Introduction to the Case
You and your fellow team members work in the new Central Procurement and Supply Office (CPSO) of ChocoTreats, a large multinational confectionary company that has production facilities in Europe, North America and Australasia. The case study you are about to read concerns the procurement of cocoa – a key input into the firm’s products.
The Historical Lack of Purchasing Strategy within ChocoTreats
There is very little tradition of professional procurement within ChocoTreats. Until six months ago, the procurement operation that existed only dealt with basic paperwork (processing invoices) and worked as an adjunct of the Finance department. The main responsibility for purchasing lay with the internal client. In theory, this meant one of the company’s three geographical divisions: UK and Commonwealth, Continental Europe or the United States. In practice, because each of these three divisions was further sub-divided into strategic business units (SBUs), the primary day-to-day responsibility for purchasing lay at the SBU-level.
Under this system, each SBU was free to specify its requirement, pick its suppliers, negotiate deals and determine the relationship and contract type that it regarded as most appropriate for a commodity. Yet whilst the different SBUs within ChocoTreats exhibited considerable organisational diversity, one thing that was common to all of them was a basic lack of procurement competence. Like the firm’s corporate centre, the SBUs had no proper procurement infrastructure. Instead, when needing to make a purchase, the head of an SBU would simply take the lead, drawing on the expertise of the firm’s lawyers when it came to drawing up contracts.
Nothing existed, therefore, that could be considered an organisation-wide purchasing strategy or infrastructure. This state of affairs very much affected the procurement of cocoa – the commodity that concerns the case.
A New CEO and a Change in the Profile of Purchasing
All of this changed six months ago. The reason for the change was the arrival of a new CEO. His background was in the automotive industry, where purchasing and supply has a much higher profile and is better developed. One of his very first acts was to set up ChocoTreats’ CPSO and give it a strategic role. The new CEO immediately charged the CPSO with making 15% savings over the first two years of its life. This target presented the new purchasing operation with quite a challenge. In addressing this challenge, the first thing its members had to do was to decide whether to try a ‘big bang’ approach or target its efforts more selectively.
After some deliberation, it opted to target its efforts and tackle the problem of sub-optimal procurement commodity by commodity. First up is cocoa. Cocoa is regarded by the CPSO managers as an excellent candidate for demonstrating the benefits of professional procurement. Supplier performance for the commodity has historically been dreadful. Lead-times are highly variable and, as a consequence, capacity planning has been made problematic. Quality has also been inconsistent, so that as much as 12 per cent of incoming supplies have to be rejected. Furthermore, ChocoTreats’ patch-work approach seems to promise ample scope for rationalisation and consolidation. Your team has to decide exactly what type of approach to adopt.
The Current Demand for and Procurement of Cocoa within ChocoTreats
Preliminary research on cocoa has turned up the following information:
Diversity in Consumer Tastes for Cocoa
There is considerable diversity in consumer tastes across the globe. Consumers in the US, for example, have grown up on low-grade cocoa sourced primarily from South America. This variety of bean has a distinctive aftertaste that is loved by Americans but which doesn’t travel well. The UK consumer is also used to a bean of a lower quality, but mainly obtains its cocoa from growers operating out of its commonwealth partners in Africa.
Consumers in Canada, Australia and New Zealand also favour chocolate made from the bean favoured by UK consumers. Interestingly enough, products made from the ‘UK bean’ have recently been tested on US consumers and the preliminary signs have been encouraging – the US consumer seemed to react favourably to the different taste. However, attempts to market test this bean on the Continent have been disastrous. For a start, it is clear that there is no such thing as a ‘European taste’.
The French prefer a darker chocolate with high cocoa solids content and a bitter taste. Germans, the Swiss and the people of the Benelux countries, by contrast, prefer milk chocolate. What all continental countries insist upon, however, is a high quality bean. In this respect, the ‘UK bean’ simply doesn’t cut the mustard. SBUs in Germany, Switzerland and the Benelux countries, therefore, obtain their cocoa from South Africa, whilst the SBU in France sources its beans from the Ivory Cost.
Current Procurement Practices for Cocoa in the Three Geographical Divisions
The current approaches to procuring cocoa utilised by the different divisions are also diverse. The US division has nothing even resembling a strategy when it comes to cocoa. There are three SBUs operating in the US, each organised on the basis of a particular product line. Between them, the three SBUs use a total of twenty different suppliers. In many instances, the SBUs source from the same supplier, but because the US tends to source on a spot-market basis, each SBU cuts its own deal. On occasion, there can be as much as a fifty per cent difference in the price paid by a different SBU for an identical product.
