Vulnerability of the supply chain network of an innovative OEM: a case
study of a producer of self-propelled sprayer equipment
by
Pieter Houtsma – student number 1824651 University of Groningen
Faculty of Economics and Business Nettelbosje 2
9747 AE Groningen 06 42608360 p.houtsma@student.rug.nl
June 2014
Master of Science, Business Administration
Specialization: Technology & Operations Management (TOM)
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Abstract: This thesis tests the applicability of a product portfolio model on the supply chain
network of an agricultural OEM, aiming at innovation and the production of customer specific products, producing self-propelled sprayers. Based on product portfolio models derived from literature and based on literature with regard to possible factors influencing the management of the supply chain network of this OEM, interviews with purchasers at the case company were held in order to find out what factors regarding the management of the supply chain network influence the OEMs operations. Following from these interviews, factors affecting the supply chain network were identified and weighted. A questionnaire at the case company was held in order to create an overview of suppliers, after which recommendations are posed to deal with the supply chain network. This thesis shows that the application of a product portfolio model cannot simply be used as a framework to apply generic strategies to deal with suppliers of an innovative, customer oriented OEM, but that the recommendations posed by Kraljic (1983) on the product portfolio quadrants turn out to be applicable to the OEM. The product portfolio model gives an insight in the supply chain network as a whole and has potential to be used by management as a tool to monitor the supply chain network.
Keywords: Supply chain management, Product portfolio model, Supply chain flexibility,
3 Table of Contents Abstract ... 2 Table of contents ... 3 List of figures ... 5 List of tables ... 5 1.Introduction ... 6 1.1 Research outline ... 8 2. Theoretical background ... 10
2.1 Product portfolio models ... 10
2.2 Kraljic’ product portfolio model ... 10
2.2.1 Adaptations to Kraljic’ product portfolio model ... 12
2.2.2 Scholarly applicability ... 13
2.2.3 Critique ... 13
2.2.4 Practice in business ... 14
2.2.5 Purpose ... 14
2.3 Characteristics of innovativeness and producing customer specific products ... 15
2.3.1 Supply chain flexibility ... 15
2.3.2 Degree of interaction between buyer and supplier in design phase ... 16
2.3.3 Make-or-buy decision ... 16
2.3.4 Architecture types ... 18
3. Case description ... 19
4. Methodology ... 22
Validity & Reliability ... 25
5. Analysis ... 25
5.1 Factors influencing strategic impact ... 27
5.1.1 Product flexibility and responsive flexibility ... 27
5.1.2 Interaction between buyer and supplier in design phase ... 27
5.1.3 Perceived bargain power of the supplier ... 28
5.1.4 Degree of technical knowledge ... 29
5.2 Factors influencing supply risk ... 30
5.2.1 Type of architectural component ... 30
5.2.2 Forecasting ... 31
5.2.3 Average lead time ... 32
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5.3 Remaining factors influencing the supply chain network ... 33
5.3.1 Buyer/supplier communication ... 33
6. Results ... 34
7. Discussion/recommendations ... 38
7.1 Strategic components ... 38
7.1.1 General recommendations ... 38
7.1.2 Strategic makeable, metal components ... 38
7.1.3 Strategic components with supplier bargain power ... 39
7.1.4 Strategic slot architectural components ... 39
7.2 Bottleneck components ... 40
7.3 Leverage components ... 40
7.4 Non-critical components ... 41
7.5 ‘In the middle’ components ... 41
7.6 Buyer/supplier communication ... 41
7.7 General comments on the matrix’ visual outcome ... 42
8. Conclusion ... 43
8.1 General recommendations for the company ... 44
8.2 Limitations ... 44
8.3 Validity & Reliability ... 45
8.4 Future research ... 46
References ... 47
Appendix 1: Overview location of companies in the same holding as case company ... 54
Appendix 2: Overview of number of suppliers at case company ... 55
Appendix 3: Semi structured interview with the plant manager ... 56
Appendix 4: Semi structured interviews with the purchasers/planners ... 56
Appendix 5: Priority tables from AHP analysis ... 58
5 List of figures:
Figure 2.1: Product portfolio model by Kraljic (1983) ... 11
Figure 2.2: Adapted product portfolio matrix by own creation & Ellram & Olsen (1997)... 13
Figure 2.3: Supplier involvement in product design (Petersen et al., 2005) ... 17
Figure 3.1: Schematic representation of Agrifac’s supply chain network ... 20
Figure 3.2: Proportion between types of cost at Agrifac ... 21
Figure 6.1: Product portfolio matrix for Agrifac’s suppliers ... 37
List of tables: Table 2.1: Flexibility drivers by Vickery et al., (1999) ... 16
Table 3.1: Production at Agrifac ... 19
Table 4.1: Interview schedule ... 23
Table 4.2: Saaty’s AHP (1980) scale of importance ... 24
Table 6.1: Adapted strategic impact and supply risk factors ... 34
Table 6.2: Prioritization table of strategic impact factors application and weights ... 35
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1. Introduction
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1.1 Research outline
The following research question will be answered:
To what extent can a product portfolio model be used for innovative OEMs aiming at the production of customer-specific products?
This research question will be answered by making use of a single, in-depth case study, based on primary data.
In order to answer the research question, the following sub-questions will be answered:
(1) What is a product portfolio model and in what way has it been applied?
Second, in order to understand the complexities an organization such as the case organization faces, the following sub-question regarding its characteristics will be answered:
(2) Which characteristics of innovativeness and producing customer-specific products should be considered when adapting the product portfolio model for OEMs aiming at innovation and the production of customer-specific products?
Sub-questions (1) and (2) make up the theoretical framework.
