Guideline for the Development of Chinese Suppliers

Vodicka, Matthias

Guideline for the Development of Chinese Suppliers

Improving the Buyer Supplier Relationship using the Balanced Scorecard

von Matthias Vodicka (Autor:in)

BWL - Handel und Distribution

Zusammenfassung

Inhaltsangabe:Abstract:
Nowadays companies all over the world face global competition. Because the bought-in part cost of engineering goods represents a big share of the overall production cost of engineering goods, procurement developed to be a major leverage to save cost in the recent years. As part of it, the supplier management is increasingly considered to be an important business function. Further, the development of supply bases in low-cost-countries (LCC), as China is, over the past years rapidly gained significance, since it is one of the remaining levers to reduce costs. After years of mass production of mostly simple products, today Industrialized-Country (IC) companies from the mechanical engineering industry strive for the sourcing of bought-in parts from Chinese suppliers.
The scope of this thesis is to examine the existing methods, especially the Balanced Scorecard (BSC), and other concepts of supplier development and supplier improvement for their application with Chinese suppliers. Based on the strengths and weaknesses of these approaches a new procedure is developed. Therefore the first step is the examination of the supplier development process theoretically and practically. The theoretic view is based on literature research while the source for the examination of the practical problems of German buyers as well as of Chinese suppliers is a questionnaire based interview study among involved companies.
Generally occurring threats of the buyer supplier relationship should be analyzed and weighed upon their relevancy especially for the Chinese supply market. Taking these issues into account, the existing procedures for supplier development and improvement are optimized for their application to Chinese companies. Finally the thesis closes with a general risk examination and the development of an applicable FMEA (Failure Modes and Effects Analysis) based methodology for the assessment of purchasing risk especially in China.
IC companies penetrating the Chinese market with the target to source locally have to develop a supply base first. The supplier development identifies the required suppliers, assesses them upon their capabilities and establishes a co-operation. A successful supply needs supplier improvement, since fundamental capabilities are lacking frequently. Further, risks weigh heavier due to the high investments required in advance. Considering mainly small and medium sized enterprises in investment goods industry, the […]

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Inhaltsverzeichnis

Matthias Vodicka

Guideline for the Development of Chinese Suppliers

Improving the Buyer Supplier Relationship using the Balanced Scorecard

ISBN-13: 978-3-8366-0012-5

Druck Diplomica® GmbH, Hamburg, 2007

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Institute for Production Science

University of Karlsruhe (TH)

Kaiserstraße 12

D-76128 Karlsruhe

Prof. Dr.-Ing. J. Fleischer

Prof. Dr.-Ing. J. Schmidt

Prof. em. Dr.-Ing. H. Weule

Diploma thesis

For Mr. cand. mach Matthias Vodicka

Guideline for the development of Chinese suppliers -

Improving the Buyer-Supplier Relationship using the Balanced Scorecard

The bought-in part cost of engineering goods represents a big share of the overall pro-

duction cost of engineering goods. Facing increasing global competition, many German

engineering companies identify low-cost sourcing especially from China as a one of the

remaining levers to reduce costs. But shifting purchasing volume to China requires in most

cases the qualification and development of the new suppliers.

The scope of this thesis is to examine the existing methods, especially the Balanced Score-

card (BSC), and other concepts of supplier development and supplier improvement for their

application with Chinese suppliers. Based on the strengths and weaknesses of these ap-

proaches a new procedure is developed.

Therefore the first step is the examination of the supplier development process theoretically

and practically. The theoretic view is based on literature research while the source for the

examination of the practical problems of German buyers as well as of Chinese suppliers is a

questionnaire based interview study among at least 10 companies. Generally occurring

threats of the buyer-supplier relationship should be analyzed and weighed upon their rele-

vancy especially for the Chinese supply market. Taking these issues into account, the ex-

isting procedures for supplier development and improvement are optimized for their appli-

cation to Chinese companies. Finally the thesis closes with a general risk examination and

the development of an applicable FMEA (Failure Modes and Effects Analysis) based meth-

odology for the assessment of purchasing risk especially in China.

Internal No. of thesis:

Start date:

End date:

Supervisor:

PRO130

01.03.06

31.08.06

Marc Wawerla

Karlsruhe, 31

August 2006

___________________________

Prof. Dr.-Ing. J. Fleischer

Acknowledgements

Here, I would like to express my gratitude towards the many people, who supported this

thesis professionally and personally, or inspired me in any other way. This list is not com-

plete, so I would also like to thank everyone, who is not mentioned in the following, but is

somehow connected to this work and my person.

In the first place I would like to thank Prof. Jürgen Fleischer, whose trust and support fa-

cilitated to work on this interesting topic at the marvelous University of Science and Tech-

nology in Hong Kong. Marc Wawerla earns many thanks for being a tolerant, always moti-

vating and amicable supervisor - meeting in Shanghai and Hangzhou strengthened me a

lot! Thanks also to Anna Lena Wagner, who co worked with me on a related topic and was

always ready for fast feedback and support with relevant material.

Big gratitude earn all the students at the Advanced Manufacturing Institute, who affiliated

me quickly into the AMI-family and eased the settling down at the HKUST. The small chats

and the presentations gave me a lot of inspiration. Prof. Tseng, as head of the AMI, has to

receive special thanks for the friendly invitation to his institute, and even more for his fair

comments, strong personal involvement and high claims for meaningfulness and clearness.

I got highly impressed by him as supervisor and mentor, also on a personal level. Thanks

also for giving me the opportunity to spend time at the Zhejiang AMI in Hangzhou, where I

could gather a lot of experiences about life in China within a very friendly environment.

