LIFTING PROCUREMENT TO A HIGHER LEVEL Research towards efficiency improvement of the
procurement of offshore consumable goods Master Thesis
Author: Reinder J. Buren
University: Technology Management
Faculty of Business Administration
University of Groningen
Landleven 5
9700 AV Groningen
the Netherlands
University supervisors: Mrs. É. Karásek
Mr. T. van der Vaart
Company: Heerema Marine Contractors
Vondellaan 55
2300 PH Leiden
the Netherlands
Company supervisor: Mr. M. Hendriks
Date: August 2006
__________________________________________________________________________________
PREFACE
This is the final report of the Master Thesis project in my degree Technology Management at the Rijks Universiteit of Groningen. I started this study in September 2004 after finishing my Bachelor of Science degree in Technische Bedrijfskunde.
From May 2006 until August 2006 I carried out a research project on the Procurement & Subcontracting department of Heerema Marine Contractors (HMC) at the head office in Leiden.
This research project aims to look for improvements in the internal efficiency of the procurement for off-shore consumables at HMC.
I have enjoyed the past three months working in a large internationally oriented company with a focus on large off-shore projects.
In the short period I worked at the procurement & subcontracting department, the department was very in motion. I would like to thank all the people working on procurement & subcontracting department in general. The following people I want to thank by name for their support: Mr. R. Bolderheij, Mr. N. Dopper, Mr. J. de Jong, and Mr. H. Mars for the discussions and specially my internal supervisor, for his effort to assist me with the applications within HMC, Mr. M. Hendriks. I also want to thank my academic supervisors Mrs. É. Karásek, for the monthly meetings and advices and Mr. T. van der Vaart for his academic support during my research.
Reinder Buren
Leiden, August 2006
__________________________________________________________________________________
EXECUTIVE SUMMARY
In the past three months I performed my final thesis at the procurement &
subcontracting department of Heerema Marine Contractors (HMC) in Leiden the Netherlands. The target of my thesis was to improve the internal efficiency in the procurement of offshore consumables. The following problem statement has been made:
How can the internal supply chain efficiency for consumable goods be brought to an acceptable level, without an increase of the purchase value of the consumable goods for HMC, so that HMC will be able to focus with the same staff on high value &
high impact products.
The final target was threefold:
- Decrease in the number of suppliers
- A more efficient internal purchasing process
- Categories of articles pooled and collected within frame agreements
First were various analyses of the data of purchases in the past year done. The result of these analyses was:
- The procurement process of consumables does not work in transparent way.
- There are many suppliers where only a few orders are placed.
- A lot of orders represent little value.
- The total costs associated with the internal supply chain are in general high compared to the order value. The costs of the current purchasing process are high, about $ XXX,- per order.
- The original idea of HMC to make frame agreements on article level will not work for (all) the different categories, because the repetitiveness of the procured articles is too low, and the total number of different articles bought incidentally is high.
When these findings are set out against the large amount of low value orders, it appears to be necessary to design and implement solutions to improve the efficiency of the purchasing process.
Improvement measures are divided in two ways; first a way to reduce the number of purchase orders and then to improve the process itself.
If the necessary articles aboard the ships are collected per category instead of the way they are currently collected, per cost-center (storage space aboard the ship), the amount of purchase orders can be reduced. In this way articles of the same category are ordered together, instead of separately per space aboard the ship (for example engine room). This will result in less purchase orders. A single saved order will lead to about $ XXX,- savings in the internal purchasing process. Finally, internal cost saving leads to an increase of efficiency, so the purchasers will have more time to focus on high impact high value articles.
To improve the purchasing process itself an e(lectronic)-procurement solution for
consumables is well suited for HMC. An ordering catalogue system (e-MRO) would
fulfill the demand of HMC’s procurement management to have a more efficient
__________________________________________________________________________________
purchasing process and fewer suppliers. However, in order to make such a system work, frame agreements (on category level) with a small number of suppliers, with an e-catalogue system have to be made, i.e. the standard HMC discounts have to be (re)negotiated. Step two would be to open an external website of HMC from where suppliers can upload the orders directly. For the articles where the process of Request For Quotation (RFQing) cannot be omitted (the ones without frame agreements), an e-tendering system will lead to some cost savings by improving internal efficiency in the selection process. This way eventually one system has to be made by HMC with two different options: a direct order possibility (e-MRO system) and a possibility where bids can be compared (e-tendering system). In short, by these solutions the pool of suppliers and the internal purchasing costs are reduced. This solution is also suitable for articles with a low repetitive rate.
With these adjustments the internal supply chain efficiency for consumable goods
can be improved, without an increase of the purchase value by reducing the number
of requisitions sent from the ships, and implementing an e-catalogue system for the
preferred suppliers of certain categories of products. This will lead to a better internal
purchasing process and a decrease in the number of suppliers (by ordering certain
categories of products with preferred suppliers).
