Purchasing Strategies for Sara Lee/DE’s New Instants
(Public Version)
Jan Veldhuizen
University of Groningen
Faculty of Management & Organization Section Production & Service Management
March 2005
Important Note:
Because of the confidentiality of the information regarding the New Instants (i.e. supplier names, volumes, spend, etc.), some data has been
changed. This does not have consequences for the research and conclusions.
The study with the original data is known at Sara
Lee/DE.
Preface
This report is based on the research I have conducted at the Procurement Department of Sara Lee/DE in Utrecht, the Netherlands. As a graduation thesis, this is the final piece of my study Management & Organization at the University of Groningen in the Netherlands.
I would like to thank my supervisor from Sara Lee/DE, Michel van der Broek, who gave me all openness in business and taught me how purchasing works in ‘the real world’.
Also I would like to thank Jacqueline Lisseburg, Henriette van der Elzen, Anne-Maaike Molter, Marije Gast and all others colleagues involved in my period within the organization of Sara Lee/DE.
Bart and Eric, our ‘secret’ meetings in Sara Lee/DE’s coffee corner were unforgettable, cheers for that.
I would like to thank my supervisors at the University, especially Dr. Van der Vaart. His patience with me and his willingness to help out were necessary were outstanding.
Also I’d like to mention my time in Groningen. Clayton, sharing a canal-boat with you was amazing. Jeroen, Tim, Joeri and Maarten; Groningen will never be the same without us!
Last but not least, I’d like to thank my mom and dad, who have been extremely supportive.
Hoevelaken March 2005 Jan Veldhuizen
Student nr: 1085298
Supervisors from the university:
- Dr J.T. van der Vaart - Dr J. de Vries
Supervisor from Sara Lee/DE:
- M. van der Broek
Abstract
This research has been concerned with the improvement of the purchasing strategies of the New Instants product portfolio. A few problems have been the reason for this research:
- Proliferation of different products, names and packaging
- No co-ordination between United States and non United States business - Many different suppliers
Together with the objective of the Procurement Department, to enrich their knowledge of purchasing and achieve transparency in their processes, the following research question has been defined:
Which purchasing strategies should Sara Lee/DE use to achieve her goals and how should these be developed?
The analyses can be divided in three different parts:
- Product portfolio - Make-or-buy issues
- Buyer-supplier relationships
With regard to the product portfolio, the following can be said. With the help of theory, it has been shown that most of the cost savings can be made in the specification process.
Streamlining the product portfolio makes the purchasing process easier. There are many opportunities to streamline the New Instants portfolio. There are 350 different SKU’s and 109 of these SKU’s represent a volume of only 17.500 kilograms or less. Getting rid of these SKU’s would simplify the portfolio, it is however not sure if these SKU’s have the same recipes as other SKU’s. If so, there would not be that many cost savings. Secondly there are many different weights per consumer unit. A lot of these weights have very low volumes or the weights have values very close to each other. Combinations could be made to reduce the number of different weights per consumer unit. There are various packaging types, which come in very low volumes, which should be reconsidered. Especially when a lot of these packaging types could be replaced by others, because they have matching weights per consumer unit and the commonality is high.
This research has also outlined the make-or-buy issues. It becomes clear that the cost element is not the only factor in making a decision on this topic. Making coffee, which is used in the cappuccino products is a core competence of Sara Lee/DE. Theory suggests that the company should make this herself. Especially, because SL/DE has got an over capacity at the moment, which makes the production cheaper. It is however not known if this over capacity is structural. Partial outsourcing could be an option for the cappuccino products. In this case the use of coffee of Sara Lee/DE should be a restriction for suppliers. The Creamer and Chocolate products should be outsourced completely.
In the relationships with the suppliers, there is a balanced situation of mutual dependency.
Most important factors for the power of Sara Lee/DE is her attractiveness for suppliers. On the other side, all the special/unique requirements which are asked give her a weaker position. Streamlining the product portfolio and making the specifications more general would give Sara Lee/DE more power as a buyer. More should be done to reduce the supply risk and make the spend per SKU bigger. This can be done through combining several SKU’s, which gives potential scale advantages. Currently there is a single sourcing policy, however multiple sourcing could result in higher cost savings. The product portfolio has got a great potential for globalization. Adjustments within the productportfolio have to be made to lower the local dependency. This globalization will need a tighter coordination of the firm’s
activities. An integrated sourcing strategy would be a good option, instead of the current multi domestic sourcing strategy.
The main conclusion is that the purchasing strategy starts with reconsidering the product portfolio. When this is completed, it is important to think about the make-or-buy decisions.
Finally, the focus should be on the buyer-supplier relationship.
