KLM in control of electronic requisitioning

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KLM in control of

electronic requisitioning

Design of a performance measurement framework and

exploring opportunities

J.R. Kuiken

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KLM in control of electronic requisitioning

Design of a performance measurement framework and exploring opportunities

The author is responsible for the content of this thesis. No reproduction, copy or transmission may be made without permission of the author.

Technology Management

Faculty of management & organization University of Groningen

Author: J.R. Kuiken

Supervisors KLM: E. Vermeiren

R. Wagener

Faculty supervisors: E. Karasek

Dr. P. Vandenbossche

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Abstract

In this graduation research thesis, the primary goal is to develop a performance

measurement framework for operational purchasing, or more specific, for the electronic requisition process of KLM. Subsequent goal is to find possibilities for improvement of this process. This has taken form in looking at the theoretical considerations as well as the exploration of possible consequences, of increased cooperation with suppliers regarding product catalogues.

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Management summary

Focus of this research is first to develop a performance measurement framework for the KLM ICT purchasing department. The lack of information regarding the process had to be solved to be able to effectively control the electronic requisition process. The need for effective performance measuring was expressed when starting this research project. This has led to the first research question:

“How should a performance measurement framework, designed in order to improve control over the e-requisition process from within the purchasing department, look like in the KLM situation?”

Further, during this project improvements for this process should be pointed out, and this has been included in the research. This has taken form in the exploration of a specific possibility to cooperate more closely with suppliers. Therefore, a second research question has been stated:

“What are the theoretical conditions for, and possible consequences of, increasing cooperation with suppliers regarding product-catalogues?”

The first question has been answered by developing a performance measurement framework including performance indicators for the specific KLM situation. From a literature point of view has been determined, what kind of performance measurement framework can be used in the requisition process. Result of the literature research was the basis for a design of a performance measurement framework, which consists of different dimensions regarding efficiency and effectiveness (figure m.1).

Subsequently, performance indicators for every dimension for the specific KLM situation have been defined. Literature provides different methodologies to come to performance indicators. The process approach has been chosen as best applicable in the situation, primarily because the controlled system is a process in which more departments are involved, but not the whole organization.

Figure M.1: Relations between performance dimensions

The application of the process approach led to the general design of the framework. The approach is characterized as an inside-out approach and has resulted in the specific

Process quality

Process cost savings

Customer satisfaction Logistical performance Time savings Supplier relations Compliance efficiency effectiveness

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performance indicators for KLM. The general e-requisition process can be divided into subprocesses; the order process, the approval workflow, the POR process, the goods receipt and the invoicing process. The groups of stakeholders that have been identified are management, requisitioners, purchasers, warehouse employees and AP. Each group of stakeholders has its specific interests and demands regarding the process. These have been linked to the performance dimensions, which lead to the basis of the framework. The framework, including the KLM specific indicators, but without goals and trends, is presented below (figure m.2). The data presented below is purely fictional.

Figure M.2: The framework including performance indicators

When implementation of such a framework takes place, it seems likely that obstacles have to be faced. These have been acknowledged in the proposed plan for

implementation and in the options for development of the framework, which is primarily characterized by the continuous cycle and the involvement of as many stakeholders as possible. It is recommended to do further research to reveal possibilities to link this performance framework to other performance measurement systems.

Customer satisfaction

- Information quality

- Internal customer satisfaction

Process quality

+ First time invoice match + Catalogue items + Invoices paid overdue

+ Spend covered by e-requisitioning * Catalogue completeness

* Changed PO’s after sent

Efficiency

Framework with from left to right:

Current level (+ above target, * on target, - below target), description, goal, score, trend

Time savings

+ Handling time purch. dep. + Approval time

+ Transactions per FTE

+ Time GR to appr. confirmation + Time PO created to PO sent

Compliance

- Information availability - Spend ordered through contracts

Supplier relations

- Electronic invoices

Effectiveness

Process cost savings

* FTE cost

Logistical performance

- On-time deliveries - Returned deliveries

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Suppliers have not been involved in the methodology to derive performance indicators, due to the inside-out approach with its specific boundaries. Suppliers do have a certain role in the requisition process and literature stresses that they have a certain obligation to assist in improving purchasing processes. This results in the second research question and can be described as exploratory.

Van Weele (2005) claims that suppliers can, and must, contribute to process and product improvements. Theoretical conditions, especially with regard to the product portfolio do not prevent taking a further look into the possibilities this cooperation could bring. This has been concluded by using theory of Kamann (2000), who addresses this matter in relation to the product portfolio and the role of suppliers.

Requisitioning within KLM primarily concerns products with low strategic value and relatively low financial relevance. The more routine the contact with suppliers is, the easier it can be replaced by electronic contact. Electronic contact will have its impact on the relation with the supplier; most suitable for this changing role are the so-called preferred suppliers.

A link has been made with performance in the operational process and concluded is that implementing this technology will cause a certain change in the way of working.

Especially purchasing assistants are affected by this. Including all employees from the start of such a project will be a good starting point to make it a success, although further research is necessary to be able to make a decision regarding the implementation of this technology.

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Preface

This thesis is the result of my graduation project to obtain the doctorandus degree for my study Technology Management at the University of Groningen. The research project primarily took place at the ICT purchasing department of KLM.

I would like to describe the ICT purchasing department as ‘the best possible combination’ of ICT and purchasing. With my specialisation within my studies being Information Technology, this was the perfect opportunity to explore the field of procurement. The field of procurement was completely new to me, and I experienced this as extra challenging, when starting this project. Although this meant a lot of reading and studying, especially in the beginning, I definitely consider this as worth the effort.

During this project I had the chance to experience a very dynamic and interesting

environment at KLM offices in and around Schiphol, Amstelveen and even in Paris at Air France.

