Preface
I
Preface
This thesis is my final assignment in order to graduate at the faculty of Technische Bedrijfswetenschappen of the University of Groningen. I look back at the good time at the production site of Philips DAP Drachten.
Hereby I want to thank Mr Slingerland from Philips Drachten for the opportunity to do my final assignment at the purchasing department in Drachten and to write my thesis about it.
My thanks also go out to the purchasers of Philips Drachten who were involved in the research for their valuable input, especially my direct supervisor Mr Huijsmans that guided and supported me through the period.
A special word of thanks as well for the purchasing managers of companies outside Philips Drachten, who were involved, for their expertise and vision on e-sourcing.
I hope you will enjoy reading this report and that the benefits of the proposed new ways of sourcing will become visible either financially or in means of time. I would be happy to discuss further questions or comments that might arise upon reading this thesis.
Bas Appeldoorn
Executive summary
Executive summary
The last few years the attention on purchasing has increased. The companies realise purchasing is important. One of the trends in purchasing nowadays is e-purchasing.
The e-purchasing initiatives receive a great deal of attention, because it can significantly reduce costs.
The cause to research e-sourcing is the result of a successful reverse auction. To understand e-sourcing better and to benefit from the opportunities the following
‘problem statement’ has been formulated:
How can e-sourcing lead to a cost reducing way of purchasing direct parts at Philips DAP Drachten, and what likely implications will it have on the sourcing process and organisation?
The research is divided into three phases:
1. Theory: A theoretical framework of e-sourcing
2. Practise: The experiences of e-sourcing in and outside Philips.
3. Application: The theoretical framework and experiences will be applied to Philips Drachten.
The theoretical framework is a combination of ‘traditional’ sourcing with e- commerce. E-sourcing is sourcing with the use of the Internet. This means that the market situation has changed, because Internet is the intermediary. The strategic sourcing decisions determine the ‘kind’ marketplaces and what tools can be used.
These marketplaces can diver in type of connectivity as well as industry. There are three types of connectivity, Industry is categorised in vertical (specialised industry) and horizontal (several industries) industries.
The tools on a marketplace support the sourcing process. The tools can help indicate possible (new) suppliers and improve efficiency and speed. A reverse auction is a good tool for a very fast process and dynamic pricing.
The second phase is the use of e-sourcing in practise. The experiences with marketplaces inside Philips have been successful, but one initiative failed to work.
The first experiences were with a reverse auction and were successful. The second experiences with e-sourcing were on a collaboration of two companies. These developed a marketplace and use various tools on it. The third experiences inside Philips were on an online negotiation tool and were not that good. The organisation saw no need to use new technology and the market was not in favour.
The experiences outside Philips were also diverted. The chemical companies see major cost reductions in both e-sourcing and e-procurement. The FMCG companies see cost reductions in the e-procurement, but are still in doubt of e-sourcing. The tool that is mostly used is the reverse auction, because it is fast and the cost reduction can be shown directly. The results of these experiences are used to put up preconditions.
These conditions are used to see what choices have to be made in order to use e- sourcing and to make e-sourcing cost reducing. With these preconditions a decision tree is made to see how the choices on e-sourcing can be made.
The third phase is the application of the preconditions. In this phase the current situation is used to see the changes that should take place in order to use e-sourcing.
The decision tree is used and explained to see on what criteria the decision have to be
Executive summary
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judged. The sourcing activities will also change. The focus will be on product category and supplier market scanning. The scope of e-sourcing is to shorten the sourcing cycle.
After these three phases the conclusions are:
• The use of e-sourcing start with a well defined sourcing strategy and purchasing portfolio.
• The own organisation has to be ready and willing to use the Internet
• The own organisation has to see the benefits of e-sourcing.
• The specifications have to be easily communicable.
• The switching costs involved should not be too high.
• The supplier have to be ready and willing to use the Internet
• The marketplace has to be viable and has to be able to grow to maturity
• The kind of marketplace is determined by connectivity, industry and industry support
• The choice of marketplace depends on the e-sourcing strategy
• The tools used on a marketplace depends on e-sourcing strategy
• The Reverse auction is the most used tool, because the results are direct visible.
• Other tools are less used, because time reduction and more information can not be expressed by cash cost reductions
Recommendations:
Revise the purchasing portfolio to have a better view on the purchasing situation.
Make a detailed opportunity assessment on the revised portfolio
Take a few routine products that comply to the e-sourcing criteria and see what is needed to source through the Internet (Lightxchange for example).
Scan the markets for the leverage quadrant products that can be sourced. And use the reverse auction when the market conditions of a product are in favour of the buyer.
Make measurable figures to see the benefits and evaluate these after the sourcing.
Make a scan of the suppliers that are ready/ willing to use the Internet for e- sourcing.
Other points of attention:
♦ Next to the direct products, the indirect products can also be sourced
electronically. The use of e-sourcing for indirect products is more applied, because the main process is not affected and the products are often standard.
♦ Another hot issue is e-procurement, this gets more attention than e-sourcing, because the cost reductions are perceived higher.
