0000Master Thesis Report
STRATEGIC SOURCING & SHARED PROCUREMENT SERVICES
Submitted in fulfillment of the Degree MBA (Master of Business Administration)
Area of Operations & Strategic Management
MANAGEMENT DEVELOPMENT INSTITUTE – GURGAON
Student:Ajay Kumar GuptaStudent Number: 16PT2-01
Chair: Manoj Srivastava Operations Management
First Supervisor: S. Chatterjee Operations Management
Second Supervisor: Veeresh Sharma Strategic Management
External Supervisor: Abhijit Guha McDermott Inc (Formerly CB&I)
STRATEGIC SOURCING & SHARED PROCUREMENT SERVICES
SHIFT FROM A TACTICAL COST SAVING TO A STRATEGIC VALUE DRIVEN
Ajay Kumar Gupta
Student number: 16PT2-01
Supervisor: Prof. Mr. S. Chatterjee
Advisor/Guide/ Mentor: Mr. Abhijit Guha
Master’s Dissertation submitted to obtain the degree of Master of Business Administration
Academic year: 2016 – 2018
I declare that the content of this Master’s Dissertation may be consulted and/or reproduced, provided that the source is referenced.
Name student: Ajay Kumar Gupta (Signature)
Strategic sourcing, being a part of procurement/ Supply chain management, is nowadays not just focused on costs savings but also on supporting the company in realizing its long-term goals. Thus, strategic sourcing has become a critical part of strategic management that is focused on a company’s sourcing decision making. This shift in strategic sourcing decision making from a tactical way of cost savings towards a strategic way of value analysis Total Cost of Ownership in the defined frame of the objective area.
From Organization perspective, strategic sourcing is currently still (mostly) driven by a tactical thinking converge primarily on cost savings or Potential cost saving. The shift in thought process / wishful thinking is yet to be translated from theory to a Data-Driven Model of value analysis. The practitioners, do not understand what exactly is cost saving and strategic sourcing decision making and what value-driven strategic sourcing decision as Practice.
Therefore, the fundamental research question is: “What is the difference between cost saving based strategic sourcing model and value-driven decision-making Model?”
This is an attempt to establish work at Shared Procurement Services (SPS) aimed at developing a toolkit to support informed sourcing strategy-making. The toolkit rationale and background will be presented. The focus will then be on discussing three major outcomes of the research so far: the global sourcing process model, the project management checklists and the IT-enabled sourcing module. The work done to develop the main concepts behind the aforementioned outcomes -as a combination of literature study and experience gathered while working on global projects from a shared services center in Energy and Infrastructure Company and thought to implement the concepts carried out in consultation with Regional Supply Chain Leadership who is a champion/service provider expert in supply chain optimizations. This paper contribution lies in addressing the lack of usable theories and tools to support sourcing decision making in today’s global environment.
In this dissertation, shift based on the literature review on strategic management and strategic sourcing. To address this research question, we define the research objective to develop two models, one for cost saving and one for value-driven strategic sourcing decision making. These models include different decision categories, questions, metrics, and methods. After this, we describe how you can move from cost saving to value-driven strategic sourcing decision making in a gap analysis. Finally, we apply a case study in McDermott Inc. to demonstrate the developed models and evaluate their correctness.
Writing a master dissertation is the biggest challenge to obtain the certificate of a Business Graduate. This thesis would not be on point without the help of several people, in particular, my advisor Mr. Abhijit Guha & and McDermott Inc. for the company case study. I would like to take this opportunity to thank them all.
I want to thank my advisor Mr. Guha for his help, feedback, and guidance. Furthermore, I want to thank Mr. Guha and Prof. Dr. Chatterjee for providing me this subject. My research has helped me gain insight and interest in strategic sourcing and eventually will contribute to the SCM organization with my McDermott Inc.
Finally, I want to thank, my Family and Office Colleagues who supported me for all their support during difficult moments and for their belief in me.