The main recommendations are listed below:
- Reduce number of SKU’s
- Reduce number of packaging types and weights per consumer unit
- Sara Lee/DE should make coffee ingredient for cappuccino products herself - Globalization to increase the potential scale advantages
- Multiple sourcing to increase power
- More authorities Coreline Manager to prevent proliferation
Index
Preface 3
Abstract 4
Index 6
Introduction 8
1 Sara Lee/DE 9
1.1 Introduction 9
1.2 Sara Lee/DE 9
1.3 Finished Products 12
1.4 Conclusion 17
2 Research Design 18
2.1 Introduction 18
2.2 Reason of this research: Project Streamline 18
2.3 The research 20
3 Problem Focus 28
3.1 Introduction 28
3.2 Costs as main performance objective 28 3.3 Lowering costs by improved purchasing 29
3.4 Conclusion 31
4 Purchasing at Sara Lee/DE 32
4.1 Introduction 32
4.2 General information and products 32
4.3 Organization 33
4.4 (Development of) Purchasing strategies 36
4.5 Conclusion 39
5 Analysis – The Productportfolio 41
5.1 Introduction 41
5.2 (Theoretical) Relevance 41 5.3 The Productportfolio in short 42 5.4 Streamline/ Rationalization 43
5.5 SKU 43
5.6 Weight 45
5.7 Packaging type 48
5.8 Packaging material 50
5.9 Conclusion 51
6 Analysis – Make or buy? 52
6.1 Introduction 52
6.2 Triggers of make-or-buy questions 52 6.3 To make or not to make? That’s the question 53 6.4 Factors in decision-making 54 6.5 Implications for purchasing 56 6.6 Summary advantages and disadvantages outsourcing 57 6.7 Outsourcing: Partial or complete? 57
6.8 Conclusion 58
7 Analysis – Buyer-Supplier relationship 59
7.1 Introduction 59
7.2 Market Analysis 59
7.3 Relationship 62
7.4 Single or multi source 66
7.5 Global strategy 68
7.6 Conclusion 71
8: Conclusions and Recommendations 72
8.1 Conclusions 72
8.2 Recommendations 73
Literature 75
Appendix 1: Team ‘Streamline’ 76
Introduction
This research is concerned with the improvement of purchasing strategies at Sara Lee/DE, with the objective to increase cost savings. The focus of this research will be on the purchasing strategy of a specific product category, New Instants. Examples of these products are cappuccino powder and cacao powder. The objective of this research is:
Presenting recommendations for purchasing strategies and the development of these strategies – regarding the purchasing of New Instants – with which Sara Lee/DE can achieve cost savings and improve her profit.
The first chapter will give a general description of Sara Lee/DE. Also, it will describe finished products and in particular a category of finished products: New Instants.
Secondly, the research design is presented. This chapter will deal with the reason of this research. Also, the objectives and research question are presented.
The next chapter will discuss the problems stated in the research design. The question which will be answered in this chapter is: ‘Why are these problems so important?’
Chapter three will describe the purchasing organization within Sara Lee/DE.
The analysis will start with a closer look at the Productportfolio of Sara Lee/DE’s New Instants. This chapter starts with a description of the theoretical relevance of looking to the portfolio. After this, strong and weak points will be described, and the threats and weaknesses will be given.
The second chapter of the analysis will focus on Make-or-Buy dilemmas. This chapter will investigate the issue if Sara Lee/DE should make the New Instants herself, or if she has to buy them. Other options will be discussed as well, for example partial outsourcing.
The analysis will end with the buyer-supplier relationships. Issues like dependency, relationships, multi- or single-sourcing, and global purchasing strategies will be discussed in this chapter.
This research will end with the most important conclusions and recommendations.
Chapter 1: Sara Lee/DE
1.1 Introduction
To get a better view of the organization where the research has been performed, this chapter will introduce Sara Lee/DE in general. This research focuses on a smaller part of the organization, called Finished Products, within the Coffee and Tea Division. This area will be described into more detail.
The first part will describe Sara Lee/DE in general: the organizational structure, the policy, and the products sold by Sara Lee/DE.
This chapter can be seen as part of the orientation component of this thesis.
1.2 Sara Lee/DE
Chicago-based Sara Lee Corporation is a global manufacturer and marketer of high-quality, brand-name products for consumers throughout the world.
The three lines of business are:
• Food and Beverage
• Intimates and Underwear
• Household Products
Sara Lee has operations in 55 countries, markets branded products in nearly 200 nations and has 145,800 employees worldwide. (source: Sara Lee inSite)
Sara Lee/DE is an international marketer of high quality branded products, and is part of Sara Lee Corporation, Chicago, USA. The origin of Sara Lee/DE dates back to 1753.Sara Lee Corporation's leading brand names are known around the globe. As Sara Lee/DE says on their intranet ‘Sara Lee/DE InSite’:
“Our preeminent brands are built on consumer needs and expectations, offering exceptional quality and value. Sara Lee Corporation builds and maintains leadership positions through innovation and responsiveness. Some of our brands are decades - or even centuries - old, and many are leaders in their respective categories.”
Strategy
It’s important to be aware of the corporate strategy. This will affect all decision made in a company. This could also limit this research. The official strategy statement of Sara Lee/DE is:
Our mission is to feed, clothe and care for consumers and their families the world over.
We focus our efforts on building leadership brands in three global businesses: Food and Beverage, Intimates and Underwear, and Household Products. Seeking to be innovative in everything we do, we follow four operating principles to create long-term shareholder value:
1. Drive profitable top-line growth by: anticipating and meeting our consumer's needs; partnering with our trade customers; investing our cash flow behind internal opportunities and strategic acquisitions.
