Development of a Global Sourcing Strategy Through Purchasing Portfolio Management

Table of Contents

List of Tables

1. Introduction

2. Purchasing Process at XY CHINA
2.1 Work documentation
2.2 The Lack Of Specification

3. Market Challenges
3.1 Porter´s Five Forces Applied to XY CHINA
3.2 Further Challenges

4. Developed Tool For Enhancing Procurement at XY CHINA
4.1 Adapting Kraljic´s Matrix
4.2 Analysis Of The Results

5. Possible Savings And Implications

6. Conclusion And Prospect

Bibliography

List of internal sources

List of interviews and talks

List of internet sources

List of Tables

2013, Table 1: Work Documentation Purchasing

2013, Table 2: Porter´s Five Forces

1993, Table 3: Kano’s model of customer satisfaction

2013, Table 4: Portfolio Classification

2013, Table 5: Questionnaire

2013, Table 6: Weightings

2013, Table 7: Plotted Kraljic Matrix

2013, Table 8: Cluster HSS drills

2013, Table 9: Possible Savings for cluster HSS drills

1. Introduction

Ever since the introduction E-Business solutions in the late 1990´s markets have been evolving to more transparency and immediacy. Having the capability of comparing prices and lead times the global key costumer base also has become more demanding in terms of price, quality and availability.

These changes have been increasing market pressure especially within the trading industry which often adds no or little value to the original product.

The tool, machine, working equipment and service provider, the XYGroup, with its headquarters in Germany offers almost seventy thousand articles; from simple steel grinding tools to high-complexity industry working equipment solutions. The products are mostly delivered from the German headquarters to the subsidiaries. The company has been operating since 1910.

In 2012 Z´s sales aomunted roughly to 100 million €.¹

One of the 15 subsidiaries within XYis XY CHINA is situated in the directly governed municipality CHINA. The subsidiary was founded in 2002. In 2012 it accounted for 4% of total XYsales.²

The location (City in China) was chosen because it provides a mature infrastructure including a harbor and a convenient highway connection to Beijing. In 2012 CHINA has reported Gross Domestic Product per capita of 91,180.6 RMB which was the highest GDP per capita of all Chinese cities. Furthermore CHINA´s real GDP had the highest growth rate of all Chinese cities, 13,8% in 2012.³ Key accounts are leading automotive as well as aircraft manufacturers. Due to the financial crash in 2008 and its aftermath sales declines in consumer as well as professional markets. Competition within the tool and machine industry has ever since become fierce and the subsidiary struggles with different internal as well as external factors.

One of the indicators for the accentuation of competition within the Chinese market is the subsidiary´s increasingly growing “Outsource Procurement Quota“. This quota states the amount of goods not being ordered from the headquarters in Germany but locally in China or in other countries from external suppliers.

What might be the reason the purchasing managers currently source an increasing number of goods locally or in other countries instead of sourcing from their mother company that states to provide reliable conditions and quality?

Wöhe explains this phenomenon. He defines saturated markets by the ratio of supply and demand. If supply is greater than demand he claims that cost minimisation as well as creation of demand should be primary efforts of the company.¹ The goal of this thesis is to provide a scientific theoretical foundation, the first step of developing an efficient global sourcing system within XY CHINA.

In chapter 2 the current purchasing process of XY CHINA will be described. Chapter 3 will reveal the arising market challenges by a brief Porter´s Five Forces Analysis. Based on the current circumstances and challenges a suitable purchasing strategy will be deducted. In chapter 4 a costumized tool will be presented as well as applied on XY CHINA.

2. Purchasing Process at XY CHINA

Prior to the external and internal analysis in chapter 3 and 4 the current purchasing process at XY CHINA will be determined. For a multinational trading organisation the importance of efficient sourcing is an ongoing concern. It is vital to provide a continuous supply of goods at a suitable prize and within shortest possible lead times. Another concern for purchasing managers are possible group-wide purchasing synergy possibilities by exert the group´s purchasing volume in order to achieve a competitive advantage. Porter suggests that competitive advantage should be a key factor in an organisation in order to reacting to slower growth and competition.²

2.1 Work documentation

In order to determine the purchasing process it is vital to consider the work documentation. As seen in Table 1 the IDM - Department, that is German for Inhouse Sales - Department, pose a PR, a Purchasing Request. The purchasing manager now has three purchasing options. XY headquarter (catalogue products) implies ordering from the German XYheadquarters. The other options Local purchasing and Purchase in other countries however imply a gross profit check, GP checking.

These three options indicate a hybrid global sourcing approach.

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Work Documentation Purchasing¹

2.2 The Lack Of Specification

Regarding the implementation global sourcing researchers emphasize the difficulty of finding a balance between immediate local responsiveness, which implies local purchasing with short lead times, and using economies of scale arise out of global synergies.² According to table 1 the purchasing request has to got through an allocation before an order is placed. This allocation however lacks specification. Apart from comparing gross profits and different prizes the decision making process is not standardised. One objective of this thesis is therefore to develop a standardised framework in order to guarantee a bias-free purchasing process.

