The method for customer-driven purchasing

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Presentation of empirical data

This chapter will present the empirical findings that have been gathered trough interviews, observations and document studies. The first part will introduce the reader to the four case companies by providing a short, but elaborative presentation of them. The second and last part will present the empirical data gathered at the companies. All data that are published in this chapter is approved and verified by the companies.

Description of case companies

This section will present the four case companies and provide the reader with the context of where the results derived from. Hence, this will enable the fulfillment of the transferabil-ity criteria, as stated by Guba and Lincoln (1989).

Siemens Industrial Turbomachinery AB

Siemens Industrial Turbomachinery AB is a part of Siemens AG and produces gas tur-bines. This research has focused on Siemens Industrial Turbomachinery AB in Finspång and will henceforth be referred to as Siemens. The products that Siemens produce are used to generate electricity in power plants or as a power source to operate pumps and compres-sors (Siemens, 2014a). Finspång is Siemens biggest site in Sweden (Siemens, 2014a) and employed approximately 2 700 people in 2013 (Amadeus, n.d.a) with a turnover of 1 263 million EUR and an EBIT of 214 million EUR (Amadeus, n.d.a).
Siemens’ customers are usually countries, states, independent power producers, hospitals or heavy industries (Bäckstrand, 2012). Approximately 99% of the manufactured turbines are exported (Logistics Development Manager (LDM)) and today the company has turbines that are operational in over 100 countries (Siemens, 2014b). The company has total market share of about 20% (Bäckstrand, 2012) and manufactures approximately 50 turbines per year with customers usually requesting delivery within approximately one year from order. The lead-time for producing a gas turbine is longer than the demand lead-time and some parts therefore have to be built on speculation (Bäckstrand, 2012).

Fagerhult Group

Fagerhult Group employed nearly 2 200 people worldwide and had a turnover of 363 mil-lion EUR as well as an EBIT of 29,3 million EUR in 2012 (Amadeus, n.d.b). Fagerhults Belysning AB is a part of Fagerhult Group and produce professional lighting solutions for public environments. This case study has been carried out at Fagerhult Belysning AB in Habo and will henceforth be referred to as Fagerhult. The company’s products are divided into four application areas, namely; ’Indoor’, ’Outdoor’, ’Retail’ as well as ’Health and Care’ (Fagerhult, 2014). Fagerhult offers standard products, standard products with some modi-fications, as well as fully customized products. The demand lead-time for a standard item is the next day, except for standard products with an uneven demand pattern or a small yearly demand. These products as well as modified products have a delivery lead-time of 14 days. There are no guidelines regarding the delivery time for customized products since it is de-pendent on the design of the requested product.
Fagerhults’ customers are typically architects and therefore form a business-to-business re-lation, but private consumers are also handled within some products lines (Bäckstrand, 2012). The domestic market (Sweden) represents 35% of the volume sold and is thereby their biggest market (Bäckstrand, 2012).

Parker Hannifin Manufacturing Sweden AB

Parker Hannifin Manufacturing Sweden AB employed nearly 1 100 people in Sweden and had a turnover of 133 million EUR as well as an EBIT of 9,4 million EUR in 2012 (Amadeus, n.d.c). Parker Hannifin Manufacturing Sweden AB is part of Parker Hannifin Corporation and this research has focused on the manufacturing site in Trollhättan and will henceforth be refereed to as Parker. At this site Parker produces hydraulic pumps and mo-tors for the global market. The lead-time for the products are described as short by Bäck-strand (2012), and one way of attracting customers is Parker’s ability to deliver these items with customer adaptations, according their ‘Inbound and Outbound manager’.
Parkers’ customers consist of other manufacturing companies (Bäckstrand, 2012) and are therefore a business-to-business relationship. Approximately 85% of their products are ex-ported (Bäckstrand, 2012) and around 50% of Parkers items and components are sourced from suppliers in Sweden. Parker Hannifin Corporation currently operates a worldwide company directive to source 5% from low cost countries. Parker has chosen to purchase this volume from Eastern Europe (Bäckstrand, 2012).