__________________________________________________________________________________
TABLE OF CONTENTS
PREFACE III2
EXECUTIVE SUMMARY IV3
INTRODUCTION 7
1.0 HEEREMA MARINE CONTRACTORS 8
1.1 Company profile 8
1.2 Procurement & Subcontracting 8
1.3 Procurement strategy change 9
1.3.1 Purchasing portfolio for the current situation 9
1.3.2 Advice by Darewin in a factual context 10
2.0 METHODOLOGICAL FRAMEWORK 13
2.1 Problem statement 14
2.2 The meaning of efficiency 15
2.3 Framework of the assignment 15
3.0 CURRENT PURCHASING PROCESS 17
3.1 Process description 17
3.2 ‘Habitus’ of the purchasers of HMC 19
3.3 Status of procurement process 19
4.0 ANALYSES OF THE PURCHASE ORDERS 21
4.1 Constraints of the analyses 21
4.2 Purchase orders per supplier 21
4.3 Categorization of suppliers 25
4.3.1 Result of the analyses per category 26
5.0 ANALYSIS OF THE PURCHASING PROCESS 30
5.1 Internal purchasing process 30
5.2 Organizational costs of the purchasing process 31
6.0 SOLUTIONS 33
6.1 Solutions for categorisation 33
6.1.1 Frame agreements 33
6.1.2 IT solutions 35
6.1.3 Advice for an e-catalogue system 40
6.2 Internal purchasing process 42
6.3 Financial consequences 43
7.0 CONCLUSIONS 45
7.1 Recommendations 46
7.2 Action Plan 47
BIBLIOGRAPHY 48
__________________________________________________________________________________
List of Appendices
Appendix 1: Flowchart purchase process A3
Appendix 2: Vendors per categories of purchases A6 Appendix 3: Portfolio analyse consumables per category A8 Appendix 4: Poll for internal purchasing process A9 Appendix 5: Internal costs purchasing of consumables HMC A10
Appendix 6: Overhauled process A11
Appendix 7: Photographs HMC A13
__________________________________________________________________________________
INTRODUCTION
Heerema Marine Contractors, hereafter HMC, has a dominant market position in the field of installation and decommissioning of offshore platforms world wide.
HMC divides its capabilities into these four categories:
- Deep water construction
- Heavy lift
- Float-over
- Decommissioning and removal
Deep water construction involves construction, engineering, planning and installation of subsea structures, such as mooring systems, pipelines and floating oil production facilities.
Heavy lift installation activities include all operations that require the lift capacity and services of the three crane vessels. Usually these services are for offshore lift purposes up to 14.000 metric tons; platforms or other structures, but also projects like the pillar for the Erasmus Bridge in Rotterdam, which can easily be performed by HMC. The weight of the pillar is around 1,400 tons, not even 10% of Thialf’s maximum capacity. (See image to the right)
Float-over is another technique used for installation of platforms on their foundations. It uses barges and jacks to float the platform over the base structure and then lower and install it.
HMC currently works in the following geographical areas: the Mexican Golf, North Sea and the West coast of Africa, the head office is based in Leiden, the Netherlands.
The mission statement of HMC is by dry measure to be and to be recognized as the best offshore construction contractor in the world.
In order to be a market leader in this industry in the future HMC has launched in 2005 an innovation project the so called Darewin project. In short this means a change of focus; improvement targets have to be met. Improvements have to be identified (2005) and eventually implemented (2006-2007) in the different departments of HMC.
The assignment HMC gave me was a direct result of the improvement targets for procurement & subcontracting by the Darewin project. The assignment was to improve the internal efficiency of the procurement of offshore consumable goods (articles).
Fig. 1: The Thialf lifts part of the Erasmus Bridge
Source: HMC
1.0 HEEREMA MARINE CONTRACTORS
In this chapter the profile of HMC as well as the department I worked in during my thesis will be described.
1.1 Company profile
HMC was founded in 1948 as a company who installed and constructed oil drilling platforms. In 1978 HMC launched the first two semi submersible crane vessels
“Balder” and “Hermod” of the world. In the nineteen eighties it was very difficult to survive in the market for the off shore installation, due to low oil prices. As a result HMC founded a joint venture with a former competitor McDermott. This joint venture was ended in 1997 and the biggest crane vessel was bought from McDermott and added to HMC’s fleet, the “Thialf”. The HMC’s fleet nowadays has three of the world’s five semi-submersible crane vessels. Another special thing about HMC and her sister companies Dockwise, Heerema Fabrication and Intec Engineering, is that it has just one shareholder Mr. Pieter Heerema.
HMC strives to be the first choice contractor with clients, first choice partner with business sector peers and first choice employer. HMC will deliver this by focusing on the Heerema Group core business principles of reputation management (website HMC).
1.2 Procurement & Subcontracting
This research is conducted at the procurement and subcontracting department of HMC in Leiden. The organization of the department has recently changed. Today all the procurement has to go via this department, where in the past purchasing was done at various locations in the company. The organization can be seen in the following figure.
V
Manager Procurement
Secretaries, SAP specialist, Administrative support Procurement process
assurance
Portfolio manager subcontracting
Portfolio manager purchasing
Charters (17%)
Fabrication &
barge cleaning (7%)
Project support&gen.
subcontract.
(21%)
EM and PPD subcontracts
(5%)
Manpower (7%)
Project support
&mat.Equipment fuel (17%)
On & Offshore consumables &
EM vessel needs (6%)
Others and logistics
(20%)
Fig. 2: Organization chart P&S Source: HMC
__________________________________________________________________________________
1.3 Procurement strategy change
Before is started with the theoretical framework and analyses a description of the changes within the procurement department will be given with the help of purchasing literature. So the reader gets more insight in both the changes at HMC and relevant purchasing literature.
Partly due to the Darewin project the procurement strategy will be changed inside HMC. The procurement department has become more a strategically department instead of an operational department which it was until recently.
1.3.1 Purchasing portfolio for the current situation
Purchasing has become more strategic since the last two decennia of the twentieth century. The purchasing portfolio (Kraljic matrix) has been the foundation of this new approach. The general idea behind this matrix is to minimize risk and maximize buying power. Kraljic recognized that there was not one general strategy to purchase all different products and that not all buyer-supplier relations are to be managed in the same way (Westra 2005). The horizontal axis gives besides complexity an impression for availability, possible number of suppliers and risk.
Fig. 3: Kraljic’s portfolio matrix Source: Kraljic 1983
The situation of HMC of the procured products in the old situation placed in the Kraljic matrix:
Fig. 4: Kraljic matrix, old situation HMC exaggerated Source: Darewin project & research HMC
HMC had in the old situation long term contracts with a few strategic suppliers, the upper right quadrant. HMC had for other low-value products no contracts with suppliers. Those products were bought by requisitioning and ordering by the cheapest supplier.