Table of contents
PREFACE ...I EXECUTIVE SUMMARY ... II
1. RESEARCH DESIGN ... 7
1.1 INTRODUCTION... 7
1.2 MOTIVE... 7
1.3 OBJECTIVES... 8
1.4 PROBLEM STATEMENT: ... 8
1.5 LIMITATIONS... 10
1.6 RESEARCH MODEL... 10
1.7 INTRODUCTION DAP ... 11
1.8 PRODUCT AND MARKETS... 11
2 SOURCING ... 12
2.1 SOURCING STRATEGY... 12
2.1.1 Direct parts vs indirect parts ... 13
2.1.2 Purchasing Portfolio ... 13
2.1.3 Purchasing situation... 14
2.2 SOURCING PROCESS... 14
2.2.1 Sourcing process activities... 15
2.2.2 Sourcing cycle time ... 15
Summary ... 16
3. E-PURCHASING ... 17
3.1 MARKET DEVELOPMENTS... 17
3.2 SAVINGS... 17
Summary ... 18
4. E-SOURCING ... 19
4.1 E-SOURCING MARKETPLACES... 19
4.1.2 Industry... 20
4.1.3 Viability ... 20
4.2 E-SOURCING STRATEGY... 21
4.3 E-SOURCING TOOLS... 22
4.4 E-SOURCING PROCESS... 24
4.4.1 Specification... 25
4.4.2 Evaluation... 25
4.4.3 Negotiation ... 25
Summary ... 26
5. EXPERIENCES INSIDE PHILIPS... 28
5.1 PRACTICE AT PHILIPS DAP DRACHTEN... 28
5.2 PRACTICE AT PHILIPS CONSUMER ELECTRONICS... 29
5.3 PRACTICE AT PHILIPS LIGHTING... 29
Summary ... 30
6. EXPERIENCE OUTSIDE PHILIPS... 32
6.1 SOURCING... 32
6.2 E-PURCHASING... 32
6.3 E-SOURCING... 33
6.4 E-MARKETPLACES... 35
6.5 IMPLEMENTATION... 36
Summary ... 36
7. PRECONDITIONS... 38
7.1 E-SOURCING MARKET SITUATION... 38
7.2 STRATEGY... 38
Table of contents
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7.3.1 E-sourcing opportunity... 42
7.3.2 E-sourcing strategy ... 43
7.3.3 Search for appropriate marketplace... 43
7.3.3 Develop marketplace ... 43
7.4 E-SOURCING PROCESS... 44
7.5 E-SOURCING CYCLE... 45
8. APPLICATION OF PRECONDITIONS ... 46
8.1 PURCHASING ORGANISATION AND STRATEGY... 46
8.2 E-SOURCING DECISION TREE... 47
8.2.1 E-sourcing opportunities Philips Drachten ... 47
8.2.2 E-sourcing strategy ... 48
8.2.3 Examples... 49
8.3 CURRENT SOURCING PROCESS... 50
8.3.1 Specification... 50
8.3.2 Search for suppliers... 50
8.3.3 Development RFQ ... 50
8.3.4 Evaluate proposals ... 50
8.3.5 Contracting ... 51
8.4 E-SOURCING SITUATION... 51
8.4.1 Market evaluation ... 51
8.4.2 Specification... 51
8.4.3 Evaluation and analyses of quotes ... 52
9. CONCLUSIONS... 53
10. RECOMMENDATIONS ... 55
10.1 PURCHASING PORTFOLIO... 55
10.2 E-SOURCING DIRECT PARTS... 55
10.3 E-SOURCING INDIRECT PARTS... 56
10.4 E-PROCUREMENT OPPORTUNITY... 56
10.5 SUPPLIER SCAN... 56
LITERATURE ... 57
E-sourcing: fast or too fast?
"It is not the biggest nor the strongest who will survive, it is the one who is most able to adapt to change." (Charles Darwin, 1809-1882)
Research Design
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1. Research Design
In this chapter the objective and backgrounds of the research are described. In paragraph 1.1 an introduction is given followed by the motive in paragraph 1.2.
Paragraph 1.3 shows the objectives and in paragraph 1.4 the problem statement is explained with subquestions which forms the basis of the research. The limitations are given in paragraph 1.5 to define the field of the research. Subsequently in paragraph 1.6 the research model will give an overview of the topics that need to be researched and how these relate to the outcome of the research. At last, in paragraph 1.7 and 1.8, a brief description will be given of the product division and company where the research took place.
1.1 Introduction
Purchasing has become a hot issue lately. More and more, it is attracting the attention of senior management, who has discovered its vast potential. At the same time, electronic purchasing has emerged and is expected to drastically alter market relations and the role of purchasing itself.
Purchasing used to be solely a clerical function, with the ultimate purpose of buying as cheaply as possible. Nowadays purchasing is regarded as a major strategic function in many companies. Studies have shown that the average manufacturing company spends over 50% of its revenues on purchased inputs. With companies continuing to increase the volume of outsourced work across industries, this percentage is likely to rise (Corbett, 1999).
Initial attempts to improve procurement activities have focused primarily on streamlining direct materials acquisition and planning processes. Many of these strategies relied on Material Requirement Planning (MRP) and Enterprise Resource Planning(ERP) systems to automate and track production purchases. Nowadays other technologies make it possible to improve purchasing activities. E-purchasing. E- purchasing is part of e-commerce and can be defined as buying with the use of Internet (van Doorne & Verheijen, 2000). The last few years e-purchasing initiatives received much attention, because they significantly and directly impact the company's bottom line (Jovin, 2001). E-purchasing solutions can streamline inefficient processes and lead to significantly reduced costs.
Looking at the future, Gartner announced its forecast for the global Business-to- Business (B2B) Internet commerce market. In 2000, the value of world-wide B2B Internet commerce sales surpassed $433 billion, a 189 percent increase from 1999.
Gartner predicts that world-wide B2B Internet commerce will reach $919 billion in 2001 and $1.9 trillion in 2002. In 2003, the market will increase to $3.6 trillion, and at the end of 2004 world-wide B2B Internet sales should reach $6 trillion.
1.2 Motive
In order to benefit from Internet opportunities in the future, Philips Drachten has taken a few orientating steps into e-purchasing and sees opportunities to decrease costs.
After a pilot of an electronic reverse auction has been done in the beginning of February 2001, the first steps have been made in e-purchasing. The project started with a request for information on suppliers that are able to supply. This resulted in a
Research Design long list of potential suppliers. Next the potential suppliers were screened, this resulted in a short list. Hereafter a request for quotation was sent out. Finally a reverse auction took place. The result was a quick negotiation round with a cost price reduction. Because of this result more research was needed.
In order to get the maximum results out of e-business a research will be undertaken on e-sourcing. The goal of the research is to seek opportunities that are best suitable for DAP and ways in which these opportunities can contribute to the purchasing efficiency.
1.3 Objectives
The main objective is to gain insight into the possible solutions of e-sourcing.
Secondly, a recommendation will be made which are best applicable for the Philips DAP Drachten.
1.4 Problem statement:
In this paragraph the problem statement will be discussed. In order to clarify the problem statement, an explanation is given of the cost reduction criteria in the problem statement, and sub questions are constructed in order to answer the problem statement.