In a subsequent section the specific context of the case study at Agrifac will be described. Next, the research method used in this thesis will be discussed. After that the results of interviews held at the case company are presented, leading to an answer to the following sub-question:
9 The outcomes of this analysis result in the research question, the proposed answers to which are addressed in the results section:
(4) Which factors of the strategic impact and supply risk dimensions suggested by Kraljic (1983) should be added to the dimensions strategic impact and supply risk of the product portfolio model of an innovative OEM aiming at the production of customer-specific products and which should not be added?
This question’s answer provides an evaluation on whether or not Kraljic’ (1983) suggested factors should be added to either the strategic impact or supply risk dimensions when applying the product portfolio model to an innovative OEM producing customer-specific products.
The answer to the following sub-question is presented in the discussion section:
(5) To what extent can the recommendations of Kraljic’ (1983) product portfolio model be applied when applying the product portfolio analysis to an innovative OEM aiming at the production of customer-specific products?
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2. Theoretical background
In this section, the following research question will be answered:
(1) What is a product portfolio model and in what way has it been applied? 2.1 Product portfolio models
A product portfolio can be seen as a collection of relation items and reflects the importance for balance in collecting individual elements. ABC inventory analysis has been used to classify the importance of items by cost of consumption and times consumed per unit. This might be a useful tool to prioritize inventory, but only few factors are taken into account here. High cost items for example might not have such a strategic impact on the particular company, but still might be regarded as important. ABC analysis is considered to be useful in situations where a limited number of material categories are involved.
‘Purchasing should become strategic instead of an operational function’, according to Kraljic (1983), who introduced the first comprehensive portfolio approach for purchasing.
2.2 Kraljic’ product portfolio model
As stated in the introduction, Kraljic (1983) has introduced a product portfolio model in order to deal with different types of suppliers. Purchased items can be classified in two dimensions; profit impact of the purchase and complexity of the supply market. Each dimension spans high and low values, and thus a segmented 2x2 matrix is used to classify purchases into four categories: strategic, bottleneck, leverage and non-critical. The combination of the two dimensions is to ‘minimize supply vulnerability and make the most of potential buying power’ (Kraljic, 1983).
Strategic items represent a substantial value to the organization in relation to a large impact on
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Bottleneck items tend to have a moderate influence on the financial results of a firm, but are
vulnerable regarding their supply. Suppliers in question seem to have a dominant power position over these products, as is the case as well with the strategic items. The buyer can (1) accept dependence and reduce the negative consequences or (2) attempt to reduce dependence and risk and thereby find other solutions as for example broaden product specifications or finding a new supplier (Kraljic, 1983).
Leverage items can be obtained from various suppliers and represent a relatively large share
of the end product’s cost price in combination with a relatively low supply risk. Supply risk is minimal in this situation. Strategies related to this quadrant involve (1) the exploitation of buying power, or (2) developing a strategic partnership and move the supplier to the strategic quadrant. The latter strategy should however only be used if the supplier involved is willing and capable of contributing to the buyers’ competitive advantage (Kraljic, 1983).
Non-critical items have a small value per unit and many alternative suppliers might be able to
be found. Kraljic (1983) suggests two strategies of coping with this quadrant: (1) pool purchasing requirement to reduce logistics and administrative complexity or (2) systems contracting by making use of an individual ordering strategy.
12 The pre-set factors for the dimensions of profit impact and supply risk dimensions by Kraljic (1983) are as follows:
Dimension Factor
Profit impact Volume purchased
Percentage of total purchase cost Impact on product quality
Impact on achieving competitive advantage
Supply risk Product availability from supplier
Long term supply difficulties Number of potential suppliers Switching cost
Substitution possibilities
2.2.1 Adaptations to Kraljic’ product portfolio model
13 Figure 2.2: Adapted product portfolio matrix by own creation & Ellram & Olsen (1997)
2.2.2 Scholarly applicability
When searching on the keyword ‘product portfolio’ in scholarly databases, differentiated results arise since the model has been applied to a wide range of industries. De Haan et al., (2003) have applied a product portfolio model to a firm in the rubber industry, whereas Zhao et al., (2007) have focused on a factor analysis in the electronics assembly industry. Liu and Xu (2008) have made use of the matrix in the steel industry and Lee & Drake (2010) have used the portfolio model for evaluator manufacturers, whereas Gelderman & Donald (2008) apply the model on a Surinam oil manufacturer. The model has however not been applied yet in assembly SME OEMs aiming at innovation and the production of customer-specific products. Therefore, this thesis attempts to test the applicability of the product portfolio model to this specific company type.
2.2.3 Critique
14 very sensitive to the outcome of the analysis (Dyer, 1990). Ellram & Olsson (1997) agree with this statement and emphasize that that weighting of each factor is the most important part of the product portfolio process, but is very subjective as well.
2.2.4 Practice in business
The product portfolio model is being used in different industries (Gelderman & Donald, 2008). Wagner & Johnson (2004) indicate that managers of the firms they have researched on making use of the product portfolio model (several car manufacturers, airplane manufacturers and electronics equipment manufacturers) have recognized supplier portfolio management as a strategically important factor contributing to the overall success of their firm. Large companies as Shell, Philips and Siemens make use of Kraljic’ (1983) portfolio model (Van Weele, 2000). In a survey of Dutch companies, almost 50% of the responding purchasing managers have indicated to use the matrix for formulating purchasing strategies (Boodie, 1997). A survey of 111 purchasers in the UK concluded that ‘strategic purchasing leads to improved supplier integration and socialization mechanisms, giving overall improvements in buyer performance’ (Lawson et al., 2009). Manufacturers Motorola, Honda and Toyota have benefitted from strategically managing purchasing by achieving higher quality, increased operational flexibility and cost reductions (Metty et al., 2005; Pressey et al., 2007).
