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Supplier classification within distinct Indirect
Procurement (IP) categories, case study from an FMCG
multinational
Willemijn Doesburg
1683780
December, 2013
University of Groningen Faculty of Economics and Business
MSc. Technology Management
Unilever
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Supplier classification within distinct Indirect Procurement (IP) categories,
case study from an FMCG multinational
Master Thesis Technology Management
Unilever Indirects Procurement Belgium, The Netherlands, France Nassaukade 5
3071 JL Rotterdam The Netherlands
University of Groningen
Faculty of Economics and Business Postbus 800 9700 AV Groningen The Netherlands Author Willemijn Doesburg Paramariboplein 67-3 1058 AR Amsterdam Willemijndoesburg@hotmail.com Supervisors
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Preface
This Master Thesis is the ultimate examination of my Master degree in Technology Management. The research-process required experience, (academic) skills and knowledge from several courses and last but not least, analytical and critical thinking.
I appreciated being part of the IP BeNeFra team of Unilever for half a year. It was very interesting to get involved in the processes of procurement and to experience the ‘real world’ of business for the first time. Based on responsibility and trust, I received many opportunities to develop (practical) procurement, academic and social skills. Looking back, the internship at Unilever was full of learning. Finally, I enjoyed the collaboration with all employees a lot. Therefore, I would like to thank all my colleagues of the IP BeNeFra team for their contribution.
I would like to thank my manager and Unilever supervisor Mr. Bob Berghuis. He introduced me to the world of procurement and supported me in writing my thesis. Moreover, he ensured the pleasant stay at Unilever by adopting me in his team and inviting me for the two working days in Brugge. Furthermore, I would like to thank Mr. Henk de Vries, my primary supervisor. He supported me with dedication during my stay at Unilever and helped me in providing insights in several processes. His commitment and accessibility was very valuable during this research.
Finally, I would like to thank Mr. Bokhorst for his feedback and help, which was enlightening and useful.
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(Management) Summary
This descriptive research explores a systematic vendor classification method for Indirects Procurement (procurement of non-product related items and services such as marketing-items). Researchers describe the trend in purchasing to develop cooperative relationships with suppliers (partnerships) implying several benefits and to sort suppliers into categories based on performances (Araz & Ozkarahan, 2007). In general, classification is an instrument to define appropriate relationships for the investigated suppliers. Moreover, it assists management in selecting suppliers for strategic partnership (Talluri & Narashimhan, 2004). Several classification methods have already been identified for Product-related procurement. Therefore, it was interesting to conduct this research for (less investigated) Indirects Procurement characterized by diverse purchasing activities. Research showed there is no appropriate vendor classification method for IP available yet. Therefore, a concept classification methodology had been composed based on Product-related Procurement academic literature. This method (Concept Solution Design) consists of 6 steps:
1). Collect evaluation criteria, 2). Define metrics and calculate weights, 3). Define importance of criteria from business perspective, 4). Choose supplier evaluation techniques, 5). Calculate supplier end-grade, 6). Supplier classification in four groups.
In order to provide description and understand underlying principles, a Case Study had been performed during an internship at Unilever Indirects Procurement BeNeFra to test and extensively evaluate the proposed method towards classification. Hereby, Unilever management wonders how the evaluation and classification process of their preferred suppliers needs to be accomplished. The steps of the classification design had been executed and tested according a participative driven test methodology whereby several procurement officers of Unilever were involved.
Case Study findings emphasized a systematic, comprehensive and holistic method to gather evaluation criteria, metrics and weights. The described steps include a top-down approach: starting from business perspective, composing general criteria sets towards finally specifying detailed metrics and weights. Hereby, the evaluation of supplier performance and -capabilities should be accomplished in two distinct trajectories.
The House of Quality is proven to be an appropriate method to identify the importance of evaluation criteria, because it drives participants to think about their added value to the business in total. Given the subjective driven evaluation, the Linear Weighted Method and Maturity grid are suggested as evaluation techniques for respectively supplier performance and capabilities. The maturity matrix describes the supplier professionalism along the capabilities and is an optimal tool to formulate supplier development plans.
A Performance-Capability matrix has been suggested to map the multiple suppliers based on the two supplier end-scores. Finally, by marking the classification boundaries into the grid, the suppliers will be divided into four categories. The matrix enhances the visibility (traceability) and provides supplier development potential. In addition, suppliers could be easily compared and lastly, the matrix serves as a useful communication tool for all stakeholders.
All in all, the findings of the Case Study caused an improved classification method (Solution design). This research contributes to academic literature by suggesting a method to gather evaluation criteria and a tool to define criteria weights from business perspective. Moreover, the in-depth investigation of the whole process towards classification contributes to the less discussed IP literature. Due to the explorative research, new insights occurred and many topics for further research have been suggested. Finally, IP management will be better prepared and informed about the aspects and conditions of the evaluation and classification process to make more embedded decisions.
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Abbreviations
AHP: Analytical Hierarchy Programming CSD: Concept Solution Design
FMCG: Fast Moving Consumer Goods HoQ: House of Quality
IP: Indirects Procurement
JBDP: Joint Business Development Plan MKT: Marketing
NPR: Non product-related (procurement) P-C Matrix: Performance Capability matrix PI: Packaging and Ingredients (Procurement) PO: Purchase Order
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Table of Contents
Preface ... 3 (Management) Summary ... 4 Abbreviations ... 5 Introduction ... 8Role of Unilever IP BeNeFra in Research ... 8
Unilever ... 8
1. Problem context ... 11
1.1 Unilever management question ... 11
1.2 Motivation and Relevance of research ... 12
2. Research question ... 15
2.1 Main question ... 15
2.2 Sub questions ... 15
2.3 Research methodology ... 15
3. Analysis Unilever IP BeNeFra practices ... 19
4. Theoretical Background ... 21
4.1 Generic vendor classification method for IP ... 21
4.2 Indirects Procurement ... 23
4.3 Supplier evaluation criteria ... 24
4.4 Methods for gathering supplier evaluation criteria ... 28
4.5 Define importance of evaluation criteria ... 30
4.6 Supplier Evaluation Techniques using evaluation criteria ... 33
5. Concept Solution Design ... 39
5.1 Outline Design ... 39
5.2 Detailed Design ... 41
STEP 1: Collect evaluation criteria ... 42
STEP 2: Define metrics and calculate weights ... 45
STEP 3: Define importance of criteria from business perspective ... 46
STEP 4: Choose supplier evaluation techniques ... 46
STEP 5: Calculate supplier end-grade ... 47
STEP 6: Supplier Classification into four groups... 47
6. Test methodology ... 48
6.1 Design choice: Case study ... 48
6.2 Hypotheses ... 49
6.3 Test Methodology ... 51
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7. Results ... 58
7.1 Systematic criteria setting process: Step 1 and 2 ... 58
7.2 Define importance of criteria from business perspective: Step 3 ... 66
7.3 Supplier evaluation techniques: Step 4 ... 69
7.4 Supplier Classification process: Step 5 and 6 ... 72
8. Conclusion... 76
8.1 Generic supplier classification methods for IP ... 76
8.2 Systematic criteria setting process... 76
8.3 Importance of criteria from business perspective ... 77
8.4 Supplier evaluation techniques ... 78
8.5 Supplier Classification process... 78
8.6 Process towards supplier classification for Indirects Procurement ... 79
9. Discussion ... 80
Final Solution Design ... 81
10. Limitations and suggestions for further research ... 82
References ... 85
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Introduction
This document is a master thesis about the process and method towards vendor classification of an Indirects Procurement department. Indirects Procurement (IP) is characterized by purchasing non-product related items such as marketing materials or workplace facilities.
