Copyright is owned by the Author of the thesis. Permission is given for a copy to be downloaded by an individual for the purpose of research and private study only. The thesis may not be reproduced elsewhere without the permission of the Author. Achieving Procurement Cost Efficiencies in a New Zealand Telecommunication Company - An Exploratory Study A thesis presented in partial fulfilment of the requirements for the degree of Master of Applied Science in Logistics and Supply Chain Manageme nt at Massey University, Palmerston North New Zealand. Jayshree Ravi 2010 Supervised by: Dr. Norman Marr This page intentionally left blank i Abstract The purchasing function in supply chain management contributes directly to the operating results and profitability of an organization. The fact that purchasing spend of an organisation is over half of its revenue highlights its potential. Supply Chain Management addresses many aspects of a business, and it can be even more complex for a telecom munication organisation where both goods and services play a key role. This research utilised a single case study to investigate pathways to achieving procurement cost efficiencies. The current supply chain literature was used to assess the supply chain of a telecommunication organisation with a view to quickly identify opportunities for improvement. The research explored a number of topics as described below. • The processes in the procurement cycle, namely Forecast, Source, Order, Pay and Review. This was used to assess the procurement process maturity and recommendations for improvement were made. • Understanding the procurement spend is a key requirement for the development of a procurement strategy. This is typically performed by category. However this is a difficult task for most organisations. This study showed how a spend analysis and category management system can be designed and implemented. It also showed how this can be used in conjunction with a purchasing portfolio matrix to quickly focus on spend c ategories that would provide maximum benefit. • Research has shown that Information technology is a key enabler in the supply chain. This study also highlighted how the current SAP ERP system and E - procurement can be leveraged in the current context to obtai n process and cost benefits. • Measurement of procurement performance is an important aspect for any process improvement exercise. The study identified relevant performance measures for supplier as well as payment performance. ii • The research also showed how the SCOR model can be used to provide an overview of the supply chain and the importance of calculating some key SCOR metrics to assess opportunities for improvements. The study revealed that a number of options are available for procurement cost reduction. It also highlights the importance of process compliance and integration with other aspects of the supply chain (especially forecasting) to exploit opportunities for cost reduction. iii Acknowledgements I would like to express my sincere gratitude to Dr. Nor man Marr, my supervisor. His guidance, enthusiastic support and the advice throughout this research project has been invaluable. I would like to thank Peter Guard, Telecom New Zealand for providing me with the opportunity of studying the procurement processes and working on a number of opportunities in the procurement transformation project (Category Management, Spend Analysis, Asset Lifecycle Management) that contributed to this research project. Thanks also to Cynthia Mathonsi, Neil Ritchie, Simon Mason a nd Sandra Beddis at Telecom for patiently answering my questions. I would also like to thank Alan Win (Massey University, Auckland) for convincing me to embark on the Master s Programme and Kathy Hamilton (Massey University, Palmerston North) for assisting with the enrolment. Thanks are also due to my employer Soltius New Zealand for permitting me to spend my downtime on completing this study. In particular, I would like to express appreciation for my colleague Siow Fong Chen with whom I have had endless discussions on procurement systems. I am extremely grateful to my husband Ravi who has been my mentor, friend and critic and provided me with a lot of insight and guidance in this work. A big thank you to my daughters Shrividya and Vaijayanthi , my mother Leela and my parents- in- law Meenakshi & Balasubramanian for putting up with my expositions and supporting me during this long process. Finally I would like to dedicate this work to my late father, Krishna Iyer who has moulded me into what I am today and motivated me to do my best. Jayshree iv Table of Contents Abstract ...................................................................................................................... i Acknowledgements ............................................................................................. iii Table of Contents ................................................................................................. iv List of Figures ......................................................................................................... x List of Tables ........................................................................................................ xiii Glossary .................................................................................................................. xv Chapter 1. Introduction ...................................................................................... 1 1.1 INTRODUCTION ............................................................................................ 1 1.2 BACKGROUND .............................................................................................. 1 1.3 COMPANY BACKGROUND .............................................................................. 2 1.3.1 The Networks business .............................................................. 5 1.4 RESEARCH OBJECTIVES ................................................................................ 5 1.4.1 Why focus on purchasing & supply management? ................ 6 1.4.2 Research Question ...................................................................... 7 1.4.3 Scope............................................................................................. 8 1.4.4 Limitations .................................................................................... 9 1.5 THESIS SUMMARY ........................................................................................ 9 Chapter 2. Industry ............................................................................................ 11 2.1 INTRODUCTION .......................................................................................... 