A Europe-wide approach to non- paint products
From paint manufacturer to wholesaler
Public Version
Author: Belle Spaan
A Europe-wide approach to non-paint products
From paint manufacturer to wholesaler
Akzo Nobel Car Refinishes
Graduate Thesis for “Technische Bedrijfswetenschappen” at the University of Groningen
Public Version
Author: Belle Spaan
Student number: 1074989 Date: May 1st, 2004
Place: Amsterdam
Supervisors University: Dr. E.P. Jansen
Dr. J. de Vries
Supervisors Company: C. Suurenbroek
P. Coady
C. Kuijper
T. Zijderveld
‘De auteur is verantwoordelijk voor de inhoud van het afstudeerverslag; het auteursrecht van het afstudeerverslag berust bij de auteur’
Management Summary
‘A Europe-wide approach to non-paint products: from paint producer to wholesaler’ is a report containing the results of research done for Akzo Nobel Car Refinishes as part of an internship at Car Refinishes Europe-West.
Market trends in the automotive repair-market have led to decreasing margins for Car Refinishes Europe- West. Car Refinishes is specialised in car-repair paint and services. To improve margins, the decision has been made to forward integration in the value chain. This has resulted in acquiring independent
wholesalers and integrating the businesses into the Car Refinishes branch organizations.
Forward integration also means selling more non-paint products to customers. Non-paint products (abrasives, tapes etc) are not manufactured by Car Refinishes but bought from suppliers. The amount of non-paint sales is increasing as more wholesalers are integrated.
Until now, every country has organized a country-specific strategy on non-paint products, amazingly enough, without any coordination or communication on a Europe-West level. Compared to non-paint, paint and service products are developed and managed on European-level.
The subject of this thesis is non-paint, because money is made on selling non-paint products and the relative importance of non-paint products is increasing due to the forward integration. The objective is to study the relationship between the assortment of non-paint products and the supply costs non-paint related, and to advice on cost-saving potentials. Based on the theoretical purchase and Strategic Cost Management concepts, efficiencies in the assortment and supply process are investigated.
Non-paint is sold as part of the Sikkens product offer. Customers are prepared to pay a premium for their car-repair products. In return they expect a high level of quality and service. Supplying non-paint products is an important part of this offer. Local preferences drive non-paint preferences. A certain level of local autonomy is therefore needed.
This is the public version of this thesis. Specific strategic subjects and financial information are regarded confidential by Akzo Nobel Car Refinishes Europe-West.
These parts have been removed and replaced by a confidential sign. This sign does not indicate the size of the deleted parts. The index and chapter structure are left unchanged. The paragraph titles provide an indication of the information that has been removed. Therefore, it should remain possible to read this work in a logical manner.
The four assortments investigated show the same characteristics. It was found through data-analysis that only a small part (On average 230 out of 2000 products) of the non-paint assortments make 80% of the non-paint sales. These products show financial relevance. The average gross margin lies around 24%.
The purchase price is the highest amount of cost made for non-paint. Increasing purchase power is supposed to result in improved purchasing conditions. A leverage strategy achieves this by combining all purchase volumes of the financially relevant products.
Creating a Europe-wide approach for the leverage assortment brings, on one hand, cost-saving potentials by increasing purchase volume. On the other hand a local assortment remains, containing most of the products.
The cost-driver analysis, based on a case study, showed that the activity-costs are driven by the number of items or the number of suppliers. This means that the amount of resources consumed will not
significantly change because of the implantation of the Europe-wide approach. However, on European level a certain organization is needed to support the leverage assortment. Cost-savings are not achieved by adding activities on European level while hardly reducing activities on country level. The overall increase of activities needs to be, at least, compensated by increased buying power, recovered by the team of people performing the European activities. Thus, achieving cost-savings by a Europe-wide approach for leverage items could appear difficult.
In line of the findings the following recommendations are given to Car Refinishes Europe-West.
First, leverage the products that show significant sales in more countries. But, only approach the suppliers for negotiation after all relevant data and information is collected. The main difficulty of this research was the data analysis. Comparisons and analysis of different countries can only be made on item level if the databases of sales organizations are aligned. A supplier classification is equally necessary in the sales databases before a supplier analysis is possible.
Second, a differentiation strategy based on quality and service (Sikkens strategic value) and cost-savings do not go well together. Cost-saving should be part of a total strategic approach to non-paint and should not harm the competitive advantage of Sikkens. Achieving cost-saving by only leveraging the high volume products and leave the other part of the assortment unchanged will be difficult. However, a Europe-wide approach can from a strategic point of view add more than cost-saving potentials. This should be taken into account.