Further, it made possible to meet executives for interviews, who were willing to share their

knowledge and hence, supported this thesis' practical relevancy to a great part; many

thanks to the participants.

Further, I owe personal thanks to many of my fellow students, who were willing, patient and

supportive, when listening to, and giving feedback on my thoughts, or supported this work

by offering their precious time for review, like Amelie, Maxime, Michael and Rayan. Within

this group, special thanks deserves my "co-co-supervisor" Felix Papier, who did not

hesitate to spend many hours sharing his knowledge on scientific works, giving critical

feedback and stimulating many ideas; this always encouraged me.

Last, thanks to my closest ones. Juemin, no matter how the wind of change blows, thank

you for supporting my thought, to go to China. You inspired me to wish more and I believe I

can achieve higher aims now. Further, high gratefulness is to be dedicated to my brothers

David and Stephan, who one and the other were able to make me laugh over a distance of

about 10 thousand kilometers, and so, gave me moments of feeling like home. And even-

tually, my greatest thanks are devoted to my mother and my father, whose interest was al-

ways to support, to motivate and to share, and who always smoothened the way for my

valuable education and my life.

Mamí a tatí, d kuji Vám za Vasí v ýnou a nekoneýnou lásku

Thank you all, for giving me this unforgettable experience at my study's ending.

Matthias Vodicka, Hong Kong

Matthias Vodicka

Table of content

INTRODUCTION

1.1

Motivation 1

1.2

Objective 1

1.3

Thesis structure

BASICS

2.1

Definitions for this work

2.1.1

Buyer and Supplier

2.1.2

Supplier Development

2.1.3

Supplier Improvement

2.1.4

Supplier's capabilities

2.1.5

Low Cost Country

2.2

Supply chain management

2.3

Procurement 6

2.3.1

Performance Indicators

2.3.2

Performance Measurement

2.3.3

Supplier Management

2.3.4

Supplier Controlling

2.3.5

Supplier's Capabilities

2.4

Global sourcing

2.4.1

Low-cost sources in global procurement

2.4.2

Considerations for Sourcing in China

2.4.3

Procurement Activities in China

2.4.4

Differences between markets

2.4.5

China specific issues

2.4.6

Differences in aims and company culture in ICs and China

2.5

The Balanced Scorecard

2.5.1

General framework

2.5.2

Strategy maps

2.5.3

Key Performance Indicators / Measures

STATE OF THE ART IN RESEARCH

3.1

Supplier Development and Improvement

Matthias Vodicka

3.1.1

Supplier Development

3.1.2

Supplier Development in China

3.1.3

Risk Assessment as part of the SD in China

3.1.4

Supplier Improvement as part of the supplier development

3.1.5

Supplier Improvement in China

3.2

Adapted BSCs for the Supply Chain Management

3.2.1

Description of approaches

3.2.2

Deficits for improvement in China

TODAY'S ISSUES AND PRACTICES OF THE INDUSTRY'S SUPPLIER

DEVELOPMENT IN CHINA

4.1

Interviews with global playing companies in Germany

4.1.1

Target definition

4.1.2

Structure of the interview guideline

4.1.3

Results 44

4.2

Interviews with global playing companies in China

4.2.1

Target definition

4.2.2

Structure of the interview guideline

4.2.3

Three case studies

4.2.4

Results 48

4.3

Survey in Germany

4.4

Requirements for BS-Relationship Improvement in China

REQUIREMENT FOR THE BSC APPROACH IN BRIEF

BSC-BASED RELATIONSHIP IMPROVEMENT AS PART OF THE

SUPPLIER DEVELOPMENT IN CHINA

6.1

Adaptation of the BSC

6.1.1

Cooperation perspective

6.2

Improvement Strategy Maps

6.2.1

Strategy maps as roadmaps to improvement

6.2.2

Strategy map for Buyer Supplier Relationship Improvement

6.2.3

Strategy map for SI to meet minimum requirements

6.3

Improvement Balanced Scorecard

6.3.1

Buyer Supplier Relationship BSC

6.3.2

"Audit-BSC" to Boost Supplier's Capabilities

6.4

Organizational integration of the BSC

Matthias Vodicka

III

DISCUSSION

SUMMARY AND OUTLOOK

8.1

Summary 80

8.2

Outlook 81

REFERENCES

ANNEX

Matthias Vodicka

Table of Figures

FIGURE 2.1 OUTSOURCING MAKES PROCUREMENT A KEY FUNCTION (/SOE-99/)

FIGURE 2.2 PERFORMANCE MEASUREMENT - REWARD SUPPLIER AND STAFF (/SOE-99/)

FIGURE 2.3 SUPPLIER MATURITY CURVE (/HAN-99/ P. 32)

FIGURE 2.4 PROCUREMENT ACTIVITIES PERFORMED AT DIFFERENT LEVELS (/SOE-99/)

FIGURE 2.5 INCREASE OF AVERAGE SOURCING QUOTA IN THE WORLD BY 2010

FIGURE 2.6 GRAPH SHOWING THE MAJOR PROBLEMS OCCURRING

ILLUSTRATION 2.7: FEW SUPPLIERS SEEM CAPABLE OF FULFILLING REQUIREMENTS

FIGURE 2.8 EMERGING CRITICAL RISKS DURING PROCUREMENT IN CHINA

FIGURE 2.9 A TEMPLATE BALANCED SCORECARD (CP. /CRE-05/)