11 2.2 WORLD TELECOMS .................................................................................... 11 2.3 NZ TELECOMS ........................................................................................... 12 2.4 THE TELECOMMUNICATION SUPPLY CHAIN .................................................. 14 v 2.4.1 Why is a telecom supply chain different? .............................. 14 2.4.2 Fixed Networks .......................................................................... 17 2.5 SUPPLY CHAINS IN NEW ZEALAND .............................................................. 18 2.6 SUMMARY .................................................................................................. 19 Chapter 3. Literature Review .......................................................................... 21 3.1 INTRODUCTION .......................................................................................... 21 3.2 SUPPLY CHAIN MANAGEMENT ..................................................................... 23 3.2.1 SCM definitions .......................................................................... 23 3.2.2 Service Supply Chains ............................................................... 25 3.2.3 Supply Chain Boundaries .......................................................... 27 3.2.4 Supply Chain Maturity ............................................................... 30 3.3 MODELLING THE SUPPLY CHAIN ................................................................... 31 3.3.1 Why a supply chain model? ..................................................... 32 3.3.2 The SCOR model ........................................................................ 33 3.3.3 Supply Chain Performance Metrics ......................................... 36 3.3.4 Factors to Consider ................................................................... 40 3.3.5 A Revised SCOR model for Telecoms ..................................... 41 3.4 PURCHASING AND SUPPLY MANAGEMENT .................................................... 44 3.4.1 Introduction ................................................................................ 44 3.4.2 Supply Management.................................................................. 45 3.4.3 Procurement Processes ............................................................ 46 3.4.4 Purchasing Portfolio .................................................................. 49 3.4.5 A Portfolio for Services Procurement ...................................... 54 3.4.6 Supply Market Complexity ........................................................ 54 vi 3.5 ACHIEVING PROCUREMENT EXCELLENCE ..................................................... 57 3.5.1 Importance of good procurement practices ......................... 57 3.5.2 Procurement Maturity ............................................................... 60 3.5.3 Category Management ............................................................. 61 3.5.4 Spend Analysis ........................................................................... 65 3.6 LEVERAGING INFORMATION TECHNOLOGY................................................... 68 3.6.1 Information Technology Opportunities .................................. 68 3.6.2 Impact of Information Technology on Performance ........... 71 3.6.3 E-Procurement ........................................................................... 74 3.7 SUPPLIER MANAGEMENT ............................................................................ 81 3.7.1 Supplier Relationships .............................................................. 81 3.7.2 Supplier Performance ............................................................... 84 3.8 SUMMARY .................................................................................................. 88 3.9 LITERATURE AND CURRENT STUDY ............................................................. 89 Chapter 4. Research Methodology ................................................................ 91 4.1 INTRODUCTION .......................................................................................... 91 4.2 RESEARCH OBJECTIVES .............................................................................. 91 4.3 THE RESEARCH PROCESS ........................................................................... 92 4.3.1 Overview ..................................................................................... 92 4.3.2 Research Philosophy ................................................................. 93 4.3.3 Research Approach ................................................................... 96 4.3.4 Research Strategies .................................................................. 96 4.3.5 Research Choices .................................................................... 103 4.3.6 Time horizon ............................................................................ 103 vii 4.3.7 Data Collection ......................................................................... 104 4.4 ETHICAL ISSUES ....................................................................................... 105 4.5 CHOICE OF METHODOLOGY ...................................................................... 106 4.5.1 Summary ................................................................................... 108 Chapter 5. Analysis and Discussion ............................................................ 109 5.1 INTRODUCTION ........................................................................................ 109 5.2 PURCHASING AND SUPPLY MANAGEMENT .................................................. 109 5.2.1 Purchasing Organisation in Telecom .................................... 109 5.2.2 Process and Systems Overview ............................................. 111 5.2.3 Forecast ..................................................................................... 112 5.2.4 Source ....................................................................................... 113 5.2.5 Purchase ................................................................................... 116 5.2.6 Pay ............................................................................................. 118 5.2.7 Review ....................................................................................... 120 5.2.8 Purchasing Process Maturity .................................................. 122 5.2.9 Recommendations for improving process efficiencies ....... 122 5.3 IMPLEMENTING CATEGORY MANAGEMENT AND SPEND ANALYSIS ................ 125 5.3.1 Approach ................................................................................... 