I would like take this opportunity to thank a few people, who supported me in one way or another throughout this project.

First of all I would like to thank Eddy Vermeiren and Roland Wagener from KLM for their personal support, great ideas and for making me feel like part of the organization in the time I did my research at the ICT purchasing department. A special word of thanks goes out to Johan Zandstra from KLM corporate procurement, whose role I can best describe as mentor in my period at KLM.

I would like to thank my first supervisor from the faculty of Management and

Organisation Eva Karasek for her ideas, comments and support, which helped to make this thesis in what it is! Also, I would like to thank Piet Vandenbossche, who acted as second supervisor, for changing my view on certain matters.

Last, I would like to thank my family and friends for their support. Groningen, October 2006

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List of abbreviations

AP Accounts Payable

Backend system The back-end system comprises the components that process the

output from the frontend system

BSC Balanced Score Card

BW Business Warehouse reporting system

CIO Corporate Information Office

CIO (2) Chief Information Officer

CPO Corporate Procurement Officer

EBP Enterprise Buyer Professional

ERP Enterprise Resource Planning

Frontend system The front-end is the part of a software system that interacts directly

with the users

FTE Full Time Equivalent

PMS Performance Measurement System

PO Purchase Order

POR Purchase Order Response

SRM Supplier Relationship Management

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Introduction

An organization is being influenced by developments in its environment, with in it most importantly clients, suppliers and competitors. Worldwide competition causes, among other things, companies to concentrate more and more on their core activities and to outsource non-core activities (Monczka, 2002). Several developments and events in the last few years like the strong increase in oil prices and ‘9/11’ have had a great impact on the airline industry. Cost savings had to be achieved in a drastic way to be able to survive. KLM Royal Dutch Airlines is an international airline operating worldwide. KLM is part of the world’s second largest alliance SkyTeam and is the centre of the KLM Group with other members being Transavia.com and KLM cityhopper. KLM merged with Air France 2004.

Also for KLM, cost savings were and still are an important issue. Because spend and procurement are connected inseparately, procurement gained a lot of attention in the last years. The use of technology to support the procurement processes has also been gaining attention in the last couple of years (A. Brun et al, 2004), because there is a potential to achieve cost savings.

Procurement concerns a wide area and several forms of technology can be used to facilitate the different processes. Performance measurement is necessary to effectively control the different processes. Performance measurement systems in literature usually focus on buyer performance, supplier performance or performance of the complete purchasing function.

The focus of this research is the operational purchasing process, or more specifically, the electronic requisitioning process. The first and largest part of this research project aims at providing a performance measurement framework for this process, where the second part will focus on a specific possibility to improve the process.

Chapter one will focus on the design of the research project and chapter 2 describes the environment in which research takes place. The third chapter will describe the literature study. In chapters 4 and 5 the application of the theory will result a performance

measurement framework. In chapter 6 considerations for improvement will get the attention. Conclusions and recommendations will follow in the last chapter.

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1 Research design

This chapter describes the research as conducted at the ICT purchasing department of KLM. First of all the motive for research will be provided. Further the problem statement including the research goal and questions will be described. Finally the structure of the report will be discussed.

1.1 Motive for research

Procurement gained a lot of attention in the last decades. Increasing globalisation, economic regression and developments in technology are examples of factors leading to companies giving more attention to cost reduction. This is visible in the increasing attention organizations give to procurement.

Two other important reasons for this can be pointed out (Monczka, 2002). First of all companies become more and more aware of the fact that savings in procurement have a direct influence on the results and second, the fact that the part of turnover which is being purchased, has increased in the last years.

Purchasing organizations have been undergoing a considerable amount of changes in the past years due to the increasing attention to cost savings. This changing role of

purchasing leads to a more controlling type of purchasing departments in the operational process1_{, meaning that attention can be directed towards strategic purchasing in which}

relatively more savings can be achieved2_{. The shift towards a more controlling type of}

purchasing in the operational process calls for the ability to perform the right

performance measurements. Literature shows a lack in measurement and control systems keeping up with changes in functions, task-skills and expectations (Telgen, Pop-Sitar; 2000). Monczka (2005) also states that few standardized measures of effectiveness and efficiency have emerged over time. However, several forms of performance measurement systems aimed at purchasing were developed in the last years in order to overcome this. Examples are the performance prism (Neely, Adams; 2000) and the development of the the Balanced Scorecard (Kaplan, Norton; 1996) by Aich and Fiedler (2002), who added an extra dimension with regard to suppliers. Still, performance measurement systems in purchasing often seem to be lacking in executing specific control, because objectives of the purchasing function are not clearly defined (Van Weele, 2002).

This thesis aims at providing a specific performance measurement framework for a purchasing department to control the electronic requisition process.

When starting this research project, the management of the ICT purchasing department asked to obtain more insight in the operational purchasing process. Complaints addressed at this department and expressions of dissatisfaction among employees regarding the operational purchasing process occurred on a regular basis. It was not sure what caused these occurrences. Although the feeling among purchasers pointed in certain directions,

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like the introduction of a new electronic procurement tool, no actual facts were available and no measurements were being performed.

In the exploratory interviews with main stakeholders like purchasing managers and purchasers, it appeared that these occurrences were not limited to the Information

Services division. Purchasing departments in other divisions were experiencing the same. The feeling of not being in complete control over the process was mainly caused by the lack of information regarding the process. The need for effective performance measuring was expressed.

This situation led to the research goal as stated in the next paragraph.

1.2 Problem statement

The main research objective and question are:

1.2.1 Main research objective

“To advice KLM with regard to defining and measuring performance in the operational e-requisition process by developing a performance measurement framework for the purchasing department and subsequently to identify opportunities for improvement in the e-requisitioning of ICT products.”