By contrast, sourcing in the UK and Commonwealth division is a much more coherent affair. The divisional head has negotiated a series of contracts on behalf of his SBU chiefs. When the SBUs require more cocoa, they simply ‘call off’ against these contracts. The UK and Commonwealth Division takes 80 per cent of its beans from just two suppliers.
Yet whilst on the face of it, it looks like the UK’s approach appears to be much the better of the two, the reality is more complex. The UK chief’s background is in operations. Like many managers with an operations background, his primary concern is security of supply. When negotiating, therefore, he traded cost for security. Currently, therefore, the UK pays a fixed price for its beans, irrespective of what is happening in the global marketplace and the suspicion of the CPSO is that it is paying too much. This impression is reinforced by the fact that the UK chief currently selects his two preferred suppliers on the basis that he has been using them himself for years. He undertakes, therefore, little or no market research prior to signing his deals.
Lastly, because of its diversity, the strategy of the Continental European division is harder to categorise. SBUs in Germany and Switzerland use the same bean varieties but source from different suppliers. The Benelux SBU uses many of the same suppliers but cuts its own deals. Finally, the SBU in France single sources its beans from a consortium of specialist growers. Outside of this consortium, there is no other source of supply.
We have already commented on the diversity of the prices paid by the US division. However, there are also pricing issues affecting the other divisions. The current (and where relevant potential) prices for cocoa are summarised in the attached table.
Develop a strategy for the procurement of cocoa. What should be bought by each division, or unit within a division, and from which suppliers?
How procurement was transformed at Manchester Airports Group
29 March 2018
Supply Management (www.supplymanagement.com)
“If you do procurement without being engaged in the business, you’re on borrowed time.”
Manchester Airports Group has transformed over the last few years, as has its procurement department. Key to its success: a great relationship between CEO and CPO
While airport-related news in the south of England has been dominated by Heathrow versus Gatwick expansion for years, further north Manchester Airports Group (MAG) has been quietly, determinedly getting on with becoming the country’s largest UK-owned airport operator. Since Charlie Cornish became CEO in October 2010, the group has undergone, in his words, a “massive transformation”.
“When I joined, MAG was generating profits of around £110-120m; we are now close to £400m per annum,” Cornish tells SM, when we meet him and director of procurement and contracts George Owens at MAG’s HQ by Manchester Airport, overlooking the increasingly busy runaways (the airport launched direct flights to China in June 2016, and flies direct to about 200 destinations via more than 60 airlines). MAG is a private company, but if listed it would be a FTSE 100, adds Cornish.
In his time as CEO, MAG has sold two smaller regional airports (Humberside and Bournemouth) and bought a far larger one: London Stansted. It also owns East Midlands airport, has a fledgling business in the US, and has launched its own specialist e-commerce business, MAG-O, to capitalise on growing digital opportunities. Its ownership model has also changed in that time: where it used to be a public corporation, it is now owned 35% each by IFM Investors and the City of Manchester, plus 29% by other Manchester councils.
MAG’s contribution to that city and the wider Northern powerhouse is significant: Manchester Airport alone now handles almost 28m passengers a year, with over 40,000 people employed across the group and thousands more throughout the supply chain. “Our gross value add to the UK economy is enormous – £7.1bn per annum,” says Cornish.
If that sounds like an impressive success story, it is matched by what procurement and supply chain has achieved since Owens joined the group in October 2014. When Owens, who has an admirable pedigree leading procurement in firms including United Utilities, arrived at MAG he found a supply chain function that had not kept pace with the group’s rapid expansion. “The service was immature and morale was low,” he says. A lack of alignment with and credibility within the business meant some budget holders were doing their own procurement, risking non-compliance with EU Utilities Contracts Regulations.
A place at the top table
Today, things couldn’t be more different and procurement has cemented its place at the top table within the business – and delivered sizeable savings of about £15m. The team is also multi-award winning, having gained several awards in the CIPS Supply Management Awards 2017 in the UK and Europe, with Owens personally being named professional of the year at the European awards.
The very fact Cornish has agreed to give up his time for a joint interview with Owens in this magazine is further evidence of the function’s improved standing within MAG. “We’ve moved the procurement function to a different level altogether,” Cornish says. “[It used to be] very transactional. It set up contracts, ran OJEU procurement processes, but we never necessarily had procurement impacting on the business longer term. Now, we’ve moved to a much more strategic supply chain and category management function.”