2.2.5 Purpose
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2.3 Characteristics of innovativeness and producing customer-specific products
In this section, the following research question will be answered:
(2) Which characteristics of innovativeness and the production customer-specific products should be considered when adapting the product portfolio model for OEMs aiming at innovation and the production of customer-specific products?
2.3.1 Supply chain flexibility
As technological and competitive forces are changing, especially for innovative, customer oriented OEMs supply chain flexibility has become increasingly important and will therefore be taken into account.
Supply chain flexibility is ‘the ability of the purchasing function to respond in a timely and cost effective manner to changing requirements of the purchased components’ (Swafford et al., 2000). Supply chain flexibility reflects the capacity of a manufacturing system to adapt successfully to changing conditions, coming from inside the system as well as from the environment (Chan et al., 2009). Flexibility is a complex and multi-dimensional concept, difficult to summarize and is viewed to be an important ability to mitigate negative effects of supply chain disruptions (Upton, 1994; Narasimhan & Talluri, 2009). Flexibility drivers could be changes in demand, fluctuations in production schedules, product life cycle length, order stability and supply uncertainty (Tachiwaza, 2005). Vickery et al., (1999) distinguish 5 flexibility drivers, which are presented in the table below and partly on the next page.
Product flexibility Ability to remain responsive to market changes by bringing new variants to existing products to the market.
16 Delivery flexibility The ability to make a product widely
available and accessible easy.
New product flexibility The ability to be able to bring new products to the market.
Responsive flexibility The capability of supply chain partners to respond to unpredictable changes.
Table 2.1: Flexibility drivers by Vickery et al., (1999).
2.3.2 Degree of interaction between the buyer and supplier in the design phase
As an innovative OEM aims at regularly bringing new products to the market, supplier involvement in product design becomes increasingly important and theory on this area of research will therefore be taken into account.
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Figure 2.3: supplier involvement in product design (Petersen et al., 2005)
2.3.3 Make-or-buy decision
As has been mentioned in the introduction, a global shift to outsourcing has been made in manufacturing, as well might the case for OEMs aiming at innovation and the production of customer-specific product.
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2.3.4 Architecture types
As not every component has the same interaction characteristics as other components, theory on types of architectural components is considered.
Ulrich (1995) describes product architecture as being the scheme by which the function of the product is allocated to the physical components involved. Ullrich (1995) sees product architecture as (1) the arrangement of functional elements, (2) the mapping from functional elements to physical components, and (3) the specification of the interfaces among interacting physical components. Ulrich (1995) distinguishes three types of architecture: slot, bus and
sectional. The distinction between those three can be defined as the way the interactions
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3. Case description
The case chosen to answer the research question is the case of Agrifac Machinery B.V., a SME OEM in Steenwijk, the Netherlands. Agrifac assembles self-propelled sprayers, pull-behind sprayers as well as sugar beet harvesters for agricultural purposes. A growth in turnover over the last 5 years has shifted from € 10 million in 2009 to € 40 million in 2014. In 2012, the Agrifac was acquired by Exel Industries, owner of 15 companies in the self-propelled sprayer sector (Appendix 1) in different countries across Europe.
Product type 2010 2011 01-01-2012-01-09-2012 01-09-2012-31-08-2013 01-09-2013-31-04-2014 Timeframe (in months) 12 12 8 12 7 Self-propelled sprayer 33 61 72 92 88 Pull-behind sprayer 19 30 24 15 4 Sugar beet harvester 29 30 18 26 9
Table 3.1: Production at Agrifac.
20 monitor the supply chain network. Agrifac's supply chain network encompasses about 70 regular suppliers throughout the Netherlands, Germany, Belgium, Italy, Hungary and Canada. A self-propelled sprayer consists among other things of metal frames, a chassis, spraying tracks, smaller metal components, batteries, tires, wheels, filters, hydraulics, lubricant systems, air pressure components, a motor, a power pack, a fuel tank, sensors, lamps, tubes, plastic and iron components for spraying, spirals, prints, computer hardware and software, a water tank, hoses, plastic body work, electric wiring, GPS, the cabin, spray nozzles, and nuts, bolts and rings to connect everything with each other.
A schematic representation of the different types of suppliers is set out in the figure below.
Figure 3.1: schematic representation of Agrifac’s supply chain network
Kx: Supplier provides kits for assembly
Mx: Supplier provides pre-assembled modules Sx: Supplier provides components
21 Four large components are being supplied in modules; of which 2 make a stop at another company, where a modification or addition (painting e.g.) is being executed on the module. Agrifac does not make components themselves but only assembles. The number of suppliers has decreased over the years (Appendix 2). The main reason for this is that pre-assembly of some components is done on suppliers’ location. About 75-80% of all cost consists of the cost of goods which have been bought. This might give an indication of the variety of suppliers and importance of dependency on the supply chain network.
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4. Methodology
Before a research can start, a researcher needs to decide on how the study will be conducted. A decision of research strategies is made based on the type of questions the study is trying to answer. Five different types of research strategies can be distinguished: ‘experiment, survey, archival analysis, history study and case study (Yin, 1994).
As mentioned in the introduction, primary data has been used to solve the research question. A single-in depth case study was chosen to solve the problem. A case study enables the researcher to have personal interactions with practitioners and to do an in-depth examination of an individual case. According to Feagin et al., (1991), case study is an ideal methodology when a holistic, in-depth investigation is needed. Whereas evidence from multiple case studies is regarded as more compelling and robust, this also means this study is more expensive and time consuming in comparison with a single case study. To find out where all components delivered to the OEM come from and how much of which component comes from which supplier, a data file of all purchased components over the last three years was quantitatively analyzed and all of the suppliers’ delivered components were quantified and sorted to type of products.