Ericsson AB

Ericsson AB is a part of Telefonaktiebolaget L. M. Ericsson. This case study has been car-ried out at Ericsson AB in Borås and will henceforth be referred to as Ericsson. The com-pany produce radio communication equipment for transferring of voice and data. The de-mand lead-time is highly variable and ranges from 5 to 50 days (Bäckstrand, 2012). Erics-son is faced with a situation were customers desires shorter delivery times at the same time as supply lead-times are getting longer (Bäckstrand, 2012).
More than half of Ericssons’ customers are government owned telecom operators (Bäck-strand, 2012), and are therefore a business-to-business relationship. Approximately 70% of their manufactured products are exported and Ericsson has customers in more than 180 countries all over the world (Ericsson, 2014a). In year 2012 Ericsson had just over 19 800 employees and generated a turnover of 13 256 million EUR and hade an EBIT of -253 mil-lion EUR (Amadeus, n.d.d).

Empirical findings

The section below presents the empirical data gathered during this study and where collect-ed during the spring of 2014. The questions asked during the interviews can be found in appendix 2. Some of the questions where used in order to get a background and better un-derstanding of how the CDP-method have been implemented and used by the case com-panies. This information has not been used directly in answering the research purpose. Nevertheless, this data were valuable for the research and is therefore presented in appen-dix 3.

Siemens

Siemens have, through their participation in the KOPeration project, speeded up the work to separate between their order- and forecast driven purchasing activities. Purchases have traditionally been handled within each project, i.e. that all items that are required for manu-facturing one gas turbine are bought especially for that turbine. Siemens has recently shift-ed from demand driven to consumption driven stock replenishment for items with low an-nual dollar volume. This means that they purchase these items based on the consumption rather than what they know will be demanded in the future. The shift towards consumption driven stock replenishment, rather than demand driven, provides the opportunity to purchase generic low annual dollar volume items for more than one project at the time. Furthermore, the KOPerations project has increased Siemens focus on reducing the supply lead-time for strategic items (according to the Kraljic-matrix) that has a long supply lead-time and must be purchased on forecast. Reducing the supply lead-time is not always an easy and straightforward task.
You have to get to know our suppliers and their supply chain. Then one can discuss whether they can have more raw materials in storage … We can take responsibility and say that we will purchase this items in X number of months”. (Senior Project Manager, Global Sourcing (SPMGS)).
Another approach that Siemens discusses with a few suppliers is implementation of con-signment inventories for the items with long supply lead-times.
Setting up consignment stock for expensive items with long delivery times will reduce the lead-time [supply lead-time], secure delivery and reduce tied-up capital” (SPMGS).
There are also initiatives to changes regarding stock replenishment responsibility. The aim is to let suppliers be in charge for replenishment of items that are characterized with a low value. It should be noted that these two changes are not a direct consequence from the CDP-method, but still, it is occurring.
“… for inexpensive items that we purchase in a sporadic manner, we have a concept to let them [the suppli-ers] replenish our storages, it is nothing strange. We have this solution on indirect materials today and want to implement it on direct materials as well” (LDM).
Theses shifts can be summarized by an increased focus on efficiency for non-critical items, purchasing larger volumes less frequently and increased focus on responsiveness for strate-gic items, reducing supply lead-times. However, purchasing based on demand is not always better than basing the purchase on consumption.
We always work to reduce our lead-times from the suppliers, as these are generally long. However, we do not need to purchase everything based on a customer order as this creates poorer opportunities for our pur-chasing department. Instead, it is better to work with items that are included in many products and thus stabilize the flow through forecasts to our suppliers and give them better conditions … There is no intrinsic value in purchasing items based on a customer order … The stabilized flow, and better communication with suppliers, can therefore reduce the supply lead-time” (Strategic Logistics Developer (SLD)).
The transition into purchasing items on forecast is somewhat dependent on the use of standardized items. Since standardization can be seen as purchasing generic items, used within several projects, the risk of storing them can be reduced. The ambition is therefore to use standard items as far as possible. However, one example when standard items can-not be used follow from specifications that are so high that only a few suppliers, on the global market, are qualified to fulfill them. Another example is when items are developed together with the suppliers. The outcome of these two examples might be situations were Siemens is dependent on this single supplier. The CDP-method could probable be of great use when it comes to these problems.
It would be very interesting to have it [step 6 of the CDP-method] at hand in a supplier selection decision and in the development of new products, to include these aspects [of step 6 of the CDP-method] in the deci-sion” (LDM).
As a mean to increase the use of standards and to reduce dependence on suppliers, two strategies were discovered at Siemens. The first example regards products that are co-developed with suppliers. This is not an unusual situation for Siemens due to the fact that they develop, and sell, high-tech products. Hence, Siemens cannot have all competences within their internal organization. Siemens strive to buy the rights of the drawings of theses items, which enable them to purchase the item from another supplier. The second strategy is to use cross-functional teams in product development. This could be illustrated by in-volvement of people from purchasing and manufacturing departments in early stages of product development.
Since Siemens customers request a function rather than exact specifications for the product and the items it consists of, it is the internal order engineering function that determines the specifications for the items.
The first step for us to increase the number of standard items is to influence the order engineering function”.(LDM).
The CDP-method makes it easier to communicate possibilities for improvement, both to order engineering, purchasing and production … they get a picture over the product structure … I think this is a big advantage and something that we can make use of” (SLD).
This has, in some cases, led to reconstruction of items to enable the same item to be used in two different products. The communication between functions were based on analysis in phase 1 and facilitated by a Gantt chart presented in MS Excel with information derived from the ERP system. A positive effect of this is that fewer items needed to be handled in the computer system and kept in storage.
We had a discussion with the help of a Gantt chart and reached consensus … They [the order engineering function] redesigned Article X [the article is anonymised in this thesis] which eliminated the need to store double sets of components” (LDM).
Regarding the cooperation among departments, the LDM at Siemens states that the align-ment of functional strategies is not always completed.
These [functional strategies] are not really in sync, they are separated today. These [functional strategies] are derived top -down from the business strategy, sourcing has one strategy, production and logistics have one strategy. These [functional strategies] are not fully synchronized, we have an organization structure that is a year old so we have not had time to do this … we do not know if they are connected … the perception is that they are not connected … the risk is that it develops sub-optimizations between functions” (LDM).