FIGURE 2.10 FROM VISION TO STRATEGY MAP TO BALANCED SCORECARD

FIGURE 3.1 SUPPLIER DEVELOPMENT PROCESS (/DUN-04/)

FIGURE 3.2 PHASE 1: CONSTRAINTS (/DUN-04/)

FIGURE 3.3 PHASE 2: SPECIFICATIONS AND REQUIREMENTS (/DUN-04/)

FIGURE 3.4 PHASE 3: THE RELATIONSHIP AND THE NEEDS (/DUN-04/)

FIGURE 3.5 SUPPLIER DEVELOPMENT PROCESS (/FLE-06/)

FIGURE 3.6 INFORMATION SOURCES FOR SUPPLIER IDENTIFICATION (/WAG-06/)

FIGURE 3.7 ASSESSMENT TOOL WITH CRITERIA AT DIFFERENT LEVELS (/WAG-06/)

FIGURE 3.8 STEPS OF THE RISK-FMEA (/FLE-06/)

FIGURE 3.9 RISK HEIGHT (/FLE-06/)

FIGURE 3.10 RISK MAP (/FLE-06/)

FIGURE 3.11 SUPPLIER DEVELOPMENT (/KRA-99/)

FIGURE 3.12 GRAPH SHOWING THE IMPORTANCE OF BUSINESS AREAS TO FOCUS

FIGURE 3.13 SCM FRAMEWORK ALIGNED TO THE BSC PERSPECTIVES (/RUG-06/)

FIGURE 6.1 BSC BASED BUYER SUPPLIER RELATIONSHIP IMPROVEMENT

FIGURE 6.2 ILLUSTRATION PROCESS TO PROJECTPLAN FOR IMPROVEMENT

FIGURE 6.3 BUYER SUPPLIER RELATIONSHIP IMPROVEMENT STRATEGY MAP (THEMES)

Matthias Vodicka

FIGURE 6.4 TEMPLATE STRATEGY MAP FOR A HOLISTIC CAPABILITY IMPROVEMENT

FIGURE 6.5 THEME-A-BSC OF THE RELATIONSHIP IMPROVEMENT BSC

FIGURE 6.6 IMPROVEMENT COMPONENTS FROM ASSESSMENTS AND PRODUCT SPECS

FIGURE 6.7 ILLUSTRATION OF FINDING IMPROVEMENT COMPONENTS

Matthias Vodicka

Introduction

1.1 Motivation

Nowadays companies all over the world face global competition. To stay competitive, pro-

curement developed to be a major leverage to save cost in the recent years. As part of it,

the supplier management is increasingly considered to be an important business function.

Further, the development of supply bases in low-cost-countries (LCC), as China is, over the

past years rapidly gained significance. After years of mass production of mostly simple

products, today Industrialized-Country (IC) companies from the mechanical engineering

industry strive for the sourcing of bought-in parts from Chinese suppliers.

IC companies penetrating the Chinese market with the target to source locally have to de-

velop a supply base first. The supplier development identifies the required suppliers, as-

sesses them upon their capabilities and establishes a co-operation. A successful supply

needs supplier improvement, since fundamental capabilities are lacking frequently. Further,

risks weigh heavier due to the high investments required in advance. Considering mainly

small and medium sized enterprises in investment goods industry, the regular problems in

China are enlarged by low purchasing volumes and specialized products. These companies

face Chinese suppliers with lacking commitment to quality and delivery in time, which rep-

resent fundamental problems. Further barriers to supplier improvement emerge from the

differing culture and the supplier's strategic orientation. Therefore, a new approach

considering the local issues and risks is suggested in order to enhance the benefits from

the executed efforts.

1.2 Objective

In the scope of this thesis, the existing methods and concepts of supplier-development and

supplier improvement, which are applied in Industrialized Countries and in China, have to

be investigated and presented. This investigation has to include both desktop research and

information from companies that are involved in China sourcing in order to increase the

practical relevancy. The specific aspects of business relationships in China have to be

shown and the main barriers pointed out, as well, as possibilities emerging. With these facts

as basis, a new concept has to be worked out, which provides enhancement to the existing

methods of supplier capability improvement by considering the local requirements for a

prosperous buyer supplier relationship in China.

The supplier development as process of developing a new supply base has to be analyzed

showing the general occurring issues and prospects of buyer's supplier development effort,

and be weighed upon its relevancy in China. The supplier improvement with preliminary

steps, as it is a key process of the supplier development in China, has to be emphasized

and analyzed upon its applicability with Chinese suppliers. From that, the elementary steps

to undertake and the main deficits for China have to be identified. Based on the found

requirements in China and the deficits of common methods a new approach has to be

designed. This approach is based on the Balanced Scorecard (BSC) and has to be applicable

to improve the relationship, between the IC buyer and the Chinese supplier, itself. Aligning

the companies' differing strategies, the BSC shows a possible way to improvement,

resulting in both parties' benefits. Within this relationship improvement, the supplier's

deficient capabilities have to be focused, since they are responsible for the major risks for

both companies; thereagainst, the buyer's efforts have to regard the Chinese culture and

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nies; thereagainst, the buyer's efforts have to regard the Chinese culture and needs, in or-

der to be successful with his undertaking. Expected results of BSC-based relationship

improvement are mutual trust, commitment and enhanced communication, leading to a fast

improvement and a prosperous relationship for both companies.

1.3 Thesis structure

In order to attain meaningful results, this thesis' approach is based on recent research and

on a survey on today's industry's issues, practices and benefits in China. In the beginning

of this work, definitions are given on the main terms required. So e.g. supplier development

and improvement may be confused, since these terms may not be differentiated in other

works. Further, explanations are given to show the constraints and the considered aspects.