The focus of this research is the development of a performance measurement framework for operational purchasing or more specifically; for the electronic requisition process. In the current situation performance in the electronic requisition process is not measured. To be able to do this, performance indicators for the specific KLM situation have to be defined and operationalized. Subsequently, it is also stated that if opportunities for improvement can be identified, these will also get the attention. After defining the

indicators, specific recommendations, with regard to these indicators, for e-requisitioning in the Information Services department will be made.

1.2.2 Main research questions

The research question is a twofold question, which will also result in two deliverables of this research for KLM. First part of the question is the following:

“How should a performance measurement framework, designed in order to improve control over the e-requisition process from within a purchasing department, look like in the KLM situation?”

This question will be answered by developing a performance measurement framework including performance indicators for the specific KLM situation, which can be used to measure performance in the operational e-requisition process. The first step is to determine what kind of performance measurement framework can be used in the

requisition process. Subsequently performance indicators for the specific KLM situation can be defined and the ground for future use can be laid.

Further, these indicators will form the basis to make recommendations to improve e-requisitioning of ICT products.

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This leads to the second part of the research question:

“What are the theoretical conditions for, and possible consequences of, increasing cooperation with suppliers regarding product-catalogues?”

Van Weele (2005) claims that suppliers can, and must, contribute to process and product improvements. For this reason, it might be possible to improve the process in cooperation with suppliers. The (possible) impact of ordering directly from a supplier’s catalogue (website) on the performance and the possible consequences of this will be discussed. This will be done by theory of Kamann (2000), who addresses this matter in relation to the product portfolio and the role of suppliers. This part of research can be described as exploratory and will result in a second deliverable.

1.2.3 Subquestions

The main research question will be given further meaning by answering the following subquestions.

1.2.3.1 Subquestion 1

What performance measurement framework can be used to measure performance in the operational e-requisition process?

In order to be able to answer this question a study of literature concerning performance measurement in purchasing will be carried out. Aim of this study is to establish what kind of performance measurement framework is suited to be used in the operational

e-requisition process. Thus, the performance measurement framework needs to answer to the criteria of being applicable in an operational environment and needs to take the use of electronic solutions in this process into account.

What methodology needs to be applied to fit such a performance measurement framework in the KLM situation?

The performance measurement framework needs to be applied in the KLM situation. In order to do this a methodology to come to the specific indicators has to be established and subsequently applied. This methodology will be chosen after reviewing different options provided by literature. The application of this methodology will lead to the first

deliverable of this research for KLM; a set of performance indicators.

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What is the relation between performance in the e-requisition process and the introduction of round-trip3 technology?

When the performance indicators have been defined, specific recommendations for optimizing electronic requisitioning of ICT products will be made. This will take form in the exploration of a possible introduction of so-called round-trip technology. This technology is generally used to improve efficiency and communication between supplier and customer.

Goal will be to inform KLM about the possibilities for improvement that this form of technology can bring to the operational process and with this the impact this can (likely) have on operational excellence - on PIs.

Implementing this technology means that more contact with suppliers has to take place electronically. Kamann (2000) considered the impact of an increase in ‘e-contacts’. These considerations form the basis to make recommendations to KLM.

The next section will go into the typification of this research.

1.2.4 Research typification

Research conducted at KLM can be characterized as a case study of the purchasing organization and relevant areas, with a special focus on the ICT purchasing department. Purchasing organizations deal with a wide range of activities, and the view of

management on purchasing tends to be different in every organization. This perspective varies from strategic to operational. Therefore, purchasing tasks and responsibilities differ greatly from one company to another (Van Weele, 2002). For this reason it can be argued that doing a case study of more companies only adds value when a great number of similar companies is subject of research. This option is not realistic within this research project for several reasons like distance and timelimits, and for this the choice for a single case study has been made.

A research assignment can often be moulded in a design assignment (De Leeuw, 2000). Research can never solve a problem, but research can provide knowledge which can be used to solve a problem. There are three types of research according to De Leeuw (1996): policy supporting, problem solving and scientific research.

Policy supporting research is defined as: research that intends to provide useful

knowledge which can be used in a specific situation by a client and also satisfies a part of the total need for knowledge. It could be argued that this applies to this research and therefore the characterization of this research would be justified. This research on the other hand is aimed at solving the problem of having no ‘tool’ to measure performance, this justifies characterizing this research as problem solving. Therefore the DDC model (DOV-model in Dutch) which is a systematic method for taking on management problems, can be applied.

3_{Round trip technology is internet technology used for communication purposes between supplier and}

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First phase of the mentioned model is diagnosis, in which the current situation is diagnosed. Following the diagnosis is the design, where the diagnosed problem is converted into a tangible solution.

The methodology described here is used as a guidance to do research. Phases do not necessarily follow each other in time, but rather are used separately to describe the different parts of research. In order to develop a performance measurement framework first of all literature around purchasing, performance measuring and e-procurement needs to be examined. Next to this, the relevant elements of the place where research takes place need to be described. The results of this diagnosis can be used in the design phase. The last phase is the change phase, where the designed solution will be used or

implemented. This last phase of the methodology will for the larger part be outside the scope of this research, but recommendations to KLM for this phase will be made.

1.3 Structure

Research can be illustrated in a phase model. The model contains the most important research aspects and gives an overview the different phases of the research project. The model as illustrated below.

1.3.1 Phase model of the research project

Figure 1: Model of the research project

Diagnosis

Performance measurement system design

Literature research

Application of the design: the process approach KLM specific performance

indicators Identification of

improvement possibility E-contacts; consequences

and impact on PIs

Description of the problem environment Conclusions & recommendations Design Change Chapter 2 Chapter 3 Chapter 3 Chapter 7 Chapter 4 Chapter 5 Chapter 6 Chapter 6

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First of all the problem needs to be diagnosed. The problem environment is therefore described for which exploratory interviews with stakeholders will give a better view of the problem. This leads to a description of the environment in which research takes place. An extensive study of literature concerning (electronic) procurement and performance measuring will follow, to be able to construct a performance measurement framework for the operational electronic requisition process. To be able to define the performance indicators in the specific KLM situation certain methodology need to be used. After reviewing different options provided by literature, an approach can be chosen.