Contents
MANAGEMENT SUMMARY... 2 CONTENTS... 3
PREFACE... 6
CHAPTER 1 INTRODUCTION TO COMPANY AND PROBLEM ... 7
1.1 AKZO NOBEL... 7
1.2 AKZO NOBEL CAR REFINISHES... 7
1.2.1 Organizational structure... 8
1.2.2 Akzo Nobel Car Refinishes’ vision ... 8
1.3 AKZO NOBEL CAR REFINISHES EUROPE-WEST... 9
1.4 INTRODUCTION TO PROBLEM FIELD... 9
1.5 MARKET SITUATION: TRENDS IN THE AUTOMOTIVE REPAIR MARKET EUROPE-WEST... 10
1.5.1 MBFI study ... 11
1.6 REDESIGN... 11
CHAPTER 2 RESEARCH DESIGN... 12
2.1 PREFACE... 12
2.1.1 Problem situation ... 12
2.2 CONCEPTUAL DESIGN... 13
2.2.1 Research objective... 13
2.2.2 Central research question... 13
2.2.3 Research questions ... 14
2.2.4 Scope (restrictions)... 14
2.2.5 Research model ... 15
2.3 RESEARCH APPROACH... 16
2.3.1 Theoretical Framework ... 16
2.3.2. Empirical Research ... 16
2.3.3 Conclusions and recommendations ... 17
2.4 THESIS BUILD-UP AND STRUCTURE... 18
CHAPTER 3 THEORETICAL FRAMEWORK... 19
3.1 PREFACE... 19
3.2 PRODUCT ASSORTMENTS... 20
3.2.1 Assortment description & definition ... 20
3.2.2 Assortment analysis... 21
3.2.3. Kraljic’s portfolio analysis ... 22
3.3 STRATEGIC COST MANAGEMENT CONCEPTS... 24
3.3.1 Value Chain Analysis... 24
3.3.2 Activity-based Costing ... 24
3.4 CONCEPTUAL MODEL... 27
CHAPTER 4 EMPIRICAL RESEARCH; ASSORTMENT ANALYSIS ... 28
4.1 PREFACE... 28
4.2 WHY CAR REFINISHES EUROPE-WEST SELLS NON-PAINT PRODUCTS. ... 28
4.3 DESCRIPTION AND DEFINITION OF THE CURRENT NON-PAINT ASSORTMENTS... 28
4.3.1 Leeflang’s variables ... 28
4.3.2 Key figures ... 29
4.4 THE OBJECTIVES AND CRITERIA OF A EUROPE-WIDE ASSORTMENT... 30
4.5 ASSORTMENT ANALYSIS... 30
4.5.1 Cumulative Analysis ... 31
4.5.2 Portfolio analysis ... 31
4.5.4 Results ... 31
4.6 FINDINGS OF CHAPTER 4... 31
4.7 SUMMERY... 32
CHAPTER 5 EMPIRICAL RESEARCH II; ACTIVITY ANALYSIS... 33
5.1 INTRODUCTION... 33
5.2 GERMANY AS A CASE STUDY... 33
5.3 VALUE CHAIN ANALYSIS... 34
5.4 NON-PAINT COSTS AND COST-DRIVERS... 36
5.4.1 Costs... 36
5.4.2 Cost-driver analysis... 36
5.5 IMPACT ANALYSIS... 37
5.5.1 The impact on the cost-driver volume of each activity... 37
5.5.2 The cost impact of the European approach... 39
5.6 GERMAN CASE STUDY COMPARED TO THE OTHER COUNTRIES... 40
5.7 FINDINGS OF CHAPTER 5... 40
CHAPTER 6 CONCLUSIONS & RECOMMENDATIONS... 41
6.1 INTRODUCTION... 41
6.2 PHASE ONE... 41
6.3 PHASE TWO... 43
6.4 RECOMMENDATIONS... 43
CHAPTER 7 REFLECTION AND FUTURE RESEARCH POSSIBILITIES... 45
7.1 INTRODUCTION... 45
7.2 REFLECTION... 45
7.3 FUTURE RESEARCH POSSIBILITIES... 47
REFERENCES ... 49
BOOKS AND ARTICLES... 49
INTERNET SITES, ANNUAL REPORTS AND INTERNAL DOCUMENTATION... 50
Preface
This thesis forms the final stage of my study “Technische Bedrijfswetenschappen” (Industrial Engineering and Management Science) at the University of Groningen. It is the result of a research carried out for Akzo Nobel Car Refinishes in Sassenheim.
I would like to express my gratitude to everybody who supported me during the process of research and writing:
Mr. Jansen, the first supervisor from university. Thank you for all the fresh ideas and intelligent questions.
They often provided me with the right things on crucial moments.
Mr. de Vries, the second supervisor from University. Thank you for your supervision and valuable input.
My supervisors from Car Refinishes: Carin Suurenbroek, Phil Coady, Cor Kuijper, Tim Zijderveld and Jeroen Jansema, thank you for the opportunity to ask much of your time, all the support and input you gave me.
All colleagues from the product management paint department Europe-West for supporting me during my internship. They provided me a place to work and useful information about the organization.
Car Refinishes Germany, the steering committee and the non-paint product managers in the United Kingdom, Spain and the Netherlands. I would like to thank you for all the detailed information you provided and the contributions to this research.
Finally, of course, thanks to my family, boyfriend and friends who have supported and helped me during the process of research and writing.
Chapter 1 Introduction to company and problem
1.1 Akzo Nobel
Akzo Nobel Car Refinishes is part of the global company Akzo Nobel. Most people are familiar with the name Akzo Nobel. However they often do not know what products are manufactured by the company.
Many of us will not notice it when we use an Akzo Nobel product, but we probably use or touch one every day. The product portfolio is ranging from contraceptives, antidepressants, veterinary vaccines to
hundreds of types of paint and chemicals. The Akzo Nobel strategy is founded on strongly decentralized operating companies combined with an optimal use of financial power, cyclical resilience, and collective know-how.
The company consists of three divisions; Pharma, Chemicals and Coatings. These divisions contain several independent business units (see figure 1.1).