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Fagerhult

Fagerhult has recently started to work in a slightly new way with non-critical items, as by the classification of the Kraljic -matrix. Non-critical items, such as screws, had historically been purchased on a customer order if the supply lead-times allowed purchasing and man-ufacturing within the requested delivery lead-time. A new way of working has been to pur-chase these items, with low value and low supply risk, on forecast rather than customer or-ders. This has resulted in a situation were less time is spent on ordering material, but with higher inventory levels since the days of supplies in inventory has increased. The time saved from doing this can now be used, by the purchaser, to strengthened the relationships with the suppliers. Fagerhult is working on reducing the supply lead-times for all of their purchased items, which is especially important for the strategic – and bottleneck items. This is to enable Fagerhult to purchase the items downstream of the CODP.
we have to work with them [strategic and bottleneck items] in order to push them downstream of the CODP.” (Production Logistics Manager).
This can be done by either reducing the lead-times or by having buffer stocks at different strategic locations in the supply chain.
The suspension wires, used to install the products at the end customers ceiling, illustrate one example regarding the use of standard items at Fagerhult. Fagerhult has established certain standard lengths of theses wires, but still customers can request whichever length they desire. If customers order a unique length, Fagerhult needs to purchase the ordered length resulting in a longer delivery time for the customer. But if the customer can use a standard length they can have a faster delivery since the standard lengths are in stock. Cus-tomers seldom know the exact length needed since the height of which the lighting is sus-pended depends on a number of factors related to the interior design of the room. This means that the wire is almost always too long when the product is delivered and therefore needs to be cut to proper length when installed. Therefore, the use of a generic length, that is longer then the customer request, can be utilized and a longer part of the wire cut off. Asking the customer if they accept a standard length, instead of a unique length, can be seen as a way of using delivery lead-times to regulate the degree of uniqueness of the item. This is due to the fact that customers in general want faster deliveries.
The researcher had an opportunity to attend a workshop were the companies’ future work with the CDP-method was presented for the employees. During this workshop, the re-searchers were able to capture the employees’ initial comments on the method. This work-shop reviled that the employees of Fagerhult thinks that alignment of KPIs among func-tions is important. However, the employees felt that the different departments did not al-ways work towards the same objectives, and that an alignment between strategies therefore would be important.