Next, in order to explore how this specific OEM operates in general with regard to the supply chain network, qualitative preliminary exploratory semi-structured interviews with the plant manager were held (Appendix 3). After these interview outcomes were analyzed, semi-structured interviews were held with the responsible purchasers/planners at the OEM to find out which problems arise with regard to their activities in the management of the supply chain network (Appendix 4). The questions posed in these interviews were partly based on literature from section 2.3.
23 Table 4.1: Interview schedule
After the list of factors was established, these factors were ranked in the same team exercise according to a balanced scale from 0 to 9; 0 indicating equal importance between two factors, 9 indicating extreme importance of one factor over another factor.
Having weighed all criteria on a balanced scale, questionnaires were set up per supplier based on the company data analysis. A questionnaire per supplier was filled in by the responsible purchasers and was also filled in by the plant manager to determine whether or not the data is valid. In case of dissimilarities between the parties, a consensus was reached. In case one supplier supplied several components, distinctions were made. The used method for determining measurement weights is the Analytical Hierarchical Process by Saaty (1980). AHP is a decision making tool that can help in setting priorities and making the best decisions by using both qualitative and quantitative data. AHP can facilitate and encourage consensus-based decisions in the decision-making process transparent (Drake, 1998). When using AHP, complex decision making requires the establishment of relative importance between selection criteria (Goodwin & Wright, 2004; Nydick & Hill, 1992). Because there was not considered to be overlap in the measurement scales, AHP was used instead of a balanced scale. AHP was used by setting out options against each other in accordance with the plant manager. This was done by making use of the 1-9 preference scale that can be found on the next page:
Date Respondent Means Time Topic
2014-07-05 Plant manager Face-to-face 1 hour General
2014-13-05 Plant manager Face-to-face 1 hour Supply chain design 2014-15-05 Purchaser 1 Face to face 1,5 hours Supply chain problems 2014-16-05 Purchaser 2 Face to face 2 hours Supply chain problems 2014-02-06 Planner / Purchaser 1 Face-to-face 1 hour Supply chain/planning
problems
24 AHP Scale of Importance Numeric Rating Reciprocal (decimal)
Equal importance 1 1 (1.000) Weak 2 1/2 (0.500) Moderate importance 3 1/3 (0.333) Moderate plus 4 1/4 (0.250) Strong importance 5 1/5 (0.200) Strong plus 6 1/6 (0.167)
Very strong importance 7 1/7 (0.143)
Very, very strong 8 1/8 (0.125)
Extreme importance 9 1/9 (0.111)
Table 4.2: Saaty’s AHP (1980) scale of importance
The sum of the weighted criteria represents the final score of each class inside the factors:
In which:
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5. Analysis
In this section, the following research question will be answered:
(3) Which factors influencing the strategic impact and supply risk dimensions should be added to the adapted product portfolio model of an innovative OEM aiming at the production of customer-specific products?
Findings in this section are divided into three classes in order to be able to adapt the strategic impact and supply risk dimensions:
Factors influencing strategic impact (5.1) Factors influencing supply risk (5.2)
Factors which cannot be caught in either one of above dimensions since these apply to the whole company or cannot easily be assigned per component or supplier (5.3)
5.1 Strategic impact factors
In this section, factors which have been added to the strategic impact dimension are discussed.
5.1.1 Product flexibility and responsive flexibility
The plant manager states:
‘Over the last years, we aim at a strategy which is based on a short time to market; we want to remain flexible for market changes and want to have a short time to market. The company
aims at offering our customers products which can be highly customized to their wishes. Different levels of options lead to a situation where multiple hundreds of variations in product
26 The level of customization and the built-to-order assembly strategy has implications as well for the suppliers involved:
The plant manager, purchaser 1, purchaser 2 and purchaser/planner 1 state:
‘Some suppliers do have difficulties with certain modifications to products. They are simply not able to deliver a modified product correctly.’
Where purchaser/planner 1 adds:
‘But that’s our own responsibility as well. Seen as we aim at a short time to market and aim at offering customized products means we need an component from our supplier which is a little
different than normally. It is logical that they need a little more time for that.’
Being flexible for market changes can work as risk mitigation to be adaptive to changes in the market. The supply chain network becomes more complex as interaction with certain suppliers needs to happen more frequently to fulfill this OEMs strategic goal. When a modification to a component needs to be done, it is important that this happens according to the OEMs standards. A risk involved here is that a supplier might not be able to modify and deliver the component correctly (or in time). Implications for the supply chain network are that when a new (type) of product needs to be set in the market, needs from the supplier might change, and in case the supplier is not able to fulfill certain needs to achieve the goal of launching innovative products in a short timeframe, another supplier possibly needs to be found.
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5.1.2 Interaction between buyer and supplier in design phase
By aiming at innovation and production of customer-specific products, the interaction between the buyer (especially the R&D/Engineering department) and the supplier can considered to be essential.
Purchaser 1 and purchaser/planner 1 state:
‘When the R&/D department/engineers are working on a new model self-propelled sprayer, they sometimes do not interact enough with our suppliers to see whether or not some components they have designed can indeed be made by a certain supplier. This can cause a
situation where they have been working on a design of a new product for months of which some components eventually are too complex to be executed (against a normal price and against a short lead time) by our suppliers. This does not only have implications for these
components, but for other components of the machine as well.’