The Darewin project findings resulted in the recommendation to change these processes.
1.3.2 Advice by Darewin in a factual context
The advice was to change these processes. In the literature the following with respect to adjustments in the portfolio was found.
leverage Strategic
Non critical Bottleneck
Profit impact Low High
Low High Supply risk
3 4
6 5
7
9 8
1 2
Fig. 5: Overview of strategic directions for all categories Source: Gelderman & van Weele (2003)
__________________________________________________________________________________
1: Moving to another position: ‘decomplex the product, find a new supplier’
Bottleneck items are per definition of low value and high risk. From an economic perspective it is interesting to search for new solutions. The most common alternatives refer to the product (decomplex, broadening specifications) or to the supplier (searching, managing and developing suppliers, or cross sourcing). These measurements must lead to a lower level of supply risk and a lower level of the dependence on a supplier. This means a shift towards the non-critical quadrant.
2: Holding the position: ‘accept the dependence on a supplier, assurance of supply’
If no other options are feasible, then the category remains the same. Examples for HMC are welding electrodes and greases.
3: Pooling of requirements
In order to reduce the high percentage of internal costs, procedures can be started to ease up the process. You can choose to ease up the process by making agreements with certain fixed suppliers for coupling and delivering those items. Your buying power is the also increased.
This method has also some disadvantages:
- Market knowledge and know how of purchasing department is lost.
For example; buying all articles related to a specific category from a fixed supplier.
4: Individual ordering, pursue efficient requirements
This strategy is aimed at reducing the indirect purchasing costs which are connected with administrative activities.
5: Exploit buying power (‘partner of convenience’)
To exploit the dominant position short-term contracts are feasible options.
6: Develop a strategic partnership
This cooperative strategy is only pursued, if the supplier is willing and able to contribute to the competitive advantage of the firm. This shift should be considered as an exception to the rule.
7: Holding the position, ‘maintain the strategic partnership’
Long-term relationships with key suppliers should always contribute to the competitive advantage of the firm.
8: Holding the position: ‘accept a locked-in partnership’
A position in the strategic quadrant may be due to unchosen, unfavourable conditions. This results in a locked-in situation, and has the problems of high switching costs or by specific customer demands. These circumstances produce an involuntary stay at the strategic quadrant. An example for HMC is the Remotely Operated Vehicles and Oceaneering
9: Moving to another position: ‘terminate a partnership, find a new supplier’
A partnership may develop in an undesirable way. A supplier’s performance may
become unacceptable and incorrigible. This may start a painful process of reducing
the dependence on the supplier involved. The firm will have to search, develop and
contract another supplier, while bringing the relationship with the non-performing supplier to an end. For example by an alternative design, mostly done in production oriented companies. Examples for HMC are the suppliers of heavy ropes slings and shackles.
The advices made by Darewin are in the figure below placed over the strategies of Gelderman & van Weele (2003).
leverage Strategic
Non critical Bottleneck
Profit impact Low High
Low High Supply risk
Fig. 6: Strategies by HMC Source: Darewin and own
1: Position of a huge volume of products purchased by HMC
HMC has contacts with a few suppliers upstream in the supply chain (close to the manufacturer). This has the consequences of a larger list of different suppliers and, as a consequence, high administrative costs. This is due to the huge amount of different articles (from different suppliers) which are purchased in this group.
2: Towards a position with more buying power
In order to reduce the costs of the administrative Process made by HMC and exploit buying power, the position of HMC for a number of products can be shifted towards a more leverage position (by pooling them with other products from for example the non-critical cell). In this case products are bundled with certain parties (wholesalers).
The shift from the bottleneck quadrant can be explained as follows: A wholesaler can buy all products for the customer (he is able to fulfil the purchasing function for the company, and buys the (not in the catalogue) products at the “original” upstream supplier). So the original product is a bottleneck product, but some suppliers are willing to add the product in their assortment and the total number of suppliers will increase. So in that case the total number of suppliers will be reduced and the product shifts to the non-critical part. The shift towards the leverage quadrant can be explained by the increase of value per suppliers by the pooling of products. So in short this means fewer suppliers with a higher value per supplier.
So the strategy of HMC is in short, to optimise internal purchasing procedures without creating much dependency on the suppliers. In short this means get fewer suppliers with more value.
In the next chapters my assignment and analyses will be presented.
2 1
2
__________________________________________________________________________________
2.0 METHODOLOGICAL FRAMEWORK
In this chapter the problem of HMC will be determined and the boundaries for the research will be set. According to de Leeuw (1997) determining the problem is establishing a tension between a “desired situation” and a “current situation”. A problem is a state of difficulty that needs to be resolved. Given the fact that this research is performed at a company and it is provided with a clear business review the search for research methodology can be restricted to practical research methodology.
De Leeuw presents the DOV model, (“diagnose”; diagnosis, “ontwerp”; design,
“verandering”; change model) as a foundation of sound research.
Diagnosis; this step is meant to disentangle the problem with a multiform scope. The first step is to analyse the primary process of the problem area. The second step is a conceptualisation of the problem. Finally, a clear problem definition is formulated.
Design; the design phase consists of two parts. First the direction of the solution is determined. This is a further analysis of the problem, meant to pinpoint the exact flaw and to determine what the rough solution looks like. The second phase is the design of proper measures that can be taken to solve the problem.
Change; in this phase the suggested solution is implemented. This should be done by developing an implementation plan and by the designation of an implementation team. Finally the whole process should be conducted by an implementation.