After that, the changes of supply chain management in the last years, and the emerging

issues are discussed in order to show the basic need for an enhanced approach.

In the following, the supplier management is focused. The fundamental circumstances to

consider are discussed and beneficial practices shown. The supplier management involves a

performance measurement system for both supplier and procurement department. The

supplier controlling can be of strategic and operative nature. The basics on performance

indicators are introduced and an illustration on the meaning of the supplier's capabilities

maturity is given. This is followed by a discussion about global sourcing that brings in

chances and risks. Low cost country sourcing contains special characteristics, so the

sourcing in China is focused and drivers for success are shown. Presenting the main pro-

curement activities and their application in China, the supplier development and improve-

ment in China with its goals are focused. In order to understand the importance for a

structured approach, the differences between the IC and Chinese market are shown and the

specific occurring issues analyzed. This is concluded by the differences in aims and

company culture between IC and Chinese companies. Last in this chapter, the Balanced

Scorecard is presented as it is the method of choice for the later approach. The aim and the

measures of the BSC are explained. Further, the strategy maps are a useful extension of the

BSC, so they are introduced as well.

In chapter 3 researches on supplier development are discussed, the general issues pre-

sented and evaluated upon applicability in China. A recent approach on supplier develop-

ment for China is presented, which represents a guideline for the development of a Chinese

supply base. It also considers the required steps for supplier improvement. The risk

assessment plays an essential role in supplier development, so it is emphasized and con-

clusions for the supplier improvement derived. Further, the supplier improvement ap-

proaches in research are discussed. They show the major drivers for success and the pos-

sible barriers. These factors have to be considered in the approach to design. The second

part of the desktop research deals with the current Balanced Scorecard approaches sug-

gesting using the BSC in an inter-organizational environment. From latter ones beneficial

elements can be extracted for the later approach.

In chapter 4 the survey results are presented. Beginning with interviews conducted in Ger-

many, the structure of the interview guideline is described; interest is given to the compa-

nies' aims followed by their China sourcing activity. Emphasis lies on supplier assessment

and improvement. After the description of results, the interviews with China located com-

panies are presented. These interviews aim to identify the triggers of supplier improvement

activities and the experiences made. Further, the expectations, the practices and the most

critical elements are relevant. Three case studies illustrate experiences of companies

differing in size, strategies and products. This is followed by results that are derived from

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ing in size, strategies and products. This is followed by results that are derived from the

information given. The data attained from the survey confirms partially desktop research

findings, but also uncovers elementary requirements for the improvement in China.

Chapter 5 shows the most important findings from desktop research and interviews briefly.

Thus, based on other approaches' deficits, the room for research is found. Suggestions for

the design of the buyer supplier relationship BSC are given.

In the beginning of chapter 6 the required adaptation of the Balanced Scorecard is ex-

plained. The cooperation perspective is added to enable the alignment of the two strongly

differing companies' strategies. To enhance communication and understanding the strategy

map is found to be a useful tool. It shows the cause and effects of strategic objectives and it

helps the supplier and the buyer to comprehend the requirements. The on the previous

findings based strategy maps are divided into two categories: (1) the buyer supplier

relationship improvement includes the required objectives leading to both companies

benefits; (2) the "Audit-Strategy Map" includes the required steps to undertake in order to

reach the minimum level of requirements. Next, the Balanced Scorecards are presented.

Aligned to the Strategy Maps they follow the given cause and effect, and provide a frame-

work to measure and steer the tangible and intangible assets of this buyer supplier rela-

tionship. With that a project plan can be set up, including targets, actions and responsibili-

ties.

In chapter 7 the BSC Approach is assessed upon its advantages, applicability and limitations

within a buyer supplier relationship. A summary and an outlook for future research con-

clude this work.

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Basics

2.1 Definitions for this work

2.1.1

Buyer and Supplier

The Industrialized Country (IC) company (buyer) concentrates on its core competencies in

the investment goods industry; it sources specialized products in low volumes from suppli-

ers in order to manufacture and deliver finalized products to an end-customer. The sup-

pliers are the companies, which supply to the buyer. For this work's scope, these suppliers

are local Chinese companies. In the discussion of literature however, suppliers are generally

meant to be companies in Industrialized Countries.

2.1.2

Supplier Development

In this thesis, the supplier development is defined as the activities to execute in order to

build up a new supply base. According to Dunn (/Dun-04/), it may be in other works de-

fined as the actions to undertake in order to improve a supplier's business process to

achieve a better supplier performance or enhance his capabilities. However, since this work

includes both of these processes, supplier improvement and supplier development need to

be clearly differentiated. The supplier development represents the process to develop a

supply base: starting with the identification of the parts to source and ending with the ter-

mination of the relationship. Latter is due to the fact that the continuous supplier im-

provement and management are both considered to be part of the supplier development

process. In cases of another definition of the term "supplier development" in examined

literature, an adaptation to this work's definitions was conducted to avoid confusion (this

counts for cited passages as well).

2.1.3

Supplier Improvement

The supplier improvement is part of the supplier development process. Supplier improve-

ment activities can range from a passive verbal or written request for improvement by the

buyer, up to an active involvement with transfer of know how and buyer's employees in-

volved at the supplier's site to improve supplier's capabilities.

Passive involvement is the traditional approach and commonly used in different industries:

it is reactive in nature, so it bases on past performance indicators. Companies regularly as-

sess the supplier performance upon foregoing orders' results, e.g. delivery delays, quality

complaints, etc. A report is being worked out and discussed with the supplier. The supplier

has to improve his performance over a given time, otherwise rejection impends to him. For

passive involvement, the supplier has to be to a certain level dependent on the buyer. Oth-

erwise, the threat of rejection would have no effect.