The situation described above can be regarded as a potential for the disruption of the achievement of the OEMs strategic goals. The buyer does not make sufficiently use of the buyer-supplier relationship in the product design phase, whereas some (metal) components to be made involve complex manufacturing skills from the supplier’s side. Another problem that can arise for the buyer is that if no (sufficient) interaction between buyer and supplier (of customizable) metal components is done, is that the supplier produces an expensive, complex product with a high lead time which could possibly be replaced by a less complex component with a shorter lead time.
As indicated by Petersen et al., (2005), interaction between buyer and supplier is dependent on the complexity of the component which needs to be made. As this OEM wants to be innovative and offer customer specific products, the factor degree of interaction between
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5.1.3 Perceived bargain power of the supplier
Purchaser 1 states:
‘I think some suppliers have a certain degree of under-capacity. They have so much business to do that other buyers seem to be first on the list. That’s a real problem then.’
&
‘Some big suppliers, for example the supplier of tyres and cabin, almost have a monopoly on the market; they have a system where they work in classes. The smaller the buyer, the more difficult it is to bargain good prices. If we comply with their standards of long lead times, it can work out all right, but that might indicate we need to keep an inventory of the cabins
sometimes. Cabins cost about € 13.000, so keeping inventory can be quite costly.’
Where purchaser 2 adds:
‘Some suppliers just lack the urge to be really sharp on making sure we get a quality, customized product on time. Especially in our peak time in April, May and June, suppliers seem to be lacking because these companies deliver to larger companies who also deal with a
peak of demand in this period of the year. ’
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5.1.4 Degree of technical knowledge
Purchaser 2 states:
‘A lot of supply disruption problems are related to the complexity of the product. For the chassis for example, which we regard to be as one of the most important components affecting the core competences for our end product, we have switched suppliers for this type of product,
because of firstly technical defects and secondly delivery time problems. Supplier X only seems to be able to work in projects instead of in flow. Therefore, we have switched suppliers
for this product type. This switch however caused problems as well in terms of information transfer. Technical drawings of the product were limitedly available at X, and therefore
transfer of relevant information to our new supplier was difficult.’
Where purchaser 1 adds:
‘The product which was delivered by supplier X was very different to the technical drawing they had for the product. However, not even a technical drawing is 100% reliable. We however consider the consistency of technical knowledge at our suppliers to be very relevant
for the achievement of our companies’ goals.’
For some components, the degree of technical knowledge at the supplier can be considered to be relevant for achieving the strategic goals of this OEM, the factor degree of technical
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5.2 Supply risk
In this section, factors which are added to the supply risk-dimension are discussed.
5.2.1 Type of architectural component
Purchaser 1, purchaser 2 and purchaser/planner 1 state:
‘If motor manufacturer X were declared bankrupt, it would have major implications for our operations. We might maybe still be able to get a few motors from some other suppliers, but after that we would probably have to change our product architecture in a major way, which has implications for our engineering department, who have to design a new product and this implicates that our needs from some other suppliers change as well. As well is the case for wheel reduction caskets and hydraulic separate caskets. We would probably need about 3 or 4
months to be up and running our production again if those suppliers are not able to supply anymore.’
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5.2.2 Forecasting
The plant manager states:
‘We aim at sharing our production forecast with our suppliers. For the goods which are common, we ‘automatically’ forecast in our IT-system which is accessible to suppliers. For the goods needed in production which are customer-specific, we attempt to let our suppliers know as soon as possible which customer-specific goods are needed from them. Forecast for the upcoming six weeks is fixed, and the intention from the buyer is that they will buy 100% of
the goods which are placed in the category 0-6 weeks. For the period after, from 6-13 weeks, the buyer intents to buy is 75% of the goods, and for the period after, the intention is to buy
50% of the goods. We rarely have contracts with suppliers.’
Where purchaser 2 adds:
‘Forecasting has enabled us to deliver our products in a shorter timeframe. However, the difficulty is that some components cannot easily be forecasted since these are
customer-specific.’
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5.2.3 Average lead time
The short time to market has implications for suppliers as well; purchaser 1, purchaser 2 and purchaser/planner 1 state:
‘Lead times can be a problem for our operations. Some suppliers have a standard delivery time of about 8 weeks. If they are busy or something happens, this might just become 10 or 12
weeks. It can become a problem then if we have agreements with our buyers.’
As some components have a longer lead time than other components, average lead time per
component is added to the dimension supply risk. 5.2.4 Impact on assembly line
As the researched OEM makes use of an assembly line, a sequential process is used. It however differs per type of component being delivered too late whether or not assembly can continue.
As purchaser 1 states:
‘The sequence of assembly is not necessarily a strict sequence. If a certain type of good is delivered too late, assembling of the product can sometimes continue to a certain extent by changing the sequence of assembly. The guys at the assembly line can be quite inventive in these matters. However, for some other goods it is absolutely necessary that these arrive in
time correctly or assembly cannot continue.’
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5.3 Remaining factors influencing the supply chain network
This section encompasses a description of possible supply chain disruption in the case company on subjects which cannot be placed in either the strategic impact or supply risk section of the matrix. These should however not be considered as irrelevant as these affect the supply chain network as well.
5.3.1 Buyer/supplier communication:
A problem which arises in the supply chain which is not directly related to the strategic impact or supply risk factors is something as purchaser 2 calls: ‘Supplier mentality’.
Purchaser 1 confirms the lack of mentality detected in employees at some suppliers.
‘It is quite common I do not even get a response to some of my e-mails.’
‘Supplier X for example; when we order an x number of goods and we want to have these delivered in 16 weeks, it might just be the case that nobody fills us in on the status and when I
call them 15 weeks after ordering, they might not be able to deliver in time.’