How the application of this approach actually takes place in practice will be described in chapter 4. The application will lead to a first deliverable of this research to KLM; a set of performance indicators. With respect to these PIs, recommendations for implementation and development will be made. The second part of this research project involves a possibility to change the process by increasing ‘e-contacts’ with suppliers.

Increasing e-contacts with suppliers will have its influence on the performance indicators. The technology used will be highlighted and the relation between the performance

indicators and this option will be assessed in the second part of this research. The deliverable of this second part is to inform the KLM organization of the possible consequences and considerations that need to be made.

1.3.2 Structure of the report

Chapter two will describe the research environment. In chapter three a wide range of literature sources will lead to the choice for design of a performance measurement framework. In chapter four the methodology that is chosen to extract the specific KLM performance indicators is applied. In chapter five the performance measurement framework for KLM is introduced. In the sixth chapter the possibility to increase ‘e-contacts’ with suppliers gets the attention and chapter seven contains the conclusions and recommendations.

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2 Research environment

This chapter aims at describing the environment of the research project. First of all the aspects of the company KLM that have a relevance to this research project will be shortly introduced in this chapter. The organization and strategy that have an influence on the procurement organization are shortly described. Further, the organization of procurement itself will get attention to be able to understand the origin of the operational process. After this, the organization the Information Services department is shortly described to get the complete overview of the environment in which research takes place and to give the background information necessary to answer the second research question.

2.1 Organization

Founded as the Royal Dutch Airline on October 17th 1919, the first KLM flight took place on the 17th of May 1920 between Amsterdam and London. With this, KLM is the oldest operational airline still flying under its’ original name.

In that first year, KLM transported 345 passengers, 22 tons of cargo and three tons of mail. This has grown to 20 million passengers and more than 600.000 tons of cargo in the last year. Furthermore KLM did maintenance jobs for more than 20 other airline

companies.

The mission statement of KLM is:

“By striving to attain excellence as an airline and by participating in the world's most successful airline alliance, KLM intends to generate value for its customers, employees and shareholders”

KLM also wants to offer a stimulating and dynamic working environment for staff, to participate in mutually beneficial relationships with its partners and to maintain a good relationship with its other stakeholders.

The strategic goal of KLM is to realize profitable and sustainable growth. Together with Air France, it will try to achieve this through the development of the three core activities in the most attractive markets in cooperation with SkyTeam, the second largest airline alliance in the world. The strategy has changed compared to previous years by merging with Air France. Agreements about both airlines keeping their respective identity, name and core businesses have been made. This demarcated structure guarantees efficient management of both the separate airlines. Both organizations are responsible for their own operations, while the holding guarantees the coordination and overall strategy. The two most important goals of the new group are; implementing a strategy of complete cooperation between Air France and KLM and the respectful dealing with identity, name and value.

2.1.1 Structural measures

In 2003 KLM launched a two-year program to structurally reduce costs by 650 million Euro a year. These measures were prompted by the ongoing crisis in the global airline

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The measures aim to bring about greater efficiency, smarter purchasing, and lower costs, without losing quality in customer service. The specific plans devised by divisions and departments have been laid down in business cases, which were reviewed by the KLM Works Council before implementation. During the first year, KLM achieved savings to the sum of 200 million. This resulted in KLM making profit again after these two years.

2.1.2 New Horizon

For the next three years (2006-2009) a new strategy program4_{is introduced:}

‘New Horizon, making the future work’ which aims at realising success by giving attention to employees and the five most important strategic components with its most important aspects:

 Decrease in costs

Raising productivity, fleet renewal, innovation and extension of e-business applications

 Increase in income

Better product, broader demand, stronger position in the market and the strength of the Air France and KLM network

 Operational excellence

Realizing promises to customers, design processes effective and efficiently

 Realization of growth

Utilize growth possibilities in the 3 businesses Passage, Cargo and Engineering & Maintenance, focus on new attractive markets

 Realization of synergies (on group level of Air France and KLM)

Coordination, harmonization and integration where useful, cooperation with SkyTeam members

The third aspect concerning operational excellence can be linked directly to this research project, because also the electronic requisition process is part of the goal to reach for operational excellence. The following paragraph will focus on the procurement organization.

2.2 Procurement structure

The position of a procurement department indicates how an organization structures decision-making authority (Monczka, 2002). Practice shows that the procurement

organization is structured in different ways: from centralized to decentralized as well as a form in between those two. Nowadays, centralized procurement emphasizes on support, integration and coordination of different tasks and levels in order to reach maximum performance instead of just practicing control over the process. (Monczka, 2002) In this paragraph the structure of procurement within the organization will be considered. Procurement within KLM is for the larger part organized decentrally (a figure of procurement depicted in the organization chart of KLM can be found in appendix A).

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The main reason to do so is that not many benefits can be achieved by doing it centrally. The different businesses, Passage, Cargo and Engineering & Maintenance don’t have much in common regarding procurement spend. Only for ICT and facility services

procurement is being done centrally. Facility Services covers a lot within KLM, examples are car-leasing, repro activities, real estate, internal transport, uniforms, but also pens and pencils.

In the organization chart of the KLM group (appendix A), it can be seen that the Corporate Procurement & Fleet Development is attached to the Corporate Centre. This department is responsible for the fleet development and the general corporate

procurement policy within KLM. The function of Corporate Procurement & Fleet Development can be described as advising to the purchasing departments.