Active involvement is a newer approach, which has emerged in different industries in the

1990's. Since companies have increasingly to concentrate on their core-competencies,

suppliers obtain higher responsibility in the supply chain, resulting in the buyers' higher

dependency. This led to the concept of active supplier improvement. It means that the

buyer supports the supplier to improve his capabilities: e.g. consulting him on certain proc-

esses, giving workshops, etc. It is mostly applied to fix problems on the short term to lever

the supplier's capabilities so that the buyer's basic requirements are met.

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2.1.4

Supplier's capabilities

The supplier's capabilities are basically the abilities to fulfill the buyer's requirements. Es-

sentially, they are the production processes respectively all processes having impact on the

supplied part. However, in this work it also includes the supplier's company culture, which

has great impact on the relationship and for which the buyer also may have requirements

(e.g. cooperation willingness, strategic orientation etc.).

2.1.5

Low Cost Country

Low Cost Countries are considered to be the countries, where production of goods is pos-

sible at lower cost, compared to Industrialized Countries. This effect is strong for develop-

ing countries, with low labor or material costs. The low cost naturally mustn't be taken as

an absolute term. It refers to theoretically possible cost savings. In contrast, the risk and

diverse other cost rise, lowering the savings, and, in some cases, even turning the savings

into losses. In this thesis the emphasis lies on China. However, many characteristics and

issues emerging on the Chinese market and from Chinese suppliers may be transferable to

other developing countries, where sourcing at low cost is possible.

2.2 Supply chain management

"The comprehensive definition of "Supply Chain Management" is the coordination of mate-

rial and information flow from raw material in the ground to the end-customers' recycling

of the expired product" (/Had-04/). The Council of Supply Chain Management Professionals

(CSCMP) defined that SCM "encompasses the planning and management of all activities

involved in sourcing and procurement (...). Importantly, it also includes coordination and

collaboration with channel partners, which can be suppliers (...) and customers. In essence,

Supply Chain Management integrates supply and demand management within and across

companies" (/CSC-06/).

The changes in manufacturing have been revolutionary since the early 1990's. Quality and

performance techniques for example ISO9000, Six Sigma, Baldrige, TQM among many oth-

ers and the implementation of IT-systems like Resource Planning Systems, relationship

management systems etc., supported businesses to lean their production, increase quality

and lower prices. These changes have the aim of enhancing the supply chain; the results

were satisfying. However, parallel effects emerged. On the one hand, buyers are more de-

pendent on suppliers, so that effective sourcing and relationship management gained a

considerable strategic importance in an organization. On the other hand, the strategic

sourcing still emphasizes the performance indicators like quality, delivery and price. Latter

ones do not sufficiently support the relationship improvement to a collaborative one (/Nee-

04/ p. 34). Soellner and Mackrodt (/Soe-99 / p. 16) state that "for leading companies to

have world-class procurement operations, the central focus of their procurement

organization must be managing supplier relationships". Jehle (/Jeh-02/ p. 3) concludes that

growing varieties and complexity of products and services require enhancements in

product- and process-related competencies. At the same time, the rising world competition

and cost situation lead to the companies' concentration on core competencies with present

capacities. In this contradicting environment, the cooperation of organizations in

production and logistics networks was identified as important success driver.

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2.3 Procurement

As Soellner and Mackrodt (/Soe-99/) explain, the procurement department traditionally had

the function to supply the company with the predetermined needs, whilst being responsible

that the materials and services required were available at the lowest price. Latter was con-

sidered to be the best way to contribute to the company's success. Regarding the focus on

core competencies, higher innovation potentials from the suppliers, and the optimization of

management-efficiency, the importance of the supplier management increased strongly

over the past years. The supply base is jointly responsible for the long term success (/Wag-

03/). According to Soellner and Mackrodt, this has its root cause in the change the

companies underlay in the last decades, when concentrations on core competencies led to

an increase of outsourcing to suppliers (cp. Figure 2.1). The result is that procurement

became a key factor for competitiveness (/Soe-99/).

Figure 2.1 Outsourcing makes procurement a key function (/Soe-99/)

According to Handfield (/Han-02/ p. 15, et seq.) many companies still focus on single

transactions and the orders settled, without aligning them to the other functions of the

business, the suppliers or the customers. The organizations have to be able to compete,

besides of on the basic factors like cost, quality, delivery and technology, on the basis of

time, since companies have to be faster than the competition (/Han-02/ p. 38) (today time

is also a big cost driver). However, the performance measurement focuses on overall supply

chain effectiveness. This includes also the consideration of the customers and the suppliers.

Therefore, companies increasingly strive for the development of longer term relationships

with key customers and suppliers and apply strategies for improvement and sharing of in-

formation between the parties. Handfield states that a key element of improved relation-

ships is the application of an objective performance measurement system, with a mutual

understanding of targets. To attain proper solutions, communication has to be fostered,

clear objectives established and conflict causes avoided. On this basis, trust and further im-

provements can be achieved.

2.3.1

Performance Indicators

According to Terenzini (/Ter-94/ p. 11, et seq.), performance indicators (PI) can have dif-

ferent targets and characteristics, and underlie different objectives of appliance. However,

the meaning of PIs can be stated briefly in "measures of how well something is being done".