Diagnosis of the situation at HMC
The assignment HMC gave me was to optimise the efficiency of the internal process associated with the purchase orders (PO’s) of consumable goods. About 6% of the total purchased values are made for consumables (figure 2). Consumable goods for HMC can be divided into three different groups: on-shore, offshore and project related. In this thesis the focus is on off-shore consumables. Offshore consumable goods for HMC are articles bought, in order to keep the three crane vessels running (except fuel). For example nuts & bolts, engine parts, greases, safety clothing &
equipment, kitchen equipment, small tools, etc.
HMC had assessed that the total number of suppliers was large and that too many low value orders were placed. For the year 2005 the total value for consumables bought for the crane vessels was about $11,4 million, spent at 640 different suppliers.
HMC wanted to solve the situation by making frame agreements
*with fixed suppliers for the articles bought with the supplier.
The first step was to analyse whether the problem sketched by HMC was a real problem. Secondly, it should be assessed if the solution HMC wanted to implement was a correct solution for solving the problem.
*i.e. Call-off agreements for articles
2.1 Problem statement
The following problem statement is made:
How can the internal supply chain efficiency for consumable goods be brought to an acceptable level, without an increase of the purchase value of the consumable goods for HMC, so that HMC will be able to focus with the same staff on high value & high impact products
The final target was threefold:
- Less suppliers
- A more efficient internal purchasing process
- Categories of articles pooled, and collected within frame agreements
To come up with a potential conclusion the following questions can be formulated.
- In what way is the current purchasing process organised?
- This provides insights in the current situation of procurement of consumables at HMC. This is acquired with interviews and observations.
- What are the characteristics of the purchasers?
- This possibly can provide some explanations for researched data. This is done with a literature study and observations.
- How is the distribution of the purchase orders and values on the purchase orders?
- This will provides insight in the efficiency of the current process. This will be done with a data study and analyses mentioned in purchasing literature.
- To what extent is pooling of articles in frame agreements possible?
- This will gives insight in the original wish of HMC to make frame agreements.
This will be acquired with a data analysis.
- How efficient is the current purchasing process of consumables?
- This will provide insights in the problem statement. This will be provided with a research of all involved in the purchasing process.
- Which solutions are possible for the problems?
- Different potential solutions for improving the efficiency of the procurement of consumables are formulated. This will be done with the help of purchasing literature and common sense.
Essential preconditions
- There are three different kinds of consumables for HMC: offshore-, onshore- and project related. Only purchasing orders made by the purchasers responsible for offshore consumables are examined. However, during my research HMC made the choice to buy all consumables from the first of June by the purchasers of consumables. This is why the first analyses are made from different data, then the later analyses. But this has no consequences for the conclusions of the research (see also paragraph 4.1)
- Data used for the research are from the year 2005, and are representative for HMC.
- Purchasers are capable to focus on high value high impact products.
- The research should be rounded off within three months.
__________________________________________________________________________________
2.2 The meaning of efficiency
The word internal efficiency is mentioned above a number of times, but the meaning is not yet made clear. In this paragraph the meaning of internal efficiency is defined.
Efficiency in this context means particularly time savings on the purchasing process without a decrease of control, which HMC wants to keep in their own hands. The other meaning of internal efficiency is in terms of organizational costs. A saving on internal costs means an increase in efficiency, that the purchasers have more time to focus high value high impact articles. This perspective on efficiency is consistent with the terms of HMC, in which the problem has been formulated at the start of this research.
Definitions
In this thesis a number of different expressions are mentioned a number of times. In order to provide the reader more insight the different quotes are explained below.
Fig. 7: Explanation of what is meant with different words Source: Own
So a category consists of a number of different product-groups. There are four different names for the same products. For example a category electric consists of all electric related products which can be procured at one supplier.
2.3 Framework of the assignment
To give a better insight in the whole picture sketched in the previous paragraphs a framework is made in this paragraph. The goal of this framework is to give the reader a better insight in the analysed subjects of the thesis. As you can see the start of the thesis is external. An external person (me) has no prejudiced opinion about the processes and solutions. I started by reading the available data at HMC, and a small literature study. After that, analyses of the purchase data (of 2005) are made. The target of these studies was to analyse whether the problem sketched by HMC sketched was a real problem. In cooperation with the purchasers categories of purchased consumable articles were made. This was done to get an insight in the different products bought by the purchasers and to get some insight in the number of
- Article - Good - Product - Article
- Good - Product
- Category A - Group B
Offshore
consumables
suppliers per category. Getting a preferred supplier per category should be a good basis for supplier reduction.
To give HMC insight in the costs associated with a purchase order, an analysis of the current purchasing process was carried out.
In the design phase alternative solutions were formulated and analysed.
Finally, in the implementation (change) phase the most applicable solution has been tested. Due to the short (three months) period of my research this phase could not be implemented fully.
Summarized
A framework for the research has been made according the DOV model (diagnosis, design, change) to give a better impression for the steps of the research. After that a problem statement, the final target and essential preconditions were formulated. In the next chapter the current purchasing process flow will be analysed, to give an impression of the current situation of procurement of consumables at HMC.
Internal / External Internal
External
Start ANALYSES
• Portfolio analyses
• Interviews
• Darewin
• Other literature
• Brainstorm sessions Analyses
data HMC
Situation judgement HMC
Pooling categories Analysis internal
purchase process HMC
Advice for adjustments Implementation
Fig. 8: Framework of the thesis
Source: Cooperation between me and HMC
__________________________________________________________________________________
3.0 CURRENT PURCHASING PROCESS
The consumable goods (articles) under investigation for my thesis are the goods that are needed for the three crane-vessels (Balder, Hermod, Thialf). The aim of this chapter is to give an insight in HMC’s current purchasing process of consumables. In this chapter an analysis about the flow of information and purchased goods will be presented. This chapter will end with an initial value judgement of the current purchasing process in the light of process efficiency.