The function of the Corporate Procurement Officer (CPO) is directing. An example to illustrate this structure is the ICT purchasing department (XF). Hierarchically XF is directed by the Vice President Corporate Information Office and in the end by the Chief Information Officer (CIO). The CIO in his turn reports to the KLM Board.

Figure 3: Procurement organization

The different purchasing managers together with the CPO form the Procurement Council. The goal of the Procurement Council is the optimalization of the procurement function and for this purpose it aims at processes, knowledge, people and procurement tools. Advantages of this structure are: (Van Weele, 2005; Monczka, 2002)

 Corporate procurement gives advice to the purchasing department. Advice is not binding and because of this the interest of the business is served. The business also has the possibility to guarantee its own interests.

 Uniformity; the use of procurement systems can be coordinated and managed. This results in the use of uniform systems, for example e-tools.

 Development of purchasing expertise.

Corporate Procurement & Fleet Development

Board of Managing Directors

Corporate Information Office & Information

Service Vice President CIO

Office Purchase & Contract

Management (XF)

Business unit n

Vice President n

Purchase Department n

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 Development and coordination of combined purchasing strategy.

 Reducing the purchasing efforts; activities related to purchasing policy, procedures and systems are placed centrally and not within the separate purchasing departments.

Corporate Procurement & Fleet Development has stated its’ mission:

“Create measurable value and sustaining competitive advantage for the KLM through achieving the lowest cost of ownership in all our purchasing markets and the best performing key vendor-base compared with our direct competitors”.

The general policy within KLM and the goals as formulated by top management form the guidance for the procurement policy and the targets set on different levels for the

different purchasing departments.

The different activities within the procurement organization of KLM can be classified on three levels, namely strategic, tactical and operational procurement activities. These find their basis in the KLM policy, the company goals and the KLM procurement policy. The activities of Corporate Procurement & Fleet Development are mainly aimed at the strategic level. Organizing study programs, e-procurement research, organizing of training activities, seminars are part of the activities of Corporate Procurement. Some relevant aspects within KLM that are important in the procurement process are:

 KLM is a ‘smart follower’ and wants to eliminate risk in development processes as much as possible

 KLM wants to spread project risks by cooperation with other organizations

 KLM wants to optimize the use of existing systems

 Outsourcing of Facility Services

KLM adopted a program to professionalize the purchasing function. This program is a combination of the so-called CSD (Commodity Strategy Development) program. The commodity teams which originate from this program are responsible for a part of the savings achieved in the last two years.

The CSD program finds it origin in the MSU model of Monczka (a more detailed explanation of this model can be found in appendix C).

Facility services is very likely to be outsourced completely. This will take place somewhere next year.2_{After next year the employees now working for KLM, will}

officially work for another company. Their functionality will for the larger part not change because they are hired as external personnel by KLM.

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Chief Information Office/Information

Services

Control/ Finance

CIO Office Operations Development

Human Resources IS Purchasing Department Business Development Office (5x) 2.3 Purchasing ICT

This paragraph will focus on how purchasing ICT within KLM is organized. Purchasing ICT is the responsibility of the department from where this research mainly takes place; Purchase & Contract Management (XF). The department hierarchically falls in the domain of the Information Services (IS) division. This division has a facilitating function in the KLM organization and offers work to approximately 700 employees.

The division is split into two main subdivisions, namely Operations and Development, and a third subdivision Corporate Information Office (CIO). Operations deals with maintaining business and all technology currently used, while Development focuses on the future. The CIO office’s activities are practically everything what does not directly fall in the domain of operations or development.

The mission statement of IS:

“Create business value by delivering reliable ICT-services to the business processes and innovative ICT-solutions to enable and support business change”

Figure 4: Organization chart of the Information Services department

The purchasing department is placed under the supervision of the CIO office (figure 4). Purchasing of ICT products and services is done for the whole KLM organization. This happens for a large part in projects which are initiated by the different businesses. Within KLM, a certain ‘obligated shopping’ through this department takes place. The responsibility for the purchasing of all ICT products and services lies with this

department. Pricing and conditions to be met are to be optimized and since tenders for all KLM business units are supposed to be generated from this department this means all ICT related purchasing will pass through the XF department.

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2.4 E-procurement: using ICT in the purchasing process

This paragraph will focus on giving a short introduction on how KLM deals with internet technology to support the purchasing process. As in many discussions around

e-procurement nowadays, it’s not the question whether, but how e-e-procurement can

contribute to the organization (Croom, 2000). This results for KLM and Air France in the following vision:

“Internet technology is the key enabler to facilitate and improve the entire Air France – KLM procurement and supply chain management process”

An important issue in the alliance is the realization of synergy-effects. At this point in time, KLM and Air France are in the process of aligning their e-procurement solutions. One of these solutions concerns e-requisitioning. On product level, mainly indirect products from the routine and leverage quadrants - in the Kraljic matrix5- are being ordered through e-requisitioning. Products in these quadrants in general have a low supplier risk and increasing process efficiency is important, especially to routine products due to the relative low value of the products. Relatively not many savings can be

achieved here (see 3.3.1) and the companies’ aim often lies in making this process as efficient and low-cost as possible.

Although sporadic orders for ICT products ordered through electronic procurement might involve products from other quadrants due to administrative causes, these are pointed out as exceptions, because it hardly occurs.

For catalogue systems6 this includes the following. KLM has a relatively strong position in any market due to its name and being the worlds’ largest airline. The body of thought that results from this is that purchasing should be buyer driven, not supplier driven. One result in the field of e-procurement is that up to this point supplier systems are not directly used, but all systems are kept in-house as much as possible.

