Delft University of Technology
Faculty Mechanical, Maritime and Materials Engineering Transport Technology
A.A.M.A. van Hasselt Improving the sourcing process of Unilever Bestfoods Europe Masters thesis (2nd part), Report 2006.TL.6937, Transport Engineering and Logistics.
In the past few years, two important changes in the corporate strategy have made the sourcing process of UBFE more complex. The merger with Bestfoods added a huge number of materials to the portfolio and the change from Local Supply Management (LSM) to European Supply Management (ESM) centralised the purchasing process of all production items. Due to the increased complexity, the sourcing process is not able "to fulfil the need for resources at the right quality and availability, while minimising the total cost and maximising profitable innovation". and "to eliminate waste and avoidable complexity at all levels of the organisation."
To improve the sourcing process, a strategy control cycle has to be implemented that initiates and evaluates all processes setting a Sourcing Strategy. This Sourcing Strategy incorporates a Specifications Strategy as a standard for the specification development process and a Supply Strategy as a standard for the supplier approval process. A hybrid fuzzy expert system used for classification allows deriving an objective and consistent Sourcing Strategy.
Furthermore the individual processes have to be redesigned. To improve the specification development process both a qualitative and a quantitative control cycle have to be implemented. This will ensure that specifications define the 'right' quality, are harmonised and the suppliers sign all specifications. To improve the supplier approval process both a qualitative and a quantitative control cycle have to be implemented. This will ensure that for every material the 'preferred' suppliers are approved, the desired number of suppliers is approved and the total number of suppliers is minimised. To improve the contracting process it should focus on negotiating the contracts with the suppliers only.
A pilot project in the 'Starch and Derivatives' portfolio shows that the implementation of the strategy control cycle and the improved individual processes can lead to significant cost savings, while improving the quality and availability of the purchased resources at the same time. Implementation is challenging, as it requires a change of mindset. However, as the potential benefits are incredible it should be a topmanagement priority.
Abstract
In the past few years, two important changes in the corporate strategy have made the sourcing process of UBFE more complex. The merger with Bestfoods added a huge number of materials to the portfolio and the move from Local Supply Management (LSM) to European Supply Management (ESM) centralised the purchasing process of all production items. In the current configuration, the responsibility for the purchasing process of UBFE is split between ESM and the Sourcing Units (manufacturing sites). ESM is responsible for the sourcing of the required materials, which entails specifying the materials and selecting and contracting the suppliers. The output of this process is a contract with a supplier. (Figure 1) The Sourcing Units then order the materials on a replenishment basis according to the terms set in the contract.
Figure 1: 'As-is' Processes and Organisation Structure of the sourcing process.
Due to the increased complexity, the sourcing process is not able "to fulfil the need for resources at the right quality and availability, while minimising the total cost and maximising profitable innovation" and "to eliminate waste and avoidable complexity at all levels of the organisation."
The 'As-is' Processes and Organisation Structure are not able "to fulfil the need for resources at the right quality"
The properties that the material must have to fulfil its purpose are not well defined in many specifications. Many materials are under-specified, over-specified or have a supplier-specific specification.
Although it is absolutely necessary to have every specification signed by the supplier, in practice none of the four Material Groups of the Ingredients 2 Supply Group can live up to this policy. (see Table 6.1 in the report) In fact only 23 % of the total spend is covered with a signed specification.
The 'As-is' Processes and Organisation Structure are not able "to fulfil the need for resources at the right availability." Almost 86 % of all materials have only one approved supplier.
Only 70% of all materials is supplied by 'preferred' suppliers.
The 'As-is' Processes and Organisation Structure are not able "to fulfil the need for resources minimising the total cost."
The Supply Strategy followed in the contracting process does not always define the right actions to minimise the cost of the purchased resources that do not allow the company to achieve and sustain a differentiation advantage.
The 'As-is' Processes and Organisation Structure are not able "to fulfil the need for resources maximising profitable innovation." The Supply Strategy followed in the contracting process does not always define the right actions to maximise the added value of the purchased resources that allow the company to achieve and sustain a differentiation advantage.
The 'As-is' Processes and Organisation Structure are not able "to eliminate waste and avoidable complexity at all levels." The total number of suppliers is four times as big as the desired total number of suppliers.
Materials are not always harmonised. When the complete portfolio is covered with only Category specifications, the total number of specifications can be reduced by 38%. Cross-Category specifications could reduce this number even more.
Analysis of the 'As-is' Processes and Organisation structure shows that the primary and internal goals of the sourcing process are not met because materials are not specified well, suppliers are not selected well and suppliers are not contracted well. Moreover, as the sourcing process is not controlled an unsatisfactory performance in one process negatively affects the performance of the other processes.
Materials are not specified well because the specification development process is not controlled well.
Many materials are under-specified, over-specified or have a specification that is supplier-specific because of a lack of qualitative control. Only 23% of the total spend is covered by a specification that is signed by the supplier because of a lack of qualitative and quantitative control. Materials are not harmonised because of a lack of quantitative control.