3.1 Process description
The current purchasing process for consumables is organised as follows (see also flowchart appendix 1):
On the vessel the need for specific articles is identified. The store-keeper of the vessel makes a requisition and sends it to the procurement department in the head- office in Leiden, with the program MEM (Materials Equipment and Maintenance). In this requisition the following is placed:
- cost-center
*of the article on the vessel - requested arrival date
- description with former manufacturer name (so the selection of possible suppliers, to send a request for quotation (RFQ) to is easier to make)
- price (usually from last purchase) - number of articles needed
The secretary prints the requisition (an automatic converter changes the requisition from MEM to SAP) points out a purchaser and gives it to a manager. The manager checks whether the appointed purchaser is the right one and whether the requisition is project related or consumable related. He gives the requisition to the correct purchaser. The purchaser selects one or more suppliers to send a RFQ (and makes the RFQ out of the bases he got in SAP). Within a few weeks the supplier has to respond to that with a price. The purchaser decides to place an order to one of the suppliers and the procurement manager has to sign the order. When the price is above the
$100.000,- top management has to approve the order.
When the delivery date arrives the goods are delivered on the specified location (usually Vlissingen). There, the less than container loads are combined and stored in a container. When the container is filled it is shipped to the location nearest to the vessel from where it will be further shipped to the crane vessel.
Sometimes goods are ordered near the location of the vessel in the USA according to arguments of employees it is due to import problems, cost advantages, delivery time, HMC has a buyer-office in Fourchon Louisana (USA). But these arguments differ per occasion and nobody actually has a clear insight into this issue.
* A cost-center is part of a vessel (i.e. engine room), fifteen cost-centers together are a vessel in a financial way, project consumables and consumables which were not appointed to a cost-center were not part of the analyses.
In the following figure the process can be seen graphically:
Fig. 9A: Current process of communication and products in a drawing Source: Interviews HMC
Fig. 9B: Current process of communication and products in scheme Source: Interviews HMC
The figure above shows that there are two ways of communication from the vessel (as it is stated in the Golf of Mexico) to the main office in Leiden, where most requisitions are sent to and towards the buyers-office in the USA. It is currently unclear why and which requisitions are sent to Fourchon and which ones to Leiden.
It seems that the procurement process of consumables does not work in an unambiguous way.
Trans.
Vessel
Leiden
Office USA
Vendor (USA)
Vendor
(EU) Vliss.
Nearest
port Vessel
Inf.
goods
Req.
Req. Trans.
Trans.
Fourchon
__________________________________________________________________________________
3.2 ‘Habitus’ of the purchasers of HMC
Before the analyses of data of the current purchasing process starts, the backgrounds of the purchasers are described. This is done because it will probably give some explanation for the current situation of the purchasing process. The current purchasers for consumables have about 20 years of purchasing experience. The picture Kamann (2004) sketches of two archetypes of purchasers makes the situation for consumables at HMC clear.
“Archetype one has only a limited amount of working experience. His knowledge base will make him focus at the total cost of ownership, extended services and will restrict shark type behaviour to only some of the leverage suppliers. He spends a significant amount of time on visiting suppliers to find better ways to streamline processes. He uses portfolio analysis to differentiate between categories of suppliers and never orders goods himself; users do this.
The other archetype the ‘traditional’ purchaser has an active purchasing past”. From an observation of the purchasers could be concluded that the picture sketched for
‘traditional’ purchasers fits better with the purchasers of HMC. “He is a shark type negotiator who likes to play with his opponents. Purchasing to him is about playing a hard bargain to get his goods at the lowest price. He spends most of his day on the telephone asking for prices and ordering goods and will receive the suppliers at his office. He likes to shop around and frequently switches between suppliers”.
Consequences of this situation could be an extensive list of suppliers and lots of low value orders (by splitting orders towards the supplier with the lowest bid). These arguments as stated above can give some explanations for the results of the current purchasing process of consumables (see chapter 4.0). These arguments will not be analysed any further because this was beyond my research.
3.3 Status of procurement process
To give a better picture of the situation of the purchasing process Keough (1993) has developed five different growth phases of the purchasing process. He also says that companies have realised savings from around five to ten percent by moving to the next phase. The different phases are:
1. “Serve the factory”; purchasing function only exists on side level. The task focuses on clerical, logistical and expediting duties.
2. “Lowest unit cost”; purchasing is charged with minimizing material costs.
Cost analysis, competitive bidding and negotiations become key skills.
3. “Coordinated purchasing”; to lower material costs some form of cooperative purchasing across the company. Key skills are collecting information about purchases in a common format, negotiating multi-site agreements.
4. “Cross functional purchasing”; internal processes as design, specification and supplier development have far more impact than does negotiation. To be effective cross-functional teamwork and total system costs are demanded.
5. “World class supply management”; procurement activities are focussed on selection and benchmarking of suppliers globally, integrating suppliers in product development etc.
The current situation of HMC has some characteristics of the phases two and three.
The purchasers of consumables at HMC are traditional and focus on the lowest costs
per unit. The Darewin project attempted to acquire more phase four characteristics
particularly in the procurement of subcontractors and projects. For the procurement
of consumables HMC should try to acquire more phase three characteristics. This fits well in the wish of HMC to reduce the list of suppliers and make frame agreements with a limited number of suppliers per category of products.
Summarized
A small analysis of the purchasing process of consumables is made. From this analysis it can be concluded that the procurement process of consumables does not work in an unambiguous way.
Purchasers purchase in a traditional way which has advantages, for example on the
price per purchased good, but has disadvantages for the total costs of the purchasing
process (this point will be further extended in chapter 4.0 and 5.0). As a consequence
a large list of suppliers will arise. This has probably disadvantages for the internal
supply chain efficiency. In the next chapter it will be analysed if this is really the
case.