2.5 Conclusions

This chapter has given a description of the research environment. KLM has been undergoing a reasonable amount of changes in the last years due to events in the environment. This also had its effect on the procurement organization. Procurement within KLM is organized decentrally. Only for facility services and ICT products is purchasing done centrally. The department Purchasing and Contract Management (XF) is the department from where this research takes place and this department is responsible for all ICT related purchasing within KLM. XF falls hierarchically under the Information Services division, meaning that corporate procurement has an ‘advising’ function. KLM’s view on the use of internet technology for procurement ensures that technology will be an - even more - important part of the process in the years to come.

5_{See chapter 3} 6_{See chapter 3}

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3 (E-)Procurement and performance measuring

This chapter will first of all form a basic introduction to the concepts related to e-procurement and performance measurement. Literature provides a wide range of information but also many inconsistencies with respect to definitions and meanings. Therefore, this chapter will provide a basis of reference for the interpretation of

purchasing concepts and other terms, which will be used throughout this research report. The chapter starts with the concept of procurement and then leads to the more specific field of requisitioning. After exploring the concept of “e-procurement”, the use of electronics in the purchasing process, performance measuring will get the attention. This will result, in the third paragraph, in a choice of design for a performance measurement framework for the operational e-requisition process. The last paragraph contains the outline of the methodology to apply this design to the KLM situation.

3.1 Procurement and the requisition process

Procurement gained a lot of attention in the last decade. This is visible in the increasing attention organizations give to procurement. So has the number of CPO’s (Corporate Procurement Officer) increased significantly (A.Brun et al, 2004). Two important reasons for this can be pointed out. First of all companies become more and more aware of the fact that savings in procurement have a direct influence on the results, and second, the fact that purchasing turnover has increased in the last years. In this paragraph the elements related to the requisitioning are outlined.

3.1.1 Definitions

Literature provides many definitions for procurement. Van Weele (2005) defines it as ‘all activities, aimed at monitoring and controlling the flow of incoming products, from the moment that these products leave the supplier to the moment these are used in

production.’

Within procurement, a lot of descriptions and definitions are used for different parts of the process, as also for requisitioning. Figure 5 gives an overview of the definitions used according to Van Weele (2005).

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Figure 5: Procurement and its different parts illustrated according Van Weele (2005)

Procurement hence comprises the purchasing process, which includes the following activities (Van Weele, 2005):

 Specifying of what needs to be purchased  Selecting the most suitable supplier

 Contracting the supplier, including negotiating conditions  The actual ordering of the products

 Expediting and monitoring the delivery

 The follow up and evaluation (claim settling, keeping up with supplier documentation etc.)

Specifying, selecting and contracting are called strategic or tactical purchasing. The last three phases, ordering, expediting & monitoring and follow up & evaluation are called operational purchasing. The operational part of the process is in fact the result of the tactical part. It is the actual ordering of products for which certain agreements have been made - for example in umbrella contracts - with the supplier in the first phases of the process. Requisitioning is part of operational purchasing as illustrated below.

Figure 6: Illustration of requisitioning as part of the purchasing process model based on Van Weele (2005)

Requisitioning specify select contract Order Expedite & monitor Follow-up & evaluation Sourcing Contract Select Specify Contract

Order Expedite and monitor Follow up and evaluate Customer Supplier Operational purchasing Tactical purchasing Purchasing/supply management sourcing buying Procurement

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3.1.2 A broader perspective; the purchasing function

Next to the described purchasing process, there are also other elements which are relevant when talking about procurement. Elements like procedures, methods and personnel. These elements form the infrastructure needed to execute the purchasing process. The whole purchasing process, with these elements added, is called the purchasing function. This function is illustrated in the racecar-model (Gunning, Veeke, 1993; Van Weele, 1999).

Figure 7: The racecar model (Gunning, Veeke, 1993; Van Weele, 1999)

3.1.3 The product portfolio

A widely accepted way to analyse the product portfolio is the Kraljic matrix. Kraljic developed the matrix in 1983.

The product portfolio is analysed by looking at two aspects. The first aspect is the relevance of the product - or product group - to the financial result of the company, and the second is the complexity of the supply market. When the two aspects are combined, four quadrants are formed in the matrix for which separate strategies can be formed. In theory, the top two quadrants contain 80% of the total expenditure in purchasing and 20% of the suppliers.

 Routine: products with low financial relevance and many suppliers in the market are indicated as routine. Strategy should be aimed at maximum efficiency of the

purchasing process.

 Bottleneck: products with low financial relevance and low complexity of the supply market are indicated as bottleneck. Strategy should be aimed at securing the

availability and the development of alternatives.

Purchasing organization

Suppliers (market)

Personnel & Procedures organization & methods

Systems Organizational policy Procurement policy Expedite & Monitor Order Follow up & Evaluation contract Select Specify Performance indicators

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 Leverage: products with high financial relevance and many suppliers in the market are indicated as leverage. Strategy should be aimed at competitiveness.

 Strategic: products with high financial relevance and high complexity of the market are typified as strategic. Strategy should be aimed at long term cooperation and development of partnerships.

Figure 8: Kraljic matrix

E-requisitioning concerns mostly products with a relatively low financial relevance (Harink, 2004) and non-complex markets. This means that e-requisitioning mainly concerns products in the routine quadrant and to a lesser extent the leverage quadrant. A newer form of the matrix is the so-called Kamann cube (Kamann, 1999), where additional aspects are added to the matrix. The Kamann cube can be found in chapter 6.