There seem to be great differences in the way suppliers deal with certain situations. For example, Purchaser 1 and purchaser 2 state:
‘There are absolutely great differences in this, some suppliers do the right thing immediately, whereas other suppliers do not even put up a request for information on the product and
deliver a wrong product 10 weeks later. Especially with technical difficult products, dependence on suppliers is so great.’
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6. Results
In this section, the following research question will be answered:
(4) Which factors of the strategic impact and supply risk dimensions suggested by Kraljic (1983) should be added to the dimensions strategic impact and supply risk of the product portfolio model of an innovative OEM aiming at the production of customer-specific products
and which should not be added?
Based on the analysis in section 6, Kraljic’ (1983) standard criteria have been adapted in a team exercise with practitioners. For the dimension of strategic impact all of Kraljic’ (1983) factors have been included to the factors to be taken into account except the factor of volume
purchased. The volume purchased factor has been removed since this is not easily
quantifiable and the factor percentage of total purchase cost is perceived to be too closely related to the factor volume purchased. Thereby, degree of product flexibility; degree of
responsive flexibility; degree of interaction needed between buyer and supplier in design phase, perceived bargain power and degree of technical knowledge were all added to the
strategic impact dimension. For the supply risk dimension, Kraljic’ (1983) factor substitution
possibilities has not been included as this was considered to be closely related to factors product availability and number of potential suppliers. The factors type of architectural component, degree of the part forecast ability, average lead time of the part and impact on assembly line were all added to the supply risk dimension, as can be seen in the table on the
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Dimension Factor
Strategic impact Volume purchased
1. Percentage of total purchase cost
2. Impact of component quality on final product quality
3. Relevance of the product in achieving competitive advantage
4. Degree of product flexibility 5. Degree of responsive flexibility
6. Interaction between buyer and supplier in design phase 7. Perceived bargain power of the buyer
8. Degree of technical knowledge for part
Supply risk 1. Product availability
2. Long term supply difficulties 3. Number of potential suppliers 4. Switching cost to new supplier Substitution possibilies
5. Type of architectural component 6. Degree of part forecast ability 7. Average lead time
8. Impact on assembly line
Table 6.1: Adapted strategic impact and supply risk factors
36 Criteria 1 2 3 4 5 6 7 8 Priority weights 1 1 1.22 1.50 1.22 1.22 1.50 1.22 1.00 15,2% 2 0.82 1 1.86 1.22 1.22 1.50 1.22 1.00 14,9% 3 0.67 0.54 1 0.90 1.00 1.00 0.88 0.88 10,4% 4 0.82 0.82 1.11 1 1.00 1.22 0.90 0.90 11,9% 5 0.82 0.82 1.00 1.00 1 1.22 0.90 0.90 11,8% 6 0.67 0.67 1.00 0.82 0.82 1 0.90 0.90 10,4% 7 0.82 0.82 1.14 1.11 1.11 1.11 1 1.00 12,4% 8 1.00 1.00 1.14 1.11 1.11 1.11 1.00 1 13,1%
Eigenvalue=8.027 Consistency Ratio= 0.2%
Table 6.2: Prioritization table of strategic impact factors application and weights
Criteria 1 2 3 4 5 6 7 8 Priority weights 1 1 1.86 1.86 1.50 1.22 1.86 1.50 2.33 19,3% 2 0.54 1 0.90 0.90 0.86 1.00 0.90 1.00 10,6% 3 0.67 1.11 1 1.00 0.88 1.00 0.88 1.22 11,3% 4 0.67 1.11 1.00 1 0.90 1.22 1.00 1.50 12,4% 5 0.82 1.16 1.14 1.11 1 1.86 1.22 1.86 15,0% 6 0.54 1.00 1.00 0.82 0.54 1 1.22 1.22 10,8% 7 0.67 1.11 1.14 1.00 0.8 0.82 1 1.50 11,9% 8 0.43 1.00 0.82 0.67 0.654 0.82 0.67 1 8.3%
Eigenvalue=8.031 Consistency Ratio= 0.3%
Table 6.3: Prioritization table of supply risk factors application and weights
38
7. Discussion/recommendations
In this section, the following research question will be answered:
(5) To what extent can the recommendations of Kraljic’ (1983) product portfolio model be applied when applying the product portfolio model to an innovative OEM aiming at the
production of customer-specific products?
Obviously, buyer-supplier relationships do not necessarily need to have a ‘one-size-fits-all’ strategy for supplier management (Dyer, 1998). Therefore, this section assess whether or not the recommendations posed by Kraljic (1983) apply to the investigated innovative OEM aiming at the production of customer-specific products.
7.1 Strategic components 7.1.1 General recommendations
As the strategic (22) components form the most important quadrant of suppliers in terms of strategic importance and supply risk, monitoring of and communication with the suppliers of these components should be regarded as crucial. Therefore, decision making on these components should be centralized. Seen as product flexibility is of great importance to the case company, no long-term agreements should be made for all strategic components. First it needs to be assessed whether or not the supplier is able to adapt to product flexibility in the future. If this is the case, long-term agreements with this supplier might be considered. Close ties with suppliers can lessen risk associated with changing markets and volatile business conditions (Hartley & Choi, 1996; Wu & Liker, 2000).
7.1.2 Strategic makeable, metal components
39 should be done according to at least the white box-approach (Petersen, 2005). The primary advantage of having close ties with suppliers is that suppliers are willing to share technology, offer support and knowledge (Bravmen, 1993). For these components, checking consistency between technical drawings and the actual delivered product every once in a while should be used as risk mitigation. Second sourcing should be considered as a method for risk mitigation for these components in order to remain consistency between the technical drawings and actual product as a safety net in case one of these suppliers might not be able to deliver. When not choosing to second source, shortlists should be created of suppliers who have the manufacturing skills to be able to produce this product as well in a given timeframe. This might be the suppliers of the firms in the same holding. Having made a decision on the supply of these components, holding the current position and maintaining a strategic partnership, as Kraljic (1983) suggests for strategic components, should be considered as a key priority.