__________________________________________________________________________________
4.0 ANALYSES OF THE PURCHASE ORDERS
In this chapter analyses of the current purchasing data are made. Before these analyses are done the constraints of the analyses are made clear. The first analysis will be a Pareto analysis. This will be done in order to give some insights in the percentage spent at the total list of suppliers. After that more detailed analyses are made about the purchased goods. Finally categories of articles are formulated and analysed.
4.1 Constraints of the analyses
In the first analyses the total value of consumables booked at a cost-center are used.
From paragraph 4.3.1 on, the choice is made to look at all the consumables instead of consumables on cost-center level. The reason is that the overall picture gives a better indication of totals spent, than when only the purchases for cost-centers are analysed.
Why this was not done before lies in the fact that there was a distinction between consumables on cost-center level and project-oriented consumables (which where not part of my research at the time). HMC has chosen during my research to buy all offshore- and project related consumables by the purchasers of consumables. So the total amounts will be larger (mostly offshore consumables and some project oriented consumables). The first analyses are not done over again because the results would not differ significantly. Because the total value per supplier increase but so do almost proportionately the total number of different articles bought at the supplier. So the final conclusions will be the same. So it will cost only precious research time.
4.2 Purchase orders per supplier
The total number of purchase orders and the value of orders per vendor are analysed.
First of all a so called Pareto analysis is done on the acquired data. This is a tool for
separating the vital few from the trivial many. The kinds of problems that the Pareto
analysis seeks to identify are those relatively few problems that account for the
biggest dollar loss. A visual tool used to assist in Pareto analysis is the Pareto chart
(Nicholas 1998 p. 59).
Fig. 10: suppliers versus spent Source: analysis consumables HMC
suppliers vs. spend
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 20 40 60 80 100
cumm. % suppliers
cumm. % spend
cumm spend PO's
turnover 80%
% suppliers 17%
% PO’s 55%
As you can see in the Pareto analysis at HMC 80% of the turnover is supplied by 17% of the suppliers and this represents 55% of the purchase orders. This means also that 83% of the suppliers represent 45% of the purchase orders and only 20% of the value. So a small part of the total spent on consumables is done at the part of the suppliers. In other words there are a lot of suppliers where very few orders are placed.
To give HMC a better insight in the above conclusion, an analysis of the amount of
orders placed against the number of suppliers is made. This analysis will not give any
information about the values involved, but it will give a better insight in the
distribution of orders against the total number of suppliers.
__________________________________________________________________________________
number of purchase orders vs. number of suppliers
0 50 100 150 200 250 300
0-1 1-2 3-5 6-10 11-15 16-25 26-50 51-100 101-150
# of purchase orders
# of suppliers
Fig. 11: Number of purchase orders vs. number of suppliers Source: analysis consumables HMC
As made clear in figure 11 a lot of suppliers have only just a few orders from HMC.
This implies that HMC must make a lot of cost for maintaining those suppliers in the system. The total costs per order will be higher due to negotiating time and chance of wrong or incomplete delivery.
The figure below gives some financial values of the expenditures. The purchases are divided into four different categories sorted per value of the category (an ABCD- analysis).
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
80,00%
major 50%
spent
next 25%
spent
next 15%
spent
lowest 10%
spent
lowest 5%
spent (split up from
10%)
suppliers PO's Articles
1
Fig. 12: ABCD analysis Source: Research at HMC
About the major 50% of the total spent represents 4% of the suppliers 23% of the PO’s and 41% of the articles (line-items) made on consumables on cost-center.
The most important conclusion which can be drawn from figure 12 is that the lowest 5% of the spent is made at 55% of the suppliers. So this picture confirms the rough picture acquired by the Pareto analysis. It seems that it would certainly pay off to reduce this group of suppliers drastically. This way one will get fewer suppliers where both small (low value) orders and a small number of total orders are placed.
This will lead to large cost savings in the purchasing process. Cost savings in the purchasing process will be made clear in the next analysis.
To give the reader a better feeling in the values per order the next figure will help.
Confidential
Fig.13: Comparison of supplier, PO’s and articles per cost group Source: Analysis at HMC
About 4% of the suppliers have an average order value below the $100,- this are about 1% of the purchase orders and 0,5% of the articles (so these orders consist of few articles). And on the other hand have a high percentage, 80% of the total value of the order is due to internal costs. For the amounts of the internal costs see the research done in paragraph 5.1.
The total percentage of internal costs decreases with the increase in value per order.
This is logical in general the internal costs of a high value order are lower than the ones of a low value order. For the analysis above the same value of internal costs are used for every group. So the average value of an order in the 100-500 group will be just a bit higher than the total internal costs. In order to reduce these internal costs one should try to add as much line-items as possible per order, to get the total value per order higher. A lot of suppliers (41,5%) have an average order value below the
$1000,-, which also leads to high internal costs in the purchasing process. 32% of the
purchase orders for consumables belong to these groups.
__________________________________________________________________________________
Summarized
The total costs associated with the internal supply chain are in general high compared with the order value. There are a lot of suppliers where very few orders were placed, for example the lowest 5% of the total spent is done at more than 50% of the suppliers. The deviation of the purchase orders by values is that almost the half of the suppliers and one third of the purchase orders placed are below the thousand dollars.
So one can conclude, from the analyses, that that the efficiency of the purchases for consumables at HMC is a candidate for improvement.
4.3
Categorization of suppliers
A portfolio analysis provides insights in the overall picture and helps to decide where supplier reduction is necessary. Because it gives insights in how many of the current suppliers deliver in a certain category (in this analysis the size of the bubbles). The purpose of this analysis is to give insight in which main categories consumables are bought. Secondly it will be necessary to make this distinction for the pooling of articles in frame agreements (4.3.1). 26 categories with the according supply risk were distinguished with cooperation of the purchasers of consumables (‘buyers’).