As result of the objectives the following problem statement is formulated:
How can e-sourcing lead to a cost reducing way of purchasing direct parts at Philips DAP Drachten, and what likely implications will it have on the sourcing process and organisation?
In order to answer this question a number of subjects have be clarified. ‘Cost reducing way’ is considered as a manner in which the benefits are greater than the costs. This can be reached in several ways (e.g. Williamson, 1975; 1991). The first is a reduction on the total costs of the product, for example as result of a lower cost price. The second is the reduction of the sourcing cycle time, as a result of a faster communication. This saves the costs of man-hours. The third is a reduction in time and money spent on travelling and meetings with other companies. The other subjects of sourcing, e-purchasing and e-sourcing will be described in separated chapters that are the answer to the sub questions.
To answer the central question the following sub questions are formulated:
1a. What is sourcing?
In order to make the link with e-sourcing, a description of sourcing is given to explain
‘traditional’ sourcing. The decisions on strategy and an overview of activities of the sourcing process are given. This forms a basis for the research to compare sourcing with e-sourcing and to give an insight in the similarity and possible improvements in the activities.
1b. What is e-purchasing?
The general characteristics of e-purchasing are shown and how sourcing is related to e-purchasing. The benefits are also given to show the motive of e-purchasing. This will also give a direction for the interviews for the experiences outside Philips.
Research Design
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The combination of sourcing with the characteristics of e-puchasing is put in a theoretical framework. A description is given of the strategic decisions of e-sourcing, to show the possibilities of e-sourcing and how it can be used. The activities of e- sourcing will also be described to compare these with the ‘traditional’ sourcing activities and see the possible improvements in activities.
The information on the theoretical framework is obtained from specialised literature and articles in magazines and on the Internet. A qualitative research analysis is used to summarise the results.
2a. How does Philips use e-sourcing?
The experiences and lessons learned of e-sourcing projects within Philips will give an indication of the possible advantages and disadvantages. These can be used as a reference for Philips Drachten. The information is obtained from desk research and interviews. The experiences inside Philips are shown as a qualitative description.
2b. How do leading multinationals use e-sourcing for the purchasing of BOM parts?
To answer to this subquestion will give an insight how leading multinationals use the Internet for e-sourcing. Secondly it gives insight in the opportunities and threats of e- sourcing. These insights are used as a reference and can help to develop an e-sourcing strategy for Philips DAP Drachten. The information on the experiences of e-sourcing outside Philips is obtained from several interviews and is used to make a list of preconditions for e-sourcing.
Both the theoretical framework and the practical experiences give an insight in the use of e-sourcing. The question remains when e-sourcing can be used efficiently by Philips DAP Drachten. Therefore a list of preconditions will be made in order to judge whether and how e-sourcing can be used by Philips DAP. This list will summarise the findings of the theory and the experiences and will make a decision tree to assist further analysis.
3a. What does the sourcing process look like at Philips DAP Drachten?
The strategic decisions on sourcing and the sourcing activities at Philips DAP Drachten have to be mapped in order to compare these with the preconditions of e- sourcing. This comparison shows the opportunities in certain situations on which recommendations on the use of e-sourcing can be made. The information on the sourcing process at Philips Drachten is obtained from several interviews of purchasers. The results are put in a qualitative analysis in which the focus is on the relevant activities.
3b. What kind of e-sourcing opportunities are applicable for Philips DAP Drachten?
The current sourcing process has to be compared with the e-sourcing preconditions, in order to show the situations in which the opportunities are applicable. The applicable opportunities have to be evaluated on cost reduction in the sourcing process. The analysis is based on information gained from the previous questions. The result is a recommendation for e-sourcing opportunities for Philips Drachten.
Research Design
1.5 Limitations
The following items will not be investigated:
• Implementation of SAP at the purchasing department
• Implementation of organisational changes
• Changes in policy for next year
• Connection to Information Systems
1.6 Research model
To give a good overview in this research, a survey of the points of research was made and put them together in a research model (see figure 1.). This model is a result of the sub-questions of the problem definition.
First, a theoretical framework of e-sourcing is given. A literature study is conducted to identify material relevant to purchasing in general, sourcing, e-purchasing and e- sourcing in particular. Both Internet and traditional library databases were used. A complete reference list of sources is included in the reference section.
Secondly, the experiences with e-sourcing in practice are described. The theoretical framework served as a basis for the interviews. The interviews took place at two sites of Philips and four leading multinationals outside Philips. This resulted in an overview of the use and experiences of e-sourcing in practise. These experiences have been compared to each other in the field of the subjects. The trends are shown and so are the advantages and disadvantages.
Third, an overview will be given of the preconditions to make e-sourcing a cost reducing way of sourcing. These preconditions form the basis to determine in which way e-sourcing can lead to a cost reduction. The findings of the theory combined with those of the experiences create a path to follow in selecting the best opportunities of e- sourcing.
Fourth, a description is given of the current sourcing process at Philips Drachten, in order to compare the sourcing strategy and activities to the preconditions and in order
E-sourcing Chapter four
Conclusions and Recommandations
Chapter nine + ten
figure 1: the research model and report structure Traditional
Sourcing Chapter two
E-purchasing Chapter three
E-sourcing experiences ouside Philips
Chapter six E-sourcing experiences
at Philips Chapter five
Preconditions Chapter seven
Application at Philips Drachten
Chapter eight
Theory Practice Application
Research design Chapter one
Research Design
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to see the opportunity to facilitate the sourcing and show the improvements in the activities.
Finally conclusions and recommendations can be made on the basis of the preconditions and the current sourcing at Philips Drachten. This will be done on criteria relevant to the cost reduction mentioned in the problem definition. The cost reductions have to be shown on the basis of the possible cost reduction of e-sourcing matched with the sourcing activities at Drachten. This results in possible time or cost reductions in the sourcing activities, which are enabled through e-sourcing.
1.7 Introduction DAP
Philips Domestic Appliances and Personal Care (DAP) is one of the product divisions of Royal Philips Electronics. The scope of Philips DAP is to design, manufacture and sell electrical appliances for home management and personal well being whose installation requires no expertise. Philips DAP markets about 400 different products and its annual sales volume amounts to about 70 million products. DAP employs about 10,000 people worldwide spread over four business units.