Today, the three divisions account for a total turnover of €14 billion and a net profit of € 818 million over the year 20021. Akzo Nobel is employing circa 65.200 persons worldwide.
1.2 Akzo Nobel Car Refinishes
Akzo Nobel Car Refinishes (ANCR) is one of the five business units (BU) within the coatings division.
They produce paint for the automotive repair market and commercial vehicles (trucks and busses).
Figures 1.2 shows the relation between the annual turnovers of the different BU’s. Over the year 2002 the annual turnover for Car Refinishes totalled to an amount of € 713 million representing 13% of the total turnover for the coatings division2.
1
Figure 1.1; Akzo Nobel Corporate structure Board of management
Corporate Staff / Central Services
Pharma:
Diosynth Intervet
Coatings:
Car Refinishes Decorative Coatings Industrial Finishes
Marine & Protective Coatings
Chemicals:
Akcros- PVC Additives Base Chemicals Catalysts Energy
Functional Chemicals Polymer Chemicals Pulp & Paper Chemicals
3 4 %
3 0 % 10 %
13 %
13 %
D e c or a t i v e C oa t i ngs I ndust r i a l A c t i v i t i e s M a r i ne & P r ot e c t i v e C a r Re f i n i she s I ndust r i a l P r od uc t s
1.2.1 Organizational structure
The Car Refinishes headquarter and primary production site are located in Sassenheim. The business unit is split in different sub-business units (SBU’s). Figure 1.3 shows the sub-business units in a global
perspective. A global department in Sassenheim is responsible for the coordination of the different SBU’s.
1.2.2 Akzo Nobel Car Refinishes’ vision
According to ANCR no business can do it alone in this world. Today’s business depends to a large extent on network relations that are developed with reliable partners. ANCR’s global vision and strategy is built around serving the customers as partner in business. (See appendix 1 for the vision statement) This strategy has led to an extensive product-line in paint, services and software for car-repair and commercial vehicles. Different brands are produced for different markets world-wide. In Europe the best known brands are Sikkens and Lesonal.
2
SBU North America
SBU Europe-West
SBU South America
SBU Africa Middle East
SBU Europe East
SBU Asian Pacific
Figure 1.3; Sub Business Units CR world wide Figure 1.2; Sales Akzo Nobel Coatings 2002
1.3 Akzo Nobel Car Refinishes Europe-West
The Car Refinishes Europe-West Organization (CREW) is one of the sub-business units of Car Refinishes. It is responsible for 18 countries divided in 6 regions. Most countries have a sales organization. Exceptions are Austria (under the German sales organization) and Portugal (Spain).
The decentralized structure of Akzo Nobel is also continued in the CREW organization. The local sales organizations were, until recently, profit-centres. They were purely measured on their bottom-line financial results. Recently, the structures have been slightly adjusted to create a more European approach and more centralized control. For example, KPI’s (Key Performance Indicators) have been defined by the Europe-West organization to measure and manage distribution processes in the sales organizations.
1.4 Introduction to problem field
Body-shops in Europe-West expect their supplier to supply paint and non-paint products. Non-paint products are those products that are not paint, but which are related to the paint processes in a bodyshop.
Figure 1.4 shows an average repair process. Besides paint, non-paint products like sanding paper, masking tape and polishing materials are used for an average repair.
The definition of non-paint products used in this research is
“all consumable products, tools and equipment which are not paint and not manufactured by Akzo Nobel Car Refinishes.”
For a more detailed description of the non-paint products and the definitions used see appendix 2.
CREW uses two types of channels to supply bodyshops;
Firstly, through independent wholesalers (indirect sales), who employ there own sales representatives. A wholesaler can be an exclusive CR dealer or a non-exclusive dealer (i.e.
also selling non-CR brands of paint). Secondly, the Akzo Nobel branches (direct sales) who deliver directly to the bodyshop. Wholesalers are independent parties, managing their assortment paint and non-paint. Branches, owned by CREW, also have a non-paint assortment to offer their customers.
Every sales organization has historically developed a non-paint assortment for their branch. Selling non- paint is to them a significant part of everyday business. On the other hand, there has never been a coordinated European approach or policy to non-paint. The different sales organizations do not exchange information or combine purchasing activities in field of non-paint products.
Damaged Car
Pre-process Cleaning
Taping Spraying
Drying
Polishing
Repaired Car Figure 1.4; Car repair Process
An average assortment of non-paint products contains about 2000 products. A distinction can be made between equipment, tools and disposable products (e.g. sanding paper). The distribution and sales processes are complicated by the volume and diversity of the non-paint assortment.
Due to the current trends and developments in the automotive repair market (the next section discusses these trends in more detail) margins are increasingly under pressure for CR. To defend itself against the smaller margins CREW has defined a specific strategy.
An important part of this strategic plan is to forwardly integrate in the value-chain towards the customer (i.e. an increase in direct sales). This means that independent wholesalers are acquired and integrated with the branch organizations. A result of this forward integration is an increase of non-paint turnover (CREW is increasingly selling more non-paint products) and therefore an increasing interest of the CREW management to look more closely to non-paint. The causes of this interest are:
1. Margins are made on selling non-paint. Could they be improved?
2. The significance of non-paint products is growing as a result of the forward integration.
The increasing interest has initiated this research.