2. Achieve the lowest possible costs by leveraging our skills, scale and technology, while striving for functional excellence in all business processes.
3. Be an employer of choice for highly talented people, retaining and attracting world-class individuals through a philosophy of empowerment and a system of providing rewards commensurate with performance.
4. Adhere to the highest standards of ethical business conduct, treating fairly, and with respect, all those we touch as a company.
(Source: Sara Lee/DE InSite)
Figure 1: Sara Lee/DE as a part of Sara Lee Corporation (Research has been done within the Coffee and Tea division, see arrow)
Lines of business
To get a good view of all products Sara Lee/DE has got to offer, this paragraph will describe the different lines of business. Sara Lee/DE manages Sara Lee’s world-wide Coffee and Tea and Household and Body Care activities, including Direct Selling operations, as can be seen in figure 1 (red markings). Sara Lee/DE markets a wide range of brands across the world scene, most of which are leaders in their markets. Meanwhile, international brands like Douwe Egberts coffee, Pickwick tea, Natreen sweeteners, Sanex body care products, Delial sun care products, and Ambi-Pur air fresheners are established success-stories in regions across both hemispheres.
Sara Lee/DE also has an impressive offering of local brands, many of which are household names in their home countries. In Spain, connoisseurs of good coffee cherish their Marcilla brand. And it is a similar picture in France with Maison du Café, in Denmark with Merrild and in the USA with Superior. Meanwhile, in the United Kingdom, their Radox brand of body care products is a deeply embedded household name. In Germany the same applies to Duschdas.
Coffee & Tea Division
This division has strong brands in the areas of coffee, coffee systems, tea, sweeteners and grocery products, including rice and nuts. With brands like Douwe Egberts, Jacqmotte, Maison du Café, Marcilla, Merrild, Moccona, Superior, Chock Full o’Nuts, Harris and the recently acquired Brazilian Pilão, Sara Lee/DE is one of the world’s leading suppliers of coffee. A wide variety of tea products is offered to consumers throughout Europe under the brand name Pickwick. In Spain SL/DE has a leading position in tea with her brands Hornimans and Sueños de Oro. Natreen is one of the world’s largest sweetener brands. Nuts are marketed in the Netherlands, Belgium and France under the Duyvis and Bénénuts brand names.
Sara Lee Corporation
Intimates & Underwear Household products Food & Beverage
House- hold &
Bodycare
Direct selling
Coffee &
Tea
Sara Lee|DE
Household & Body Care
The principal focus of the Household and Body Care activities are the Shoe Care, Body Care, Air Fresheners and Insecticides product categories. The Kiwi brand, available in over 130 countries, is the world’s leading shoe care brand. Vapona, Catch, Bloom and Ridsect products offer solutions to any insect problem of consumers throughout Europe and Asia.
Our Ambi-Pur air freshener brand leads the market in several European countries with the liquid toilet bloc Ambi-Pur Flush. And with brands such as Sanex, Badedas, Brylcreem, Delial, Duschdas, Monsavon, Radox, Williams, Zendium and Zwitsal, Sara Lee/DE has secured a leading position in many markets for body care products.
Direct Selling
Sara Lee/DE’s direct selling operations House of Fuller, House of Sara Lee, Nuvó Cosméticos, NaturCare, Avroy Shlain, Swissgarde and Nutrimetics distribute a wide assortment of cosmetics, fragrances, toiletries and personal products directly to the consumer in over twenty countries. Today, some 860,000 independent sales representatives deliver Sara Lee/DE branded products directly to the consumer.
(Source: Sara Lee/DE InSite)
1.3 Finished Products
Description finished products
The department where this research takes place is the department Finished Products. This department has got a purchasing function and buys finished products. Also they are responsible for other outsourcing projects, but these projects are more like a heritage from the past. Their main business is buying Finished Products for the OpCo’s (operating companies of Sara Lee/DE) in Europe . Finished products are products which are directly ready for use. The value added by Sara Lee/DE is design, brandname and distribution.
Examples of finished products are milkcups, papercups and cacaosticks. These products are made for out-of-home business or the retail, and sometimes for both markets. The focus of this research is on one product category: New Instants. A detailed description of this product category will be presented in the next paragraph. More information about the other Finished Products will be given in chapter 4. This chapter will outline the purchasing situation at Sara Lee/DE, focussed on the Department Finished Products.
New Instants
As stated earlier, the focus of this research will be on the New Instants. Sara Lee’s definition of New Instants is:
‘all soluble/ instant products, excluding pure instant coffee, soup, sugar, lemonade and teas’
Four categories have been set:
- Cappuccino
All products containing instant coffee, milkpowder and sugar as main ingredients. This product is mixed with hot water only, either through a dispenser or in a cup.
Figure 2: Purchasing spend of New Instants worldwide per category per year (Euro)
- Chocolate
All products containing milkpowder, sugar and cocoa powder as main ingredients. This product is mixed with hot water only, either through a dispenser or in a cup.
- Milk/ Creamer
All products containing only milkpowder, sugar, dairy and non dairy creamers as main ingredient. This product is used to mix brew or liquid coffee.