Only suppliers who could be placed in a category were analysed. The portfolio matrix as filled in for these suppliers can be seen below.
Fig.14: Portfolio matrix filled in Source: Analysis consumables HMC
*: Sheets Kamann “Advanced purchasing” (2005).
3%*
Kraljic matrix for Consumables
0 2 4 6 8 10
Risk (high) ->
Value (high) ->
Cooling Ref rigeration Airco Pneumatics (air tools) Hydraulics (kleppen)
Hydraulic couplings, pipes Electrical Tools (Hand)
Filters Appendages (valves,) Rigging
Rubber & Gaskets Couplings + packing sheets Oil & Grease Air f reights
Fire hoses Welding electrodes Specialties Engin
Miscellaneous Personal protection Overalls
Welding Plastic Pipes Steel Pipes
Accommodation (+kitchen) Off ice equipment Sanitary equipment
Fastening Miscellaneous Engine room (bearings, filters)
Confidential
The categories “electrical“, “oil & grease”, “specialties engine room” and
“miscellaneous engine room” cannot be seen because they lie above the 3%
boundary. Setting this boundary was necessary, because otherwise the other categories would be unclear. In appendix 3 the original matrix for consumables can be found. There are some categories where multiple suppliers are currently used.
This fits also with the picture sketched in paragraph 3.2. The supply risk in these categories is in general low. The risk is decided in cooperation with the purchasers and small Internet analysis. In the next subparagraph the categories are analysed in more detail.
4.3.1 Result of the analyses per category
The articles in the categories of paragraph 4.3 are analysed in more detail. The purpose of this analysis is to get an insight in the repetitiveness rate of the ordering of certain articles. This is done in order to obtain useful information as input for the start of negotiation and selection of suppliers. Frame agreements on estimates of purchase quantities for different articles give a clear picture and as a result, a good negotiating position for selecting suppliers i.e. suppliers give annual quotations for the articles. The original idea of HMC was to pool the articles into frame agreements.
The next figure will make clear what was meant with this.
Prices are negotiated for the different articles per category. So when HMC wants to buy an article, agreements have already been made and included in the frame agreement with the preferred supplier.
In the next figures it will be analysed whether such frame agreements will be a suitable option to improve the internal supply chain efficiency of procurement of consumables at HMC. The purple parts of the lines represent that part of the value that is suitable for frame agreements in the way HMC originally wanted. This means that the articles are ordered three times or more a year. The effort of making price agreements for all those thousands of articles that are ordered just once a year would
Article Article
Category A Category B
Original level of frame agreements HMC
Offshore consumables
Fig. 15: Hierarchy of purchases within potential frame agreements Source: Analysis consumables HMC
__________________________________________________________________________________
not pay off. So the more “purple” you see in the line, all the more suitable the category is for making frame agreements.
Confidential
Fig. 16: value suitable for frame agreements compared with total value Source: Analysis consumables HMC
So in general, the repetitiveness of articles (line-items) bought by the suppliers was very low compared with the total number of articles ordered in the category (between the 3,5% and 11,5% per category). Due to this it will be almost impossible to set up frame agreements on a detailed level, such as on article-level (see also appendix 2).
Furthermore, because these articles are only bought in the year 2005, the total number of different articles over the years is likely to be much higher. The effort to make a contract will only be repaid by a high level of repetitiveness for the articles put in the agreement.
This result of the analyses was surprising (for both me and my assessors), given the fact that the repetitiveness of articles is rather high at other companies (from purchase literature).
As can be seen in figure 16, only a few categories will be suitable for frame agreements. These categories are: oil & grease, accommodation & coveralls, welding electrodes, gloves and shoes. So it seems that frame agreements as HMC originally asked for will not be feasible.
The following explanations are there for the diversity of equipment and the low level of repetitiveness:
- This can be caused by the large number of different types of special equipment (times three vessels) aboard.
- Consumable articles are bought in large quantities (a few times a year), in order to keep logistic costs per article low, reduce the times that customs have to be passed (this can be a problem in certain countries) and to secure a certain level of safety stock.
- Globally there are different suppliers for the same articles, in order to reduce logistic costs.
- Another explanation could be that the repetitiveness of the articles is low (you normally do not change the same engine parts three times a year). To see whether the above explanation is correct, a small analysis is done on a few categories over the past six years (2000-2005). The result of this analysis was that the repetitiveness was there, but not on a level that the effort of making frame agreements on article level would pay off. An acceptable level would have been for example when 20 or so articles would represent 50% or more of the spent and when they were ordered on average three or more times a year. In that case the effort of putting articles in frame agreements and negotiations about prices for them would pay of.
Two examples of this analysis are given below:
For the category electrical there were XXX different articles bought in six years (2000-2005), XXXX of which where repetitive (two or more times ordered in six years) but only XXX articles where ordered once a year or more (on average).
In other words when you make a frame agreement on article level only 2,0% of the different articles will be covered.
For the category hydraulic couplings and pipes XXX different articles were bought,
of which XXX articles were repetitive but only XXX articles were ordered on
average once year or more. A frame agreement on article level for these products
would cover 2,6 % of the different articles.
__________________________________________________________________________________
Summarized
From the analyses it can be concluded that the original idea of HMC to make frame
agreements on article level will not work for (all) the different categories. The
repetitiveness of the procured articles is too low, and the total number of different
articles bought incidentally is high. However, there are still a few categories, which
are suitable for making frame agreements. These categories are: oil & grease,
accommodation & coveralls, welding electrodes, gloves and shoes. However,
implementing such agreements will have minor (or no) consequences on the
efficiency improvement, because the total number of orders will not be reduced by
this method. There are no orders, which consist solely out of articles mentioned in
the frame agreements. Only financial improvements can be realised on the purchase
price by doing this, but no efficiency improvement in the purchasing process, which
was my assignment.