The current trends in the automotive repair market and the redesign project are shortly discussed in the following sections to create a better understanding why this research is initiated by CREW.
1.5 Market situation: Trends in the automotive repair market Europe-west The demand of repairs per country depends on the following equation3:
Average demand = Car park * accident rate * repair rate * material usage Car park is the number of cars in a country.
Accident and repair rates are influenced by:
• The extent of traffic congestion
• Traffic claming measures (speed control etc.)
• The residual value of a car
• OEM replacement part prices
• Insurance premiums and agreements that make it less interesting to repair minor damage, especially if car owner is at fault.
3
Confidential
1.5.1 MBFI study
In 2003 an extensive market research was conducted by the British company ‘Market Facts & Business Information’ (MBFI). This research took place in seven west European countries4. The main conclusion is that bodyshops are forced to become larger and operate more efficient in order to survive. This trend is caused by the two main issues explained below.
1. Insurance companies
In West European countries more than 70% of the repairs done, are paid for by insurance companies. The other repairs are paid by fleet owners with self insurance or by private car owners.
EU-regulation is forcing every car owner to have some kind of car-risk insurance. The assurance market is developed into a mature market with global competition between large international companies. Their profits are suffering due to the conditions on the stock-market, high competition and new distribution channels (direct sales, internet and bank assurance). Therefore cost reductions are becoming more important. Because every car owner has an assurance it is interesting for assurance companies to focus on reducing the costs for car repair.
2. Environmental constraints
Besides the pressure from insurance and accident management companies, also political and environmental restrictions force bodyshops to become larger and operate more efficient in order to survive. European legislation forces a reduction in the VOC (Volatile Organic Compound) solvent emissions. This means that in the coming years most countries will have to change to waterborne paint systems. The Netherlands already fully switched. Switching to waterborne systems means high
investments in new technology and training of employees. Many small bodyshops can not afford these kinds of investments.
As a result of the described issues, many independent bodyshops fear that the growing pressure from insurance companies, car dealers and car manufacturers will result in a smaller (consolidated) number of bodyshops. Anxiety also exists in paint companies, including Akzo Nobel Car Refinishes, and other suppliers. They fear the increasing control on costs of products and brands used.
1.6 Redesign
4
Confidential
Chapter 2 Research Design
2.1 Preface
This chapter explains the research objective in more detail. The context of the problem situation is outlined. This leads to the definition of the research objective and the central research question in paragraph 2.2. More specific research questions are defined to cover all relevant information required to answer the main question of research. The methodology used in this research and the structure of this thesis are explained in paragraph 2.3.
2.1.1 Problem situation
As described in the previous chapter Car Refinishes Europe-West wants to achieve cost-savings by redesigning distributions and sales and improve margins through forward integration. Forward integration means increasing sales and increasing importance for non-paint. Besides, integrating different
assortments and a higher volume means a higher level of complexity in the assortment of non-paint.
Therefore the subject of non-paint is defined part of the FD (future distribution) project.
The Europe-west organization in Sassenheim has historically never coordinated or supported the non- paint business. Every sales organization has developed their assortment of non-paint products and their way of managing non-paint. The CREW management want to know if efficiencies are possible by organizing a Europe-wide approach.
CREW management believes that a Europe-wide approach to non-paint products is needed to achieve the improvement of profits, because of the following arguments:
To centralize purchase deals
To prevent reinventing the wheel at distributor, country or regional level
This research focuses on the cost side of profit improvement. The most important costs made are the purchasing price and the costs made for all the supply processes to the end-customer (i.e. the bodyshop).
The sales related costs do not fall within the scope.
Besides the growing sales and assortment complexity, no clear insights on the financial results and added value for non-paints are readily available in the CREW organization. Sales organizations were, until recent, managed and controlled as pure profit centres. Therefore only aggregated revenues and costs were reported to CREW. Besides, the focus of CREW has always been on the customer. Costs splits between paint and non-paint are never made. All costs are allocated to paint. Looking at financial statements indirect selling costs, for example, are always entirely allocated to paint or to total sales. The organization has no clear understanding of what selling non-paint products costs.
2.2 Conceptual design
2.2.1 Research objective
A Europe-wide approach to non-paint should create efficiencies in managing non-paint so cost-savings are achieved. This research investigates the possibilities to achieve cost-savings in non-paint.
By approaching the problem situation through a strategic cost management point of view, a framework is developed to identify potential efficiency gains.
Therefore the following research objective is defined:
To study the relationship between the assortments of non-paint and the supply costs of non-paint, and to advice on cost-saving potentials. Based on theoretical purchase and strategic cost management
frameworks, efficiencies in the assortment and supply process are investigated.
Car Refinishes does not manufacture any non-paint products. They have the function of wholesaling non- paint products to their customers. Therefore the purchase price they pay is an important driver for the money that can be earned. Profit is revenues minus costs. The purchase price is supposed to be the largest part of the costs. This is why this research will focus on the product assortments and the supply processes that determine the purchase performance.
The research will result in:
• Recommendations on how a Europe-wide assortment could look like.
• Recommendations on the cost-savings as a result of the Europe-wide assortment.
2.2.2 Central research question
The central research question leads to the required answer needed to achieve the research objective.
According to Baarda and De Goede (1997) research findings can support policy problems, but the researcher is not the person to solve these problems. The same applies for this study. It aims at diagnosing the problem situation and at identifying potential cost-savings through a Europe-wide assortment. However it will not be capable of solving the problem itself.