The DAP organisation comprises two Corporate Centres (strategic decision-making and support), four Centres of Competence (product and process development), several International Production Centres (production) and around 45 National Sales Organisations (marketing and sales), which are organised in regions.
This research is done for the business unit Male Shaving and Grooming (Philishave) in Drachten. The factory is the largest and most sophisticated production plant of electronic shavers in the world. About 2,000 employees work daily on the development, testing, design, purchasing and production of shavers.
1.8 Product and markets
Under the brand Philishave and Norelco, Philishave is market leader of electrical dry shavers. The largest competitor in this field is Braun. Both manufacturers apply a different concept. Philishave is known for their rotary system and Braun uses a vibra foil system. Furthermore there are some smaller parties who offer electrical shavers like Panasonic, Sanyo and Remington.
Besides the competition of electronic shavers, Philips has to deal with the wet shaving market competitors. Main players in this field are Gillette and Wilkinson. Having this in mind, Philips tries to gain market share in this field by introducing waterproof electrical wet shavers, which gives the user the wet shaving feeling by using an emulsion.
Sourcing
2 Sourcing
A description of sourcing is given to explain ‘traditional’ sourcing, in order to make the link with e-sourcing and to compare the two and see the similarities and differences. Also the sourcing activities will be shown in order to see opportunities to reduce costs in these activities.
Sourcing is defined as: finding sources of supply, guaranteeing continuity in supply, ensuring alternative sources of supply, gathering knowledge of procurable resources (Vollman et al.,1984). Sourcing no longer refers to getting materials at desired prices, rather, sourcing decisions should be incorporated into the buying firms’ operating strategy to support the firms’ competitive advantages (Zeng, 2000). Therefore, buying organisations should choose suppliers in a deliberate, calculated fashion based on the strategic impact of that supplier on the overall supply chain instead of simply awarding each supply contract to the supplier with the lowest bid (Alaniz & Shuffield, 2001).
The term ‘sourcing’ is rather vague, because it is used in much literature differently.
The definition is very broad, if guaranteeing continuity in supply is taken literally.
The restriction of sourcing in this research is shown in figure 3.
Sourcing is divided in two parts: a strategic part for the decisions on how to source and the process part for the execution of sourcing. In paragraph 2.1 the sourcing strategy is described. The sourcing strategy gives an overview of the decisions that should be made, to control the sourcing process. The strategic choices should lead to different kinds of sourcing strategies, depending on the nature of the required product and the purchasing situation. These factors are described in the sub paragraphs. In paragraph 2.2 an overview is given of the activities that take place in the sourcing process.
2.1 Sourcing strategy
The sourcing strategy is shown to give a view on the strategic choices and the factors that affect them and to use the strategy focus to determine the possible e-sourcing strategy. The different strategic choices should lead to different kinds of sourcing strategies, depending on the nature of the required product and the purchasing situation.
In a perfect market, information about supply alternatives would be readily available, and suppliers would freely and constantly compete for a buying organisation’s business. Since the markets are far from perfect, gathering information and soliciting competitive activity require effort. The most powerful weapon that buyers have in their dealing with suppliers is knowledge about, and willingness to use, alternatives (Kapoor and Gupta,1997). Therefore a standardised approach has to be made, a sourcing strategy. This sourcing strategy has to pursue the differences in the kind of strategic choices. The main sourcing choices are; global versus local, single versus multiple, contract versus spot and price orientated versus performance orientated (Van Weele, 1997). The factors of choosing are related to the kind of product, supplier variables, purchasing situation and organisation. Therefore a few are discussed that are important to this research. First the difference between direct and indirect goods will be described, because of the difference on impact and way to source depend on the kind of good. Second a purchasing portfolio will show the importance of the supplier market and the financial impact of product and the emphasis in the sourcing
Sourcing
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process. Third the different situations of purchasing are given, because this can affect the sourcing process in the need for information.
2.1.1 Direct parts vs indirect parts
The difference of direct and indirect goods is important to the strategic decisions that have to be taken. The decisions relate to the impact on the main processes and the focuses on different criteria, the differences are shown in Table 1.
Direct parts Indirect parts
Use Production Support operations and MRO
Accounting treatment Cost of Goods Sold General and administrative Logistical Requirement Stringent Less stringent
Quality level High Average
Order frequency Below average High
Planned in time Yes No
The sourcing of direct parts needs to be done carefully, because of the impact on the main process. Direct goods are used in the finished products and are critical to production. The financial impact of direct parts is often considerable. The sourcing decisions are based on conformance to quality, current and future supplier capacity, design specifications, on-time performance and total cost to the buyer, including ease of manufacturing/ assembly and logistics (Alaniz & Schuffield, 2001).
Indirect goods are not part of the finished product; they are used in supporting processes. The sourcing of indirect goods is based on price, service and convenience.
2.1.2 Purchasing Portfolio
The different strategic choices can be based on a purchasing portfolio. The purchasing portfolio (Kraljic, 1983) classifies products on two dimensions:
Business impact: The business impact of a given supply item can be defined in terms of the volume purchased, percentage of total purchase cost, or impact on product quality or business growth.
Complexity of the supply market: depends on the number of available suppliers, competitive demand, make-or-buy opportunities, and storage risk and substitution possibilities. The resulting portfolio and the main characteristics are shown in figure 2.
Based on these two dimensions, four product categories have been formulated:
routine, leverage, bottleneck and strategic products. As result of the different nature of each product category, each requires to be sourced on a different way. For the routine quadrant the focus is on the sourcing process efficiency, because process costs determine a relative big part of the total costs. The focus in the leverage quadrant is combining standardised products to have more competitive power in order to receive reductions. The focus in the strategic quadrant is the communication and co-operation, because the product and know- how is more important than price. The focus of the bottleneck quadrant is to secure the products and to identify other suppliers to look for substitutes.
Table 1: Differences direct-indirect parts ( Revised from Stephens Inc.)