- Other
9 .0 0 0 .0 00
5 .0 0 0 .0 0 0 2 9 .0 0 0.0 0 0
1 5 7 .0 0 0 .0 0 0
0 2 0 .0 0 0 .0 0 0 4 0 .0 0 0 .0 0 0 6 0 .0 0 0 .0 0 0 8 0 .0 0 0 .0 0 0 1 0 0 .00 0 .0 0 0 1 2 0 .00 0 .0 0 0 1 4 0 .00 0 .0 0 0 1 6 0 .00 0 .0 0 0 1 8 0 .00 0 .0 0 0
C a p p u ccin o C h o co la te M ilk /C re a m e r O the r C a te g o ry
S p e n d in E u ro
Other but mentioned above, including products that contain both instant coffee and cocoa.
All New Instants are sold in the Out-Of-Home industry (restaurants, coffee bars, etc.) or in Retail (products to be used at home). Some products are for both markets (see appendix).
Also, the products vary in sizes and packaging types. (see appendix).
Examples of these New Instants are the 1.5 kg bags filled with cacao powder, or little (12.5 grams) sticks with cappuccino powder. Products with the biggest purchasing spend per year are shown down below.
Top 3 Cappuccino Products
Country Stock keeping Unit Spend (x1000 Euro)
USA Cappuccino 1 50.000
USA Cappuccino 2 40.000
USA Cappuccino 3 9.000
Top 3 Milk/ Creamer Products
Country Stock keeping Unit Spend (x1000 Euro)
USA Milk 1 2.500
USA Milk 2 2.000
USA Milk 3 1.200
Top 3 Chocolate Products
Country Stock keeping Unit Spend (x1000 Euro)
USA Choc 1 6.500
USA Choc 2 4.500
USA Choc 3 4.400
The network structure
It is very important to be aware of the network structure of an organization. Slack (Slack et.
al. 1995: 209) defines three reasons why an organization should take a total supply network perspective:
- The first benefit is that it helps any operation to understand how it can compete within the network. According to Slack this is because a supply network approach requires operations manager to think about their suppliers and their customers as operations.
- Taking a supply network perspective can also help to identify particularly significant links within the network and hence identify long-term strategic changes which will affect the operation.
- The starting point for all these advantages is taking a broad perspective not only of the immediate supply network (that is the customers and suppliers with which an operation has immediate contact) but also of the total supply network (that is all the significant operations on the supply side and the demand side of an operation).
Although there are always exceptions, there is a general network for most Finished Products.
In the figure below, the network for New Instants products has been explained. This network is representative for most of the Finished Products.
Figure 3: The network structure for New Instants
Three situations
For the products, there are three different ‘route’ possible. This depends on two things. Is the product actually ready for use, when it is purchased? Or does it need extra work? The second question is: is the product a global or a local product? Local products are bought by each OpCo individually and global products are sourced by Divisional Procurement.
The product delivered by the supplier is not completely finished
Supplier delivers different components to the Sara Lee/DE factory in Joure. This factory will finish the product. The next step is storing the product and sending it to internal customers, also called local OpCo’s. These OpCo’s will take care of the local distribution part.
The product delivered by the supplier is completely finished and is purchased locally.
In this situation local OpCo’s are responsible for the process of purchasing the product. The general idea in this situation is that there is a need for local products, which have unique specifications. These products are designed locally and often bought locally, because of the little amounts. In Hungary, for example, a Hungarian supplier is responsible for the supply of a local product.
The product delivered by the supplier is completely finished and is purchased for global use.
These products are purchased by Divisional Procurement. This is a centralized department, which is responsible for strategic purchasing. In brief, they try to get a good view of all different needs of the different OpCo’s. If possible, they will try to come up with a product, which suits more than one OpCo’s preferences. Information about ingredients and more can be read in different languages on the packaging. Divisional Procurement arranges the deal, but local OpCo’s need to order for their selves. All global product are stored in the Netherlands, before being shipped to the local OpCo’s.
Supplier
Factory Joure (Netherlands)
Stored in the Netherlands
Local OpCo’s Finished?
no
yes Local or global product?
Global
Local OOH Local Retail
Local Supply of coffee ingredients
Sara Lee/DE as coffee supplier
In some situations, suppliers of Sara Lee/DE are enforced to use the coffee of Sara Lee/DE in their products. A very good example is the product ‘Instant Cappuccino’. A substantial part of this product is coffee, which is produced by Sara Lee/DE in Joure. The only thing the supplier is responsible for, is mixing the ingredients and packaging.
One exception: United States and Canada
There is however one exception. The Sara Lee Coffee and Tea Division in the USA supplies the Canadian OpCO. Looking to the figure, one could say about the New Instants which are bought in the USA, that they are:
1) finished products, no extra handling
2) ‘global’ products (they are not used all over the world, but they are used in more than one country)
Instead of the products being stored in the Netherlands, they are stored in the USA, before being shipped to Canada. The principle however, is the same.