The following central research question is defined:
How could cost-savings be achieved for Car Refinishes Europe-West by changing the approach to non- paint into a more coordinated Europe-wide approach?
This central research question contains two aspects: first, optimising purchase prices, secondly,
optimising activities. The two aspects can be regarded as two different phases of research: the phase of analysing the assortment and the phase of examining the value chain and the impact on activity costs.
2.2.3 Research questions
The answers on the following sub-questions, lead to the answer of the central research question:
1. What criteria should a Europe-wide assortment for non-paint products meet?
When is a product or product-group qualified to offer Europe-wide? The objective is to create cost- savings on managing non-paint. In order to achieve this, the first step is to set the criteria by which products or product-groups are evaluated whether they qualify for a European assortment.
2. Based on the defined criteria, what non-paint product groups are to offer in a Europe-wide assortment?
Which of the current non-paint product sold by CREW are, according to the criteria, qualified to form a European-wide offer? The current product portfolio of non-paint (in the different west European countries) will be analysed according to the criteria defined.
3. What activities are performed regarding non-paint?
Before studying potential cost savings, the first thing is to make an inventory of where costs are made. The first step is to define the business processes concerning non-paint. Defining the routes non-paint products take through the CREW organization.
4. Based on the defined activities, what causes the costs of the activities to be incurred?
By defining the cost-driver of each activity, insight is created how costs develop. This insight is needed to study the cost impact of changes in the activity.
5. What is the impact of a Europe-wide non-paint assortment to non-paint related activity costs?
A Europe-wide assortment should lead to changes in the activities performed in every profit centre as well as to the activities on European-level. This impact on activity level combined with the cost- driver of an activity makes it possible to define the potential cost-savings.
2.2.4 Scope (restrictions)
This research and the results are restricted by:
This research focuses on the activities of supplying and purchasing. The assumption is made that the purchase prices are the greatest costs. Supply related activities are directly linked to the purchase price. Therefore changes in purchasing can affect these activities and the impact of these changes needs to be investigated.
There is no specific information available on the customer perception and satisfaction of non- paint products. Therefore the following two assumptions are made:
1. It is assumed that the products representing a large part in volume and value are the products with the highest demand.
2. Customer perception and satisfaction is not specifically measured for non-paint products.
But it is measured for the entire Sikkens brand. The results from this research are used as assumption for non-paint perception.
The countries of focus; The Netherlands, Germany, the United Kingdom and Spain. The
assumption is made that that they represent the entire region of Europe-West. The four countries
were chosen because they are representative for the different regions of Europe-West and information can be relatively easy obtained.
The strategic choice to forwardly integrate by acquiring independent wholesalers is regarded as a fact. However this fact resulted in a greater need for a coordinated approach.
Paint that is sold through branch organizations is assumed to be the Sikkens brand. In reality Germany sales also non-paint to their Lesonal customers.
The time line, this research is conducted from the first of September till the first of April.
The results should be applicable for the entire Europe-West region.
2.2.5 Research model
The following research model clarifies the research process and scope. This research focuses on the relationship between the assortment characteristics and the supply costs. The supply costs are defined as, all costs caused by the activities involved with non-paint products in the CREW organization. The assortment is seen as the decision variable and the supply costs as the depending variable. (See the direction of the arrows between assortment and activities in figure 2.1) The strategic cost management theories form the basis of this research. The specific theoretical concepts are explained in more detail in chapter 3.
From the basis, the research is split into two phases. The left ‘pillar’ (i.e. phase 1) studies the potential of cost-savings in the assortments. The criteria for a Europe-wide approach are based on the objective of creating cost-savings. By applying the criteria on the current non-paint assortments, the Europe-wide assortment is evaluated.
Underlying Theory of Strategic Cost Management Ass.
2
Criteria
Figure 2.1; Research Model
Objectives
Value Chain Analysis Ass.
1
Ass.
3
Ass.
4
Activity Based Costing
EW Assortment Supply Costs
The right ‘pillar’ (i.e. phase 2) studies the activity costs of non-paint. The value chain analysis is used to identify the relevant non-paint activities. Next an activity-based costing framework is applied to outline the costs and the cost-drivers for the non-paint activities. Insight in the cost-drivers is needed to evaluate the impact of changes in the assortment.
Eventually the effects of a Europe-wide approach on supply-costs are studied. Please note that the scope of this research is to study the relationship between assortment and supply-costs. In reality it is, of course, very well possible that other arguments influence the assortment criteria.
2.3 Research approach
This research consists of four different parts:
1. Formulation of research design.
2. Formulation of theoretical framework.
3. Empirical research
4. Conclusions and recommendations
In this chapter part 1, the formulation of research design, is addressed. It contains the research objective, the research questions, the research framework, and the scope of research.
2.3.1 Theoretical Framework
The theoretical framework presents a guideline for the rest of this research. The following concepts are discussed:
The theory of strategic cost management.
The theoretical frameworks for analysing product assortment and portfolio’s
How theoretically cost savings can be analysed by value chain analysis and activity based costing theory
2.3.2. Empirical Research
The information required for answering the research questions comes from different sources. Different data collection methods are used to find the answers to the different research questions.