3.2 Procurement & ICT

Electronic procurement (e-procurement) can be defined as the use of internet technology in the purchasing process (Van Weele, 2005). Using the internet in the purchasing process is not new. Companies have been using technology to communicate for several decades through electronic data interchange (EDI). EDI made it possible to transfer transactions between two companies by integrating databases using a standardized format for purchase orders and other elements in the purchasing transaction. This was an

improvement over the paper-based exchange of information and raised high expectations for the years to come. Multinationals started large expensive e-procurement projects. However, the success rate of e-procurement projects seemed to be very low. A study of the Boston Consulting Group in 2001 has shown that in Europe the expected effects materialized in only 20% of companies that implemented e-procurement initiatives (A.Brun et al, 2004).

Internet technology provides ways of drastically reducing costs in the purchasing process (De Boer et al, 2001) and the potential of e-procurement is not a real matter of discussion (A.Brun et al, 2004; Croom, 2000). Advantages include among others; reducing

administrative costs, shortening the order fulfillment cycle time and lower inventory level.

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However, there are many forms of e-procurement available and organizations often find it difficult to find a good mix of the different forms for their specific commodities and suppliers (Harink et al, 2002).

3.2.1 Different forms of e-procurement

Harink (2004) distinguishes eight forms of e-procurement. Next to e-requisitioning, are these, for example, E-contract management and E-sourcing. For the purpose of this research, only e-requisitioning, also referred to as e-ordering, will be described here. E-ordering is in reality a process in which employees in an organization, who have operational needs, can request all kinds of products and services electronically, order and receive, thereby using a so-called ordering catalogue system.

This is how Harink (2004) describes e-ordering, which is in fact the same process as what others call e-requisitioning, as also within KLM. In practice the ordering catalogue

system is most often used for requesting, ordering and receiving of facilitary products and services. This refers to planned and unplanned operational needs.

The ‘centre’ of a catalogue system is the electronic catalogue with selected suppliers in it, products and services as well as their contract prices. In fact, the catalogue contains a part of the result of the tactical purchasing process. The results of the tactical purchasing process are different types of contracts, like frame agreements, umbrella contracts and one off contracts.

3.2.2 Understanding the benefits of e-requisitioning

The application of technology in business processes is usually focused on the core business. However, also the costs of facilitating processes can be reduced, especially in traditional procurement cycles where processes tend to be inefficient. Many activities do not add any value and therefore these activities should be avoided as much as possible. Harink (2004) mentions some effects of using an ordering catalogue system like higher efficiency, reduced lead times and improved distribution of supplier and product knowledge.

When e-procurement is implemented, usually a business case precedes the decision to do so. A business case necessarily focuses on the hard benefits that are required to deliver enhanced shareholder value and gain board or management approval. Examples are price savings and head count reduction.

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3.3 Performance measuring in purchasing

Now that the concepts around e-requisitioning have been introduced, it will be determined what kind of performance measurement framework can be used for this particular part of the purchasing process.

Performance measurement has been around for some time, although in the early years it was focused especially on the financial and internal results (Bourne et al, 2003). It is argued that the real trend around performance measurement has set in, in the 1990’s. Several new performance measurement systems (performance measurement frameworks are mostly referred to in literature as PMS; performance measurement systems) were developed like the widely accepted Balanced Scorecard (Kaplan, Norton; 1992). Also within purchasing, a growing interest in performance measurement can be seen throughout these years. This paragraph will focus on performance measurement in purchasing. This will result in a choice of design for a performance measurement framework for a specific part of the general purchasing process: the operational e-requisition process.

Telgen and Pop-Sitar (2000) observe a growing dissatisfaction with actual performance measurement and control systems in purchasing. They point out the following three issues:

 Measurement and control systems have failed to keep up with changes in functions, task-skills and expectations;

 Most of the performance measurement systems concentrate only on purchasing activities that are performed in the purchasing department, while the purchasing performance outside the purchasing department remains out of focus;

 Performance measurement and control systems described in the purchasing and supply literature seem to show a gap between efficiency-measures and

effectiveness-measures in purchasing. Most systems only concentrate on

controlling and measuring purchasing efficiency based on the assumption that an excellent purchasing organization leads to high purchasing performance.

Purchasing performance is the relation between the purchasing output or results

(purchasing effectiveness) and the purchasing input or resources (purchasing efficiency) through which the purchasing objectives are realized (Van Weele, 1994). Neely et al. (1995) defined performance measurement as “the process of quantifying the efficiency and effectiveness of action”.

Dumond (1994) makes a similar distinction regarding performance measurement systems (PMS) in purchasing. She distinguishes four types of PMS. First is the effectiveness PMS, a more contemporary PMS, highlighting the ability of procurement to contribute to the attainment of the firm’s goals. Second is the efficiency PMS in which the traditional approach to procurement performance measurement is reflected, namely the focus on minimizing costs and maximizing operating efficiency. The third is the multi-objective PMS, incorporating both efficiency and effectiveness. The last one is the naïve PMS in which only an orientation scenario is provided and no performance measures.

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Since both effectiveness and efficiency are important when operational purchasing is taken into account, a PMS for the e-requisition process seems to fall into the category of multi-objective performance measurement systems.

On a general level, purchasing effectiveness can be evaluated along four main dimensions (Telgen et al, 2000):

 contribution to cost reduction;

 contribution to product and process quality;  contribution to logistical performance;  contribution to customer satisfaction.

Based on the control paradigm by De Leeuw (1994), Telgen et al. argue that these general dimensions may require different measures. The control paradigm contains three basic elements: a controlling system, a system that is subject to control – the controlled system – and an environment which can influence the two other systems. The various measures depend on the definition of the controlled system. For example, if you measure the cost effectiveness of buyers, you need other measures than when you measure the cost effectiveness of, say, suppliers. In this research the controlled system is the

e-requisition process and the controlling system is the purchasing department. This is illustrated in figure 9.

Dumond (1994) deals with more or less the same dimensions with regard to effectiveness, but adds the dimension of supplier relations.