It is not fixed whether performance indicators have to be always quantitative measures or

could also be qualitative ones. They can be used to show trends "performance indicators

show trends in performance as opposed to current value or level of activity". This can

provide a basis for strategic decisions that have impact on the future development. PIs are

always connected to a certain goal with a specific direction (whereat the statistical tools give

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information without direct connection to a future action or objective). Further, Terenzini

(/Ter-94/ p. 12, et seq.) explains that PIs simplify data by extracting some meaning of

them and putting them into a describable context. In order to improve processes, the data

attained has to be meaningful, so the values have to be normalized by another value or

ratios created (/Ter-94/ p. 24, et seq.). From the measures monitored, the "health, ef-

fectiveness, and efficiency of an organization can be determined" (/Ter-94/ p. 64). Ter-

enzini (/Ter-94/ p. 96) concludes that "performance indicators need to have a clear pur-

pose, be coordinated throughout an organization or system (vertical alignment), extended

across the entire range of organizational processes (horizontal alignment), be derived from

a variety of coordinated methods, and be used to inform decision making." Neef (/Nee-04/

p. 163, et seq.) states that indicators need to be acceptable in the whole company, be

clearly defined, and be reliable measures of criteria (direct connection and always measur-

able). In order to save resources, performance indicators have to be easy to measure and

record. Neef states, in brief, performance indicators ought to be "SMART: specific, measur-

able, attainable, relevant, and time-framed".

As part of a decision making process in procurement, performance indicators are used for

the supplier improvement. They show deficiencies and measure the progress of improve-

ment. Handfield (/Han-99/ p. 28) suggests to measure besides of the conventional as-

sessment criteria quality, delivery and costs ("while still important") other measures, miss-

ing for attaining the "whole picture": e.g. evidences for continuous improvement and effi-

ciency, lead-time fulfillment and inventory risk reduction and others.

2.3.2

Performance Measurement

Wagner (/Wag-03/) explains the supplier management as process of "planning, imple-

menting, developing, and monitoring company relationships with current and potential

suppliers" or "organizing the optimal flow of (...) components to manufacturing companies

from (...) suppliers". For both of these descriptions, the performance measurement is re-

quired, since "people can't manage what they can't measure, and they can't measure what

they can't describe", (/Kap-04/ p. 3) the capabilities have always to be expressed in a par-

ticular way.

In the past the low price contracts, single orders and the supplier audits were the main

contributions of the procurement. Today, the measures are different. Measures are con-

nected to the value created by the procurement by having an incentive system for both

procurement staff and supplier, since both are becoming processes with strategic relevancy.

Following is explained as characteristics of the needed measurement system: "continuous,

formal, objective, quantifiable, transparent and value-added oriented". In house and

suppliers' contributions are distinguished regularly (Figure 2.1) (/Soe-99/ p. 19, et seq.).

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Figure 2.2 Performance measurement - reward supplier and staff (/Soe-99/)

For the supplier the contributions regarding the product innovation, the provided quality

rates and the delivery on time are the main indicators. Further, the buyer's reaction can be

measured, e.g. the returns, repairs and complaints on the products, giving information on

the buyer's satisfaction. The buyer's procurement performance can be measured by the

production relevant processes (cost of ownership, inventory levels etc.), the supplier struc-

ture with its characteristics (e.g. A-suppliers, internationality, brands etc.), the comparison

of its own solutions to the competitors, and the use of the Balanced Scorecard approach

with corrective action plans (/Soe-99/ p. 20, et seq.).

An example on supplier performance measurement from a case study is presented by

Ogden and McCarter (/Ogd-04/). The considered company attained higher value by evalu-

ating the performance in the areas product & technology, service and support, quality, de-

livery & lead-time and the total cost performance: When there are gaps the supplier has to

improve to meet the requirements, leading to other suppliers' motivation to improve also.

The considered company gives incentives (awards) to its supplier's. The resulting benefits

are long term commitment, the close relationship decreases risks (which are shared by both

companies), and the top management is involved in quarterly performance reviews. Also

Min (/Min-98/) presents a best practice in which it was recognized that a control program

is essential for continuous improvement. Measuring performance, creation of improvement

targets with the suppliers, and the facilitation of the supplier's understanding were under-

stood as the drivers to achieve the goal.

2.3.3

Supplier Management

Many companies have divisions, which are responsible for supplier management and that

are rather involved in production processes, negotiations and relationship management

than being directly involved into the operative tasks of the procurement. Hartmann (/Har-

04/ p. 100, et seq.) describes the risks and chances to consider in supplier management.

Besides of the size of the company, its policy and strategy, there are some fundamental

circumstances, which play an essential role in supplier management:

A high qualification of the participating employees, regarding their competency in tech-

nology, methodology, leading and organization, is required (as in the sales).

Negotiations with the suppliers, which are considered to be partners, have to be exe-

cuted with changing buyer's employees. Decisions have to be found in a team.

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The procurement employees need to know about the supplier's strategy, since economic

circumstances (e.g. low orders) may drive his decisions. Therefore supplier controlling

and site visits are inevitable.

The best opportunity for a successful supplier management is the win-win situation.

Both parties have to see the benefits of a contract and a prosperous future development.

For both sides there is supposed be the strong desire for a long term partnership.

A weaker market position bares risks for the weaker partner. Since the sourcing volume

is small he can't count with a real partnership from the other side.

Insufficient controlling bears the risk that economic problems are not recognized and

cannot be avoided in time. Therefore a preventive risk management is necessary.

As the major chances for a successful partnership Hartmann understands the standardiza-

tion, simultaneous engineering, the learning curve effect to decrease prices, and the opti-

mization of the entire supply chain. Further, Hartmann states that supporting activities (e.g.

workshops) at the supplier's site may be required in order to attain the desired partnership.