During this research, it seemed that no generic vendor classification method for IP was available yet. As a result, a concept method (design) towards vendor classification for IP had been composed based on well investigated Product-related (or Direct) Procurement academic literature.
This research focuses on the separate steps of the supplier evaluation whereby the multiple and diverse suppliers of IP could be classified in an appropriate way.
The proposed classification method for IP is tested and evaluated during a Case study at Unilever Indirects Procurement Belgium, the Netherlands and France (BeNeFra).
The role of the organization during this research is described next following by general information about Unilever and the Indirects Procurement BeNeFra department.
Role of Unilever IP BeNeFra in Research
Unilever IP management raised the question how to evaluate and classify suppliers in IP. This management question was the first motivation for conducting this research (explained in 1.1). As a result, Unilever has been involved in this research since the beginning. Their role during this research was twofold.
First, Unilever IP BeNeFra provided insights in the Indirects Procurement processes in practice. Challenges and shortcomings of their way of working contributed to the understanding of IP in general. In addition, Unilever provided insight in their already available aspects of supplier evaluation and classification.
This collected knowledge was useful in composing a concept vendor classification method for IP based on Direct Procurement academic research (5.1), when it seemed that no generic classification method was available yet for IP (4.1). The decisions made during the creation of this proposed classification method were driven by the observed IP practices.
Second, the concept method towards vendor classification in IP had been tested at Unilever IP BeNeFra. Experiences and opinions of stakeholders such as procurement officers contributed to an extensive evaluation of the proposed method.
Finally, based on the test results at Unilever, an improved method towards vendor classification for IP had been suggested in this research.
Unilever
Unilever is a Fast Moving Consumer Goods (FMCG) multinational delivering more than 400 brands over the world focusing on health and well-being as shown in Figure 1. With generated sales of €51 billion within a scope of 190 countries in 2012, Unilever is one of the world leading FMCG companies. Around 30 brands are marketed in Europe and nowadays emerging markets account for more than half of the business of Unilever. With around €1 billion yearly invested in Research and Development, Unilever responds to the fast changing environment with several innovations in products and services.
The brands of Unilever are divided into four categories: (Internal publication of Unilever: inside.unilever)
- Personal Care: which includes Skin, Deodorants, Oral and Hair such as Dove, Axe, Andrélon - Refreshment: which consists of Ice Cream and Beverages such as Lipton, Ben and Jerry’s, Ola - Food: including Savoury, Spreads and Dressings such as Knorr, Calve, Unox, Becel
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Figure 1: Internal publication of Unilever: Unilever brands worldwide, 2010In 1884, William Hesketh Lever introduced the Sunlight Soap. As founder of Lever Bros, he wanted to make hygiene a common good in Victorian England. The businesses that formed Unilever have always tried to improve the welfare of their workers and developed products with a positive social impact. Nowadays, this vision is translated in the Compass of Unilever (Appendix A) in which the following vision is formulated:
Double the size of the business, whilst reducing our environmental footprint and increasing our positive social impact. (Internal publicaton of Unilever: inside.unilever)
Besides business growth, the purpose is to make sustainable living commonplace. Due to the Unilever Sustainable Living Plan as guidance, Unilever has already made considerable sustainable improvements such as harvesting 36% of the raw materials of Unilever (tea, tomatoes and palmoil) in a sustainable way within two years (Trouw, April 2013).
Unilever Netherlands
As part of the corporate center, the first head office is situated in Rotterdam (Weena, Unilever N.V.), the second office is located in London (Unilever PLC). Although the board is situated in Londen, Weena head office in Rotterdam is an important strategic global hub.
Three Dutch factories are still in process for production of the following brands: Unox soups (Oss), Ben and Jerry’s ice cream (Hellendoorn) and Blue Band margarine and Calvé peanut butter (Rotterdam). Moreover, two large offices are located next to the factory of Rotterdam, ‘de Nassaukade’ and ‘de Brug’. Finally, a Research and Development center is located in Vlaardingen where many new products have been created and tested.
All in all, the Netherlands have a large stake in the global processes of Unilever.
Indirects Procurement BeNeFra
Indirects Procurement (IP) BeNeFra covers Unilever in Belgium, the Netherlands and France, and is responsible for the purchase of products and services which are not directly part of the primary products Unilever delivers. The department is divided into three main purchasing categories: Marketing, Workplace services and R&D as shown below in Figure 2.
Figure 2: Internal publication of Unilever: Indirects Procurement BeNeFra,nov2012
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is assigned to a general Procurement Project Officer and finally, Bob Berghuis is the Procurement Operations Manager of the BeNeFra Cluster (1FTE).Each year, on average 750 million Euros is spent over the three countries. The ‘active’ supplier base of the department consists of around 13.8 thousand vendors where orders have been placed. Since a few years, research has been conducted to reduce the supplier base in order to keep only ‘preferred suppliers’.
Improvement topics
The maturity grid in Appendix B shows the current position of IP BeNeLux (IP BeNeFra) and illustrates the opportunity to develop and improve along the grid. Although the IP department is operating well without many failures or problems, improvement plans have been set up by Unilever to become more efficient and professional (Table 1).
Improvement topics
1. Reduce the supplier base, only use preferred suppliers 2. Classification of suppliers
3. ‘Partner to Win’ (partnerships)
4. ‘No PO No Pay’, to avoid maverick buying 5. Standardization (by using more catalogues)
Table 1: Improvement projects of IP BeNeFra
Finally, ‘VEGA’ is an outsourcing project whereby spend < 10k has been outsourced to IBM. Spend between 10k-100k will be performed by IP BeNeFra procurement officers and spend > 100k is the responsibility of global IP. The development processes (including the improvement topics) contributing to professionalism and IP savings are given in Appendix C.