Next to the effectiveness, efficiency plays an important role. Efficiency reflects the ‘energy’ the organization spends to produce and deliver the requested product or service (Schaap, 2001). Dumond argues that efficiency includes operating cost and order

processing time.

The grouping of performance dimensions in purchasing in effectiveness and efficiency is widely accepted and acknowledged in purchasing literature. The grouping will also be used in this research. It seems necessary to include both dimensions when the controlled system is a process. Following Dumond, this means incorporating a multiple objective PMS.

Electronic requisition process Purchasing department

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Purchasing effectiveness can thus be evaluated on the following dimensions, according to respectively Telgen and Dumond:

 Cost reduction

 Product and process quality  Logistical performance  Customer satisfaction  Supplier relations

Purchasing efficiency can be evaluated on these dimensions:  Time savings

 Reduction in operating cost

These performance measurement systems do not explicitly take electronic solutions into account. The benefits of the so-called e-solutions have been described by a great number of authors. Neef (2001) divided benefits using e-solutions for procurement in three categories: process efficiency, compliance and leverage. A.Brun et al (2004)

acknowledge this in their value assessment of e-procurement projects. Compliance seems to be an important benefit when using e-solutions. Examples are that more people can be reached more easily and a uniform way of ‘doing things’ can be created. For this reason the dimension compliance is added to the dimensions stated above.

With regard to the benefits process efficiency and leverage can be argued that the efficiency dimension has been acknowledged and benefits related to leverage primarily concern the strategic part of purchasing. If it is argued that leverage benefits can be related in the operational process than these concern the dimension supplier relations. As briefly pointed out in the previous paragraph, the extent to which the dimensions are related to the operational part of purchasing will differ. For example the amount of cost savings that can be reached in the strategic part of the purchasing process is far greater than that in the operational part. An early involvement of purchasers and customers in the first stages can lead to great savings. In the operational part of the process the

specifications of the product are more and more determined and the possibility to achieve cost savings will diminish.

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Figure 10: Possibilities to achieve cost savings (Telgen, De Boer et al. 1994)

When taking a closer look at the product and process quality dimension the conclusion can be drawn that product quality is for the larger part determined in the strategic purchasing process. A definition of quality used by Van Weele (2005) is: quality is the degree in which demands are met. In this case this is limited to the quality of the process. Quality of the process deals with the degree in which the necessary conditions for

execution of the process are met as well as the occurrence of errors in the process. The contribution of the process to logistical performance is limited to the agreements made with suppliers about deliveries.

Cost reduction with regard to effectiveness is beyond the scope of this research, because agreements with suppliers are made in the strategic part of the process. The same

argument could be used for the dimension of supplier relations. However, because the actual ordering and thus contact with suppliers takes place mainly in the operational part of the process, this dimension is included.

The performance dimensions, after adjustment with respect to performance in the operational purchasing process can be grouped as shown in table 1.

Effectiveness Efficiency

Process quality Time savings

Customer satisfaction Process cost savings Supplier relations

Logistical performance Compliance

Table 1: Performance dimensions

These dimensions form the basis of a performance measurement framework for the electronic requisition process. A performance measurement framework for the electronic requisition process has to be able to bring a balanced view of the various dimensions. ‘Balanced’ does not mean that there cannot be any tension between the dimensions, but that relations between them have to be pointed out. These relations will not be exactly the

specify select contract order monitor evaluate

Degree in which specifications are determined

Possibilities to achieve savings

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applying a methodology to define the KLM specific indicators. The following paragraph deals with this methodology.

3.4 Extraction of KLM specific performance indicators

According to Kerklaan (2003) several methods exist which can lead to the extraction of a set of performance indicators. These methods cannot be used to actually define the indicators but have the ability to point out the relevant and also most important elements, or as Kerklaan (2003) calls it: fields for searching. The metrics for each of these elements - generally more than one metric per element - form the performance indicators. To these performance indicators, goals can be related. For example, when a metric “time of reaction on a complaint” is defined, the norm could be “reaction time has to be 30 minutes or less”.

The methods that can be used to point out the elements are the horizontal approach, the vertical approach, the balanced scorecard approach, the system approach and the process approach. The different approaches will be illustrated here and a choice will be made. This approach will form the guideline to arrive at the first deliverable of this research; the set of performance indicators.

Horizontal approach

The essence of the horizontal approach is that all links of the main logistical processes are connected perfectly. By acting according to this approach, an inventory has to be made of the customer wishes. Customers are those who receive the final product or service. The customer wishes are consequently translated in product features. These are the specific features the product has to have to be interesting to the customer. The next step is the translation of final product features to features for productparts. Last step is the translation of the productpart features to features of processparts. Each step adds its features, and with that, potential performance indicators.

Vertical approach

The essence of the vertical approach is making a connection between the management goals and the goals that are derived from these for the specific departments. The vertical approach makes sure that the goals of the different departments are in line with the company goals. By acting according to this approach the vision is turned into clear goals and concrete action plans to reach these goals. After this, the lower levels of the company are being involved. All department heads have to name their own goals and plans, in line with the company goals. These goals, effective on different levels, are transformed into performance indicators.

The balanced scorecard approach

This approach is one of the more popular and also widely accepted methods to measure performance. The balanced scorecard has four perspectives, namely the financial, customer, internal business and the learning and growth perspective. These four

perspectives are designed to give insight in the performance of the different aspects of an organization. By acting according this method, Critical Success Factors have to be named for every perspective, for which the indicators can be derived.

KLM in control of electronic requisitioning

KLM in control of

electronic requisitioning

Design of a performance measurement framework and

exploring opportunities

J.R. Kuiken

KLM in control of electronic requisitioning

Abstract

Management summary

Preface

Table of contents

List of abbreviations

Introduction

1

Research design

2

Research environment

3

(E-)Procurement and performance measuring