OpCo’s
The network applies to all OpCo’s of Sara Lee/DE which buy and sell New Instants. OpCo is short for operating company. Worldwide there are many operating companies. The ‘New Instant’ OpCo’s are the following (including yearly purchase spend):
Spend per Country
Country Spend (€)
USA 178.069.882
Netherlands 6.058.052 United Kingdom 4.683.568
Belgium 2.276.064
Hungary 1.990.087
Denmark 1.421.390
Canada 1.383.950
Australia 1.032.389
Germany 847.509
France 692.773
Brazil 522.623
Czech 429.286
Russia 282.790
New Zealand 232.828
Spain 170.369
As can be seen in both the table and the charts, the United States is by far the biggest player. Taking a look at the spend overview when the US is excluded, one can see that the Netherlands and the UK are relatively big. Belgium and Hungary are fairly big, where Russia, New Zealand and Spain have very low volumes.
Figure 5: spend overview per country
Figure 6: Spend per country (US excluded)
Suppliers
This topic will be dealt with in more detail in chapter 4. Because suppliers are a vital part of the network, the top supplier are shown in the figure below. There are 40 different suppliers:
a few big ones (7 with a spend of more than1 million Euro per year), and a lot of small local suppliers (21 suppliers with a spend less than 400.000 Euro per year).
Spend Overview per country
USA
United Kingdom
Netherlands BelgiumHungary
Spend Overview per country (US excluded)
Netherlands 29%
United Kingdom Belgium 21%
10%
Brazil 2%
France Germany 3%
4%
Denmark 6%
Canada 6%
Australia 5%
Hungary 9%
Netherlands United Kingdom Belgium Hungary Denmark Canada Australia Germany France Brazil Czech Russia New Zealand Spain
Figure 7: Top 5 suppliers
1.4 Conclusion
This chapter has presented a general view of the organization Sara Lee/DE. It’s important to know what the company does, what kind of products they make and what their strategy is.
This can be of influence of this research. Also, a more detailed view of the research area has been described. Finished products and in particular New Instants have been outlined. The network has been presented. It’s clear how the different New Instants are transported from supplier to customer. This network applies to most Finished Products too. Concluding we can say that we know now what kind of product we’re talking about and how the product is moved from start to end-user. Chapter 3 will describe how these product are purchased; the purchasing part of the Finished Products and in particular for New Instants. Chapter 2 will give insight in the research objectives.
Top 5 Suppliers (spend per supplier in Euro)
150.000.000
6.000.000 4.500.000 10.000.000
20.000.000
0 20.000.000 40.000.000 60.000.000 80.000.000 100.000.000 120.000.000 140.000.000 160.000.000
Supplier A Supplier B Supplier C Supplier D Supplier E
Chapter 2: Research Design
2.1 Introduction
This chapter discusses the research in more detail. It consists of a description of the problem, the research question, the sub-questions, the research constraints and the data collection. The research objective defines the framework of this research: for whom the research is performed, what the results are and why the results are of importance for the principal of this research. The research constraints are the limitations for the results and methods of the research. The chapter will end with a description of how the desired data is obtained.
2.2 Reason of this research: Project Streamline
This research has been triggered by a project called Streamline. This the name of a rationalization project of Sara Lee/DE. This paragraph will give a more detailed description of the project. As earlier stated, the project is called streamline. This paragraph will first describe the essence of the project; why is it started in the first place? Secondly, the targets of project Streamline will be made clear. Also the scope will be dealt with. At last, the team- members and the role of the project in this research will be outlined.
New Instants
The definition of New Instant products is:
‘all soluble/instant products, excluding pure Instant coffee, soup, sugar, lemonade and teas’
Examples are cappuccino powder or powder for hot chocolate.
Why Streamline?
There are a few different reasons why this project has been set-up:
Proliferation of blends, SKU’s, pack types
No co-ordination US and non-US
Many different suppliers
Proliferation of blends, SKU’s, pack types
Although there’s no insight in this issue, the feeling at Procurement and Core Line Management is that there are too many different blends, SKU’s and packaging types. All OpCo’s are relatively free in developing and introducing new blends, SKU’s and packaging types. A lot of different blends will probably hardly differ from other blends. The same is true for SKU’s. There are too many different product names, which means extra costs because of switching machine-settings.
No coordination US and non-US
The New Instant business in the United States is a very big part of the total New Instant business. However, there’s no real coordination between US and non-US business. Insight should be gained in both businesses, so SL/DE will be able to see differences and similarities. Also, non-US businesses could gain advantage by cooperating with US. Both businesses could share knowledge and achieve scale advantages by combining their purchasing activities.
Many different suppliers
The feeling is that there are too many suppliers for New Instants. A lot of countries have got their own supplier for their own little product. SL/DE would like to find out if there are possibilities to cooperate and reducing the amount of suppliers. Potential scale advantages could be achieved by these actions.
Objectives of Streamline
Four objectives have been set by the team.
Improve Harmonization
Maximize Leverage Purchasing
Clear Rules for Product Amendments
Synergy US and Non-US
These objectives are worked out into more detail down below:
Improve Harmonization
The experience of all people/OpCo’s involved is that there are too many processes running independent of each other. Getting insight in procedures, like ordering or selecting suppliers is necessary. This project aims to harmonize the processes.