7.1.3 Strategic components with supplier bargain power
As the suppliers Michelin (tires), Marant (motor), Motrac (motor), Claas (cabin) as well as Comet SPA & Arag SRL (suppliers of actual spraying equipment) seem to have a great deal of supplier bargain power, holding the position and accepting a locked-in partnership, as Kraljic (1983) suggests for strategic components, might be considered as a good strategy as these suppliers have a monopoly position on the market. Terminating the partnership and finding a new supplier (as Kraljic suggests for strategic components) and thereby moving to the leverage quadrant would probably not be a realistic option. However, in order to strengthen the buyer’s position, pooling of purchasing power with other buyers who are buying from the same supplier (which can be for example the companies in the same holding) can be a good option to achieve some common buying power for two reasons: (1) having components delivered sooner and (2) bargaining lower part prices.
7.1.4 Strategic slot architectural components
40 Kraljic’ (1983) recommendation of ‘terminating the partnership and finding a new supplier’ will be applied.
7.2 Bottleneck components
As bottleneck components (11) do not influence strategic impact much but can pose supply risk, close ties with these suppliers might be considered and buffer stocks for additional security (since the price of these components might not be that high) should be considered as well. Although the strategic impact of these components on the OEMs end product is not so great, supply risk can still be regarded as being crucial. In this quadrant, electronic components are dominant: E components (electronic switches), EPR techno (prints), Mobile climate control (air-conditioning), a van der hof (electric wiring), Agrometius (GPS related electronics), Wurth (computer hardware). For these components, accepting dependence and reducing negative consequences, as Kraljic (1983) recommends for the bottleneck components, might be a good option for components with low switching cost. For the components with high switching cost, multiple sourcing (if possible) might be considered to decrease supply risk. If multiple sourcing is not possible, the recommendation posed by Kraljic (1983) to find other solutions by broadening product specifications might be considered as well.
7.3 Leverage components
41
7.4 Non-critical components
Seen as the non-critical components (26) do not pose much risk on both dimensions, time spent on these suppliers should be very limited. Two strategies are suggested by Kraljic (1983): pool purchasing and an individual ordering strategy. Pool purchasing, as Kraljic’ (1983) first recommendation is, might be applicable to this OEM to ensure supply and a steady price. The second recommendation of applying an individual ordering strategy by Kraljic (1983) might be applicable as well. Inventory of these components should be reduced to a bare minimum and should maybe even by managed by the supplier, according to a VMI-approach.
7.5 ‘In the middle components’
As the components delivered by Avnet & Prins (smaller metal components) and Agrotop & Lechler (spraying equipment) are positioned somewhat ‘in the middle’ of the matrix, it might not be smart to apply generic supplier relationship management strategies to these components. Therefore, a more in-depth look behind the data should be done to find out which characteristics position the part in that position. Based on these criteria, customized strategies to deal with these suppliers can be posed.
The recommendations posed by Kraljic (1983) can considered to be useful for determining strategies how to deal with certain suppliers in the context of innovative OEMs aiming at the production of customer-specific products. As one cannot apply generic recommendations per supplier positioned in a quadrant, per supplier should be evaluated which of Kraljic’ (1983) recommendations should be applied, if any.
7.6 Buyer/supplier communication
42 might be considered. If buyer/supplier communication becomes a real problem for leverage and non-critical components, finding a new supplier should be considered as supply risk is minimalized for these quadrants.
7.7 General comments on the matrix’ visual outcome
43
8. Conclusion
In this section, main research question will be answered:
To what extent can a product portfolio model be used for innovative OEMs aiming at the production of customer-specific products?
44 context of innovative OEMs aiming at the production of customer-specific products. As one cannot apply generic recommendations per supplier positioned in a quadrant, per supplier should be evaluated which recommendation might be useful.
8.1 General recommendations for the company
As the number of suppliers decreases by an increasing level of outsourcing, it has become increasingly important to monitor these suppliers and to have a back-up plan if one of these suppliers might not be able to deliver, especially if these suppliers are positioned in the strategic/bottleneck quadrant. Next to the production of self-propelled sprayers, this particular OEM is advised to keep assembling sugar beet harvesters as well in case a (long-term) supply problem for a particular critical self-propelled sprayer supplier arises. Thirdly, in order to keep on ‘continuously improving’, working together with other companies in the same holding on areas of purchasing and R&D processes for example might provide ideas on how to structurally improve the organization. If not decide to work together, consulting these companies on how certain situations are handled there might provide some interesting insights.
8.2 Limitations
45 involved. If the buyer has some kind of (personal) aversion to or friendship with a certain supplier, he or she might be biased towards this supplier in a negative or positive way. This might cloud his or her opinion and his judgment on certain situations. Another limitation of this thesis involves the fact that although the supply chain network of this OEM is being researched, no visits to the actual suppliers were paid due to the wide scope of suppliers.
8.3 Validity & Reliability
Generally, the validity of a thesis is measured by pointing out the relevance of the research method and the study in general to the point which is being made by the authors. Validity aims at ensuring that a thesis’ authors have attempted to make use of all the elements in their power, and did not just chose a side and sought arguments to support this point of view. Qualitative studies take into account a broader range of elements in the validity consideration when comparing it to quantitative studies (Golafshani, 2003).