Getting the enthusiastic buy-in and support of the CEO has been critical to procurement’s transformation. Cornish personally endorsed Owens’ group policy, which defined the authority for signing off contracts.
Whereas the situation used to be “a little bit confused”, says Owens, with budget holders often signing contracts, now only a procurement contracts expert can do so, reducing risk. However, to ensure business alignment and buy-in, the budget holder must give authorisation for the order to be signed. “It’s a subtle but significant difference because it repositions procurement altogether,” Owens explains. “Having a policy top down from the chief exec was key. Any function will only go as far as its executive support.”
Business alignment is about more than just understanding the business for Owens: “You have to go one step further and understand what the business means to procurement. If you do procurement without being engaged in the business, you’re on borrowed time.” He uses the example of developing a procurement strategy based on the stages of an asset lifecycle while at United Utilities.
At MAG, he settled on a total cost of ownership model (a management accounting concept that takes long term factors into account), in line with Cornish’s overarching aim to create a “long-term, sustainable, growing business”. Critically, this model is scalable: “As the company grows, it’s about thinking what’s core and what’s non-core in the supply chain, and considering the ‘make or buy’ question.”
“You’ve got to arrive at a real synergised business understanding that sits at the core of your strategy, and that’s what will sustain things,” Owens adds. “It’s being on other people’s agendas, having shared objectives and tying into them.” These goals can’t just be about reducing costs. MAG’s procurement team supports stakeholders in multiple other areas, like reducing carbon emissions and contributing to social value by looking at how local the group’s spend was.
To arrive at true alignment, category leaders need to have two jobs, he believes: being a business partner as much as a category expert. “Being at the table is key. [Procurement] has got to integrate, or you’re back in the corner and not in the business.”
From the CEO perspective, Cornish believes there are three main things procurement and supply professionals must do to add value to their businesses: “Work hard to understand the business, think long term, and work hard at building relationships. The way procurement can have a real impact on the business is understanding the 10-year plan and building a category strategy around it.”
Risk must also be a key consideration for functional leaders. “Risk is so important to a business like MAG,” Cornish adds. “From time to time, you get functional leaders that forget about risk and just look at opportunity. It’s a balance: you have to look at both.”
It’s all in the detail
Data has been critical in getting Owens a seat at MAG’s top table. Having a forensic and evidence-based view helped remove the fear of change for some, he says. By taking data from two separate systems and recoding it, new opportunities were uncovered, providing a persuasive case for business leaders. This work has also increased spend coverage from 25% to nearer 90%.
When it comes to data on savings, Owens says he is “cynical”: “You have to be able to prove procurement savings.” So, at MAG savings are audited by group finance, and a three-way sign-off between the budget holder, finance and procurement is required.
Of course, delivering transformation on this scale required more than just Owens. “A very big focus was people,” he says, in terms of development of existing staff and recruitment of new talent. It was important that people saw how their jobs aligned to MAG’s overall objectives, what Owens calls “that golden thread contribution”, and procurement defined its goals in line with the group’s six strategic priorities.
Getting team members to set their own objectives helped boost buy-in and engagement – in fact the department has moved from having the worst employee engagement scores in the whole business to having the best.
This is significant to Cornish, who places a high emphasis on the importance of culture. “Building those relationships that will allow you to have the right level of ambition and create the right cultures is important to me,” he says. “I want people to enjoy work. We are always keen to keep moving the bar up.” And the bar for procurement needs to be raised even further, given the size of the agenda MAG is now tackling: a £1bn infrastructure programme in Manchester and a £600m one in Stansted, as well as growth in the UK and a potential opportunity in Japan.
Innovate to avoid risk
This expansion presents huge opportunities for the supply chain function, as does the impact of Brexit. “Brexit is such a big issue for any airline or airport,” says Cornish. “If we end up in a hard Brexit environment it could reduce our profits by 10-15%. Therefore we need to continue to innovate within our supply chain, and look at different kinds of risks and opportunities. Supply chain becomes even more important to the business from a strategic perspective as our economic climate changes around us. The other consideration is how we can get leverage across a much bigger geography; that will be the next opportunity for supply chain to add some value.”