Suppliers are not selected well because the supplier approval process is not controlled well and many materials are not specified well. Almost 86% of all materials have only one approved supplier because of a lack of qualitative and quantitative control and the fact that it is almost impossible to approve the desired number of suppliers as many specifications are over-specified or supplier-specific.
Only 70% of all materials is supplied by 'preferred' suppliers because of a lack of qualitative control and the fact that it is almost impossible to approve the desired number of suppliers as many specifications are over-specified or supplier-specific.
The actual number of suppliers of every Material Group is four times as big as the desired number of suppliers. This is caused by a lack of quantitative control and the fact that it is almost impossible to approve suppliers that already supply other materials, as many specifications are over-specified or supplier-specific.
Suppliers are not contracted well because the Kraljic portfolio model, from which the Supply Strategy followed in the contracting process is derived, has important limitations and is based on materials that are not specified well and suppliers that are not selected well.
The Supply Strategy does not always define the right actions to minimise the cost of the purchased resources that do not allow the company to achieve and sustain a differentiation advantage because the Kraljic portfolio model is not based on the actual material need. Instead of being based on the actual material need, it is based on materials that are not specified well and suppliers that are not selected well. Therefore an ineffective strategy might be derived.
The Supply Strategy does not always define the right actions to maximise the added value of the purchased resources that allow the company to achieve and sustain a differentiation advantage because the Kraljic portfolio model does not take the supplier's point of view into account. Therefore it is not possible to distinguish materials that allow UBFE to achieve and sustain a differentiation advantage from materials that do not allow UBFE to achieve and sustain a differentiation advantage.
The Supply Strategy does not always define the right actions to minimise the cost of the purchased resources that do not allow the company to achieve and sustain a differentiation advantage because the Kraljic portfolio model does not take the complexity of the material into account. Therefore it is not possible to identify materials that can be standardised across markets and producers.
The Kraljic portfolio model's classification method is very sensitive to the choice of dimensions, factors, and weights. Therefore it is not possible to derive an objective and consistent Supply Strategy.
For the sourcing process to be able "to fulfil the need for resources at the right quality and availability, while minimising the total cost and maximising profitable innovation" and "to eliminate waste and avoidable complexity at all levels of the organisation"ö it has to be improved significantly. First of all a strategy control cycle has to be designed that initiates and evaluates all processes setting a Sourcing Strategy based on the actual material need. This Sourcing Strategy should incorporate a Specifications Strategy as a standard for the specification development process and a Supply Strategy as a standard for the supplier approval process. (Figure 2) Furthermore the individual processes have to be redesigned to make sure that materials are specified well, suppliers are selected well and suppliers are contracted well.
Figure 2: 'To-be' Processes and Organisation Structure of the sourcing process.
A strategy control cycle is designed by developing a Sourcing Strategy model, the 'Purchasing Cube', and a new method of classification. The Purchasing Cube takes the supplier's point of view into account to be able to distinguish materials that allow UBFE to achieve and sustain a differentiation advantage from materials that do not allow UBFE to achieve and sustain a differentiation advantage.
The Purchasing Cube takes the complexity of the material into account to be able to identify materials that can be standardised across markets and producers.
The Supply Strategy that can be derived from the Purchasing Cube model defines the right type of relationship with the supplier and the desired number of approved suppliers needed to minimise the total cost and maximise profitable innovation of the purchased resources.
The Specifications Strategy that can be derived from the redesigned model defines the right type of specification and the specification generator needed to minimise the total cost and maximise profitable innovation of the purchased resources.
A hybrid fuzzy expert system used for classification allows deriving an objective and consistent Sourcing Strategy from the Purchasing Cube. The implementation of the Purchasing Cube focuses on communicating the derived strategy in the Material Group Manager's 'Portfolio database.'
The specification development process is improved by designing both a qualitative and a quantitative control cycle. A qualitative control cycle ensures that every specifications define the 'right' quality.
A quantitative control cycle ensures that every material is harmonised and covered by a signed specification. The control cycles are implemented in the Material Group Manager's 'Portfolio database.'
The supplier approval process is improved by designing both a qualitative and a quantitative control cycle.
A quantitative control cycle ensures that the desired number of suppliers is approved per material and for the complete portfolio. A qualitative control cycle ensures that the preferred suppliers are approved.
The contracting process is improved by redesigning the primary process.
The improved primary process focuses only on negotiating the contracts with the suppliers.
A pilot project in the 'Starch and Derivatives' portfolio shows that the implementation of the strategy control cycle and the improved individual processes can lead to significant cost savings, while improving the quality and availability of the purchased resources at the same time. Because all UBFE Supply Groups are organised in a similar way, the findings of this thesis are applicable to the whole ESM department. As the combined spend of all UBFE Supply Groups corresponds to € 3.5 billion, the potential total cost savings are huge. Furthermore, as a 1% reduction on material costs already leads to an increased Return on Investment of 3.5%, the potential for the creation of shareholder value is incredible.
Reports on Transport Engineering and Logistics / Industrial Organisation (in Dutch) Modified: 2006.12.27; logistics@3mE.tudelft.nl , TU Delft / 3mE / TT / LT.