Maximize Leverage Purchasing
Unfortunately, the spend of the total purchase volume is unknown. By the total purchase volume is meant the volume of all new instants worldwide purchased by Sara Lee/DE. The general assumption is that this value is somewhere around the 160 million Euro, although nobody is sure about this and the information source is not more than a feeling. If this is really the amount, Sara Lee/DE possesses a lot of potential purchasing power, which is only partly used. If the total value is known, Sara Lee/DE can use her purchasing power better than they do now.
Clear Rules for Product Amendments
In the current situation all OpCo’s are relatively free to do whatever they want to do. If they think that the market needs a new product, they have the ability to develop a new product and to introduce it to the market as well. Looking positive you could say this is a good thing, because the local OpCo’s have a good view of the market. By acting this way, they can provide the market exactly what she want. The problem is that this causes proliferation of blends, packaging types, SKU’s (Stock Keeping Units) etc. This is why one of the objectives is to develop clear rules for product amendments. This means that product developments really have to have a significant benefit compared to the current situation. If there are more different products, the less purchasing power Sara Lee/DE will keep.
Synergy US and Non-US
At the moment there’s no significant co-operation between the US and the other countries. It has always been thought that transport costs would never be compensated by benefits gained by combining the US-volume and the non-US volume. However, some suppliers have production locations at more places around the world, so transport costs would not be more than normal. If transport should have to cross the Atlantic Ocean, this shouldn’t have to be a problem because of the big amounts which have to be shipped. The bigger the amount, the lower the transport costs per unit. This is why it is important to know if there are any similarities between US and non-US products and if the volumes are big enough.
The Team
For this project a team has been set up. In this project a lot of stakeholders are involved. All members of the team will represent one of these stakeholders. The reason of this is that it broadens the view on the problems. More people from different disciplines, means a multiform view on the problems. Members of the team are purchasers, marketers, the manager of new instants, research and development employees and a supply chain consultant. More information about the team can be found in the appendix.
2.3 The research
Now it has been made clear what Project Streamline is all about, this paragraph will describe the research design of the student’s research.
Problem description
This paragraph will describe the reason of this research. Why is it important and for who is it important? Basically there are two parties involved:
- The Procurement Department - Coreline New Instants (manager)
The answer on the question ‘why is it important for these parties?’ is given below.
Coreline New instants (manager)
As stated earlier, the Streamline project is initiated by the Core Line Manager of the Instant Products. Within this project there are a lot of different areas of interest, but the main one is procurement. This is why the chosen project manager is one with a purchasing background.
The following problems (explained earlier) can be seen as the reason for the research and will lead to the research goal and question:
Proliferation of blends, SKU’s, pack types
No co-ordination US and non-US
Many different suppliers
The targets set by the team are the following:
Improve Harmonization
Maximize Leverage Purchasing
Clear Rules for Product Amendments
Synergy US and Non-US
Procurement Department
The Procurement Department is a stakeholder as well. There are some general purchasing strategies, but it’s not really clear how they work and how they are developed. The potential benefit for this department is to see how different strategies are developed for different situations. Summarizing this, this department would like to enrich their purchasing knowledge. Besides this, SL/DE would like to be identified as a company with transparent processes. This includes the development of purchasing processes.
Research objectives
The objective of this research is to develop new purchasing strategies for the new instant products so cost savings can be made. This inflects that no explicit attention will be given to the sales side. Of course will be looked to the consequences of changes in the strategies, but we will not try to increase sales. The emphasize will be on cost savings. During the process of strategy development will be looked to the current method for strategy development as well. Recommendations for improvements at this level will be given too, if proven necessary.
Presenting recommendations for purchasing strategies and the development of these strategies – regarding the purchasing of New Instants – with which Sara Lee/DE can achieve cost savings and improve her profit.
Research question
To achieve the stated objectives, the following research question has been defined:
Which purchasing strategies should Sara Lee/DE use to achieve her goals and how should these be developed?
To answer these research questions, several other questions need to be answered. These sub-questions will be described later on in this chapter. All together, the answers on the sub- questions will lead to the answers of the research questions.
Conceptual model
To get a better view of the purchasing costs a conceptual model shall be presented.
According to De Leeuw (Leeuw, 1996: 141) the goal of conceptualizing a problem is:
Developing valid conceptual definitions and/or conceptual models which give insight in the problems and which are operational.
To get a better insight in purchasing costs, Saunders (1994) uses the concept of Total Costs of Ownership. Purchasing costs are split up in three different factors:
1. ‘Costs of acquiring’ a product. As well as the profile of the unit purchase cost of the product (purchasing price), other costs of acquisition include costs of specification evaluation, sourcing, negotiation and selection of supplier, as well as those of expediting, receiving and inspection.
2. ‘Costs of possessing’ a product. These are defined as the costs of ‘ensuring that a conforming product is available for manufacture’. Under this heading can be included various internal and external failure costs associated with faulty products, the costs of holding stocks of the item and handling and transportation costs.
3. ‘Costs of sustaining’. These costs are associated with activities to ensure that conformance will be maintained in the future. Among these are the costs of supplier audits and certification, and the costs of other preventive measures with regard to supplier education and development.
(Saunders, 1994: 234)
Figure 1: Conceptual model.
yyy
Holding stock Transport
Audits
Supplier education Purchasing Price
xxx
Purchasing Costs
Costs of sustaining Costs of acquiring a product
Costs of possessing a product
Cost-based pricing
Competitive bidding Market-based pricing
Specifications Number of suppliers Demand and supply Power and dependency
This research will focus on the costs of acquiring a product.