Internal validity reviews the cause and effect relationship as well as the level of assumption of a thesis. Assumptions were avoided when writing this thesis. Not making use of quantitative
data in relation to supply chain disruption, before making assumptions on matters, the validity of the data was verified. All interviews were recorded and were typed out, after which the content of these interviews was checked with the interviewee.
External validity is related to how much generalization can be made out from the empirical findings into a broader theory. This thesis is based on the observation of solely one company,
and has been written in collaboration with this company, to give some insight the companies’ situation. Therefore, this study might not be of use to other companies facing similar problems or situations.
Construct validity is an overarching term to assess the validity of a measurement procedure that is used to measure something which will be investigated. All assumptions which could be
46 The reliability of a study is concerned with the limitation in replicating the study. The uniqueness of a certain study within a specific context can mitigate the replication of the study in another context as the issue of generalizability. The information used for writing this thesis has been collected from several employees who are involved with matters related to the scope of research of this thesis. All ‘hard’ information received when writing the thesis will still be accessible. The data concerning company processes, situations and possible problems were obtained from employees responsible for this certain task might be different if different employees would be employed.
8.4 Future research
47
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55 Appendix 2: Overview of number of suppliers at case company
No of regular suppliers Type of component Most recent year (April 201
3- April 2014)
The year before
(April 2012 – April 2013)
56 Appendix 3: Semi structured interview with the plant manager
Semi-structured interviews with plant manager:
1. What is your company structure? 2. What is your company vision?
3. What happens when I order a self-propelled sprayer? 4. Do you have any contracts with suppliers?
5. To what extent do you make use of modularity?
6. To what extent is the self-propelled sprayer customized? 7. To what extent do you have to deal with seasonal demand? 8. Is there a difference in approach to suppliers?
Appendix 4: Semi structured interviews with the purchasers/planners
1. What do you spent most of your time on in your job?
2. What type of problems do you incur in your job in relation to suppliers?
- Do these difficulties have to do with the type of product the supplier is providing? 3. Please explain to me how it works when you want to launch a new product; how is the
interaction between the R&D/Engineering department and the supplier?
4. How did you coop with suppliers in relation to the growth in output at your company over the last years?
- How did the suppliers coop with this situation?
5. To what degree did your self-propelled sprayer model change the last few years? - Do you have to find new suppliers for certain components every time you launch a new product?
6. What activities do you perform to try to mitigate risks with regard to the supply chain? 7. To what degree do you have bargaining buyer power? Or have suppliers bargaining
suppliers power?
8. What if a certain supplier is not able to deliver in time?
- What implications does it have for the assembly process if a certain supplier is not able to deliver?
57 11. To what extent is outsourcing made use of?
12. To what degree is forecasting done?
13. How far goes the level of supply chain collaboration? 14. Does a supplier ever complain to you about something?
15. Which type of goods/which suppliers pose the largest risk when you take up-scaling of production into account?
58 Appendix 5: Tables of priority from AHP analysis
Strategic Impact
1. Percentage of total purchase cost
Very low Low Medium High Very High Weights
Very low 1 0.50 0.33 0.20 0.12 4.7%
Low 2.00 1 0.50 0.25 0.20 7.7%
Medium 3.00 2.00 1 0.33 0.25 12.2%
High 5.00 4.00 3.00 1 0.33 26.1%
Very high 8.00 5.00 4.00 3.00 1 49.3%
Eigenvalue=5.125 Consistency Ratio=2.8%
2. Impact on final product quality
Very low Low Medium High Very High Weights
Very low 1 0.50 0.33 0.25 0.12 4.8%
Low 2.00 1 0.50 0.25 0.20 7.6%
Medium 3.00 2.00 1 0.33 0.25 12.0%
High 4.00 4.00 3.00 1 0.25 23.5%
Very high 8.00 5.00 4.00 4.00 1 52.1%
Eigenvalue=5.199 Consistency Ratio=4.4%
3. Relevance in achieving competitive advantage
Very low Low Medium High Very High Weights
Very low 1 0.33 0.25 0.20 0.11 3.7%
Low 3.00 1 0.33 0.20 0.20 6.9%
Medium 4.00 3.00 1 0.33 0.25 12.8%
High 5.00 5.00 3.00 1 0.20 23.2%
Very high 9.00 5.00 4.00 5.00 1 53.4%
59
4. Degree of part subjection to product flexibility
Very low Low Medium High Very High Weights
Very low 1 0.33 0.25 0.17 0.12 4.1%
Low 3.00 1 0.25 0.25 0.17 7.4%
Medium 4.00 4.00 1 0.50 0.33 17.7%
High 6.00 4.00 2.00 1 0.50 26.8%
Very high 8.00 6.00 3.00 2.00 1 44.1%
Eigenvalue=5.159 Consistency Ratio= 3.5%
5. Degree of part subjection to responsive flexibility
Very low Low Medium High Very High Weights
Very low 1 0.25 0.20 0.20 0.14 4.1%
Low 4.00 1 0.33 0.33 0.20 9.6%
Medium 5.00 3.00 1 0.50 0.50 19.8%
High 5.00 3.00 2.00 1 0.50 26.1%
Very high 7.00 5.00 2.00 2.00 1 40.4%
Eigenvalue=5.179 Consistency Ratio=4.0%
6. Degree of interaction needed between buyer and supplier in design phase
Very low Low Medium High Very High Weights
Very low 1 0.50 0.25 0.17 0.12 3.7%
Low 2.00 1 0.33 0.20 0.11 5.0%
Medium 4.00 3.00 1 0.20 0.14 9.8%
High 6.00 5.00 5.00 1 0.25 25.3%
Very high 9.00 8.00 7.00 4.00 1 56.1%