However, this needs funding and capacities. Eventually, the basis for a long term

partnership between employees and organizations are trust and open communication.

2.3.4

Supplier Controlling

According to Hartmann (/Har-04/ p. 93, et seq.), the supplier controlling can be divided

into strategic and operative supplier controlling. The operative controlling includes the as-

sessment/the measurement, which leads to certain action. The most important tasks of the

operative supplier controlling are the monitoring of the supply performance, the early rec-

ognition of changes of the performance, and the recognition and understanding of deficits.

So, it enables supplier improvement activities and forms the information basis for the stra-

tegic controlling. The strategic controlling in contrast, deals with the realization of strate-

gies, as far as they have impact on the measures within the operative controlling. However,

the strategic controlling is more qualitative in nature: it presents the strengths and weak-

nesses, the risks and chances.

Although the strategic controlling regularly does not have a short term impact on the buyer

supplier relationship, it influences it on the mid and long term. In contrast to the past, when

only the price, quality and reliability were considered, the strategic controlling has to

emphasize the dynamics of orders and the flexibility regarding changing circumstances,

lean management of procurement, logistics and modern IT-systems. The competitiveness

of a company, however, can be increased only by the implementation of future-oriented

methods and concepts. Still conservative indicators are justifiable and have to be included,

but an operative-strategic supplier management concept requires according to Hartmann

an analysis of the (operative) measures, resulting in mutually decided strategic objectives,

which have mid or long term effect (/Har-04/ p. 98, et seq.).

2.3.5

Supplier's Capabilities

The capabilities of a supplier are defined in different ways. In this research they are defined

as the "ability to fulfill the (buyer's) requirements". They can be broken down in sub-

capabilities making it possible to differentiate between different business functions and

business processes, which form the basis for the resulting capabilities.

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In the beginning of a buyer supplier relationship, supplier's capabilities are often not meet-

ing the performance- or even the minimum requirements of the buying organization. Most

capabilities are dependent on the supplier structure, which is being assessed within the

supplier audit, which is one of the preliminary actions of improvement conducted by a

cross-functional, risk-assessment team [

equivalent to audit-team

]. Some typically assessed

criteria consider the Quality-, Cost-reduction-, technical-, project management-, cycle

time- , and other (cap-) abilities (cp. /Han-99/ p. 31).

In an example given by Handfield, a company describes its improvement activities as "fixing

things". The following figure (Figure 2.3) shows the process of increasing maturity of the

company's new suppliers. Supplier Improvement A ("S-Dev (A)") is the process of fostering

mutual understanding of the necessary capabilities in order to stay business partners. The

processes from supplier Improvement B ("S-Dev (B)") on have the aim to integrate the

supplier, in order to increase efficiency and cooperation. It can be said that this activities

are mostly reactive in nature (/Han-99/ p. 33).

Figure 2.3 Supplier Maturity Curve (/Han-99/ p. 32)

2.4 Global sourcing

When an IC company decides to commence global sourcing, it has the aim to penetrate the

market or to leverage the specific advantages of the foreign country's resources to stay

competitive. In this work, latter motivation is considered to be the driver of China activities.

This means, that the attainment of products at competitive costs is the goal to achieve.

According to Appelfeller (/App-05/ p. 64, et seq.) the chances of global sourcing can be

among others the following. The advantage of saving costs by leveraging the lower prices in

the foreign country to increase the company's competitiveness, by sourcing from there or

building a local production site. Or second, the penetration of new supply markets and fu-

ture sales markets. Naturally, global sourcing takes in risks as well. Delivery and quality

performance may be lacking due to different quality mentality. The reliability, flexibility and

innovation may be poor and difficult to assure. The total cost of ownership may not be con-

sidered. The scheduling and transportation issues can represent drawbacks due to the big

distance and the high capital lockup. Other environmental risks, which are not influence

able, for example politics and catastrophes may occur.

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2.4.1

Low-cost sources in global procurement

Buyers, who allocate their supply chain to other countries to leverage the advantages of e.g.

lower labor costs, have to consider that the establishment of a localized supply base in an-

other country with a full extent to support local production and sales is difficult (/Han-02/).

A reason for this process being critical is that companies have to source a significant part of

their production locally, since governments are increasingly pushing Local Content laws.

The relationships with the new suppliers are hardly the same as in the home market.

However, in some cases [

e.g. China

], local supplier's production capabilities may be too low

to meet the buyer's requirements, like production technology, engineering and design

abilities, information systems, quality and delivery reliability (/Han-02/).

As a success factor companies recognize supplier improvement (e.g. /Dun-04/; /Han-00/;

/Har-97/ and others). Resources can be invested into a team of specialists that assesses

suppliers and improves their capabilities to meet the requirements in a short period. An ap-

proach, which tells the supplier how to increase his level of capabilities (with a report on the

deficits and suggestions how to fix them) saves the supplier burden (/Han-99/ p. 33).

Handfield (/Han-02/ p. 113) states that "leading organizations do not simply tell the sup-

plier to improve, but are increasingly adopting a hands-on approach to improvement, which

often involves working directly with the supplier to identify and resolve problems".

2.4.2

Considerations for Sourcing in China

In this work's case the buyer follows a strategy, which can be referred to as "global inte-

gration"(/Kau-05/): Kaufmann describes it as a strategy that includes high value-adding in

foreign countries and a high internal transfer of goods and services. With this strategy, a

company connects different business processes allocated to countries, where the local ad-

vantages are used to leverage the competitiveness. The major goal of this strategy is to use

these advantages of resources and local efficiencies the best. So, the example of sourcing in

China to use the leverage of low labor cost is applicable. However, it has to be considered,

that often the resulting risk can be critical and reduce the savings drastically.