Data collection and research method
The first phase of research deals with research questions one and two. The following data collection methods are performed:
Introduction meeting with different stakeholders in Sassenheim (i.e. the European organization).
Unstructured interviews5 with different functions in both the European as the local sales organization.
5 As discussed in Methoden en Technieken van Dr. D.B. Baarda and Dr. M.P.M. de Goede, Stenfert Kroese /
Data analysis (on SAP sales data)
The introduction meetings are used to create a better understanding of non-paint and related issues.
Based on these meetings the criteria are defined for a Europe-wide assortment. The defined criteria are validated by the research supervisors and during the interviews. After setting the criteria comes the analysis of the SAP data against the criteria defined.
The second phase of research discusses research questions 3 to 5. The following data collection methods are used to collect relevant information:
Unstructured interviews are held with different functions in- and outside the Car Refinishes organization. One of the external sources is an interview with an independent wholesaler in the Netherlands. Internal interviews take place with different functional managers (product
management, purchasing, logistics, branch organization etc) who carry responsibility for parts of the value chain.
Visit to sales and branch organization in Germany.
The last three research questions are answered by building a single case study. Yin (1994) defines the case study as ‘an empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident’. When researching the relation between an assortment and cost savings the real-life context is of great
importance. The boundaries between the assortment and other influencing factors on costs are somehow indefinite. A case study seems to be an adequate method.
A multiple case study is regarded more robust and the evidence is often more compelling. However, the opportunity to visit more sales organizations is not available in this research. Therefore a combination between a single and multiple case studies is applied. A major case study is built on one sales
organization. The country chosen is visited and interviews are held with different representatives within the local organization who carry responsibility for assortment, procurement or supply. The interviews are used to collect information on the activities and the activity cost-drivers for the purchasing and distribution processes. For these interviews the theoretical framework and the previously analysed data are used as a guideline. The result is semi-structured interviews.
The outcome of this single case study is validated against the other countries by the use of a
questionnaire. This questionnaire checks the most important findings of the case study to create a more considered view.
2.3.3 Conclusions and recommendations
The empirical research results in general findings. The conclusions are drawn from analysing these findings to the scope of this research.
Additionally a framework is developed that presents a guideline for future steps towards a Europe-wide approach to non-paint. It translated the scientific results of research into more practical recommendation.
It discusses issues involved in developing a successful Europe-wide approach.
2.4 Thesis build-up and structure
This section gives a short summary of the contents of each chapter.
Chapter 1 Introduction
This chapter introduces the company and the problem situation Chapter 2 Research Design
This chapter defines the objective, its background, the research model and the research questions to be answered.
Chapter 3 Theoretical Framework
This chapter presents the theory that forms the basis for the empirical part of this research.
Chapter 4 Empirical Research I; Assortment analysis
This chapter presents the results of the empirical analysis on the assortment of non-paint products.
Chapter 5 Empirical Research II; Activity analysis
This chapter presents the results of the activity based analysis of the organization of non- paint. Besides, it discusses the impact of a Europe-wide approach.
Chapter 6 Conclusions & Recommendations
In this final chapter the conclusions of this research are drawn.
Chapter 7 Reflection & Future Research Possibilities
Reflection of the research performed against the initial problem situation and the scope of research leads to recommendations on possible future research.
Chapter 3 Theoretical Framework
3.1 Preface
This chapter focuses on the theoretical framework used in this research. The objective is to provide the reader the theoretical concepts and definitions used.
The subject of research is the relation between an assortment of products and the related supply costs.
The concepts of strategic cost management are used to explain the relation between offering an assortment and the resources consumed by the organization to offer this assortment.
The objective of Strategic Cost Management is supporting the improvement of processes in an
organisation or supply chain (Ellram, 1998). Shank and Govindajaran (1992) indicate three key elements that are combined in Strategic Cost Management:
1. Value Chain Analysis 2. Strategic Positioning Analysis 3. Cost-driver Analysis
Cost considerations should span the boundaries of the organization and should take into account both costs made inside the organization as well as outside. Donelan and Kaplan (1998) define objective of the (internal) value chain as “to understand the activities within the company that create a competitive
advantage, and then manage those activities better than other companies in the industry.” This means to manage the company in a more efficient way. Therefore strategic cost management concepts are a useful framework in this research.
This research will apply two of the three elements of Strategic Cost management. The concepts of strategic positioning analysis will not be used.
Figure 3.1 shows how the research fits in the organization and its environment. It is a simplified model of a value chain between the basic source of a product and its final consumer. The model is based on a model used in an article written by James P. Morgan and Robert M. Monczka (2003).
The perfect value chain will have perfect information and product flow between original source and end consumer (through the value chain). This is only achieved if all non-value creating activities are eliminated and a perfect information flow is established.
This research focuses on the internal value chain (the rhombus between the value chain arrows), although it is inevitable to examine the relationships between the CREW organization and it suppliers. Because the sales processes are not included in the scope, there is less need to examine the specific relationship between sales and the end user. But, in reality, the relation is important because it partly defines the objectives of a non-paint assortment.
In the following sections the theoretical concepts are explained and specified to the problem situation.
Section 3.2 explains the concepts of analysing an assortment of products. Section 3.3 describes the activity based costing approach used to explore the relation between assortment and the costs of supply activities. Finally, this leads to a model that will serve as the guideline for the empirical research (research model, section 3.4).