Partner to Win
The vision to double the size of the business while reducing the environmental footprint is not easy to accomplish. Unilever cannot accomplish it alone and emphasizes the need to work closely with suppliers who require a special collaboration; partnerships (Internal publication, Unilever. 2012). Unilever wants to segment their suppliers to define the kind of relationship and ideally, allocate more resources to those suppliers that can add more value to the business (Partner to Win).
Strategic suppliers score very high on their potential to help Unilever businesses through one or more of the Reasons to Believe. Those Reasons to Believe are shown below:
Figure 3: Internal publication of Unilever: Five Reasons to Believe. Partner to Win. July, 2012.
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1. Problem context
This section elaborates the management question and relevance to investigate these research questions.
1.1 Unilever management question
Working towards collaborative supplier relationships is an important goal of Unilever. Their ‘Partner to win’ project supports an intensive and long-term supplier-buyer relationship. By composing Joint Business Development Plans (JBDP) with their major suppliers, Unilever tries to capture shared expectations and preferred outcomes for both parties. The Compass (strategy) of Unilever will be taken into account by setting up long-term relationships with the vendors of Unilever.
IP BeNeFra focuses on methods to get insight in their much extended supplier base. They wonder for instance what part of their suppliers could be identified as ‘routine’ and which suppliers might be potential ‘partners’ in the future to set up ‘Partnerships’ with.
Their way of working is a two-step methodology.
First, effort has been spent to make a rough split up in ‘preferred’ and ‘non-preferred’ suppliers. Criteria for the ‘preferred’ status are: having a contract, using catalogues or subjectively determined by the involved purchase officer.
Second, as an ultimate goal Unilever IP BeNeFra wants to classify their ‘preferred’ suppliers according to four predefined categories: Routine, Silver (collaborative), Gold and Platinum (both strategic). This way of classification is already applied to Packaging and Ingredients (PI) procurement or product-related procurement and has shown considerable advantages in supplier selection since the implementation.
However, the broad ranging purchasing goods of IP make it complex to adopt a general procedure for supplier classification.
In spite of the fact that the classification phase is currently a bridge too far, Unilever IP BeNeFra wonders:
H
ow the evaluation and classification process of their preferred suppliers needs to be
accomplished in the future and which evaluation criteria have to be involved in this process.
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1.2 Motivation and Relevance of research
This chapter provides the motivation and relevance of the proposed research. First, the purchasing function and the trend of long-term supplier collaboration will be described. Second, conditions for such long-term relationships are mentioned such as a reduced and segmented supplier base. Finally, shortcomings of the ‘classification’ process are discussed as motivation for this research.
1.2.1 Procurement trend: working towards long-term supplier collaboration
In recent years, the purchasing function has received increasing attention in the scientific research field. Multiple savings opportunities have been considered in favor of the company, due to the risen purchasing volumes as percentage of the firm’s total turnover (Schiele, 2007). For instance, Telgen (1994) mentions in his book that purchasing share in total turnover ranges between 50-90% in industrial companies.
Many researchers such as McCutcheon and Stuart (2000)described the major trend in purchasing of consolidating the supplier base and developing cooperative relationships with suppliers. Webster (1992) pointed to a ‘clear evolution’ away from arm’s–length transactions towards partnerships, alliances and networks.
There is an emphasis on strategic sourcing that establishes long-term mutually beneficial relationship with fewer but better suppliers (Vokurka, Choobineh, & Vadi, 1996). It was perceived as one of the key issues of strategic alignment between purchasing strategy and corporate strategy in the research of Crichton et al. (2003).
Many researcher and managers highlight the importance and benefits of close alliance relationships with key suppliers (Schiele, 2007). Dyer (1997) emphasized the gained effectiveness reflected by several prominent reports. Research showed that partnerships support the creation of competitive advantage for both the buyer and the supplier side. It may result in increased market share and profitability (Frohlich & Westbrook, 2001). McCutcheon & Stuart (2000) distinguish the following potential benefits:
- Transaction costs savings
- Better access to technologies, important to the buyer’s product or service success - More permeable inter-firm boundaries for easy technology transfer.
- Providing services beyond the requested goods such as assisting in R&D and providing training in areas of expertise.
Moreover, Tang et al. (2006) emphasize that collaborative relationship like partnering can lead to improved risk management and total quality management.
1.2.2 Conditions: Reduced supplier base and supplier classification
To establish long term relationships, managers need to get insight in the often large supplier base of a firm to choose potential ‘partners’. As Khorramshahgol (2012) showed in her model, several ‘sorting’ steps need to be taken to effectively allocate resources.
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Sakar & Mohapatra (2006) mention the prerequisite of having a small number of suppliers to eventually develop a strong buyer-supplier relationship.Van Weele (2009) discusses is his book the first movement of a supplier to a more collaborative relationship: become a preferred supplier of the buyer. Commonly, companies work with such a preferred supplier base to make a first separation in the extended supplier base because of the supplier development costs and effort spent on future intensive collaborations/partnerships (Sarkar & Mohapatra, 2006).
De Boer et al. (2001) distinguish pre-qualification and supplier selection. Pre-qualification is reducing the set of ‘all’ suppliers to a smaller set of acceptable suppliers, which is rather sorting than ranking. Selection is defined by Ertay et al (2011) as a process that involves wide evaluation of vendors utilizing a group of criteria and measures.
1.2.3 Supplier Classification
Ertay et al. (2011) argue that companies should evaluate firms and classify them in previously determined categories because of the dynamic and continuous characteristics of relationship management. Classification is used to define appropriate relationships for the investigated suppliers and assists management in selecting suppliers for strategic partnership (Talluri & Narashimhan, 2004). Management will gain better insight in their (extended) supplier base due to classifying the numerous suppliers in ordinal categories. Because it is infeasible (time consuming and expensive) to invest in all suppliers, classification enables management to invest in the best performing and most promising suppliers for their business. In addition, insufficient performing suppliers could be eliminated. All in all, this sorting process improves flexible and efficient purchasing decisions.
Ertay et al. (2011) classify the suppliers based on performance criteria and cluster them into four kinds of preferred relationships: Strategic partnership, Business integration, Arm’s length relationship and Trimming suppliers. Choy et al. (2005) describe the trend of sorting the suppliers into two or more categories such as ‘‘competitive or collaborative’’.
1.2.4 Formulation of evaluation criteria, shortcomings
The classification process contains the ‘formulation of criteria’ phase as basis for the supplier evaluation. De Boer et al. (2001) mention several methods in which the formulation of criteria and qualification are main steps. Interestingly, they conclude in their research that:
The process of generating criteria as well as evaluating the relevance of existing decision criteria in supplier selection have not gained much attention in the purchasing literature (De Boer, Labro, & Morlacchi, 2001).