3. Market Challenges

Due to an increasing number of key accounts within the aircraft and automotive industry demanding lower prizes and high quality standards, the strategic importance of efficient procurement for XY CHINA is ubiquitous.

A reliable tool for percieving the market situation and as a result necessary competitive advantages is Porter´s Five Forces Model. In the following chapter XY CHINA will we depicted onto this model. For this matter two items offered by the company were selected. They differenciate regarding their specification, prizes and degree of complexity.

3.1 Porter´s Five Forces Applied to XY CHINA

Porter´s Five Forces analyses a competitive rivalry within an industry as seen in Table 2 regarding danger of substitute products, bargaining power of costumers, bargaining power of suppliers, degree of rivalry between competitors and market entry of potential competitors¹.

Since XY CHINA´s product portfolio offers a broad variety of nearly seventy thousand articles, the five factors can not be expanded to the complete portfolio. This expansion afflicts the result´s validity and illustrate the industry´s complexity.

Therefore two of Z´s articles will be analysed using Porter´s well-known model in order to illustrate the complexity of Z´s portfolio.

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Table 2: Porter´s Five Forces²

Article 1: HSS Drill

The danger of substitute products: this standard product is a low-cost and low-complexity product. The average current purchasing prize of HSS drills accounts for 0,3 ¥. The danger of substitute products is therefore high.

Key accounts mostly order large quantities of this product. The total order volume of HSS drills since January 2011 amounted to roughly 35,000 pieces. This implies a high degree of costumer bargaining power since there are many suppliers for cutting tools in China´s south and the competition between them is fierce. Based on the low complexity of the product the degree of rivalry between competitors be described as high. The product does barely underlie copyright regulations and the design is well-known in the industry. Supplier bargaining power is therefore low which also means severe competition between competitors. Suppliers face difficulties in creating distinguishing factors to achieve competitive advantages.

Costumers will only be satisfied when they are being offered either lower prizes or services like resharpening the tool at the costumer´s site. These facts also indicate the high barriers for market entry of potential new competitors.¹

Article 2: TESA Microhite

The TESA Microhite is a measuring tool which is exclusively produced in Switzerland. It contains highly innovative technology. The product is highly guidance intensive as it has to be for example installed and calibrated by a professional. The danger of substitute products within Chinese market is limited since TESA grants exclusive vendor licenses in order to prevent brand dilution.

The bargaining power of the costumers is very limited due to the vendoring limitations. The bargaining power of the supplier however is very high since the brand is known for its machines accuracy and quality.

Apart from TESA there are basically no other OEMs that produce these machines. XYis an exclusive vendor of TESA machines. This indicates a high market entry barrier for potential competitors within the Chinese market. However there is a certain degree of competitor rivalry from counterfeiters that enter the Chinese market.²

One explanation for the market situation described above is provided by the Kano Model.³ As depicted in Table 3 it states that there are three different types of product requirements: the first ones are Must-be requirements. These product requirements are implied, self-evident, not expressed and obvious. If they are not fulfilled the costumer will be very dissatisfied. A suitable example regarding the Chinese tool market could be that key accounts are used to being visited by their tool supplier´s key account manager´s in order to get informed over new product innovations.

The fulfillment of One-dimensional requirements imply a proportional growth of costumer satisfaction. They are articulated, specified, measurable and technical. In most cases they are explicitally demanded by the buyer. A One-dimensional requirement could be a key account´s demand for price adjustment.

An Attractive requirement is not demanded or expressed, costumized and it causes delight. This can be achieved through offering a service that is not provided by market competitors. In the tool industry attractive requirements are innovative technologies and efficient services.

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Table 3: Kano’s model of customer satisfaction¹

3.2 Further Challenges

After a long period of growth the automotive and other industries have witnessed a recession in 2008. Data from the German automotive assocation (VDA) reports a decline of automotive sales of 4% Within 2008.²

[...]

¹ cf. x, F. (2013), face-to-face interview, 08.01.2013

² cf. x., F. (2013), face-to-face interview, 09.01.2013

³ cf. Anon (2013),http://www.dbresearch.com (status of: 01.09.2013)

¹ cf. Wöhe, G.; Döring, U. (2013), p. 383f.

² cf. Porter, M. (2008), p. xxi

¹ Adapted from Anon (2013), p.3

² cf. Carter J.; Narasimhan, R. (1996), pp. 7 sqq.

¹ cf. Porter, M. (2008), p.36

² Adapted from Porter, M (2008), pp.36 ff.

¹ cf. Zhu, x. (2013), face-to-face interview 31.05.2013

² cf. Zhu, x. (2013), face-to-face interview 30.05.2013

³ cf. Berger et al. (1993) pp. 3-36

¹ cf. Berger et al. (1993), pp. 3-36

² cf VDA (2013), http://www.vda.de (status as of 15.08.2013)