Costs of sustaining are important especially when one switches to another supplier. Is this supplier as good as promised? However, these costs are important when the supply starts, and it’s really hard to influence these costs before this point. Also, Sara Lee/DE’s purchasing policy obliges that all suppliers are regularly audited. These costs will be the same for all suppliers. As a rule, SL/DE will not invest in development and education of suppliers. They will look for suppliers which are already up to the standard or are willing to invest in themselves. Costs of sustaining are therefore not involved in this research.
This research will not focus on ‘costs of possessing’ a product either, but factors of these costs, like transportation and holding stocks are relevant factors in decision making about purchasing strategies. Time and resources were not enough to research both acquiring and possessing costs.
Within the costs of acquiring a product, this research will focus on the purchasing price.
Costs of specification are important, but most of the time these costs are internal, because specification is done by Sara Lee/DE herself. These costs won’t be different per supplier, which makes these costs not important during the selection of suppliers. Costs like expediting, receiving and inspection of goods are again internal. However, these costs will depend on the way suppliers deliver their goods. Together with negotiation and selection costs, these costs are too vague to be involved in this research. Limited time and resources will not make this possible. This is the reason why this research focuses on purchase price, which has a big influence on the total costs (especially with finished products) and is realistic to achieve a good research result with the limited time and resources.
According to Van Weele there are 3 different ways to get to the right purchasing price: Cost- based pricing, Market-based pricing and Competitive bidding.
1. Cost-price pricing: The price of the product is directly derived of the cost-price. Normally a standard profit is added to the cost-price to get to the purchasing price. (Van Weele, 1999:
261). In this research one can think about reducing the number of suppliers to achieve scale advantages, so costs can be reduced. Or for example changing the specifications of the products.
2. Market-based pricing: The price of the product is agreed on the market, because of market-factors like demand and supply, stocks on the market, politics, economic situation.
(Van Weele, 1999: 261). Important elements in this research are demand and supply. How many suppliers can make what Sara Lee/DE wants? Which parties are dependant of one other? Is it a buyers market?
3. Competitive bidding: The price of the product is both cost-price driven and market- based. This situation is the most common situation (Van Weele, 1999: 261).
The conceptual made clear what is meant by purchasing costs in this research. Also the focus of this research has been made clear: the purchasing price. However, important elements, which can influence cost like transport and stock holding will be dealt with as well.
Approach
This paragraph will deal with the research approach. The starting point of the approach is the goal of this research. Sara Lee/DE wants to define a purchasing strategy for their New Instants. Before anything can be said about how to purchase these New Instants, one should investigate the product portfolio. The general thought is that there are too many products, which actually don’t really differ that much; so-called proliferation. The first step is to get more insight in this issue by collecting the relevant data. The second step is rationalizing this product portfolio. Different products should add different values. One can think about different packaging for the same product, or a small difference in recipe, etc.
Once this step has been made, one should think about make-or-buy-decisions. The current situation is unknown, so research is necessary to find out if products or ingredients are produced in-house or is this production outsourced. It’s important to gain insight about this
subject by finding out advantages and disadvantages in general, but also specific elements in the situation of Sara Lee/DE (i.e. management statements about this issue).
This research will not go into detail at the make-side. The focus of this research is the buying side. By looking to the current suppliers and potential suppliers insight is gained of the supplier market. How many suppliers does Sara Lee/DE use at the moment? Are there many suppliers? Is it a monopoly, a cartel market or a competitive market? When this is defined, it’s important to know where the power is in these markets. Is Sara Lee/DE more dependant of the suppliers than vice versa? This will lead to the purchasing strategy that will fit Sara Lee/DE’s situation the best.
Fig 2: Research approach
Summarizing, there are three important steps:
• Specifying: what do we have to buy?
• Selecting suppliers: how many and which suppliers will we select?
• Contracting: what relationship with the suppliers will suit us the best?
Productportfolio rationalization
Make vs buy
Supplier Market Analysis Buy
vs
Make vs
Cartel market Circumventing
cartels Monopoly market
Managing monopoly supplier
Competitive market Competitive advantage matrix
Dependency evaluation
Single source
Multiple source
Relationship decision
Arm’s length Cooperative Collaborative Partnership Market forces Mutual deterrent contractual alliance vision & synergy
Defining the purchasing strategy
Specify Selecting one or more suppliersContracting
Sourcing strategy
These three steps are also called the sourcing strategy of the company, or strategical buying.
The sourcing steps are followed by an operational part, which consists out of ordering, monitoring and evaluating. However, the focus of this research will be on the strategical part.
This approach is a combination of the theory of Van Weele (Purchasing process) and Steele
& Court (Contract strategy model, page 135 of Profitable Purchasing Strategies).
The first part of the research will be one of collecting and analyzing the data; a diagnosis of the current situation with the help of scientific theories. The second part will include recommendations to develop a better purchasing strategy.