5.0 ANALYSIS OF THE PURCHASING PROCESS
In order to reduce the workload for consumables, both internal and external processes play a part. The research done in chapter 4.0 focussed on the area between both internal and external processes (see also figure 8). This chapter focuses solely on the internal process of the purchasing of consumables at HMC. The goal of this chapter is to give insight in the internal purchasing process in order to be able to evaluate the efficiency of this process.
In this chapter the following is discussed:
- Mapping of the internal flow of the purchasing process
- Cost analysis for the internal process, breakdown of internal costs per purchase order
5.1 Internal purchasing process
The internal purchasing process of consumables starts with the need for a certain article (aboard). The current purchasing process for consumables in charts can be found in appendix 1. The following functions take part in the purchasing process (in chronological order): storekeeper, superintendent/captain/chief-engineer, secretary, portfolio-manager, manager procurement, purchaser, storekeeper (Vlissingen), finance, invoice audit controller, procurement officer/budgetkeeper and finally the storekeeper again (in the whole process there are altogether about 27 persons involved).
The purchasing process can theoretically mapped out in different ways. One of the most important and well-known models is the purchasing process model by van Weele (2001). He divides the purchasing process into six different steps: specify, select, contract, order, monitoring, evaluation. This approach is a process approach;
the quality of the output of the previous steps has influence on the following steps.
When the quality of the output from a previous step is insufficient it may cause problems in the next steps.
Kamann has extended this model to nine steps, by adding awareness of functional need, registration of data and payment to the model.
It has to be determined which model (or combination of the models) fits best for mapping the purchasing process of consumables at HMC.
Awareness of functional need is not relevant for the analysis of the purchasing
process within HMC, because it differs per situation and the people involved are
almost always others. So mapping this would be almost impossible for HMC, and
has no specific value for the total purchasing process. The step contract can also be
removed from the model. This is because contract negotiations do not play a role in
terms of time for consumables. This is done together with the process of selecting
and registration of the orders into the system. The steps registration of data, payment
and monitoring can be combined for HMC, but the choice is made to keep them
separately. This is done because the role of finance is a check (monitoring) and
registration of the invoices and eventually the payment. The steps the invoice audit
controller is involved in are the check (monitoring) and the payment. However, the
purchasers and the storekeeper also do monitoring.
__________________________________________________________________________________
In the flowchart below the total internal processes for purchasing is shown.
Fig. 17: Purchasing process
Source: van Weele & Kamann & Own
5.2
Organizational costs of the purchasing process
The steps of the purchasing process as explained above were set out in a survey (see appendix 4). All functions involved in the purchasing process (as listed on the previous page) were asked to give estimates of the time they spend weekly on the different steps. The boundaries of the different departments are overlooked in this analysis. The total hours per step per week can be extrapolated to totals per year and multiplied by gross wages. When these totals are divided by the total number of purchase orders applicable for the steps, the average total costs per purchase order are obtained. The total result of this analysis is shown in appendix 5.
The following remarks have to be made about the survey. Purchases done on a cost- center level abroad (for example USA) are not included in the list for practical reasons. Urgent orders are not booked on a cost-center. This way the total orders may be in fact higher, and the administrative burden would also be higher. In some functions both consumable and other orders (project related, office related and urgent orders) pass the desk. To give a good picture for the survey, the hours for these functions are divided by the total amounts of purchase orders (instead of the orders booked at cost-centers) for these functions. Finally the number of orders is from the year 2005.
Despite these exclusions mentioned above, the total costs per purchasing order give a good estimate of the costs per purchasing order for consumables, which was not available until now.
A cost-breakdown for the purchasing process of consumables can be seen in the next table.
Phase Specification Selection Order Monitoring Registration Payment Evaluation Total Cost
per PO
Table 1: Costs per purchasing step Source: Research at HMC
Specify Select Order Monitoring Registration Payment Evaluation Specify Adequate Place an get the ordered Record the data Pay the Evaluate products supplier order at products at the invoice supplier needed selection a supplier right place and performance
time
Figure 18: Time en cost per purchasing step in % Source: Research at HMC
The real internal purchasing costs per order are much higher than originally estimated by HMC (between the $75 - $125). The breakdowns of costs give an indication for the time spent on the different steps. When these findings are combined with the flowcharts, the picture of the purchasing process ( appendix 1 ) is completed. It is now possible to make the influence of a change clear in terms of internal costs and based on that, the efficiency of the purchasing process. Order monitoring and specification are the categories with the highest organizational costs.
For specification this can be explained by the fact that HMC has three different vessels and, therefore, three crews who specify the products needed. Monitoring is done by almost everyone involved in the process. About $XX,- per order is spent on supplier selection and ordering.
In the literature the following is found for the cost aspect per purchase order (Kamann 2000); The process and the handling of every invoice costs in practice between the $ 35,- and $ 90,-. With fixed suppliers catalogue systems on the intranet, administrative costs can be reduced to $ 9,-. The average cost per order for HMC are about $ XXX,-. See also for the consequence of internal costs featuring value of orders in Fig.13 in paragraph 4.2.
Summarized
The costs associated with a purchase order at HMC are analyzed in this chapter. The total costs are specified in terms of the seven steps involved in the purchasing process, from the specification of the articles on the ships till the payment of the invoices. The current purchasing process is much more expensive than HMC originally thought, being about $ XXX,- per order. When this is set out against the large amount of low value orders, it would be clear that it will be necessary to design and implement solutions to improve the efficiency of the purchasing process.
In the next chapter alternative solutions are designed for both the purchased articles and the internal purchasing process.
Cost per order
Specification 24%
Selection 18%
Order 15%
Monitoring 23%
Registration 15%
Payment 2%
Evaluation 3%
__________________________________________________________________________________