Sourcing
This portfolio model is an important strategic instrument for sourcing, because the portfolio gives a strategy for every quadrant in which way the products should be sourced. The place of the product in the portfolio determines the focus of the strategy.
This focus of the strategy can be used to show possible opportunities of e-sourcing.
2.1.3 Purchasing situation
An overview of the purchasing situation is given in order to show the situations that occur in the current sourcing process in Philips Drachten.
Three different situations of purchasing can be recognised. The first is straight rebuy, this is the purchasing of the same product at the same conditions at the same supplier.
The second is modified rebuy, this is the purchasing of a modified product or divergent conditions. In this situation market research can be useful. The third is new task, in this situation a new product is purchased. For this situation a market research has to take place and the suppliers have to be qualified and selected.
2.2 Sourcing process
The ‘traditional’ sourcing process is shown as reference to e-sourcing. The activities of the process are shown in figure 3 and will be compared to the e-sourcing activities (Chapter 5). This comparison will show the similarities and differences. Beside this comparison an overview will be given of the sourcing cycle time. This is done to compare the time spent on sourcing with the time spent on e-sourcing, and to indicate what activity improvements can be made.
Leverage
• High expenditure area
• Many existing alternate products and services
• Many qualified supply sources
• Goods and services are readily available
• Commercial involvement can significantly impact price
Strategic
• Strategic to profitability and operations
• Few qualified supply sources
• Large expenditures
• Design to quality critical
• Complex specifications
Routine
• Many existing alternate products and services
• Many sources
• Low value
• Small individual transactions
• Unspecified items for everyday use
Bottleneck
• Very complex specifications requiring complex manufacturing or service process
• Few alternate products available
• Few qualified supply sources
• May have a big impact on ongoing operations or maintenance
• New technology involved in provision of the product or service
B U S I N E S S
I M
P A C T
COMPLEXITY OF SUPPLY MARKET
Figure 2.: Purchasing Portfolio
Sourcing
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Sourcing is part of the purchasing process. The purchasing process can schematically be illustrated (figure 3). The main processes are interrelated and are divided in an initial part and an operational part.
2.2.1 Sourcing process activities
Sourcing is almost the same as initial purchasing. Initial purchasing is the broader of the two because of the additional market research and suppliers’ management.
The sourcing process is projected on the three broad sourcing phases as identified by Van Weele (1997): Specification, Selection and Contracting. Doing so results in a more detailed description of each sourcing step. This more detailed process flow is depicted in figure 4 and provides a basis for discussing the impact of Internet Technologies on sourcing (in Chapter 4).
2.2.2 Sourcing cycle time
According to the Centre for Advanced Purchasing Studies (CAPS), it takes about 15 weeks on average just to develop and negotiate a contract between a supplier and a buyer. In many industries, new product introductions have shrunk from years to months. Most of this reduction in the new product introduction cycle is the result of advanced design software and manufacturing techniques and better co-ordination and collaboration among the departments involved (design, sourcing and production).
With the development time reduction in nowadays development projects the sourcing cycle time becomes more often a bottleneck. This results in a delay in the development and a late introduction of the product, which slows companies from efficiently getting their new products on the market (Alaniz & Shuffield, 2001;
Wheelwright & Clark, 1992). Lengthy sourcing cycles, as depicted in Figure 5, not only hinder an organisations’ ability to efficiently bring new products to market, but also limit the range of products that can be sourced effectively (Aberdeen Group, 2001). Because limited time can be spend on the sourcing of products.
Because the sourcing cycle time is often the bottleneck in nowadays development projects, the sourcing process cycle activities will be shown. In Figure 5 the main activities are shown with the percentage of time spent on this activity. In order to
Specification - Analyse spend - Identify
specifications - Develop
RFI/RFP/RFQ
Selection - Identify/search
suppliers - Sent out
RFI/RFP/RFQ - Screening/sorting
proposals
Contracting - Contract
negotiation - Contract
Figure 4.: sourcing phases specification supplier
selection contracting ordering
follow-up and evaluation expediting
and
evaluation supplier
Initial purchasing/ sourcing Operational purchasing/ supply/procurement
internal customer
Figure 3.: Purchasing process (Van Weele, 1997)
Sourcing reduce the sourcing cycle one or more of these possible bottleneck activities have to be shortened.
Summary
In this chapter the ‘traditional sourcing is described. This can be divided in a strategic part and a process part. The strategic choices depend on the several factors. These factors are product related and will affect the way of sourcing effectively. The factors are:
• Kind of product (direct or indirect)
• The place of the product in the purchasing portfolio
• The place of product in purchasing situation
The sourcing process is affected by the strategic decisions. These are shown in the activities of the sourcing process. In new product introductions the sourcing is more often a bottleneck that slows companies down to get their products on the market. The main bottlenecks in the activities are:
• Searching for appropriate suppliers
• Managing preferred supplier list
• RFQ development
• RFQ response
• Screening proposals
• Contract negotiation
In order to do the sourcing on a cost reducing way the process has to be done more efficient or total cost of the product have to be decreased. The strategic choices and the process activities will be compared to the e-sourcing opportunities to see the possibilities to reduce costs.
Figure 5.: Average sourcing cycle (Aberdeen Group, 2001)
Searching for/identifying appropriate suppliers 52 %
managing/communicating preffered supplier list
5%
RFQ development 8%
RFQ response/receipt 5%
Screening/sorting proposals 20%
contract negotiation 10%
average sourcing cycle= 3.3 months to 4.2 months
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3. E-purchasing
A description of e-purchasing is given to show the connection between e-purchasing and e-sourcing and the advantages of the Internet in order to show why e-purchasing is used.
In paragraph 3.1 the changing market conditions are given in order to show the conditions in which E-purchasing is used more often. The possible savings will be shown in paragraph 3.2 and finally the context of e-sourcing is given to show the focus of the research.
Literature gives many definitions of e-purchasing.
• Purchasing with use of Internet technology (Harink, 1999)
• To conduct the processes of supply chain electronically, whereby ‘electronically’
means using for example EDI, Internet and the possibilities of intra- or extranets (Pettinga, P.J. & Hilgers, G.E., 1998).
