Non-financial value creation of the purchasing function:

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1 Non-financial value creation of the purchasing function: components of value and viewpoints to nonfinancial performance measurement Dr. Aki Jääskeläinen ProcuValue project Department of Industrial Management Tampere University of Technology, Finland

2 ProcuValue project Schedule: 1/2015 6/2017 Four large Finnish case companies Project focus and aims Starting point: the research will highlight complex product/service combinations which are often developed only after formal agreements The project intends to develop new and widely applicable knowledge on managing strategic procurement 1. The prerequisites of strategic procurement are studied from the perspective of organizing the procurement function. 2. Managerial practices supporting the strategic procurement approach are identified and developed. 3. Different ways to produce and utilize quantitative information are identified and developed in order to manage purchases and to demonstrate their long-term value. 2

3 Viewpoints to value Jääskeläinen et al.,

4 Interview study on the capabilities of the purchasing function Dr. Aki Jääskeläinen ProcuValue project Department of Industrial Management Tampere University of Technology, Finland

5 Implementation of the interview study Interviews highlighted three themes: value-creation, long-term focus and performance management Approaches to value: Internal benefits of the purchasing function: collaboration between the purchasing function and other functions role of the purchasing function in creating value for the company External benefits of the purchasing function: role of the purchasing function in creating customer value Company Industry Type of production Company A Logistics services Continuous process Company B Knowledgeintensive services On-off (project) production Company C Manufacturing On-off (project) production No. of respondents Functions represented 6 Purchasing (5) Other (1) 6 Purchasing (3) Other (3) 6 Purchasing (4) Other (2) Case study Measurement and management of supplierpurchaser partnerships Data driven decisionmaking in category management DTC process, interaction between suppliers, product re-resign and customers Company D Manufacturing Continuous 6 Purchasing (4) Begins in Spring 2015

6 Internal value of the purchasing function Cost-savings were emphasized by our interviewees, many also acknowledged quality and delivery performance Context-specificity of the purchasing value creation important to analyze successful cases of purchasing and their casespecific value-adding components Purchasing function acts as a communication enabler between different organizational functions which supports in avoiding suboptimization and silos within the organization. The purchasing manager of case C: We are now more involved [in product re-design process] since we have this category thinking where certain persons are responsible for their purchasing categories. [ ] Purchasing personnel are important when different alternatives and certain know-how are sought from the suppliers. [ ] Design personnel require certain source information from us in order to design better and more cost-effective products. Suppliers Purchaser firm 2/5/2016 6

7 Value of the purchasing function created to the customer Perceived as an important but complex issue It is a challenge to see how a certain element is visible to the customer because causalities [between activities] are distant. [ ] We have very seldom a direct link to the end customer but luckily there are also cases where we analyze the benefits [to end customer] (category manager, company A) Purchasing function was regarded to be in a key integrator role between suppliers and end customers: Understanding of markets and customer needs is essential Development of tailored customer offerings Benefits of purchasing function in: monitoring quality and searching for a solution with lowest possible TCO to the end customer ensuring the sustainability, safety and environmental issues of offerings provided to the customer Purchaser firm End Suppliers as an customers intermediator

8 Approaches to non-financial performance measurement Dr. Aki Jääskeläinen ProcuValue project Department of Industrial Management Tampere University of Technology, Finland

9 Observations from our recent interview study on PM in PSM Starting point for measurement is the demonstration of savings obtained by the purchasing function Balance of measurement The emphasis is quite widely in financial aspects and transactions Non-financial measures could be more proactive and support in utilizing measurement in inter-organizational communication Structures of measurement systems Examination levels: purchasing function, categories, suppliers Approaches to measurement vary in different contexts: Systematic set of same measures at different levels enable comparison possibilities Varying measures at more operative levels support in capturing the context-specific success factors

10 Different kinds of objects for measurement Material /physical Financial - Financial growth - Liquidity - Costs per product/service - Profitability - Solidity Non-financial - Time of delivery - Product quality - Product quantity - Productivity - Inventory turnover Immaterial - Brand value - Goodwill - Value of immaterial rights - Employee competencies - Customer satisfaction - Customer loyalty - Innovativeness - Motivation - Personnel satisfaction

11 Component-by-component approach to measurement, example Step 1: you have an extremely difficult object for measurement, e.g. nonfinancial value of purchasing Step 2: try the identify sub-components of the object at hand, e.g. Quality Customer perception Flexibility Increased knowledge Step 3: define direct or indirect measures for each component Step 4: use an appropriate indexing to aggregate the components(if necessary)

12 Aggregating (tailored) measurement results Finpro - asiakasarvon mittaristo esimerkki Liikevaihdon kasvu Liikevaihdon kasvu % (kasvu %, keskiarvo seurantayrityksistä) 333 % Liikevaihdon kasvu panostukseen nähden, ((toteutunut-alussa) /ostot Finprolta Toteutunut liikevaihto suhteessa päivitettyyn tavoitteeseen (% KA) 130 % Toteutunut liikevaihto suhteessa alkuperäiseen tavoitteeseen (% KA) 325 % Viennin kasvu Viennin kasvu % (3 vuoden aikana, keskiarvo seurantayrityksistä) 48 % Viennin kasvu panostukseen nähden, ((toteutunut - alussa) /ostot Finprolta) Toteutunut vienti suhteessa päivitettyyn tavoitteeseen (prosenttien KA) 100 % Toteutunut vienti suhteessa alkuperäiseen tavoitteeseen (prosenttien KA) 108 % Työpaikkojen kasvu Uudet työpaikkojen lukumäärä keskimäärin 35 Työpaikkojen kasvu % (prosenttien KA) 35 % Uusien työpaikkojen lukumäärä Suomessa keskimäärin 5 Uusien asiakkaiden määrä Uusien asiakkaiden lukumäärä keskimäärin 5 Uusien asiakkaiden määrä suhteessa tavoitteisiin 3 vuoden aikana - Ylittyi (yli 20%), % osuus tarkasteltavissa yrityksistä 20 % - Täyttyi (-20% < toteuma < 20%), % osuus tarkasteltavista yrityksistä 40 % - Alittui (yli 20%),% osuus tarkasteltavista yrityksistä 40 % Uusien kumppanien määrä Uusien kumppanien lukumäärä keskimäärin 3 Uusien kumppaneiden määrä suhteessa tavoitteisiin 3 vuoden aikana - Ylittyi (yli 20%), % osuus tarkasteltavista yrityksistä 10 % - Täyttyi (-20% < toteuma < 20%), % osuus tarkasteltavista yrityksistä 60 % - Alittui (yli 20%), % osuus tarkasteltavista yrityksistä 30 % Osaamisen kasvu Kuinka moni kokee osaamisen kasvaneen odotettua enemmän (% vastauksista) 40 % Case Posti Basic unit: individual supplier partnership Markkinanäkyvyyden kasvu Markkinanäkyvyys - odotettua enemmän (% vastauksista) 20 % Case Finpro (company-wide report): Basic unit: individual customer relationship

13 Some concluding remarks The role of non-financial factors is acknowledged as a part of value created by the purchasing function Internal value highlights more cost consideration in comparison to the value provided to the customer Relationship value gives a stronger potential for differentiation in the buyer-seller relationships than cost consideration There are differences between contexts: Quality vs. cost-efficiency (service vs. manufacturing companies) Partnerships (service companies) Flexibility (continuous production vs. projects) Mutual trusts vs. formal contracts (projects vs. continuous production) Performance measurement in PSM: Requires identification of different analysis levels and actors Splitting intangible measurement objects into components Tailoring vs. coherent measures 13

14 Questions, comments?