describes the optimization process simply as determining the best sup- pliers and eliminating the others. Lysons and Gillingham have a similar vision; they suggest start- ing with an analysis of the existing supplier base and the evaluation of suppliers on criteria such as performance cost, service quality and the amount of business transaction during a specific period.

Such an analysis may result in supplier base consolidation through such approaches as

• An approved or preferred supplier list

• Selection of a single supplier with whom to develop partnership or other collaborative ar- rangements.

This seems like a basic process indeed, but what if important information is missing. The ap- proaches suggested by Lysons and Gillingham, or Monczka need quality measurements on all suppliers. If the majority of the suppliers aren’t measured, or worse, if they are not recognized by any buyer at all, then a problem arises. Considering the total number of suppliers maintained by many companies this is not unlikely. Especially when a large and complex organization purchases through or around the purchasing department it can be very hard to identify somebody that knows if a supplier can be eliminated or what the performance is. Secondly the large number becomes an obstacle it self when an attempt to solve this problem is performed. Therefore it the search for methodology continues. Spekman (1999) suggest a few early steps that can assist in making the rationalization process better feasible. He states an optimization should start with simplifying the

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procurement process and looking for methods to take waste and redundancy out of the supply chain. Unfortunately he does not provide recommendations on how to perform this; however it does seem plausible to start with a search for suppliers that absolutely do not serve a purpose anymore while being a part of the supplier base and to eliminate these.

Kamann (2003) presents a model that can be used to perform an optimization. In figure 8 it be- comes clear that the routine segment of the Kraljic matrix can be used to identify suppliers with comparable products. The Kraljic matrix and other portfolio analyses will be clarified in chapter 6.2.3 till 6.2.13. Kamann suggest that bundling these routine products creates a larger bid, which means the product bundle can climb up to the leverage quadrant. In the leverage quadrant it should be possible to negotiate a better price. A typical outcome of a Kraljic analysis show that the routine quadrant holds the majority of the suppliers. This majority of suppliers is responsible for a small part of the spending, but for a large part of the operational activities (purchase others, in- voices, phone calls).The process Kamann suggests should lead to an optimization and an im- provement of the manageability of the supplier base and the efficiency of day to day purchasing activities.

high

low high

Stimulate extra trick

Force com petion to do the sam e

Substitute Bundle

Routine B ottlene ck

Strategic Leverage

C om plexity suppliers m arket

H igh= m uch suppliers low is fe w suppliers

Value

Figure 8 Total costs purchasing dynamics (Kamann, duurzaam uitbesteden 2003)

6.2 Supplier differentiation theory and methodology

Central questions in a supplier base optimization process are, why do we have this supplier, and what suppliers do we need. How can we achieve an optimal cost efficient situation? Shortly put, we need to differentiate the suppliers. This is a need that has been acknowledged for many years and there are numerous articles and books that handle the subject. This paragraph is an attempt to summarize known and identified supplier differentiation theory. It will start with a description of a Pareto analysis, followed by the purchasing portfolio, the cube, the account portfolio and confron- tational model, a second confrontational model, the power dependency model and finally some recommendations and opinions from the researcher.

6.2.1 Pareto analysis/ ABC analysis

A powerful tool to gain insight on the supplier base by dividing it into categories is the Pareto chart.

Vilfredo Pareto (1848-1923) was an Italian economist and name giver to the principle he discov- ered in 1897. Pareto states that on number of occasions the minority of the causes, input or efforts is responsible for the majority of the results, outputs, or rewards (Koch 2002, Lysons et al 2003).

So far this contribution to historic awareness, next the significance of Pareto on purchasing will be clarified.

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