3.2 Product Assortments
Before applying the Strategic Cost Management concepts on the supply activities and costs to study the relationship between assortment and costs, the current offer of non-paint needs to be examined. This analysis should give the answer to the first two research questions and lead to a possible Europe-wide assortment. Theoretical frameworks useful for analysing and categorizing an assortment can be found in purchasing literature and the in the concepts of assortment analysis (marketing literature).
3.2.1 Assortment description & definition
Leeflang (2003) says that an assortment can be described on the basis of four variables:
Car Refinishes Trade Customers Suppliers
B A S IC S O U R C E
E N D
U S E R Non-paint
assortment
VALUE CHAIN VALUE CHAIN
Figure 3.1; Non-paint in its environment
2. The length of an assortment; The total number of products on item level.
3. The depth; The depth is measured as the length of an assortment divided by the width.
4. The consistency; The consistency can be determined by checking to what extend the items within an assortment:
Create similar needs
Are sold to similar consumer-groups Are sold through similar retail structures Fall between similar price intervals
3.2.2 Assortment analysis
The concept of assortment analysis6 is mostly used for retail organizations, primarily focusing on the consumer good markets. Its objective is to find a balanced assortment satisfying both consumer needs while minimizing (optimizing) indirect costs. In general indirect costs represent things like costs of
handling, costs of storage, cost of purchase etc. In general retail organizations manage a significant larger and more complex assortment than the non-paint assortment managed in Europe-West. However, this literature is still relevant because the objective of balancing costs and consumer need is corresponding to the CREW situation.
This method plots incremental sales to the length of an assortment. This leads to a diminishing return curve like the one shown in figure 3.2. As the number of items in an assortment, plotted on the x-axis, is increasing so are the overall sales. However, an increase in the number of items leads, on a certain moment, to a decrease in the rate at which the sales go up. Eventually a point will be reached where there is almost no increase of sales anymore.
6 Efficient Assortment Analysis – the Easy way; 2004 Bristol Technology Inc. (source:
This analysis is useful as an instrument for the current assortments of non-paint. But, it should be taken into account that there are other arguments than the contribution to sales why an item is kept in an assortment. An example is that certain item contributes to a customer perception of being a high quality supplier.
3.2.3. Kraljic’s portfolio analysis
The procurement and supply literature has been developed from the purchasing point of view. In contrast to the above described assortment analysis, which has been developed from a more marketing point of view. One of the most important frameworks for portfolio analysis is the concept of the Kraljic matrix (Kraljic, 1983). This matrix is used to perform a portfolio analysis of the goods purchased. Figure 3.3 (see next page) shows the Kraljic matrix. The supply strategy a company can best apply for certain products depends on two variables:
1. The strategic importance of purchasing. This can be the value added by product line, the percentage of raw material in total costs, profitability profile, etc.
2. The complexity of the of the supply market. Determined supply scarcity, pace of technology, entry barriers, etc.
The benefit of this matrix lies in the fact that it creates insights for the purchasing party to differentiate various supplier relations and strategies. Then, the appropriate policy can be developed for each category:
1. Leverage; hard bargaining, induce service. The objective must be to maximize purchase-power by levering purchases.
2. Routine products; reduce handling and overhead costs; try to cluster into leverage products.
3. Strategic products; try to develop partnerships
4. Bottleneck items; ensure supply and emphasis on the development of alternatives Figure 3.2; Diminishing return curve
Source: http://www.bristol.com/dataalchemy/resources/efficientassort.htm
One of the pitfalls of the Kraljic matrix is that it does not take into account the supplier’s perspective.
Hughes et al (1998) have developed a new matrix covering the supplier perspective on the buyers market.
(For Hughes’ buyers matrix see appendix 5) They divided the supply market in the following categories:
1. Generic; demand for standardized commodities
2. Tailored items; mass customization offered through flexible technology
3. Proprietary products; often monopolistic suppliers. They are unique in the product they offer. (for example power suppliers)
4. Custom design; Products are produced based on customer preferences. Possible development of partnership
The non-paint products are not manufactured by Akzo Nobel Car Refinishes but purely bought and sold (wholesaler function). This makes the above described concepts useful for this research. The Kraljic matrix is applicable because the products are produced by a third party and a relative large part of the total costs for non-paint products are in procurement.
Materials management Leverage items
Key performance criteria:
Cost/ price material flow man.
Multiple suppliers
Mix of commodities
Supply management Strategic items
Key performance criteria:
Long-term availability
Established global suppliers
Scarce and or high value materials
Purchasing management Routine items
Key performance criteria:
Functional efficiency
Established local suppliers
Commodities
Sourcing management Bottleneck items
Key performance criteria:
Reliable short-term sourcing
New suppliers with new technology
Mainly specified materials Financial
Relevance
Complexity of Supply Market High
Low Low
High Fig. 3.3 Kraljic matrix, source: P. Kraljic, 1983
3.3 Strategic Cost Management Concepts
After the analysis of the assortment of non-paint the remaining research questions need to be answered.
As mentioned in the beginning of this chapter a selection of strategic cost management concepts are useful for this purpose. The value chain analysis and the concept of activity based costing are used for this part of research.
3.3.1 Value Chain Analysis
According to Shank and Govindarajan (1992) a value chain is the linked set of value creating activities. It breaks down the chain of activities into relevant activities for the purpose of understanding costs.