The ‘criteria and weights defining stage’ contains often subjective and arbitrary decisions (Talluri & Narashimhan, 2004). Furthermore, the firm’s requirements will determine the level of detail used for exploring possible suppliers (De Boer, Labro, & Morlacchi, 2001). Recent study of Khorramshahgol (2012) to supplier evaluation, considers criteria setting for supplier evaluation as a management team task generating criteria through a brainstorming session.
Defining appropriate criteria and weights is a vague process with numerous potential criteria to choose from. Huang & Keskar (2007) offer for instance seven main criteria and 101 sub-criteria. Commonly, companies regarded supplier evaluation as picking the least invoice cost supplier, disregarding additional vital resources of secondary supplier costs like those associated with late delivery times, production breaks and poor quality of delivered goods (Roodhooft and Konings 1996). Furthermore, Wilson (1994) refers to studies conducted in 1974, 1982 and 1993 which indicate a shift in the relative importance of selection criteria used by industrial buying teams.
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development resulting in changing values and norms. For instance nowadays ‘sustainability’ might be a relevant evaluation criterion for several companies while this was not the case a few decades ago.Given the shortcomings such as the subjective, arbitrary nature of the process and changing criteria, it might be valuable to explore the ‘selection process’ and ‘importance of criteria for some predefined purchasing categories.
1.2.5 Indirect Procurement
Non-product related goods or ‘Indirects Procurement’ goods contain a large variety of products/services. De Boer et al. (2003) define Non-Product-Related purchases as all goods and services other than those used in an organization’s primary operations, like raw materials, production items, and engineering, assembly or production activities subcontracted to outside suppliers (deBoer, Holmen, & Pop-Sitar, 2003). Indirect spend has been less discussed in the academic literature than direct revenue-generating expenditure (Cox, Chicksand, Ireland, & Davies, 2005).
It might be interesting to conduct this research for Indirects Procurement given its diverse/complex characteristic compared to Direct- or Product Related (PR) Procurement. Focusing the method towards classification in a purchase department including several product/service groups might result in interesting potential differences and will deliver new insights into the procurement literature.
1.2.6 Management implications
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2. Research question
Based on the management question raised by Unilever and the contribution to academic Procurement research, the following main research question and three sub questions are formulated:
2.1 Main question
The main research question is defined as follows:
How to classify the suppliers of a broad ranging NPR/Indirects Procurement department?
2.2 Sub questions
Five sub questions have been formulated:
1. What generic vendor classification methods are appropriate for Indirects Procurement? For further in-depth research in the different phases of the method towards classification, the following questions have been formulated.
2. How to gather relevant criteria and weights for the diverse purchasing groups? Working towards a systematic criteria setting process.
3. How to define the importance of criteria from business perspective?
4. What techniques are adequate to evaluate suppliers based on the formulated criteria? 5. How to apply the classification process in practice?
2.3 Research methodology
This subchapter elaborates the kind of research and thesis structure.
Descriptive research
Descriptive research results will typically identify components, patterns, systems and structures (Karlsson, 2009). Referring to van Aken et al. (2007), descriptive research is characterized as an iterative process whereby no strictly sequential order is required. Flexibility in process steps such as adapting the problem definition phase is therefore acceptable.
This research will identify, explore and test a method towards classification for IP. In addition, no strict sequential order in the classification methodology is required. This research will extensively describe the experiences in reality with the method towards supplier classification during a Case Study. This research could therefore be identified as descriptive research.
It is difficult to make clear recommendations for general application of the ‘Method/Design’ based on ‘one’ case study. This will be enforced by the subjective nature of the methodology (including personal/departmental choices and trade-offs during testing the process towards classification). This research is therefore no evidence or guarantee for an adequate method towards supplier classification for IP in general.
The outcomes of this explorative research rather should be perceived as a ‘well established review’ of a method towards supplier classification for IP. Furthermore, it might provide recommendations for improvement and topics for discussion in other sectors, companies or purchase departments. As Karlsson (2009) stated, this descriptive research might provide a foundation for further analytical research.
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In this research, the method towards supplier classification will be explored and tested during a Case study. Potential ‘rules’ or recommendations for an improved method, will be formulated based on the direct results of the Case Study.Besides the descriptive nature, this research is a kind of action research whereby knowledge production is based on the Case Study, rather than the object or organization knowledge (van Aken, Berends, & van der Bij, 2007).
Business Problem Solving project
Van Aken et al. (2007) introduced the Business Problem Solving (BPS) project and associated methodology. BPS projects are undertaken to improve the performance of a certain business system or organizational unit (van Aken, Berends, & van der Bij, 2007).
While testing the method towards vendor classification at Unilever IP BeNeFra, results and recommendations will contribute to the (future) performance of Unilever’s business system. IP BeNeFra will be better prepared and aware of the steps towards supplier classification in the future. As described in the Relevance section, testing the classification method also contributes to academic research in Procurement in several ways.
Business Problem Solving projects could be design or development oriented (van Aken, Berends, & van der Bij, 2007). This research will be a combination.
First, the research will identify appropriate methods for vendor classification based on academic literature. If necessary, a (combined or new) classification method will be designed.
Second, the research simultaneously provides opportunities for up-scaling and improving (developing) the classification method based on insights and results of the Case Study at Unilever.
Research Concept: Regulative cycle (van Strien, 2007):
The regulative cycle of van Strien (2007) is applicable for BPS projects whereby performance improvement (action) is the ultimate goal (van Aken, Berends, & van der Bij, 2007). The cycle consists of three main parts:
1: Design part 2: Change part 3: Learning part
The regulative cycle is further divided into five phases: Problem definition, Analysis and diagnosis, Plan of action (Solution Design), Intervention and Learning and Evaluation as shown in Figure 6.
Figure 6: Regulative cycle, van Strien (2007). Van Aken et al. (2007)
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The parts and phases according van Strien (2007) and van Aken et al. (2007) will be investigated in the following research chapters. An elaboration is given below.Part Phase in cycle Chapter in research
Design part 1.Problem
definition
Chapter 1: Problem context Chapter 2: Research Question 2.Analysis and
literature review
Chapter 3: Analysis Unilever IP BeNeFra practices Chapter 4: Theoretical Background
3.Plan of action (Solution Design)
Chapter 5: Concept Solution Design Chapter 6: Test Methodology
Change part 4.Intervention Chapter 7: Results (of Case study)
Learning part 5.Learning and
Evaluation
Chapter 8: Conclusion Chapter 9: Discussion
Chapter 10: Limitations and suggestions for further research Table 2: Research structure
The cycle starts with the ‘Problem definition’. Based on the Management Question and the Relevance/contribution to Procurement literature (Chapter 1), the (sub) research questions and research methodology will be formulated in Chapter 2. One should be aware that the problem definition, ‘problem’ or goal defined by the management, should be respected however should be put in context (van Aken, Berends, & van der Bij, 2007). The problem could be a target problem. In addition, underlying problems might be the cause of the Management Problem. During this research these insights will be taken into account.