Cornish prefers the term supply chain to procurement, because of where he sees the chance for the function to really add value. “Supply chain means looking at things end-to-end,” he says. “The next evolution of supply chain for me is how you interact on business models, [thinking] right to the front end and then right to the back end to understand what actually happens. It’s about how you get that end-to-end view, and the next iteration for me is how supply chain shapes and influences the business model.”
For Owens and his team, this means “more sophisticated, commercial management of a smaller number of longer-term deals”, an elevation and evolution of contract management in which relationship management will be even more important. Delivering that will play a major role in ensuring that MAG continues to fly high.
National Savings and Investments: Self-Enforcing Agreements Exercise
In 1997, National Savings and Investments (NS&I) outsourced its business operations. This included everything the organisation undertook (e.g. call centre, IT and processing operations), except for the design and marketing of its financial products. The ensuing transaction was, not surprisingly, characterised by a high level of asset specificity and switching costs - and uncertainty. It was also, self-evidently, a business-critical transaction to NS&I.
As NS&I is a public sector organisation, the transaction had to be undertaken in accordance with the EU procurement regulations. The carefully crafted initial call for proposals yielded 90 responses (about 15 of which warranted serious initial consideration). From these, the NS&I procurement team eventually generated a shortlist of four potential suppliers. Two of these four were then taken to ‘final bidding’ - the then ubiquitous EDS and a ‘challenger’ firm, Siemens Business Services (SBS). NS&I’s procurement policy here included keeping both parties in the frame until it had negotiated a ‘draft contract’ with both of them.
Following all these stages, a final decision was made to award the contract to SBS. It was reported that SBS and EDS scored similarly on the price and solution, but that SBS rated higher on risk transfer (including liability limits) and transparency arrangements. The contract was for 10 years, with an option to extend.
The NS&I procurement team consisted of a number of different parties. As well as including NS&I operations and contract managers, there was also a senior management presence and external advisors from HM Treasury and the private sector. Considerable time was taken to ensure that there was agreement within the team over both means and ends. It was also felt that there was a need to take time over the negotiations. This was not easy as there was political pressure for a quick settlement. However, this was resisted.
The result of the procurement process was the following contractual agreement with SBS. SBS was to take responsibility for all of the operational tasks relating to the provision of NS&I financial products. SBS also accepted an undertaking to reduce the operational costs year-on-year during the 10-year contract period, by percentages, at the time, covered by commercial confidentiality.
Further contractual conditions included the following. First, the management of new NS&I products was to be opened up to competition if SBS’s performance was poor. Second, NS&I would share in SBS profits, if they were deemed to be excessive. Third, SBS was to take sole responsibility for operational errors. Fourth, 42 KPIs across different aspects of the operation were established, with an accompanying monitoring regime. Fifth, SBS is obliged to help with the switching of suppliers (if and when NS&I decide that change is necessary). Sixth, a formal change process was established to manage the consequences of uncertainty.
Underpinning all this was a further condition - that SBS’s parent company, Siemens AG, guarantee SBS’s obligations. Following the negotiations, liability was set at up to £250m (£120m in any two-year period). The NAO concluded that the liability provision placed ‘the onus on SBS to improve [should it find itself in a] loss-making position’.
While procurements such as this are never entirely trouble-free, the outcome here appears to have been quite positive. A full audit was undertaken by the NAO after five years. It concluded that NS&I had ‘added value’ to the taxpayer in the amount of £176m in 2001-2002 and £220m in 2002-2003. Operational performance was also said to have improved. For example, customer response times had, by 2003, come down from seven to three days, putting them in line with industry ‘best practice’. Both parties decided to activate the extension option in 2004, leaving the revised contract renewal date as 2014. In 2005, the NAO provided further approval regarding performance under the contract.
Most recently, in 2013, the NAO reported that SBS (acquired by Atos in 2011) had ‘saved £530 million [for NS&I] since 1999, while avoiding significant redundancy costs’, although the assumptions adopted in this calculation may mean that this figure is somewhat overstated. The NAO also reported that in 2012 Atos had ‘won a fresh competition to provide services until 2021, proposing further efficiency savings and a strategy encouraging customers to switch from post and over-the-counter services to telephone and online banking’.
Map the main stages of the procurement ‘effort’ here (i.e. not just the formal process).
What specific actions did the NS&I team take to guard against non-strategic and strategic hazards?
How did the NS&I team sequence its actions in order to achieve a measure of self-enforcement?