Value Chain analysis is a way to support a company to focus on its chosen strategic plan that leads to competitive advantage. An example of a general value chain is given in figure 3.4.
This research focuses on the internal value chain for non-paint within the CREW organization. The non- paints are purchased, stored, distributed, and soled by the CREW organization. Note that, the specific sales activities are not covered within the scope of this research. The part of the value chain focused on in this research, is to a large extend similar to an average supply chain.
The objective of a value chain approach is to analyse efficiencies between functional areas. Thus, the emphasis is not simply reducing inventory or purchasing costs, but taking on a system-wide approach and reduce total system-wide costs.
A value chain approach can be difficult to achieve because:
1. Different activities in the value chain may have different objectives. These objectives can
potentially conflict with each other. For instance sales and marketing representatives would like to offer many different non-paint products to the customer, while the purchasing department prefers one supplier delivering a small number of products.
2. A value chain is dynamic and evolves over time. Not only can supply and demand change over time, also the relative power of some activities can vary.
3.3.2 Activity-based Costing
Activity-based costing (ABC) is the allocation of direct & indirect costs based on causal activities. It first identifies activities required to produce or supply the product (through a value chain analysis). It then
Purchasing Production Distribution
& logistics
Overhead
activities Sales
Figure 3.4; Example of internal value chain (not CR specific) Company XY
determines the cost of the activities. Next, it allocates the costs to the cost object based on the object’s consumption of activities.
Cooper and Kaplan explain in their article “Profit Priorities from Activity-Based Costing” (1991) that ABC shows the link between performing particular activities and the demands those activities make on the organization’s resources. Therefore they say it reveals how “brands, products, customers, facilities, regions or distribution channels both generate revenues and consume resources.”
Traditional accounting systems allocate costs based on direct drivers like labour hours or volume. All resource expenses are allocated to item level based on direct drivers. However, modern businesses often produce or sell multiple complex product ranges through extensive marketing channels. This has led to the fact that direct production costs are only a small part of overall costs, while overhead costs have risen extremely. Kaplan and Cooper [1991] explain that allocating all costs to individual items can lead to figures that are easily misunderstood by managers. If batch or facility costs are allocated to item level based on direct drivers, it potentially allows the impression that these costs will vary with the number of items. In reality batch or facility activities do not vary when the amount of items vary. The amount of resources consumed at batch level only changes if the amount of batches changes. The expenses for the activities can only be controlled by adjusting batch or facility level activities. This is something that is often forgotten in traditional cost systems. There the assumption is often made that every activity is performed on item level.
In addition, according to Shank and Govindajaran (1992), high-volume products tend to receive relatively the largest proportion of costs because the assignment is often based on volume-like drivers. Looking at the effort required it is often not justified that high-volume products support such a large proportion.
The relation between the activity and the cost object (for example products or customers), as described in the last paragraph, is called the cost-driver. According to Shank and Govindajaran (1992), each value activity has a set of unique cost-drivers that explain the variations in costs in that activity.
In reality, it often appears that, especially, indirect costs are often not easily tracked down to cost objects because the costs are shared among other cost object. Another possible difficulty is, it is sometimes physically impossible to trace costs to cost object or it is not cost effective to trace costs in detail down to cost objects.
On the other hand, the advantage of ABC is that the allocation of indirect costs can result in:
1. Estimation of product costs
2. Increase in awareness of indirect costs
3. Opportunity to plan more cost efficient operations
To operate an ABC tool the following steps should be taken7: Identify the objectives for using an ABC method
Definition of activities and resources and construct an activity flow diagram.
Assign costs to active cost pools by identifying the costs incurred to perform various activities. In general this means categorizing costs not by cost-type but according to why costs have incurred.
(This process is called the first stage allocation)
Allocate costs (categorized by cost pools) to cost objects. The activity analysis should have determined the drivers. (Second stage allocation)
The activity-based costing framework is employed to support the analysis of the relation between the assortments of non-paint and the supply activities and costs related to non-paint products. ABC is adopted in this research to explore the impact of changes in the non-paint assortment and the supply activities. It should create management information not accounting information, so its objective is not to change or challenge any financial report. The management information created should support any future decision- making about non-paint.
7
3.4 Conceptual Model
A conceptual model supports the problem situation and further structures the research objective. In this chapter the theoretical frameworks and concepts, useful for this research, have been discussed. The conceptual model shows the concepts and their relationships in a graphical way.
The starting point is the confrontation between the 80/20 rule and the current assortments of non-paint.
This analysis shows what products have a significant sale. Based on Kraljic’s concepts a leverage buying strategy should be implemented for those products that show financial relevance. The 80/20 analysis indicates how many products are possible to leverage. These products (the leverage assortment) should be suitable for in a Europe-wide approach.
To confront the leverage assortments with the cost-drivers, first the cost-drivers need to be defined. This is done by a value chain analysis. A value chain analysis breaks down a process into relevant activities. In this research the relevancy is determined by the assortment. The following step is to apply the ABC framework on the relevant activities. The ABC methodology is used to define the cost-drivers for every activity in order to investigate the impact of a Europe-wide approach for leverage products on the supply costs.
80 / 20 Rule
Routine Assortment
Assortment
Impact on Supply Costs Leverage
Assortment
Value Chain
Cost Drivers
Figure 3.5; Conceptual Model
Supply Activities