125 5.3.2 Spend Analysis System Design .............................................. 126 5.3.3 Benefits of Spend Analysis. .................................................... 130 5.3.4 Category Architecture ............................................................. 131 5.4 ANALYSIS OF SPEND DATA ....................................................................... 131 5.4.1 Purchasing Spend as a percentage of revenue .................. 131 5.4.2 Spend by Business Unit .......................................................... 132 viii 5.4.3 Spend by Currency .................................................................. 132 5.4.4 Spend by Vendor ..................................................................... 133 5.4.5 Spend by Category .................................................................. 133 5.4.6 Kraljic Portfolio Analysis ......................................................... 139 5.5 SUPPLY PERFORMANCE ............................................................................. 143 5.5.1 Shortlisted performance metrics ........................................... 143 5.5.2 Delivery Performance Summary ........................................... 146 5.5.3 Payment Analysis .................................................................... 151 5.5.4 Future Opportunities ............................................................... 153 5.6 INFORMATION TECHNOLOGY .................................................................... 154 5.6.1 Current use of IT in Procurement at Telecom .................... 154 5.6.2 Purchasing Document Analysis ............................................. 158 5.6.3 Opportunities for leveraging Information Technology ...... 162 5.6.4 E-Procurement Strategy ......................................................... 166 5.6.5 IT Systems Maturity ................................................................ 172 5.7 SUPPLY CHAIN ANALYSIS ......................................................................... 173 5.7.1 Overview ................................................................................... 174 5.7.2 Material Flow ............................................................................ 175 5.7.3 Thread Diagram ....................................................................... 179 5.7.4 Supply Chain Performance ..................................................... 184 5.7.5 Cash to Cash Cycle Time ........................................................ 189 5.7.6 Supply Chain Maturity ............................................................ 191 Chapter 6. Conclusion ...................................................................................... 193 6.1 INTRODUCTION ........................................................................................ 193 ix 6.2 OVERALL OBJECTIVE ................................................................................ 193 6.3 OBJECTIVE 1 – PROCUREMENT PROCESS REVIEW ..................................... 194 6.4 OBJECTIVE 2 – SPEND PATTERNS FOR SUPPLIER BASE ANALYSIS............... 196 6.5 OBJECTIVE 3 – PERFORMANCE MEASUREMENT .......................................... 197 6.6 OBJECTIVE 4 – LEVERAGE IT FOR COST REDUCTION.................................. 198 6.7 OBJECTIVE 5 – SUPPLY CHAIN MODELLING AND ANALYSIS ........................ 200 6.8 LIMITATIONS ........................................................................................... 200 6.9 FUTURE RESEARCH ................................................................................... 201 References ............................................................................................................ 203 APPENDICES ........................................................................................................ 214 Appendix A – Category Architecture .......................................................... 214 Appendix B – Non-Disclosure Agreement ................................................ 218 x List of Figures Figure 1.1: Telecom Organisation Structure ......................................................... 4 Figure 1.2: Research Outline ................................................................................. 10 Figure 2.1: A traditional supply chain ................................................................... 15 Figure 2.2: A telecom supply chain ...................................................................... 15 Figure 2.3: Telecom NZ Supply Chain Schematic ............................................... 16 Figure 2.4: Telecom NZ Supply Chain model ...................................................... 16 Figure 2.5: Example of a Fixed Network .............................................................. 18 Figure 3.1: Literature Review – Topics Covered ................................................. 22 Figure 3.2: Inter-company links ............................................................................ 28 Figure 3.3: SCM Process ......................................................................................... 29 Figure 3.4: Supply Chain Maturity ......................................................................... 30 Figure 3.5: The SCOR Model .................................................................................. 34 Figure 3.6: SCOR Metrics ....................................................................................... 37 Figure 3.7: Cash to Cash cycle time ..................................................................... 39 Figure 3.8: Revised SCOR model .......................................................................... 43 Figure 3.9: Purchasing Process Model .................................................................. 47 Figure 3.10: A Typical Purchase Order Cycle ...................................................... 48 Figure 3.11: Purchasing Portfolio Model .............................................................. 50 Figure 3.12: Overview of purchasing strategies ................................................. 53 Figure 3.13: Classification of business services .................................................. 54 Figure 3.14: Supply and Demand Power ............................................................. 55 Figure 3.15: The Purchasing Chessboard ............................................................ 56 xi Figure 3.16: The purchasing spend cube ............................................................. 66 Figure 3.17: Typical IS infrastructure for SCM .................................................... 69 Figure 3.18: Linking Processes and IT Systems .................................................. 72 Figure 3.19: E-procurement goals and examples ............................................... 