The second phase is the ‘Analysis and literature review’ of respectively the practices at Unilever IP BeNeFra and evaluation/classification opportunities.
To gain insight into IP processes in practice, a short analysis of Unilever IP BeNeFra will be provided in chapter 3.
Chapter 4 provides a wide-ranging literature review in vendor evaluation and classification methods. This review showed the absence of appropriate generic classification methods for IP. Therefore, aspects of supplier evaluation and classification for (the well-investigated) Product-related procurement are elaborated. This serves as a foundation for a new concept method (‘Concept Solution Design’) towards vendor classification for Indirects Procurement.
Third, the ‘Plan of action’ phase or ‘Solution Design’ includes the composition of this Concept Solution Design (CSD). In other words the proposed method towards Classification for IP based on Product-related procurement literature. The CSD is further divided into the proposed ‘Outline’ and ‘Detailed’ Design.
The second part of phase 3 consists of the Test Methodology. The design choice and methodology to test the CSD during a Case Study are described in Chapter 6.
While exploring the CSD at Unilever, the results of this ‘Intervention’ will be formulated along the stated hypotheses in Chapter 7.
Finally, the ‘Evaluation’ phase includes the evaluation of the Concept Solution Design. The research questions will be answered in the Conclusion. In the Discussion, the (final) Solution Design, an improved method towards vendor classification for IP, will be elaborated.
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Interrelatedness
The interrelatedness of the separate chapters is spatially displayed in Figure 7. The research starts with a comprehensive ‘Literature review’. Because of the absence of generic vendor classification methods for IP, a ’Concept Solution Design’ had been created based on this literature review.
According the ‘Test methodology’, the CSD will be explored and tested during the ‘Case Study’ at Unilever IP BeNeFra. The CSD will be ‘Evaluated’ based on the findings of the Case Study translated in answering the Research questions in the ‘Conclusion’. Potential adjustments/improvements of the Concept Solution Design will be justified in the ‘Discussion’, working towards the Final Solution Design. ‘Suggestions’ for further (analytical) research will close the loop of this research structure.
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3. Analysis Unilever IP BeNeFra practices
Knowledge about the IP processes at Unilever BeNeFra is useful for a good understanding of IP in practice. This knowledge contributes to the selection of appropriate supplier evaluation and classification methods from literature. In addition, already available aspects of supplier evaluation and classification at Unilever will be taken into account in order to make well-established decisions.
Indirects Procurement process
Van Weele (1994) introduced a general Purchasing model that describes the activities of the procurement department (Figure 8). Currently, purchase activities of the procurement officers of Unilever Indirects procurement BeNeFra include all steps excluding the first one. The specifications are mainly determined by the requesters from the business such as Marketing officers.
Figure 8: Purchasing model, van Weele (1994)
The formal purchasing procedure of Unilever IP BeNeFra is as follows:
First, the requesters of the business (such as marketers) specify the need by placing a Purchase Request (PR) in Ariba, the order software. Portfolio holders receive the request, control the request, search for a (preferred) supplier, contract a supplier and finally place the order. Currently, there is a trend towards decentralization; the requester has to compose the PR by his/her own and will choose a preferred supplier from an already composed supplier list. The tasks of the procurement department are therefore more in the direction of checking already composed orders and approve them.
After composing (approving) the Purchase Order and sending it to the vendor, the supplier will deliver the requested goods/service. The requester composes a ‘good receipt’ after receiving the products/services.
The invoice is sent to Vlaardingen (Finance department) and Poland where after the Accounts Payable VMD team in Bangalore process the data and conduct a ‘three way match’ between the ‘goods receipt’ the ‘PO’ and the ‘invoice’. Once approved, the data will be stored in SAP. An overview of the purchasing process is provided in Appendix D.
Product clustering
The broad ranging purchasing goods of IP BeNeFa are clustered into team-family-class and commodity (high to low scale), Figure 9. Each portfolio holder (purchase officer) is responsible for a number of classes. This results in task specialization due to specific experience and knowledge. Furthermore, this product clustering is useful for identifying and specifying detailed spend and savings patterns.
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For a better understanding of the clustering method, the personalized Lipton Ice Tea glass of Marketing (Team) is for instance part of the following divisions:- Family: Marketing Promotional and Sales Services - Class: Promotional Merchandise
- Commodity: Promotional merchandise – glass (Figure 9).
All purchasing goods and services could be classified according this segmentation.
An overview of this clustering mechanism for Marketing and Workplace including an example of the class: Promotional Merchandise is given in Appendix E.
SWOT analysis
As described in the introduction, Unilever IP BeNeFra is in moderate stages of the procurement maturity grid. The department is operating well and considerable knowledge is available due to experienced and skilled procurement officers.
Nevertheless, there are several development opportunities such as working towards long-term collaborations and tools for standardization. Furthermore, effort could be spend on eliminating the weaknesses: update and provide correct data, better alignment with requesters etc.
A SWOT analysis is given in Figure 10 representing the formulated strengths, weaknesses, threats and challenges.
Data warehousing
Historical order data of suppliers such as the number of orders or generated spend, could be extracted from the ordering system SAP or via the IP Analytics tool. However, there is no use of customer relation management methods which might be useful in monitoring supplier performance. Consequently, supplier performance data is rarely documented as formulated as weakness (Fig 10).
Supplier evaluation
In general, supplier evaluation only takes place when a contract has ended or the supplier did not perform according the agreements, because of limited time available for accomplishing all procurement tasks. Besides the opinion of responsible procurement officers, requesters will express their experience with the evaluated supplier. However, no standard evaluation formats exists. Unilever ensures product quality and vendor credibility by requiring a ‘USQS’ qualification of their vendors. Moreover, responsible trading aligned with the Unilever Business Principles is captured in the ‘Unilever Business Code’ that needs to be signed by the vendor.
Nevertheless, the opinion and experience of procurement officers (and requesters) are currently leading in the supplier selection and evaluation.
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4. Theoretical Background
This chapter contains a literature review of supplier evaluation and classification methods. In the first section, generic vendor classification methods are discussed. Specific aspects of supplier evaluation and classification are further elaborated in following sections.
4.1 Generic vendor classification method for IP
This chapter provides answer to the first research question: What generic vendor classification methods are appropriate for Indirects Procurement?