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Parker

Parker have invested an considerably amount of work and time to reduce the supply lead-time for one of the company’s strategic items. This item had previously a longer supply lead-time then demand lead-time, and had to be purchased on forecast. The change in-volved a transition from purchasing a CG item into purchasing a CU or CoU item instead. By reducing the lead-time for this item Parker could instead buy the item against a custom-er order. In this way, the company reduced the risk by purchasing the item against a cus-tomer order rather than on forecast.
For non-critical items and leverage items the company have instead reduced the time spent on purchasing them. This has been achieved by releasing and transferring control to there suppliers in different ways.
For a third type of item Parker hade two different variants. The two variants had different specification attached to them and where therefore handled as two separately items in a purchasing situation. Both of these items had specifications that made them Parker unique, from their suppliers point of view. Meaning that only Parker bought these particular items from this particular supplier. Furthermore, both the package and the actual item looked similar, which increased the risk of a mix up. In order to solve this, the company has re-placed the two previous items by one new. The new item has even higher specification than both the others but is seen as a standard item from the suppliers point of view, and are even included in the suppliers catalog. The benefits of doing so were increased volumes for that particularly item, less stock keeping items, easier demand planning, as well as a re-duced risk of a mix up happening, which can be seen as a quality assurance. The statement below further emphasizes this;
…there is no room for errors… quality insurance is important!” (Inbound/Outbound Manager (IOM)).
The IOM at Parker recommend that the steps within the CDP-method should be used in the given order, as it is presented in Bäckstrand (2012). However, one exception from when the structure should be used is in development of new products. The IOM then thinks that step 9 should be used in an earlier stage, somewhere before step 3 or 4. This should be done in order to involve supplier relations at an earlier stage.

Ericsson

To evaluate Ericsson´s most strategic suppliers, they use a matrix called Supply risk matrix, illustrated in Figure 4.1. The Senior Supplier Developer (SSD) says that this matrix has sim-ilarities to the Kraljic-matrix, by Kraljic (1983). However, these two should not be confused with each other as Ericsson also uses the Kraljic-matrix. The difference between them is that the supply risk matrix is used with a product perspective while the Kraljic-matrix is used with a supplier perspective. The suppliers that are analyzed further in the Kraljic-matrix are the ones with high supply risk. This is done in general, but of course there are some exceptions. The long-term goal is then to move the suppliers from the right side of the Kraljic-matrix to the lefts side, by reducing the supply risk. The use of the supply risk matrix differs from the Kraljic-matrix in the sense that the supply risk matrix tells how the items should be handled depending on the supply risk, while the use of the Kraljic-matrix aims of reducing the supply risk.

Table of Contents
1 Introduction 
1.1 Background
1.2 Problem statement
1.3 Purpose
1.4 Delimitations
1.5 Key terms
1.6 Disposition
2 Methodology 
2.1 Research process
2.2 Research approach
2.3 Data collection
2.4 Analysis of data
2.5 Trustworthiness
2.6 Ethical considerations
3 Theoretical framework
3.1 Literature review
3.2 The method for customer-driven purchasing
3.3 Strategy
3.4 Matching supply chain strategies with product type
3.5 Portfolio purchasing
3.6 Standardization
3.7 Over-specification
4 Presentation of empirical data
4.1 Description of case companies
4.2 Empirical findings
5 Refinement of the CDP-method 
5.1 Improvement 1 – Step 8 of the CDP-method
5.2 Improvement 2 – Strengthen alignment of strategies
5.3 Improvement 3 – Reducing the variation of unique items
6 Conclusion and Discussion 
6.1 Theoretical implications
6.2 Managerial implications
6.3 Fulfilment of purpose
6.4 Final reflection and suggestions for future research
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How to improve the inbound flow of an manufacturing company Analyzing and refining the Customer-driven Purchasing method

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