In this thesis E-purchasing is defined as purchasing with the use of Internet technology. This is done to keep a broad perspective in the way of purchasing and the choice of Internet technology, where the Internet protocols form the basics for the communication within E-purchasing. The advantages of the Internet are (www.webminister.com, 2001):
1. Communication world wide at low cost 24/7.
2. Availability of an incredible amount of market information.
3. Communication is fast and efficient.
4. Used as ‘translator’ to communicate with other companies.
3.1 Market developments
More and more companies decide to implement E-purchasing nowadays. The main reasons are the developments in the increasing competitive market.
• Increased competition: to be competitive many companies implement e- purchasing to lower costs, to streamline the supply chain and increase service.
• Mass customisation: to deliver customised products in time can only be guaranteed if the production process and therefore the purchasing process is streamlined.
• Shorter time to market: To comply with the demands of the customer the companies have to speed up their delivery of (new) products. Therefore the purchasing process has to be streamlined in order to deliver the needs in time.
3.2 Savings
The savings that can be achieved on E-purchasing are realised on transactional costs and savings on goods and services.
Transactional costs:
The Internet offers purchasers of a company the opportunity to do a market research, to gather market information and localise new suppliers to compare them on a simple and cost effective way. The time of response on offers will be shorter and the ordering and the administration can be automated.
Savings on goods and services:
Sourcing tools can be deployed more efficiently. More transparency and dynamic pricing are used to receive savings.
E-purchasing Summary
The use of Internet gives the following advantages:
- Fast and low cost communication at al time.
As result of the developments in the competitor markets the focus is on:
- Cost reduction * Transactional
* Savings on goods and services - Streamlining supply chain and increasing service.
When the advantages of the Internet are combined with purchasing, the e-purchasing can be used effectively to reduce costs and to improve the information sharing to streamline the supply chain.
E-sourcing is the first part of E-purchasing, like the traditional process and this will be the focus of this research. Next to e-sourcing there is E-procurement, this is the operational part. E-sourcing will be tackled in the following chapter.
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4. E-sourcing
This chapter is about e-sourcing, the first part of e-purchasing. A description of e- sourcing is given to explain ‘electronic’ sourcing, in order to make the link with
‘traditional’ sourcing and to compare the two and see the similarities and differences.
E-sourcing is described to give an overview of the opportunities to reduce cost and to show the possibilities on the e-markets.
In paragraph 4.1 the e-market will be explained in order to give insight in the market situation of the e-sourcing. In paragraph 4.2 the strategy of e-sourcing will show the factors that affect the strategic choices and the focus of the sourcing. In paragraph 4.2 the activities of the e-sourcing process are described in order to show the similarities and differences in the process. The use of tools that can facilitate the sourcing are given in paragraph 4.4.
E-sourcing involves the use of Internet technology, plus specialised methodologies and expertise to make the discovery, qualification and selection of business-to- business suppliers more efficient and competitive (Hutchinson, 2001). The result should be better and faster decisions about suppliers as well as lower overall costs for buyers.
4.1 E-sourcing marketplaces
Because the e-sourcing market situation is not the same as the ‘traditional’ sourcing market, a description will be given of the e-market. The strategic choices on e-markets are based on several factors that will be shown.
The e-market consists of e-marketplaces. An e-marketplace is a specific telematics- supported market platform for the co-ordination of the exchange processes between the market participants (Schmid & Lindemann, 1998). The choice of e-marketplace is based on the characteristics of the marketplace and the strategic focus. These characteristics are important to choose the best-suited marketplace for the product to be sourced. The choices depend on connectivity (Jeff Brooks and Roger Dik, 2001) and industry. The connectivity is important to the relation with the suppliers. The type of industry relates to the available products on the marketplaces as well as the expertise of the product. Another issue to look at is the viability of the marketplaces, because a lot of marketplaces cannot survive the economic pressure, or will merge.
The right decision has to be made to join a viable marketplace.
4.1.1 Connectivity:
Connectivity is the unbiased transport of packets between two end points (Bob Frankston, 2001). The connectivity is the way to approach the suppliers and implies different relations with the suppliers. There are three types of connectivity:
Private Exchange. This is a one-to-many connection between a company and its trading partners. Private exchanges typically offer a customisable interface and can support deep collaboration. They provide access to the company’s qualified supplier base or known customers, but do not enable companies to look beyond the trading partners they already know. Private exchanges can be sell or buy orientated. The costs are often high, because of the development of specific needs for purchasing.
Industry E-Markets. This is a some-to-many connection among industry members and their trading partners. Industry e-Markets might offer almost as much collaborative capabilities as private exchanges, but at the expense of standardising processes across
E-Sourcing members. Industry e-Markets give individual members access to each other’s trading partners. In addition, they might allow other companies to join the e-Market, which spreads costs and broadens access.
Independent E-Markets. This is a many-to-many connection among buyers and sellers. Independent e-Markets have the widest variety of participants, which maximises access but makes deep collaboration difficult. The costs are often based on a percentage of the transaction volume and are therefore interesting, because no investments for development are needed.
The choice of market type is based on the e-sourcing strategy, which is derived from the sourcing strategy. The purchase situation and the products’ place in the purchasing portfolio mainly determine the sourcing strategy. The place in the portfolio shows the focus in which the product should be sourced. The focus is on the preferred relation with the supplier and the costs to develop and use the marketplace.
4.1.2 Industry
The type of industry relates to the products that can be purchased and the expertise of the products. The importance of the selection of industry is to recognise the potential to purchase a large variety of standardised products or to purchase a specialised range of products.
The marketplaces can be subdivided in vertical and horizontal markets. The vertical marketplaces offer products of a specialised industry, like plastics or metals, and are used mainly for direct goods. The horizontal marketplaces offer commodities and standard products of all kinds of industries.
The choice of industry is based on the e-sourcing strategy, which is derived from the sourcing strategy. The purchase situation and the place of the product in the purchasing portfolio mainly determine the sourcing strategy. The focus of choosing the industry type is on the specification/knowledge of the products and the preferred amount of suppliers.