Some generic supplier classification methods from academic literature are elaborated below.
Ertay et al. (2011): Accurate supplier evaluation/classification based on several methods
Ertay et al. (2011) classified suppliers based on their performance and clustered them into four kinds of relationships: Strategic partnership, Business integration, Arm’s length relationship and Trimming suppliers. Their method is as follows:
First evaluation criteria were determined in order to evaluate suppliers’ performance (Ertay et al., 2011). Second, Fuzzy Analytical Hierarchy Process (elaborated in section 4.6) is used to weight the established evaluation criteria. Third, Ertay et al. propose the use of a software package to evaluate, rank and classify performance of suppliers regarding the relative criteria (Ertay et al., 2011). The method is tested at domestic suppliers who deliver raw materials, important for production. Their method provides accurate supplier evaluation because of the construction of several methods and can deal with imperfect knowledge (Ertay, Kahveci, & Tabanlı, 2011).
Strategic sourcing framework of Talluri and Narasimhan (2004)
The Strategic sourcing framework of Talluri and Narasimhan (2004) helps managers selecting suppliers for long term collaborations. In their research, the supply base will be evaluated based on both Performance metrics (output of the supplier) and Capabilities (identified as inputs). Consequently, both a short term (performance) and long term strategic (capability) evaluation take place.
An efficiency evaluation is performed including the ratio of output and input evaluation criteria. Therefore, the methodology utilizes a combination of traditional and advanced Data Envelopment Analysis (DEA): a multi-factor analysis tool that measures the relative efficiencies of a set of decision-making units (Talluri & Narasimhan, 2004). In the ratio DEA model of Charnes et al. (referred as CRR), each test supplier k selects optimal weights for capabilities (inputs) and performance metrics (outputs) in achieving the highest possible efficiency score subject to the restrictions that these weights prevent the set of suppliers s from achieving an efficiency score >1 (Talluri & Narasimhan, 2004). The CRR model is expressed as follows:
Here, one maximizes the efficiency measure (Ek) of supplier (k), using the weights (v) and (u) for the respectively Output (Oy): y and Input (Ix): x. Subject to an efficiency score below/equal as 1 and weights larger than/equal to zero.
In addition, Cross-efficiency models are used to overcome the weight flexibility problem of the CRR model (Talluri & Narasimhan, 2004). Compared to the CRR model, Cross-efficiency models compute the efficiency of each supplier with respect to the optimal weights of other suppliers for a more comprehensive peer evaluation (Talluri & Narasimhan, 2004). As a result, it allows an effective differentiation between good overall performers and niche performers.
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Sakar & Mohapatra (2006): Supply base reduction
Sakar & Mohapatra (2006) propose a ‘supply base reduction’ method without the use of software driven classification ‘systems’.
First, they ranked suppliers separately for their performance and capability using the fuzzy set approach. Consequently, the (n) suppliers were arranged according to their capability and performance ranks in an (n x n) matrix. Suppliers were classified as balanced (equal ranks for both performance and capabilities), motivated (capability rank exceeds performance rank) or demotivated (performance rank exceeds capability rank). Finally, the most balanced and motivated suppliers were selected resulting in a reduced supplier base.
Sarkar & Mohapatra (2006) conclude that the capability-performance matrix increases the visibility about each supplier’s strengths and weaknesses and facilitates a more rational judgment. In addition, tracing the causes for a supplier being ‘motivated’ or ‘de-motivated’ can reveal important information with respect to ‘consistency’ in the supplier performance (Sarkar & Mohapatra, 2006). Finally, the matrix helps easy ranking of the suppliers with whom a sustainable long-term commitment can be made (Sarkar & Mohapatra, 2006).
In their study, they recommend further research on ‘how to develop a mechanism for continuously evaluating supplier performance’ and ‘how to include and adapt the dynamics of supplier-development potential into their proposed matrix’.
Chan (2003): Classification of Buyer-Supplier relationships
In his research, Chan (2003) classifies buyer-supplier relationships based on different combinations of four parameters: Product (PD), Process (PC), Human resources (HR) and Technology (T).
Depending on the Buyer-Supplier interactions, different evaluation criteria structures of hierarchies are built and implemented in order to select the best possible suppliers (Chan, 2003).
The five relationships range from Level 1: Temporarily basic relationships to Level 5: Long-lasting strategic relationships and are mentioned below.
The ‘Temporarily relationship’ is described as a low value of interaction and the buyer requests nothing special or critical from the supplier. The interaction particularly favors highly standardized and low-tech products(Chan, 2003).
Developing towards level 2,3 and 4, the interaction based on respectively product, products and process and human resources to control the product and process within the firm increases. In addition, the high quality/hi-tech nature of the product is increasingly available through the stages. In this example, the final long-lasting strategic relationship includes complete interaction such that the buyer can fully cooperate with the supplier in the long run (Chan, 2003). Moreover, working towards the same strategic goals, sharing any business-related information to explore new markets with novel ideas and technology and sharing some physical assets are part of this intensive form of collaboration.
Discussion
A supplier classification method specific for IP has not been identified in literature. Therefore, the above described generic supplier classification methods are focused on product-related procurement. Interestingly, these methods are not (direct) appropriate for vendor classification in IP. First, the ‘complex’ methods imply one or a few purchasing goods/services related to primary production. Consequently, the methods are hard to implement in a procurement environment involving multiple ad hoc and diverse purchasing goods/services.
Second, the methods assume the availability of sufficient data to accurately calculate supplier performance in a quantitative way such as efficiency grades. However, as described in the Unilever IP analysis, (reliable and comprehensive) performance data is not available in practice.
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Given the inappropriateness of the described generic classification methods, it is recommended to compose a new method or Concept Solution Design (CSD) towards classification for IP. Findings from aspects of well-investigated Product-related Procurement evaluation and classification methods will be elaborated next. This literature overview serves as a foundation for the CSD for vendor classification in IP.The overview starts with insights from academic literature in Indirects Procurement.
4.2 Indirects Procurement
De Boer et al. (2003) define Non-Product-Related purchases as all goods and services other than those used in an organization’s primary operations, like raw materials, production items, and engineering, assembly or production activities subcontracted to outside suppliers.
NPR purchasing thus includes many of the maintenance repair and operating supplies such as stationary, mail, printing but also capital equipment (e.g. copiers); services (health care plans, advertising, legal assistance and telecommunications (deBoer, Holmen, & Pop-Sitar, 2003). Indirect spend has been less discussed in the academic literature than direct revenue-generating expenditure (Cox, Chicksand, Ireland, & Davies, 2005). In addition, because of scale and saving opportunities, many companies spend more effort to direct procurement resulting in more matured departments compared to Indirects Procurement. As a consequence, organizations miss out on opportunities for achieving substantial NPR procurement savings and/or adding value to their organizations (deBoer, Holmen, & Pop-Sitar, 2003).