In recent years, the role of procurement within supply chain management has become more and more important. Due to global competitive market with abundance of information (mostly digital) technological complexity and the need for a sustainable competitive advantage. (Castells, 1996; Erridge, 1995; Möller, Rajala & Svahn, 2005, p. 1274). Being a part of procurement Strategic sourcing is not just focused on costs savings but also on supporting the company in realizing its long-term goals. In this way, strategic sourcing has become a critical part of strategic management that is focused on a company’s sourcing decision making. (Rafati ; Poels, 2015, p. 1; Weele, 2010). The shift in strategic sourcing decision making from a historical and tactical short-sighted focus on cost savings towards a strategic or value is driven (future vision) has been realized and identified. The cost reduction initiatives within an organization focus on minimizing costs, competition with suppliers. The Organization and SCM function including sourcing department are trying to achieve their own goals independently.
The value-driven thinking focuses on the company’s capabilities and competencies, partnerships with suppliers and alignment of company’s and sourcing goals. (Axelsson, Rozemeijer ; Wynstra, 2005; Cox, 2014; 2015) Strategic sourcing decision making is the scope of this master dissertation. Strategic sourcing decisions are, for example, Procure locally or source globally, and supplier selection. The need to shift to value-driven strategic sourcing decision making is only yet defined at a theory level. In the real-world environment, strategic sourcing is currently still (mostly) driven by a tactical way of thinking focused on cost savings. The shift is not clear for practitioners, they do not understand what exactly cost saving strategic sourcing decision making is and what value-driven strategic sourcing decision making is.
Some companies say they have value-driven strategic sourcing decision making, but practically they only have cost savings strategic sourcing decision making. Therefore, we define the following fundamental research question in this area is: “What is the difference between cost saving and value-driven strategic sourcing decision making?”
My focus is to illustrate this paradigm shift for practitioners by clearly defining what cost-saving strategic sourcing decision making is, what value-driven strategic sourcing decision making is and how you can go from cost saving to value-driven strategic sourcing decision making. For this reason, I aim to develop two separate models, one for cost saving and one for value-driven strategic sourcing decision making.
This study is structured as follows. Initially, we propose a literature review on strategic management and strategic sourcing. After this, we present the research problem and solution and describe our research methodology, the design science research method. Next, we develop the models and describe how you can move from cost saving to value-driven strategic sourcing decision making in a gap analysis. Furthermore, we apply a case study in Nokia to demonstrate the developed models and evaluate their correctness. In this case study, we observe if McDermott agrees with these models and how McDermott experiences the paradigm shift from cost saving to value-driven strategic sourcing decision making. Finally, we elaborate our general conclusions and make suggestions for future research.
At the end of this literature study, we hope to have found the strategic importance of strategic sourcing to confirm and define the paradigm shift, based on existing research. In order to identify the strategic way of thinking in strategic sourcing, we will go through a certain number of steps. To start, we introduce the concepts of strategic management and the strategic decision-making process, which is the domain in which we situate this master dissertation. After this, we will look into the process of procurement and strategic sourcing. Next, we will discuss the current trends in strategic sourcing decision making and identify strategic sourcing as critical part of strategic management. Then, we will elaborate on strategic sourcing decision-makers and perspectives in strategic sourcing decision making. Finally, we look into different strategic sourcing methods and link these to either a tactical or strategic way of thinking.
The strategy is evolving as a discipline/ function in various organizations. The importance of strategy is to determine company’s goal or assimilate the market intelligence for its customers as well as competitions. Strategic management allows an organization to be more proactive than reactive in shaping its own future; it allows an organization to initiate and influence (rather than just respond to) activities and thus to exert control over its own destiny. According to Hill and Jones (2011:2) Strategy is an action that firm manager planned an implement in the company with the purpose to increase company`s business performance relative to rivals. According to Armstrong (2012: 15), defines strategy as a declaration of intent which defines how to achieve the goals and heed in earnest allocation of corporate resources that are essential for the long-term and match resources and capabilities with the external environment.
According to David and David (2015: 39), Strategic management is an art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve determined objectives. The definition implies on management focuses on integrating functional areas, Sale (marketing)and finance/accounting, production, operations (Supply chain Management is part of operations), R&D and Management Information System (MIS) to achieve organizational success. The key aspect of strategic management is achieving a sustainable competitive advantage. It is the superior long-term benefit obtained by the implementation of a unique, unimitable value-creating strategy. Superior, in sense of creating more value than competitors.
Strategic decision making is the process itself of generating, implementing and controlling strategies so as to realize the goals. There are three levels of strategy: corporate, business and functional strategy. The corporate strategy defines in which industries and markets the company is going to compete. The business strategy defines how a company competes within a particular industry or market. This process is initiated by doing the macroeconomic external environment analysis. This leads to the elaboration and implementation of business strategies through individual functions. Figure 1 (Macro-environment analysis).
The process can be subdivided into six steps and is visualized in Figure 2. Define the company’s goals which are the reflection of vision, mission, and values. It is essential for every business to consider external forces before decisions making. Managers/individuals have limited imagination that too by their own experience and beliefs. Which often leads to behavior of neglect the reality or to refuse to recognize the critical changes in the environment. In the competitive environment or age of quick decision-making act with careful analysis of the situation rather than the judgment and instinct is expected.
Social: The social developments include factors like consumer behavior demographics, religion, lifestyles, values, and advertising.
Technological: The technology aspect of STEEP analysis focuses highly on technological advancements. It includes factors like innovation, communication, energy, transport, research and development, patent regulations and life-cycle of products.
Economic: The economic condition is strongly associated with the consumers’ buying position. In this step, factors such as interest rates, international trade, taxes, savings, inflation, subsidies, availability of jobs and entrepreneurship are considered.
Environmental: Environmental developments involve ecosystem factors such as water, wind, food, soil, energy, pollution and environmental regulations.
Political: The Political developments can highly influence individuals and organizations. It is important to be aware of likely upcoming shifts in power. Political developments can affect environmental, antitrust, financial markets, trade, and other kinds of laws. Factors to be considered include political stability, regulation of monopolies, tax policies, price regulations consumer protection, jurisdiction, and trade unions.
STEEP is commonly used to gain an insight into past, current, and future of the external environment developments during times of uncertainty, times of information overload and times of disorganization.
So, the STEEP analysis is conducted when members are unsure about how the market will react to changes in particular elements. It’s also used when there is a constant flow of information from the external environment for a company or when firms seem confused about the external environment.
Which STEEP factors you should rely on more depends highly on your field of interest or aim. B2C firms, for example, are most likely to focus on the social factors. Large non-profit companies, on the other hand, would perhaps be more concerned about the political factors. The factors which are most likely to alter and affect entities directly are the most crucial ones.
The analysis is conducted by organizations to who intend to control developments in the contextual factors. These are usually carried by individuals but is most commonly performed at Organizations firm’s corporate level or a division. It is important to follow some steps to get the best results in the time invested in executing the analysis. The primary goal of the analysis is to assess the competition and attractiveness of the business environment. The internal analysis is performed to identify the competitive advantage (cost or differentiation). Having a competitive edge advantage over the competitor’s results in higher margins. Cost and differentiation are summarized by identifying the synergy within the company.
As per Porter’s model of the value chain, Companies’ activities are split up into primary and support activities to examine the sources of the competitive advantage. Resources and capabilities are continuously built/ enhanced to sustain or build a sustainable competitive advantage. These capabilities/resources shall strategically fulfill the features of VRIN Framework/VRIO Analysis.
Birger Wernerfelt came up with the resource-based view (RBV) in 1984 as “a basis for the competitive advantage of a firm that lies primarily in the application of a bundle of valuable tangible or intangible resources at the firm’s disposal.” This influential theory has become the basis of several frameworks, including VRIO.
According to Wernerfelt’s theory, a business is a bundle of resources. Businesses differ depending on what these resources are and how they are combined with one another. Resources include but are not limited to processes, capabilities, assets, attributes, information, and knowledge. Together, they allow businesses execute their relevant activities.
Not all resources of a business are equally and strategically relevant however certain resources give the business a competitive advantage. These VRIN characteristics, which can be discovered by focusing on four essential qualities:
Value: Resources that can bring value can be a source of competitive advantage. Keep in mind that not all resources are equally easy to obtain.
Rareness: Resources that are available to all competitors rarely provide any significant competitive advantage.
Imitability: An ideal resource cannot be obtained by competing businesses.
Non-substitutable: An ideal resource cannot be substituted by any other resource.
The American professor in strategic management Jay Barney in 1991, evolved the VRIN framework to VRIO, as a complete framework. The change of the last acronym refers to the question of “organization”, which is the ability to exploit the resource or capability or both. Barney realized that the business must also be ready and able to utilize the resource to capitalize on its value. A resource that meets each of these four criteria can bring about competitive advantage to the business. The VRIO framework is particularly useful for assessing and analyzing a firm’s internal resources and its potential for applying these resources to achieve competitive advantage. A competency is a unique company-specific ability to create value for its customers and so central to its strategy (in order to achieve a competitive advantage). For example, the combination of technology and innovation capability are the basis of a company’s product design skills.
The next step is the generation of strategic alternatives (strategies and strategic decisions). As a result of the above analysis can be generated on the basis of a SWOT analysis. SWOT analysis is a process that identifies an organization’s strengths, weaknesses, opportunities, and threats. Breaking down ‘SWOT Analysis helps to outline strengths, weaknesses, opportunities, and threats that organization perceive. The external and internal analysis are put together to develop strategies based on fitting strengths and opportunities, exploiting strengths to minimize threats, acting on opportunities to improve weaknesses and avoiding weaknesses to eliminate threats. The generated alternatives can be assessed against two conditions: expected economic impact and expected implementation. This helps in quantitative analysis of the strategic alternatives.
The fourth step is the evaluation and choice of strategic alternatives. The evaluation and selection of a strategy are to review the results of the strategic situation assessment consisting of an analysis of the general, industry, and internal environments, in terms of factors critical to the success of the business.
George Steiner stated that three types of data are required to perform a situation audit: identifying threats, strengths, and weaknesses.
Past performance of the firm.
Data about the current situation, including:
Forecasts of the future.
Critical success factors (CSFs) for any business are the limited number of areas in which satisfactory results ensure successful competitive performance. The following five criteria tend to determine which factors are critical to the business and their relative importance:
Impact on performance measures, such as market share, profits, cash flow, and the like.
Relationship to strategic thrusts, such as differentiation, costs, segmentation, preemptive, turnaround, renewal, and the like.
Relationship to the life-cycle stage, that is, introduction, growth, maturity, and aging and decline.
Relates to a major activity of the business, such as marketing at IBM.
Involves large amounts of money relative to other activities of the firm.
There are several techniques for identifying CSFs for a business, its industry, and its general environment. It is important to evaluate the firm, but it is equally important to evaluate the capabilities of competitors. The evaluation takes place at the corporate, business, and functional levels, with close scrutiny of policies and plans at each of these levels. For multi-industry and multiproduct/product firm, strategic analysis begins at the corporate level. Functional strategies are identified to initiate and control daily business activities in a manner consistent with business strategy
The fifth step is the implementation of the strategies. This is a process of turns strategies and plans into actions in order to accomplish strategic objectives and goals. Implementing strategic plan is more important, than the strategy. Critical actions move a strategic plan from a document to actions that drive business growth. However, for the majority of companies who have strategic plans fail in implementation. According to Fortune Magazine, nine out of ten organizations fail to implement their strategic plan for many reasons:
60% of organizations budgets are not linked to strategy
75% of organizations don’t link employee incentives to strategy
86% of business owners and managers spend less than one hour per month discussing strategy
95% of the typical workforce doesn’t understand their organization’s strategy.
A strategic plan provides a business with the roadmap it needs to pursue a specific strategic direction and set of performance goals, deliver customer value, and be successful. However, this is just a plan/ roadmap; it doesn’t guarantee that the desired performance.
The last and sixth step is controlling if the chosen strategies realize the goals. Kenneth Andrews, long-time Harvard professor and editor of the Harvard Business Review, published the first edition of The Concept of Corporate Strategy in 1971 and updated it in 1980. His published definition of strategy took this form in the 1980 edition: “the pattern of decisions in a company that determines and reveals its objectives, purposes or goals, produces the principal policies and plans for achieving those goals, and defines the range of businesses the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to Strategy, Strategic Planning, Strategic Thinking, Strategic Management ( Fred Nickols 2016 Page 2). George Steiner, a co-founder of the California Management Review, and author of the 1979 “bible,” Strategic Planning: What Every Manager Must Know, observed that there was little agreement on terms or definitions and confined his discussion of the definition of strategy to a lengthy footnote. But, nowhere does he define strategy in straightforward terms.
In what goes further, the focus lies on strategic sourcing as part of strategic management. As a consequence, we can define the strategic sourcing decision-making process, which is the scope of this master dissertation. Goals become sourcing goals such as value-driven goals, cost-saving goals, long-term and short-term goals. Core competencies obtained out of the internal analysis are no longer only evaluated by the VRIN model but via spend analysis, capability analysis and cost-benefit analysis. Furthermore, strategic alternatives become strategic sourcing alternatives such as Local vs Global Suppliers/Vendors, Supplier Selections, Commodities /Category, Consolidation and Shared Procurement Services (SPS).
Procurement and strategic sourcing
The starting point of supply chain process within an organization is to define procurement and strategic sourcing. The supply chain is an E-to-E Process starting from starting from receiving an order from a Customer to be part of the chain of command till the customer receives it. (It can be a product or service). Prime focus procurement process is to arrange/purchase goods or services needed for the end product or service. Procurement department also consists of functions such as demand planners, purchasing agents, selecting suppliers, contracting, ordering and monitoring delivery and ensuring the payment. (Weele, 2010). Thus procurement process can be subdivided into two major sub-processes: a strategic and an operational one (Figure 2). The first sub-process is sourcing, it includes spend analysis, strategic sourcing and contract management. Strategic sourcing is focused on choosing the right sourcing strategies, suppliers’ selection and the evaluation of suppliers’ performance relative to the company’s goals. The second sub-process consist of all activities from purchasing to payment P-to-P Procure to Pay. (Rafati ; Poels, 2016).
In History, Organizations were able to earn high profits as, markets and distribution channels were regulated and resources were scarce and organizations were primarily concerned about reducing minimizing costs. (Doyle, 2000; Lindgreen ; Wynstra, 2005, p. 732) The need for a sustainable competitive advantage, changing markets, increasing importance of knowledge, technological complexity, global competition and availability of digital information. (Castells, 1996; Erridge, 1995; Möller, Rajala ; Svahn, 2005, p. 1274) These changes in recent years have elevated supply chain management as an important function so and so as procurement. The role of procurement itself within supply chain management has increased. Strategic sourcing professionals have realized that procurement is not just a cost function, but also a supports the company’s effort to realize its long-term goals. Being critical decision maker representing Organization’s strategy, the strategic sourcing also gets involved in decision-making related company’s procurement activities. (Rafati & Poels, 2015, p. 1; Weele, 2010)
The shift in strategic sourcing decision making from a tactical way / traditional thinking focused on cost savings to the strategic way of thinking focused on value-based approach. Traditional procurement was not able to support the company’s effort to realize its long-term goals, such as value creation. The Prime focus was to minimize costs, competition with suppliers. Both Supply Chain Function/ Group and Organization were working to achieve their own goals independently. Tactical sourcing decisions such as selection of Cheapest Supplier, procuring locally etc. The strategic thoughts focus on the Organization’s and Supplier’s capabilities and competencies, partnerships with suppliers, and alignment of company’s and sourcing goals. (Axelsson, Rozemeijer & Wynstra, 2005; Cox, 2014; 2015)
Sourcing contributes to a rapidly changing environment to the competitive advantage of the Organization through the configuration of VRIO resources and capabilities within a changing environment. (Hill &Jones, 2012) To add, value-driven management is also able to support a company in enhancing value creation by improving quality, mitigating risk, driving innovation and fostering long-term partnerships. (Rafati & Poels, 2016, p. 7). Value-driven sourcing decisions are for example strategic Long-term Supplier Agreements, and supplier and buyer working together in the long term and co-creating value for each other. For example, Vendor Managed Inventory (VMI) is implemented in more and more Automobile companies and as a consequence, they encounter high pressure to stay competitive in the market by reducing inventory carrying a cost. This is possible through close and joint-creation relationships with their suppliers and in this manner the responsibility of the purchasing manager’s gains importance. Executives have changed the way they think of the scope of sourcing within their company and identify opportunities in sourcing that can be a source of competitive advantage. (Kotabe ; Murray, 2004).