77 Figure 3.20: Impact of E-Procurement ................................................................. 79 Figure 3.21: E-Procurement Options .................................................................... 81 Figure 3.22: Impact of Supplier Relationship on EVA ........................................ 82 Figure 4.1: The Research Onion ............................................................................ 92 Figure 4.2: Research Choices ............................................................................... 108 Figure 5.1: Categorising Purchases ..................................................................... 127 Figure 5.2: Material Group in SAP ....................................................................... 128 Figure 5.3: Invoice Overview ............................................................................... 128 Figure 5.4: Invoice with GL Code ........................................................................ 129 Figure 5.5: Associating vendors with categories ............................................... 130 Figure 5.6: Kraljic Portfolio Analysis .................................................................... 139 Figure 5.7: Kraljic Portfolio (Revised) ................................................................. 143 Figure 5.8: PO Delivery Statistics ........................................................................ 147 Figure 5.9: Example Supplier Scorecard ............................................................ 154 Figure 5.10: Electronic Supplier Interaction ...................................................... 157 Figure 5.11: Electronic Communication with Supplier ...................................... 158 Figure 5.12: Elements of E-Procurement ........................................................... 169 Figure 5.13: E-Procurement selection considerations ...................................... 170 Figure 5.14: ISAM in a roadside cabinet ............................................................ 175 Figure 5.15: Fixed Network Process Overview .................................................. 176 xii Figure 5.16: Material Flow (Initial Build) ........................................................... 177 Figure 5.17: Material Flow (Subsequent Expansion) ....................................... 178 Figure 5.18: Material Flow (Return and Repair) ............................................... 179 Figure 5.19: SCOR Thread Diagram (AS-IS) ..................................................... 182 Figure 5.20: SCOR Thread Diagram (TO-BE) .................................................... 183 Figure 5.21: Performance metrics measured .................................................... 185 Figure 5.22: Installation Times (No. of Cards) ................................................. 188 Figure 5.23: Goods Receipt Delay ....................................................................... 189 Figure 6.1: Areas covered by study .................................................................... 194 xiii List of Tables Table 2.1: New Zealand Telecom Market Data ................................................... 14 Table 3.1: Spend Classification .............................................................................. 63 Table 3.2: Summary of E-Procurement Models .................................................. 76 Table 4.1: The Research Onion Layers ............................................................... 106 Table 5.1: Spend by business unit ...................................................................... 132 Table 5.2: Spend by Currency ............................................................................. 132 Table 5.3: Spend by Category Level 1 ................................................................ 133 Table 5.4: Spend by Category Level 2 ................................................................ 134 Table 5.5: Categories and no. of suppliers ........................................................ 138 Table 5.6: Procurement Process Metrics ............................................................ 143 Table 5.7: Delivery Time by Category (Days) ................................................... 147 Table 5.8: Payment Analysis by Amount ............................................................ 152 Table 5.9: Payment Analysis by Invoice Volume .............................................. 153 Table 5.10: Invoice Analysis by Supplier ............................................................ 159 Table 5.11: Invoices with material number ....................................................... 161 Table 5.12: Spend by PO Type ............................................................................ 161 Table 5.13: Streamlining R/3 purchasing process ............................................ 164 Table 5.14: Streamlining SRM purchasing process ........................................... 165 Table 5.15: Streamlining the payment process ................................................. 165 Table 5.16: E-Procurement options by process ................................................ 167 Table 5.17: IT Systems Maturity ......................................................................... 172 Table 5.18: Supply Chain Definition Matrix ........................................................ 174 xiv Table 5.19: SCOR Level 2 Processes .................................................................. 179 Table 5.20: Fixed Network Delivery Statistics ................................................... 185 xv Glossary Term Description APS Advanced Planning Systems Catalog A list of items that can be purchased from a supplier. Includes item details and price. COGS Cost of Goods Sold CPFR Collaborative Planning, Forecasting and Replenishment G PO Group Purchasing Officer – The Head of the Procurement function EDI Electronic Data Interchange. The computer - to- computer exchange of business data in a standardized format. ERP Enterprise Resource Planning . Large systems like SAP, Oracle ERS Evaluated Receipt Settlement or buyer- created invoices Material Group A logical grouping of similar items as defined in the SAP system OCR Optical Character Recognition RFx RFI, RFP, RFQ, Request for Information, Proposal , Quotation etc. S&OP Sales and Operations Planning SAP R/3 The core SAP ERP transactional system. SAP SRM Supplier Relationship Management. Part of the SAP suite of applications. SCM Supply Chain Management xvi Term Description SCOR Supply Chain Operating Reference - from Supply Chain Council SKU Stock - keeping Unit. Also known as Material number in SAP TCO Total Cost of Ownership UFB Ultra - Fast Broadband VMI Vendor Managed Inventory