Organisational Buying Behaviour: Developing a Programme of Action within RUHT
Background to the Case
It is 2019 and you are a member of the Procurement and Supply Management team (PSMT) at the Rushmore University Hospital NHS Trust (RUHT). The Trust works out of a well-respected university medical school with a strong record of medical research excellence. Your team’s new leadership has been tasked with reviewing the Trust’s existing procurement and supply management practices and outcomes, with a view to reducing supply input costs by 15% over a three-year period. Third-party spend at the RUHT is £74.5 million (out of an overall Trust turnover of £234.7 million), with about £61 million of that being accounted for by medical spend, £8 million by estates management and much of the balance accounted for by agency medical staff.
Current Procurement and Supply Management Practice in RUHT
The PSMT is well organised, has good systems and its staff possess good, if not ‘best in class’, procurement and supply management skills and experience. It has some control over agency spend (as much as is possible – rostering and the internal bank are both good, which helps) and has set up good-value Trust-wide contracts for the non-medical spend that, in the main, it controls or manages with largely like-minded non-medical managers (e.g. estates). However, the Finance Director believes that the Trust must improve procurement and supply management in the much larger medical equipment and product spend areas. Savings targets cannot simply go on being achieved through giving the cleaning supplier another ‘squeeze’ and other short-term (and potentially counter-productive) tactics.
Practices and outcomes in the case of medical spend are mixed. There is some good practice, but also problems (various manifestations of poor VFM – see later). The causes of the problems mainly relate to the location of authority for procurement decisions and how that authority is exercised. The RUHT’s medical spend is managed by its 9 clinical budget centres, with authority for spending residing with extremely independent-minded clinicians. Although these clinicians are able to use the PSMT, there is no statutory obligation for them to do so (except for the completion of legal paperwork). This is a principle called ‘clinical preference’.
As a result, sometimes the first that the PSMT knows about a clinical purchase is when it receives an invoice from a supplier for something already delivered. Clinical input into procurement decisions is essential, but a total by-passing of PSMT is not ideal. The clinicians at the RUHT have a long record of being resistant to any attempt to curb their freedom. Most recently, this resistance has been driven by the experience of the 2012 ‘value-for-money’ initiative. A majority of clinicians feel, with some justification, that this initiative had an adverse impact on patient care. A number of leading clinicians have refused to even discuss procurement issues since.
Not all clinicians are ‘anti-procurement’ however. The PSMT has historically had a good relationship with certain clinicians - respected senior clinicians as well as junior ones – which have assisted them with their procurement and supply management in the past. Indeed, some clinicians, particularly those with experience in overseas health systems, recognise the need for changes to RUHT commercial practice. There is also an increasing trend towards ‘clinical procurement nurses’ – with such nurses led and supported by senior nursing staff.
Specific Demand Problems within the Medical Spend
Despite the fact that there is considerable commonality in the non-specialist medical goods and services that are required across the 9 budget centres, it is not unusual for each of the centres to be buying the same equipment and products from the same suppliers, but separately and under very different terms/prices. In other categories of medical expenditure there is a different problem, spend fragmentation across the budget centres, with multiple suppliers used for the provision of similar equipment or products. Part of this results from clinicians having ‘favoured’ suppliers, although admittedly their preference is sometimes for the good reason that those suppliers provide the equipment they were trained on.
In the case of medical consumables, the problem is not variation but rather a form of behaviour common across all budget centres, over-specification. Medical consumables are purchased by the NHS nationally and made available to individual Trusts via an online catalogue. Approved products across a bewildering range are listed in the catalogue, with the prices agreed prior to the latest update of the catalogue. The issue here is that in the case of many products (e.g. sutures, gloves) there is a range of quality/specification of products, with consequent significantly different prices. There is no restriction on the product choices made by clinicians, with clinicians not greatly co-operative with product trials when initiated by the procurement function and always able to present medical arguments why their ‘top of the range’ product preferences are justified.
A further difficulty experienced by the Trust is supplier opportunism. Partly this consists of the aforementioned opportunistic pricing – suppliers taking advantage of clinician unawareness of the lower prices being paid elsewhere in the Trust. However, there is also significant evidence of some suppliers targeting the principal budget-holders in each of the 9 centres and attempting to ‘buy’ their way into the Trust - training packages, invitations to medical conferences, support for research, etc. Such sales tactics often lead to problems, for example, the Trust buying equipment or products with specifications, again, beyond the needs of patients (with a price to match) and also with restrictions on product usage and maintenance (see later).