Sub-questions
To answer the research question, the following sub-questions have to be answered:
Background information about Sara Lee/DE - Sara Lee/DE in general
- Current situation regarding Finished Products and in particular the New Instants
Background information about purchasing (at Sara Lee/DE) - How does the purchasing organization look like?
- What kind of purchasing strategies does Sara Lee/DE have?
- How are these strategies developed?
Analysis
Productportfolio:
- What does the theory say about productportfolio’s?
- How does the New Instants product portfolio of Sara Lee/DE look like?
- What are the strong and weak points of the current portfolio?
- What are the threats and opportunities?
Make-or-buy?
- What is meant by make-or-buy?
- What is the current make-or-buy situation at Sara Lee/DE?
- Can Sara Lee/DE make (parts of) products herself?
- What are advantages and disadvantages of making?
- What are advantages and disadvantages of buying?
- What are the relevant factors at Sara Lee/DE, which are important for a decision about this issue?
Supplier relations
- How dependant are the suppliers of Sara Lee/DE and vice versa?
- What kind of contracts does Sara Lee/DE have with their suppliers?
- What does theory say about supplier relations and purchasing strategies?
- What are the strong and weak points of the current strategies?
- What are the threats and opportunities?
Recommendations
- Which aspects need more research?
- Which directions can be given in the development of a purchasing strategy, which will decrease costs?
- Which aspects of the new purchasing strategy could cause problems and how should SL/DE deal with these potential problems?
Action Plan
This paragraph will deal with the question of ‘how to find the answers on the sub-questions’.
First, the general information about Sara Lee/DE is gathered by interviews. In addition to this, more specific information about the New Instants will be collected by making use of a questionnaire which will be send to all OpCo’s around the world. This will give a good insight in the different SKU’s, the packaging, the main ingredient, prices and volumes. Secondly, background information about purchasing within Sara Lee/DE will be obtained by using interviews and existing information like presentations and InSite (intranet). To find the answers on the questions concerning the product portfolio, statistical analyses will be used.
The focus will be on the amount of different products, different weight per consumer unit and different packaging types. This analyses will point out the strong and especially the weak points. For example, packaging types which are hardly used or SKU’s which have a very low turn-over. To answer the questions concerning the make-or-buy issues, statistical analyses will be used as well. This will illustrate what is made by SL/DE herself and what is outsourced. Interviews and theory will be used to find more background information about this topic. To get a better insight in the supplier relations, interviews are used, but also statistical information about the suppliers (how many and what is their share). To get a better view of the dependency, various theories will be used. Also the products will be plotted in the Kraljic matrix, which will result in recommended (moving) strategies.
All answers will result in recommendations concerning redesigning the product-portfolio, reconsidering make-or-buy decisions and rethinking buyer-supplier relationships.
Constraints
This paragraph will give insight in the main focus of this thesis, but also emphasize the elements which will not be researched. Looking at organisations, many things deserve attention, but looking to all aspects will not give a satisfying result. Van Weele (Weele, 1999, 131) thinks that the company’s topmanagement should make choices in three different areas: Customers, Competitors and Suppliers. All three together he names this ‘the strategic triangle’.
1. Customers
Products can’t satisfy everybody at the same time. Choices have to be made about which product and which part of the market. The company can’t serve everybody. The product has to suit the customers preferences. To achieve success in this area, one needs a good marketing strategy. This research however, will not deal with these issues. Although the importance of this issue is high, the recourses are not available to include this subject in this study.
2. Important competitors
Not only is it important that companies deal with the needs of customers, also important is the way they do this. It’s essential that a competitive advantage will be achieved and – even more important – kept. Products and services need to have a clear difference with those of the competition, to guarantee enough customers choosing for their product or service. Van Weele states that an international approach is essential. This second part of the strategic triangle is called ‘competitive benchmarking’: identifying the most important differences in position of the company herself and her important competitors (direct and indirect). Because of the limitations in time and manpower this subject will not be dealt with in this thesis.
3. Important suppliers
Developments in supplier-markets make it necessary to reconsider the company’s core activities. The company should analyze the execution of their core and non-core activities (both production and supporting activities) and compare it to the standards of the market.
This issue is named the ‘make-or-buy’ decision. When a company finds out that she can’t run (a part of) her activities cheaper, at the moment or in the future, she should investigate the possibilities of cooperation with suppliers. This research will deal with the make-or-buy decision and the purchasing strategies.
Figure 10: Strategic Triangle (Weele, 133)
Definitions
OpCo Operating Companies
SLC Sara Lee Corporation SL|DE Sara Lee Douwe Egberts
UOM Unit of Measurement
AOP Annual operating plan: Estimated volume per year (per uom) OLII Outlook 2: Adjustment of AOP.
Data Collection
In the study, different ways of data obtaining will be used. Baarda & De Goede identify three ways of data collection: usage of existing information, obtaining of data through observation and obtaining of data through written or oral interviews. In this study the observation method won’t be used, because no measurements are needed. To obtain data oral interviews and existing information are used.
Oral interviews
To get a good view of the company, oral interviews have been used. In this orientation phase there were a lot of ad-hoc interviews as well. Going further in time, research became more specific and so were the interviews.
Sourcing/
partnering Marketing
Customers
Suppliers Competitors
COMPANY
Competitive benchmarking