4.1.3 Viability
Next to the choices on marketplace the viability is important, because of the economic downturn many marketplaces merge or even disappear. To overcome these problems the factors are looked at that make a marketplace more viable. According to Jupiter’s report a marketplace is more viable with the following features:
• A high volume of transactions: Internet marketplaces without a high volume of business today are "unlikely to survive."
• Industry support: Those e-marketplaces that survive will have the backing of industry leaders, who will provide "trustworthiness, financial support and a commitment to placing orders" (Jupiter Media Matrix, 2001)
When these factors are put in a matrix (figure 6) the following results can be mentioned. The private vertical market is applicable in order to streamline development and will only be used when it adds value. The private horizontal market is not very viable yet. Because of the high development costs and the many substitutes available this will not yet be the best way to start e-sourcing. The consortium markets have both big potentials, because they combine the transaction volume with the support of the industry and are likely to be best viable. The Independent vertical market lacks industry support. These marketplaces will not have the knowledge of products nor will they have the networks of suppliers and buyers, which generates the
E-Sourcing
- 21 -
horizontal market on the other hand will be a potentially good market, because of the low entrance barriers and the standardised products.
In practice the term independent is often mentioned. This is often the legal form in order to comply with the competitive legislation. In fact these marketplaces can be Consortium or Independent, depending the direct source of their income. For example the marketplace Chemconnect is legally an ‘independent’ marketplace, but the investments are done by more than 20 plastic suppliers. This marketplace is in fact a
‘consortium’.
The market on which the transactions take place in e-sourcing are different from the
‘traditional’ market. E-markets have to be approached in another way. The different ways to approach the market are determined by the factors of connectivity and industry. In the next chapter the strategic choices on the possible approaches will be worked out.
4.2 E-sourcing strategy
The e-sourcing strategy is described to show how e-sourcing can contribute to the sourcing strategy, and whether the activities of sourcing can be done more efficient with the use of e-sourcing.
The strategic decisions on ‘traditional’ sourcing will also apply to e-sourcing. The choices will be made based on the focus of the strategy. The decisions in this research are aimed on the direct goods.
The choices of e-sourcing relate to the product and the way to source it. The strategic choices on the product are described with the Kraljic portfolio. In the Kraljic portfolio the activity focus will be shown per quadrant (see figure 7). This gives an overview of which markets there are to approach. The leverage and routine quadrant are the two quadrants with the most potential to reduce sourcing cycle time and to lower total costs. The Independent and Consortium markets are best suited because of the standardised products and the presence of more suppliers. For bottleneck goods the
Vertical Horizontal
+ high collaboration
− low transaction volume
− high development cost
− only few supporter
+ process efficiency
− high development costs
− only one supporter
− own supply base
+ high transaction volume + divided development costs + high product knowledge + high turnover
+ more competition
− Limited functionality
+ high transaction volume + divided development costs + high turnover
+ more competition
− limited product specifications + no development costs
+ high turnover + more competition
− low transaction volume
− no support of industry
+ no development costs + high transaction volume + high turnover
+ more competition
− no support of industry Private
Consortium
Independent
+ Positive characteristics - Negative characteristics Figure 6.: Connectivity/ industry matrix
E-Sourcing chances on cost reduction are less applicable, but identifying new possible suppliers in the market can be done in order to create more competitiveness. The use of a Consortium vertical market is the solution for highly specified products and a considerable amount of suppliers. For strategic products the chances for cost reductions are very low, because the emphasis is on the relationship with the supplier.
The Internet can however support collaboration to shorten communication on a Private vertical market.
The strategic decisions on sourcing are determined by the specifications of the product and the financial impact. In this way the focus is determined and can be used to contribute to a cost reducing way of sourcing. The method of e-sourcing depends on the use of the available tools on e-marketplaces. These tools will be described in section 4.4.
4.3 E-sourcing tools
The tools used for e-sourcing are available on the electronic marketplaces. To see the opportunities and the way the opportunities can be used to reduce costs in the sourcing process a summary of e-sourcing tools is given. In this summary all possible opportunities are given to show why they can be used and in which situation they can be used. A description will be given of the tools with the advantages and disadvantages, followed by an overview of when to use the tools based on the purchasing portfolio
These tools are meant to support the sourcing process and to do this more efficiently.
The tools can also be used to provide a better way to source based on the product focus of the (e)-sourcing strategy.
e-market information: This is a source of information on the industry and can be obtained with a search engine or newsgroup on an e-marketplace. The costs of this tool are very low, but it requires some skill and practice to know what to look for and how to get the right information.
Leverage
• Use competitive advantage to reduce total costs
• Use enterprise-wide sourcing volumes as a negotiation tool
Independent/ Consortium horizontal market
Strategic
• Ensure long term availability of supply
• Focus on relationship building and process integration with supplier
Private vertical market
Routine
• Simplify and streamline acquisition process to achieve efficiencies/ cost reduction
• Reduce number of suppliers and simplify sourcing process
Independent/ Consortium horizontal market
Bottleneck
• Reduce/ eliminate company’s risk and exposure to price increase/supply disruption
• Secure existing sources of supply and search for possible substitutes
Consortium vertical market
B U S I N E S S
I M
P A C T
COMPLEXITY OF SUPPLY MARKET
Figure 7: E-sourcing opportun ities in purchasing portfolio (CGEY,2001)
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- 23 -
e-RFI: The electronic Request For Information tool allows buyers and suppliers to exchange information and co-ordinate product specifications in real-time. It facilitates the supplier qualification process and enhances product design. To obtain additional information this is a fast and low cost solution. The standardised output makes it easy to compare the suppliers.
e-RFP: The electronic Request For Proposal is a process in which one can survey vendors to solicit competitive bids on products and services. A RFP should include information about the organisation and project as well as questions that explicate differences among competing companies. A RFP should also solicit cost quotes that allow determining both initial and ongoing costs of the product or service. Many organisations use an automated RFP tool, which creates a uniform response method and can automatically analyse vendors' proposals. The response is fast and a comparison can be made easily.
e-RFQ: The electronic Request For Quotation is a communication tool to formalise, improve efficiency and speed up the RFQ process with suppliers. A RFQ template simplifies the process of creating a RFQ with item specifications or converting a RFI into a RFQ for posting. A completed RFQ communicates product specifications, the terms and conditions of the intended purchase, and invitations to suppliers to submit their best offers. Suppliers may submit questions seeking clarification of the terms, item specification and delivery instructions, and buyers can respond electronically.