Scott (2010) elaborates typical sources of non-compliance with indirect spend as reasons for improvement. Figure 11 shows the types and their business impact. Scott (2010) advocates seven key success factors to solve these non-compliance factors: Strategy and sponsorship, Vendor partnership, Contract and relationships, Solution design, Pricing and incentives, Transition and ‘go-live’, Governance and delivery.
This research focuses on the process to classify the preferred supplier base into four predefined categories whereby the ‘platinum’ category includes potential partners. Consequently, this process enhances partner selection and contributes to the second Key success factor of Scott (2010):
To drive the transformational change, identify and engage with a partner, who will provide deep skills, experience and solutions, not just headcount(Scott, 2010).
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4.3 Supplier evaluation criteria
According to Khorramshahgol (2012), the suppliers of a firm play a crucial role in successful management of the activities of the entire chain and have significant impact on quality and timely delivery of the products/services. To classify and select suppliers (for long-term partnerships), ‘Evaluation Criteria’ should be used during the supplier evaluation. The ‘formulation of criteria’ phase is the basis for the supplier evaluation (De Boer et al., 2001). Many supplier evaluation models such as the strategic sourcing framework of Talluri & Narasimhan (2004) identify the supplier evaluation criteria as a distinct phase/area in their methodology.
Therefore, this section elaborates the numerous criteria used for supplier evaluation. The benefits and usefulness of the choice, amount and abstraction level of evaluation criteria are discussed.
4.3.1 Characteristics of evaluation criteria setting process
Weber et al. (1991) stress the complicated characteristic of vendor selection decisions because of taking various criteria into account. In their paper, they reviewed the literature of 74 articles in order to provide a comprehensive overview of the criteria that academicians and purchasing practitioners feel are important in the vendor selection decision.
Defining appropriate criteria and weights is also a vague process because of the numerous potential criteria to choose from. Huang & Keskar (2007) offer for instance 101 sub-criteria.
The ‘criteria and weights defining stage’ contains often subjective and arbitrary decisions (Talluri & Narashimhan, 2004). It is company, department and management dependent which criteria will be included in supplier evaluation models. This is a consequence of specific strategic issues (critical objectives of the company in procurement and supplier management (Talluri & Narashimhan, 2004)) and performance targets set by individuals that need to be incorporated and measured. Therefore, the criteria setting process is seen as partly a management team task and often takes place in group sessions and brain storming sessions.
4.3.2 Multi criteria decision making problem
Supplier selection is a multiple criteria decision making problem (MCDM) (Ertay, Kahveci, & Tabanlı, 2011). Multi-criteria decisions are important to cover simultaneously all aspects that encompass both competitive advantage and organizational success to choose the right suppliers well established (Khorramshahgol, 2012). Also Talluri and Narashimhan (2004) stress the importance of not evaluating suppliers solely based on a single criterion such as costs. Multiple factors need to be incorporated in the supplier evaluation process to gain a comprehensive view on the state of performance (Talluri and Narashimhan, 2004). Multi-criteria decisions involve both tangible and intangible factors such as quality, quantity and delivery versus reputation and labor relations (Khorramshahgol, 2012).
4.3.3 ‘Main’ supplier evaluation criteria
Many researchers developed selection criteria for suppliers. Selection criteria constructs concerning buyer-supplier relationships, cost, quality, delivery, short-term flexibility and innovation have been mainly adopted from literature such as Elram (1990) suggests. Further criteria, such as long-term flexibility, risk management, marketing and financing support have been created based on conceptual developments (Zsdizin, 2003).
Given the large base of performance criteria to choose from, some criteria are more important or general applicable. Dickson (1966) investigated the importance of supplier evaluation criteria for industrial purchasing managers and concluded that cost, quality and delivery performance were the three most important criteria in supplier evaluation. Weber et al. (1991) in their research to supplier evaluation criteria defined by industrial purchasers, pointed that quality was the most important factor also followed by delivery performance and cost.
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4.3.4 ‘Strategic’ supplier evaluation criteria
While operational metrics such as price, quality and delivery are important and critical in evaluating suppliers, strategic evaluation of suppliers leading to long term relationship requires consideration of supplier capabilities and practices (Talluri & Narashimhan, 2004). In the long run, firms’ products may change over time and it is important that the supplier can meet the changing requirements based on new product development, design, manufacturing capability of the firm. For instance, Chan (2003), defined selection criteria for five different levels of Buyer-Supplier relationships. Costs and Quality were relevant to all relationships. On the other hand, Degree of closeness and Degree of cooperation were relevant for the two most developed relationships.
In general, all evaluation criteria could be distinguished into: (Sarkar & Mohapatra, 2006)
(1) Capability factors: the suppliers potential that can be leveraged to the buyer’s advantages in the long term
(2) Performance factors: demonstrated ability of a supplier to meet a buyer’s short-term requirements in terms of cost, quality, service and other short-term criteria
Talluri & Narashimhan (2004) used this distinction to consider input factors (Capabilities) and output factors (Performance) to calculate efficiency scores for suppliers in their DEA study.
An extended overview of various criteria is composed by Sarkar & Mohapatra (2006) based on research of Choi and Hartley (1996), Katsikaes et al. (2004), Swift (1995) and Weber et al. (1991). The overview is given below in Figure 12.
Figure 12: Performance and Capability factors, Sarkar&Mohapatra (2006)
4.3.5 ‘Just in Time (JIT)’ supplier evaluation criteria
The growing interest in the Just in Time (JIT) manufacturing approach reordered the criteria sets in the nineties (Weber, Current, & Benton, 1991). Besides the already mentioned quality, costs and delivery; Production facilities, Production capabilities, Transport and communications convenience and Technical capabilities were also recognized as important within the JIT philosophy (Mandal & Deshmukh, 1994).
4.3.6 ‘Service’ purchasing: supplier evaluation criteria
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functions, product development and design, and the general trend towards the increased “servization” of goods, have increased the share of services in total purchase volumes (Wynstra, et al., 2006). Various studies have demonstrated that organizational buyers view the purchasing of business services as essentially different from purchasing goods (Wynstra, Axelsson, & Van der Valk, 2006). The different and seemingly tough character of services requires other methods to deal with. Major characteristics of services are described by van Weele (2009) and given in Table 3.Service characteristics Explanation
Intangibility It cannot be seen, tasted, felt or heard. The buyer has to have faith in the service provider
Inseparability Service cannot exist separately from its providers, it requires the presence of the provider
Variability Quality of service may vary depending on the person and moment at which they are provided
Perishability Services cannot be stored. Requires a good balance between supply and demand. Problems may arise when service companies are confronted with fluctuating demand, resulting to complex staffing problems.