Kaufmann (/Kau-05/ p. 165) states that the number of capable suppliers is growing stead-

ily, so the sourcing in China is increasingly possible. Especially mid and long term strategies

have prospect for success. However, Kaufmann explains that challenges like the un-

availability of expensive production technology, the problem for Chinese suppliers to

maintain good supplier buyer relationships, and the high volatility of quality (despite of the

reachable quality level) are still a big drawback in the Chinese market. However, as part of a

mid and long term strategy, investments in certain areas can facilitate the success in the

Chinese market. Kaufmann and Salmi (/Kau-05/ p. 169; /Sal-05/) identify following as

major drivers for success:

(1) The procurement has to be integrated strongly into the business processes, as it has

a high importance in the Chinese market (due to the mentioned difficulties).

(2) Performance has to be steadily measured and quality controlled.

(3) The suppliers are major factors for the competitiveness achieved in China. So, sup-

plier development and improvement (technical, managerial and also financial sup-

port) are to be executed: development of a reliable supply base, investments into

quality improvement and the education of the procurement staff are of fundamental

importance for the procurement.

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(4) Education and training of the procurement professionals to gain the knowledge and

skills required for the Chinese market.

(5) Consideration of the cultural issues (from here cp. /Sal-05/).

(6) Product specifications have to be understood clearly.

(7) Foster trust to support the discussion of problems ("losing the face issue"), local

presence is required.

(8) Building of the relationship network (Guanxi

; further comments on this are given in

chapter 2.4.6).

(9) Another possibility to avoid problems is the "supplier-following-OEM approach",

when suppliers from the home market follow to China (/Kau-05/ p. 169). [

author's

comment:

in this case latter ones would be considered as buyers

]

2.4.3

Procurement Activities in China

Not only in China the supplier relationship management and improvement are significant

tasks of the procurement. However, in China this is extraordinarily important, since the

supplier's capabilities are often lacking to meet the buyer's requirements.

Hence, in China the practices from operational up to the strategic procurement activities

have to be applied (see Figure 2.4). Special emphasis has to be given to the quality assur-

ance and, since it is a big problem, to the delivery reliability (cp. chapter 2.4.4). The "coor-

dinated/leveraged" activities have to focus the supplier relations in China, since the Guanxi

is recommended to be considered as cultural characteristic. The proper application of latter

one can be powerful to decrease risks and manage present problems. In contrast, not con-

sidering it may take in disadvantages (cp. /Sat-05/; /Hu-05/). Also the supplier certifica-

tion and the supplier performance measurement are required in China, since they represent

opportunities to decrease risk (for the business generally, and also for the success of

supply). The strategic part of the presented activities includes many activities, which are

essential if sourcing in the Chinese market (compare interview results). So, e.g. the supplier

improvement programs, as well as the internal training programs can help the buyer's em-

ployees to learn the different issues in China and how to approach Chinese suppliers. The

performance measurement builds the basis for the improvement as well as the planning

and strategic decision making.

Guanxi is a network of personal relations in the Chinese culture; it represent an important and powerful part of

private and business relationships it has to be built up, fostered and applied correctly in order to gain benefits

from it (cp. /Hu-05/; /Sat-05/)

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Figure 2.4 Procurement activities performed at different levels (/Soe-99/)

Supplier Development and Improvement in China

The following is based on the findings from the interviews conducted in the scope of this

work, discussed in chapter 4.

Supplier development and improvement is, besides of strategic cooperation, material group

sourcing and parallel negotiations, one of the most important methods of procurement in

China. It includes principally the same steps as in Industrialized Countries, but the single

proceedings have to be rethought. Already the identification of the product to source and

the supplier finding have to focus on the possible pitfalls and risks. The following supplier-

and risk assessment has a high relevancy, as it decides over further cooperation: regularly,

the same proceedings like in ICs are used, but subjective factors have a much higher rele-

vancy in most companies. After identifying the critical elements of the supplier's business,

an improvement plan has to be set up and monitored during the following relationship.

Improvement talks and planning with the suppliers are common practice in ICs. Since com-

panies regularly use company-wide concepts, the supplier improvement in China has

mostly the same structure. However, supplier improvement in China has rather fundamental

problems to cover than an optimization of suppliers in IC's. A minimum level of capabilities

has to be attained in order to mitigate the risk of non-delivery or unsatisfying parts. Many

risks threatening a successful supply of required parts make a holistic improvement

important in China. Undertaking actions to decrease risks and to enhance the major re-

quired processes helps to mitigate the probability that the costs eventually exceed the ex-

pected savings due to an unexpected problem.

When developing a supplier in China, buyers aim for following goals to build up a success-

ful relationship (supposing striving for savings for bought-in parts):

Details

Seiten
Erscheinungsform: Originalausgabe
Jahr: 2006
ISBN (eBook): 9783956360862
ISBN (Paperback): 9783836600125
Dateigröße: 2.4 MB
Sprache: Englisch
Institution / Hochschule: Karlsruher Institut für Technologie (KIT) – Fakultät für Maschinenbau, Produktionstechnik
Erscheinungsdatum: 2006 (Dezember)
Note: 1,0
Schlagworte: china supply chain management balanced scorecard global sourcing einkauf

Autor

Matthias Vodicka (Autor:in)