Online negotiation: This works in conjunction with RFI and RFQ tools to save time and travel costs through online communications with potential suppliers on key specifications and requirements or on price and conditions. The function enables buyers to communicate more effectively in a manner similar to instant messaging. It can be used to facilitate one-to-one or one-to-many discussions and document exchange with multiple suppliers, between a single buyer and a single supplier, or among different individuals within the buyer organisation. The proposals can be evaluated and the reward can be given to each suppliers based on his price or other capabilities.
RA: A Reverse Auction (RA) is a web-enabled dynamic pricing tool where the buyer initiates an auction for purchasing commodities and selects the suppliers with whom the auction will be conducted. Suppliers are selected in accordance with acquisition regulations and contract provisions. New suppliers interested in bidding can request authorisation and will be allowed, if the buyer approves them. Authorised suppliers will be issued specific user id and password, using which they can anonymously bid in the auction. The auction process is dynamic and set for a limited period of time based on the requirements of the buyer. After closure of the reverse auction, the lowest bid will be informed to the buyer. The reverse auction is a new strategic weapon for purchasing or benchmarking activities, to be used primarily with leverage and routine parts.
E-Collaborative development: This tool is used to put up the specifications and developments on a standardised format. In this way the specifications and the product can be seen real time and the communication can be done electronically.
The tools above are appropriate for the different types of products as shown in figure 8.
E-Sourcing
The use of tools in the routine quadrant focuses on the shortening of the sourcing cycle, especially the shortening of the negotiation. How the sourcing cycle will be affected is shown in paragraph 4.4. The tools will be used for standardised or well- defined products and will be negotiated about with the preferred suppliers. The tools used in the leverage quadrant focus on identifying new suppliers, shortening sourcing cycle and cost price reduction. The e-market information can help to identify new suppliers, which can increase the competition in the market. The negotiation tools can be used to reduce the sourcing cycle and to make use of the competition among the suppliers, which can lead to a reduction in cost price. The focus of the tools in the bottleneck quadrant is on identifying new suppliers, which are able to comply with the specifications. Next to this focus the tools can be used to reduce the time of negotiation. In the strategic quadrant the use of the collaboration tool is mentioned.
This tool allows suppliers to show the developments online and will shorten the communication between the two.
The use of tools and the approach to the e-marketplaces are depending on the strategic choices that are made within the portfolio. The focus of the strategy is the basis for the choice of tool. These choices will affect the sourcing process activities. In section 4.5 these effects will be described.
4.4 E-sourcing process
The e-sourcing activities are shown in order to see the similarities and differences between ‘traditional’ and ‘electronic’ sourcing. The e-sourcing activities will be described to get a better overview and to see where the cost reduction can be reached.
In the e-sourcing process (figure 9.) which is a combination of activities of sourcing and the use of Internet based on frameworks of the Gigagroup and Aberdeen Group.
Not all activities are affected by e-sourcing. In the specification phase the spend analysis and the identification of requirements need internal information sources.
These are not affected. The rest of the activities in this phase will be described in order to show how the Internet affects the specification phase. In the evaluation and negotiation phase all activities can be influenced by e-sourcing. For these phases the ways of e-sourcing are described. The contracting phase will not change with the use
Leverage
E-market information E-RFI
E-RFP E-RFQ
Reverse Auction
Strategic
E-collaborative development
Routine
E-RFQ
Online negotiation
Bottleneck
E-market information E-RFI
Online negotiation B
U S
I N E S S I M
P A C T
COMPLEXITY OF SUPPLY MARKET
Figure 8: E-tools in purchasing portfolio
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- 25 - 4.4.1 Specification
Buying organisations should construct a sourcing process that enables them to gain a company-wide view of expenditures and purchase trends for a category of products or services. Such analysis helps to identify opportunities for improvement in particular spending categories, including the potential to use alternative products or to aggregate purchases across divisions. In this phase the process should also support collaboration across functions and business divisions, enabling buyers to identify the precise requirements and criteria for selecting a product or service. In this phase the buyer should be assisted in representing these business requirements in a detailed RFI, RFP, or RFQ document that can be shared electronically with suppliers. For complex items, companies will need to upload and share material lists, engineering drawings, and other information that can enhance a supplier’s understanding of the buyer’s requirements.
4.4.2 Evaluation
The second phase is about market scanning and selecting suppliers. In this phase the Internet can be used to increase the knowledge on product and supply base. The activities have to support the aggregation and exchange of business intelligence on supplier capabilities, market trends, technological developments, and other factors that might impact the product or service being sourced. Gathering and processing such market intelligence requires significant industry and product category expertise;
constant tracking and assessment of the technology innovations; and monitoring of supply and demand dynamics, cost factors, and price trends.
A request for information can be sent to capture and maintain intelligence not only on product specifications but also on the detailed capabilities or attributes of individual suppliers. Such information is particular critical for companies sourcing custom products or complex business services (Aberdeen, April 2001). In this phase the market information is monitored to select possible suppliers. One part of is to select from the established supply base and the other part is to look at new suppliers if this is necessary. After a comparison between companies is made, qualified suppliers are selected and send an electronic RFP, or RFQ, and if a reverse auction takes place this will be prepared and supported.
4.4.3 Negotiation
The offers on the RFI, RFP, or RFQ are used to negotiate the contract with. The negotiation will be done in a marketplace that is designed to derive the lowest total- cost purchase decisions. Aberdeen has identified two critical components for total- cost negotiations.
Specification - Analyse spend - Identify
requirements across functions, divisions and sites
- Develop RFI/RFP/RFQ - Identify existing
Evaluation - Conduct product
category analysis - Evaluate market
dynamics - Identify existing
and new suppliers - Send RFI-RFQ
Negotiation - Conduct weighted
multi-parameter /multi-stage negotiations - Evaluate supplier
proposals based on total cost
Contracting - Review and align
negotiations in accordance with, constraints, pricing structures, and business objectives
Figure 9: e-sourcing process phases