Table 3: Major characteristics of services, van Weele (2009)
Professional handling of some (service) purchasing decisions requires considerable specialist knowledge, which is not always available from within the purchasing department (Bals, Hartmann, & Ritter, 2009).
In addition, services sometimes cannot be specified in detail in advance, rather they are co-created by buyers and suppliers in the procurement process (Lindberg & Nordin, 2008). Araz and Ozkarahan (2007) also mention criteria based on suppliers’ design capabilities such as the criterion ‘co-design’, defined as suppliers’ design effort within a project.
Although performance criteria are mostly investigated for industrial suppliers, Lindberg and Nordin (2008) investigated the new service procurement logic. They described that although cost was a main criterion in supplier evaluation, whether managers emphasize cost or value depends completely on the type of service. A service that is complex, of strategic importance and associated with high supply risk is evaluated based on value, whereas standardized services, such as a helpdesk are purchased at the spot market (Lindberg & Nordin, 2008). Bals et al. (2009) defined ‘procurement complexity’ as the amount of information necessary for evaluating the purchasing object. For instance, the higher complexity of professional services is a consequence of larger amounts of experience and trust characteristics, associated with a higher need for information.
Kahraman et al. (2003) justify the use of service criteria (such as order processing, delivery and support) in all supplier selection processes because any purchase involves some degree of service. When assessing the fitness of services, a firm may need to examine the following areas
(Kahraman, Cebeci, & Ulukan, 2003):
- Customer support: accessibility, timeliness, responsiveness, dependability - Customer satisfiers: value-added
- Follow-up: to keep customer informed, to verify satisfaction - Professionalism: knowledge, accuracy, attitude, reliability
4.3.7 Number of supplier evaluation criteria
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attributes by determining the relative importance of the selection criteria in various procurement situations (Wu & Barnes, 2012). For instance, Mandal and Deshmunkh (1993) provided the Interpretive Structural Modelling (ISM) system which structures the group’s judgment whether and how items are related from a complex and large set of items, more information is given in 4.5.1.4.3.8 Abstraction level of supplier evaluation criteria: hierarchy
Huang & Keskar (2007) present in their research an integration mechanism to gain a comprehensive and configurable set of metrics in a hierarchically way. An optimal supplier selection decision is then made based on a chosen set of metrics, achieving a strategic fit between the firm’s business model and its supply chain strategy (Huang & Keskar, 2007). They stress in their research the trend which is shifting towards developing more exhaustive and detailed performance metrics in a systematic way (Huang & Keskar, 2007).
Lehmann and O’Shaughness (1982) stated that when one develops a set of metrics, you must first classify the numerous criteria into an exhaustive and mutually exclusive list of categories. They proposed five categories: performance, economic, integrative, adaptive and legalistic.
Huang and Keskar (2007) explain that categories evolve over time and no one best set of categories exists. In their research, performance measures were divided into three main groups. In addition, they grouped metrics into five categories. Furthermore, all 101 metrics were classified within the categories into three classes that represent different supplier integration mechanisms. Consequently, a much extended hierarchy of metrics was created. A simple hierarchy of the supplier selection metrics is given in Figure 13.
Figure 13: Hierarchy of supplier selection metrics (Huang &Keskar, 2007)
4.3.9 Subjective vs. objective supplier evaluation criteria
As could be seen in Figure 12 (overview of criteria), while some of the performance factors are quantitative and can be measured relatively easily, most of the capability factors are qualitative and present measurement problems (Sarkar & Mohapatra, 2006). Vokurka et al. (1996) stated that criteria for partnership selection vary depending on the type of product being considered and now include many judgmental factors in addition to the historically quantitative criteria.
Often, companies possess information that cannot be converted into quantitative data or they even do not have quantitative data of their suppliers. To evaluate these suppliers against performance criteria, the purchasing team has to resort to subjective, qualitative assessment, using their mental perceptions. Several qualitative driven methodologies are described in the next chapter such as the ‘fuzzy approaches’.
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4.3.10 Composing different sets of evaluation criteria, requirements for criteria sets
Huang & Keskar (2007) claim that when different manufacturers have different business strategies for different products, it is impossible to create a universally applicable decision-making model with a fixed set of criteria. Furthermore, Cannon & Perreault (1999) stated in their research on buyer-seller relationships that different performance metrics are needed in different situations. For each performance criteria set, the following characteristics should be satisfied Beamon (1999):
1. Inclusiveness (measurement of all pertinent aspects)
2. Universality (comparison under various operating conditions) 3. Measurability (measurable data)
4. Consistency (consistent with organizational goals)
4.3.11 Conflicting evaluation criteria
It is almost impossible to maximize the goals of all evaluation criteria. Some defined criteria might be conflicting such as delivery and costs (Ertay, Kahveci, & Tabanlı, 2011). Therefore, in order to evaluate performance of suppliers, importance weights of the criteria should be known. Nevertheless, determining the weights of the criteria can be complicated, human judgment is applied to determine the weights of the criteria. There are several methods to derive importance weights such as AHP, which evaluates human judgments through pair wise comparisons (Ertay, Kahveci, & Tabanlı, 2011), this will be further explained in chapter 4.5.
4.4 Methods for gathering supplier evaluation criteria
The choice of evaluation criteria contains often subjective and arbitrary decisions (Talluri & Narashimhan, 2004). It is company, department and management dependent which criteria will be included in supplier evaluation models. Therefore, many researchers suggest to gather supplier evaluation criteria during brainstorming sessions involving multiple stakeholders (Khorramshahgol, 2012). The following methods are proposed to structure brainstorm sessions and to gather supplier evaluation criteria in a systematic way.
4.4.1 Laddering technique, explore individuals’ opinions
‘Laddering’ is a useful technique of qualitative research in understanding behaviors and has been utilized specially in marketing in order to explore individuals’ opinions, attitudes and beliefs (Veludo-de-Oliveira, Ikeda, & Campomar, 2006).
Since the introduction of the laddering methodology into the consumer research domain, numerous applications, both applied and academic, have been executed (Reynolds & Gutman, 1988). For instance, Reynolds & Gutman (1988) demonstrated the technique’s usefulness in developing an un-derstanding of how consumers translate the attributes of products into meaningful associations with respect to self-defining attitudes and values. In addition, Laddering has been used to develop effective communications strategies for many leading corporations, industry organizations, public service groups and political candidates (Reynolds & Whitlark, 1995).
Based on the Means-End Theory, the purpose of the Laddering Technique is to link sequentially and hierarchically the:
