Anna Quitt. Measuring Supply Management s Budget Effects

Transcription

1 Anna Quitt Measuring Supply Management s Budget Effects

2 GABLER RESEARCH Einkauf, Logistik und Supply Chain Management Herausgegeben von Univ.-Prof. Dr. Christopher Jahns Die Schriftenreihe stellt den State-of-the-Art betriebswirtschaftlicher Forschung am Supply Chain Management Institute (SMI) im Bereich Einkauf, Logistik und Supply Chain Management dar. Die Verbindung von Theorie und Praxis steht dabei ebenso im Vordergrund wie die internationale Ausrichtung und die unmittelbare Verknüpfung der Themen Einkauf, Logistik und Supply Chain Management.

3 Anna Quitt Measuring Supply Management s Budget Effects Introduction of Return on Spend as an Indicator of Supply Management s Financial Effectiveness With a foreword by Prof. Dr. Michael Henke RESEARCH

4 Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at Dissertation European Business School, International University Schloss Reichartshausen, Oestrich-Winkel, 2009 D st Edition 2010 All rights reserved Gabler GWV Fachverlage GmbH, Wiesbaden 2010 Editorial Office: Ute Wrasmann Britta Göhrisch-Radmacher Gabler is part of the specialist publishing group Springer Science+Business Media. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: KünkelLopka Medienentwicklung, Heidelberg Printed on acid-free paper Printed in Germany ISBN

5 Foreword Performance Measurement is currently one of the most talked about topics in Purchasing and Supply Management (PSM) in research as well as in business practice. However, it is not simply a business fad; researchers already introduced the Balanced Scorecard, a performance measurement method, to PSM a few years ago. A more novel idea in this context is measuring the budget impact of PSM its financial effectiveness. In business practice, only 10-20% of supply management s effectiveness can be identified retrospectively in the P&L account with current measurement methods. Thus, PSM is often criticised for only being able to demonstrate its efforts on presentation charts, so-called powerpoint savings. Therefore, researchers were requested to support practitioners in finding a solid and feasible solution to the problem of savings measurement. The derived solution measures PSM s financial effectiveness by integrating the function in the budgeting procedure, based on the following hypothesis: Only when supply management addresses its planned savings potential already in the budgets, it can show its comprehensive bottom line effect. Dr. Anna Franziska Quitt has addressed this issue in her doctoral thesis, Measuring Supply Management s Budget Effects. Introduction of Return on Spend as an Indicator of Supply Management s Financial Effectiveness in order to investigate this hypothesis and either confirm or refute it. Her research applies a comprehensive approach to Supply Effectiveness Measurement and thereby lays a solid foundation for future work by venturing into uncharted territory in science and practice. The objective is to determine whether and, if so, how supply management s budget effects and return on spend can be measured in a transparent and traceable way. Dr. Quitt applied a creative approach to this contemporary issue by linking different empirical research methods. As a first empirical step, a large-scale survey was conducted, which already provided very interesting and new insights about the status quo and future requirements of supply management savings measurement practices. Based on these results in combination with the findings from literature analysis, she developed first drafts of a budget effects measurement process. However, in order to meet her personal objective of developing a holistic and feasible process of measuring supply management s financial effectiveness based on the Design Sciences, Dr. Quitt further enhanced the measurement process design in a second step by performing in addition a long-term case study, a focus group, and two parallel single case studies within the scope of a hybrid qualitative research strategy. Based on her deep practical insight and the various derived contextual issues, which could occur in measuring supply management savings, she was able to transform each Design Proposition into a concrete Design Rule. These Design Rules offer variable context-based interventions to

6 VI Foreword support supply managers in substantiated measurement of budget effects. Therefore, the contribution of this application-oriented research to solving practical problems in measuring supply management s financial effectiveness can be evaluated as very high. The strength of Dr. Anna Quitt s work is demonstrated in her ability to comprehensibly place the different empirical research steps of her work in logical order, draw precise conclusions and derive a concept to comprehensively and solidly measure supply management s financial effectiveness with implications for science and practice. I am certain this dissertation will find broad readership. Wiesbaden, November 2009 Prof. Dr. Michael Henke

7 Preface Writing a doctoral thesis is like going on an adventure. First, you have this vague idea about reaching a special destination in my case, this was the achievement of the doctoral degree. Then you look more closely into the subject and you decide to become sort of a pioneer in this field. With this ambition, you equip yourself with all the relevant material and information. At this point in time, the adventure has already begun and the journey starts the journey to discover the unknown. In my case, this was the development and design of a valid and feasible concept for measuring supply management s bottom line impact. During an adventure, different approaches have to be used and stages be passed through to reach the final destination. In the course of this journey, I have gained many experiences and broadened my skill set. However, this would not have been possible, if I had not met people along the way, who supported me in good as well as critical situations. I want to thank all of them. However, there are certain persons, whom I want to thank in particular: First, I want to thank Professor Dr. Michael Henke, who enabled me as my first supervisor to do a doctorate. Based on his applied research approach, I was able to gain deep insight into practice, experience its immediate issues, and eventually obtain direct input for relevant research findings. I also want to thank Professor Dr. Ronald Gleich for accompanying me as my second supervisor. He always fostered my applied research approach and supported my work through constructive and very helpful feedback. One major stage during my doctoral studies was my stay at the Supply Chain Research Centre at the Cranfield School of Management. I want to thank Dr. Mark Johnson and Marko Bastl for inviting me as a research student and for their focus group collaboration and support. Together with Professor Alan Harrison and Heather Skipworth, they provided me with significant input for conducting and analysing my qualitative research. In addition, I would like to thank all practitioners, who participated in my survey and returned their questionnaire. Although I cannot mention the participants by name, I want to thank BeautyCo, BevCo, HealthCo, PhoneCo, and SmoCo for their research collaboration. I want to thank Bernd G. Bucher not only for his flexible proofreading activities, but especially for our discussions about all the different challenges during this time. Above all, I want to thank my family. My parents have always been standing behind me, supporting my educational career. Together with my brother Johannes, they were always there and provided me with all the support, which I required along the way. Therefore, I would like to dedicate this doctoral thesis as acknowledgement of gratitude to my family. Medlingen, November 2009 Dr. Anna Franziska Quitt

8 Overview Table of Contents... XI Index of Appendixes...XV List of Figures... XVII List of Tables... XXI List of Abbreviations...XXIII 1 Problem Set and Course of Investigation Supply Management s Bottom Line Impact A Never Ending Issue? Objectives and Research Questions of This Thesis Course of Investigation Supply Management s Financial Effectiveness The Story Behind it Supply Management s Role and Corporate Value Contribution Supply Management s Financial Effectiveness Return on Spend Design Implications for Measuring Supply Management s Budget Effects Interim Result: Return on Spend as Newly Defined Indicator of Supply Management s Financial Effectiveness Measurement of Supply Management s Bottom Line Impact: Status Quo and Future Requirements Quantitative Methodology Status Quo of Savings Measurement Practices Requirements for Supply Management s Budget Effects Measurement Interim Result: Existent Need and Preparedness for Advanced Savings Measurement in Practice Measurement Process Design: Measuring Supply Management s Budget Effects A Qualitative Approach Contextual Case Analysis Integrated Planning and Budgeting as a First Step Towards Solid Budget Effects Measurement From Planning to Measurement A Structured and Integrated Budget Effects Measurement Approach Interim Result: Five Design Rules as a Guideline for the Configuration and Functional Set-Up of the Budget Effects Measurement Process...174

9 X Overview 5 Process Implementation Design: Implementing Supply Management s Return on Spend Definition of Measurement Process Requirements Identification and Discussion of Measurement Process Inhibitors Analysis of Measurement Process Enablers Management Implications Interim Result: One Design Rule as a Guideline for the Implementation and Organisational Set-Up of the Budget Effects Measurement Process All-Encompassing Final Statements Limitations of Research Future Research From Planning to Measurement Six Design Rules as Guidance for a Solid Measurement Approach of Supply Management s Budget Effects Reference List Appendix...237

10 Table of Contents Table of Contents... XI Index of Appendixes...XV List of Figures... XVII List of Tables... XXI List of Abbreviations...XXIII 1 Problem Set and Course of Investigation Supply Management s Bottom Line Impact A Never Ending Issue? Objectives and Research Questions of his Thesis Course of Investigation Supply Management s Financial Effectiveness The Story Behind it Supply Management s Role and Corporate Value Contribution Effective Supply Management Key for Becoming an Equal Business Partner Purchasing Performance Versus Performance of Purchasing A Modified Understanding of Supply Management s Value Contribution Different Issue, Participants, and Interests A Principal Agent Perspective Supply Management s Financial Effectiveness Return on Spend Discussion of Different Performance Management Systems as Potential Role Models for Supply Management s Effectiveness Indicator Discussion of Different Financial Performance Indicators as Potential Role Models for Supply Management s Financial Effectiveness Indicator Supply Management s Budget Effects as Refined Savings and Basis for Financial Effectiveness Measurement An Integrated Budgeting Approach Design Implications for Measuring Supply Management s Budget Effects Process-Related Implications A First Draft of an Integrated Budget Effects Measurement Process Organisational Implications The Consideration of Soft Factors Within the Context of Change Research Design and Process from the Design Sciences Perspective Interim Result: Return on Spend as Newly Defined Indicator of Supply Management s Financial Effectiveness...60

11 XII Table of Contents 3 Measurement of Supply Management s Bottom Line Impact: Status Quo and Future Requirements Quantitative Methodology Questionnaire Design Data Collection Sampling Status Quo of Savings Measurement Practices Sample Characteristics The Relevance of Measuring Supply Management s Bottom Line Impact Current Savings Measurement Practices Requirements for Supply Management s Budget Effects Measurement Components Relevance for an Adequate Measurement Approach Dependence of Measurement Certainty on Specific Measurement Components Design Implications of the Survey Results for the Measurement Approach A Second Draft of an Integrated Budget Effects Measurement Process Interim Result: Existent Need and Preparedness for Advanced Savings Measurement in Practice Measurement Process Design: Measuring Supply Management s Budget Effects A Qualitative Approach Contextual Case Analysis The Different, Applied Qualitative Methodologies Identification of Contextual Issues in Practice to be Aware of in the Further Concept Establishment A Contextual Exploration Consolidation and Classification of the Different Relevant Contextual Issues Integrated Planning and Budgeting as a First Step Towards Solid Budget Effects Measurement Definition of Measurement Prerequisites Design Rule Outline of a Comprehensive Supply Planning Process Design Rule An Integrated Budgeting Approach Design Rule From Planning to Measurement A Structured and Integrated Budget Effects Measurement Approach Realisation and Monitoring Design Rule Measurement and Reporting Design Rule Process-Design Implications of the Case Study Research - The Final Draft of an Integrated Budget Effects Measurement Process...172

12 Table of Contents XIII 4.4 Interim Result: Five Design Rules as a Guideline for the Configuration and Functional Set-Up of the Budget Effects Measurement Process Process Implementation Design: Implementing Supply Management s Return on Spend Definition of Measurement Process Requirements One-Dimensional Requirements: Data or Process or Behaviour Two-Dimensional Requirements: Data & Process & Behaviour & Data Three-Dimensional Requirement: Data, Process, & Behaviour Identification and Discussion of Measurement Process Inhibitors Identification of Requirement Gaps A Methodological Excursus Requirement-Gap-Analysis Requirements Versus Status Quo Discussion of Inhibitors Data, Process, & Behaviour Analysis of Measurement Process Enablers Management Implications Corporate Enablers Supply Management-Specific Enablers Implementation Process Design Rule Interim Result: One Design Rule as a Guideline for the Implementation and Organisational Set-Up of the Budget Effects Measurement Process All-Encompassing Final Statements Limitations of Research Future Research From Planning to Measurement Six Design Rules as Guidance for a Solid Measurement Approach of Supply Management s Budget Effects Reference List Appendix...237

13 Index of Appendixes Appendix A: Questionnaire Appendix B: Survey Non-response bias Appendix C: Industry-specific implementation of total savings measurement practices Appendix D: Industry-specific implementation of bottom line effective savings measurement practices Appendix E: Survey response pattern Currently applied savings measurement basics Appendix F: Survey response pattern Savings identification Appendix G: Survey response pattern Savings definition Appendix H: Set of potential standard supply management savings initiatives Appendix I: Selection criteria for pilot categories Appendix J: Three different budget effects scenarios in case of the occurrence of contingency factors Appendix K: Focus Group questionnaire on measurement requirements

14 List of Figures Figure 1: Major supply management trends....2 Figure 2: Components of supplier relationship management....3 Figure 3: Profile of a world-class supply manager equipped with technical and soft skills...3 Figure 4: Course of investigation...6 Figure 5: Gap between supply management s self-perception and corporate perception Figure 6: Development from clerical purchasing to effective supply management Figure 7: Classification of relevant stakeholders for supply management s bottom line impact Figure 8: Bottom line impact measurement leading to a principal-agent problem...17 Figure 9: Measurement cube for the classification of financial performance measures Figure 10: Measurement cube for the classification of financial performance measures Status quo Figure 11: Different scenarios for challenging the traditional savings definition Figure 12: Development towards budget effects as future value contribution measurement object...34 Figure 13: Classification of the different budgeting approaches...36 Figure 14: Activity-based budgeting process Figure 15: Modified budgeting process with supply management s involvement Figure 16: Definition of supply management s bottom line impact...42 Figure 17: First draft of an integrated RoS measurement approach Figure 18: Communication and information channels between supply management and its environment Figure 19: Alternative forms of engaged scholarship...53 Figure 20: Research and development cycle in science-based design...56 Figure 21: Design research process aligned with the modified design research cycle...57 Figure 22: Questionnaire structure...65 Figure 23: Questionnaire responses...66 Figure 24: Industrial distribution Figure 25: Distribution over corporate sales volume, purchasing volume, and PSM employees....70

15 XVIII List of Figures Figure 26: The relevance of measuring supply management s bottom line impact Figure 27: The importance of PSM value contribution measurement to different hierarchical functions Figure 28: Currently applied total savings and bottom line effective savings measurement practices Figure 29: Reasons for measuring supply management s total savings Figure 30: Critical elements in traditional savings measurement practices...75 Figure 31: Status quo of currently applied supply savings measurement practices Figure 32: Calculation process of bottom line effective savings...77 Figure 33: Certainty on the measurement results within the different industries...78 Figure 34: Reasons for the measurement result uncertainty...78 Figure 35: Measurement components Comparison between ideal, present, and future state Figure 36: Second draft of an integrated RoS measurement approach...86 Figure 37: Status quo of savings measurement practices Figure 38: Overview of the interplay between the three different applied research methodologies Figure 39: General focus group process framework Figure 40: Change in the organisational setting of corporate purchasing between the phases Figure 41: The theoretical budget impact measurement process on business unit level Figure 42: Purchasing-internal customer alignment and transparency Figure 43: Translation matrix for a common language Figure 44: Composition of a cross-functional sourcing team and the individual planning tasks Figure 45: The pillars of a comprehensive, cross-functional supply planning process Best Practice Figure 46: Strategic supply portfolio analysis Figure 47: Four-step supply strategy process Figure 48: Integrated bottom-up budgeting process Best Practice based on BevCo and SmoCo Figure 49: Integrated top-down budgeting process Best Practice based on HealthCo...151

16 List of Figures XIX Figure 50: Shadow -budgeting process for indirect material Best Practice based on PhoneCo Figure 51: Further elaborated translation matrix for the savings-budget link Figure 52: Process from initiative definition to initiative realisation Figure 53: Degrees of Realisation-logic Figure 54: Rolling realisation tracking and monitoring cycle Figure 55: The official pot -reinvestment process Best Practice Figure 56: The full range of supply management s budget effects Figure 57: Budget effects measurement methodology Figure 58: Total versus supply management s budget effects Calculation process Figure 59: Supply management s budget effects Graphical solution Figure 60: Three options for accounting budget effects in the case of a 4-year framework agreement Figure 61: Final draft of an integrated RoS measurement approach Figure 62: Requirements for measuring supply management s budget effects Figure 63: Requirement gaps for the four participating focus group companies Figure 64: Classification of the different inhibitors Data, Process, & Behaviour Figure 65: The designed nine-step implementation approach Implementation code of practice Figure 66: Flow of argumentation in Chapter

17 List of Tables Table 1: An overview of selected performance management systems Table 2: Overview of relevant budget effects measurement components Table 3: The impact of the measurement components on the measurement certainty Table 4: Overview of the structure of the longitudinal single case study Table 5: Overview of the structure of the focus group workshops Table 6: Overview of the structure of one single case study Table 7: Overview and classification of the different contextual issues Table 8: Overview of the different budgeting process characteristics of the case companies Table 9: Business year relation in the case of a single or multi-year contract Table 10: List of budget effects measurement inhibitors

18 List of Abbreviations $ = U.S. Dollar (USD) = Pound Sterling (GBP) ABB = Activity-Based Budgeting ABC = Activity-Based Costing ABP = Affiliate Budget Planning BE = Budget Effects BME = Bundesverband Materialwirtschaft, Einkauf und Logistik BOM = Bill of Materials BSC = Balanced Scorecard BU = Business Unit BY = Business Year CAPEX = Capital Expenditure CC = Cost Centre CDI = Cost Development Index CEO = Chief Executive Officer CFO = Chief Financial Officer CFRoI = Cash Flow Return on Investment CIMO = Context Intervention Mechanism Outcome COO = Chief Operating Officer CPO = Chief Purchasing Officer CR = Cost reduction DOC = Degrees of Confidence e.g. = for example ( exempli gratia ) EBIT = Earnings before Interest and Tax Ed(s) = Editor(s) ed. = Edition EFQM = European Foundation for Quality Management-Model EVA = Economic Value Added FB = Financial Benefit FMCG = Fast Moving Consumer Goods GM = General Manager HoP = Head of Purchasing HQ = Headquarters i.e. = that is ( id est ) I 1 = Intervention 1, etc. IC = Internal Customer

19 XXIV List of Abbreviations KPI = Key Performance Indicator Mat# = Material number NOPAT = Net Operating Profit after Tax OPEX = Operational Expenditure PO = Purchase Order PSM = Purchasing and Supply Management RfQ = Request for Quotation RoI = Return on Investment RoS = Return on Spend SM = Supply Management SWOT = Strengths, Weaknesses, Opportunities, and Threats TCO = Total Cost of Ownership UK = United Kingdom UoA = Units of Analysis vs. = versus WACC = Weighted Average Cost of Capital