Finally, there is a long-standing problem of inefficient pathology services, an area of the Trust that costs £4.2 million per annum. There are six internal labs (e.g. cell pathology). These labs use of suppliers is not great, with spend fragmentation featuring again. However, there is a bigger issue in that there is a need for an overhaul of lab equipment. This investment is not really a top priority for RUHT, not least as there is a regional ‘super-lab’ initiative being explored, where hospitals in the region will share pathology services (having effectively outsourced them). There is enormous internal resistance to this idea from the well-(medically) connected pathology services leadership team. At some stage, however, the two senior procurement managers believe that the commercial logic of the ‘super-lab’ will need to be confronted.
All this means that across the medical spend there is a whole collection of demand management problems. A good example of the consequences can be seen in the purchase of x-ray film and chemicals. In this area of spend the price paid by the centres differs by as much as 45%.
Both of the two most senior managers in your team are new to the RUHT and last week had their first meeting with some of the Trust’s clinicians. The managers are meeting with clinicians from each of the 9 budget centres - this meeting was with those clinicians involved in the purchase of theatre products. This centre’s medical spend includes a wide variety of purchases including heart valves, neuro-stimulators, sutures, angiography equipment, grafts, gloves, oxygenators, patient warming blankets, chest drains, respiratory consumables, headwear and masks. There are then also common medical items such as cannulas, syringes, dressings, etc.
The meeting did not go well, with the clinicians reacting negatively to the prospect (despite being described in positive terms – “commercial support”) of their independence once again coming under threat and their specifications and/or supplier preferences being challenged. The clinicians argued that, for example, supplier consolidation was likely to threaten patient care, with many clinicians (a majority of the group) making, as ever, often highly complex medical arguments for the exceptional nature of their needs.
The meeting ended with little progress made, although your senior managers (recruited from the private sector) had learnt much about the nature and magnitude of their task. Having reflected on the meeting, the two senior managers came to the view that it was not a case of clinicians as a whole being either ‘right’ or ‘wrong’ in their opposition. Rather, whether or not clinician arguments were valid actually depended on the nature of the item of spend in question. Understanding more about this was deemed necessary before the rest of the budget centre meetings.
Profile of the Medical Expenditure
On examination, certain features of the medical spend became clear. First, medical goods and services vary enormously by value. For example, angiography equipment and its maintenance accounts for a large proportion of the annual spend in Theatres, whereas chest drains account for very little. However, second, it was noticeable that there was no correlation between the purchases that generated the greatest clinician opposition to change and the amounts of money being spent.
The third aspect of the medical spend that was noticeable was the different competitive structures that existed for the different spend items. Some markets were completely undifferentiated with abundant sources of supply. Not surprisingly, in these markets supplier average margins tended to be low. Other markets were different. For example, supplier products in some markets were highly differentiated, with certain suppliers offering equipment and products based upon leading proprietary technology. If the Trust wanted this technology, sometimes required to enable the clinician to provide ‘leading edge’ treatments, then they had to pay the premium prices such technology commanded.
In a final type of market, equipment and products were generally of similar technological advancement, but differed in terms of whether or not they required proprietary consumables and maintenance, the aforementioned restrictions. Many medical purchases require significant consumables and maintenance so ‘whole life cost’ is a key issue. Not surprisingly, supplier pricing is sensitive to this issue, with ‘lock-in pricing’ and ‘unbundled pricing’ common and sometimes employed in an opportunistic manner. As mentioned, inducements to purchase can also be offered to clinicians.
The task for your team is to prepare a brief five minute presentation for the next ‘Chief Executive’s Forum’ outlining your initial thoughts on a programme of action for taking forward medical-related procurement and supply management within the RUHT. This will particularly need to concern the problems, the key variables that distinguish both clinical personnel and medical spend categories and what those variables might mean for the prioritisation and nature of action.
This case is a fictitious representation of consultancy work undertaken within an NHS hospital trust.
Procurement Transformation at Vodafone: Case Exercise
Rebecca Ellinor, Supply Management, 19 July 2007
Detlef Schultz, global supply chain management director of Vodafone, tells Rebecca Ellinor how the company has transformed its procurement
Detlef Schultz bursts into the room bright-eyed, energetic and animated. The scene is set. As we whirl our way through the interview, he bangs on the table and occasionally throws off his glasses, sending them whizzing down the desk. Surprising, but not for effect and not as a sign of aggression. He is just passionate about procurement. And it isn't for my benefit. I get the impression this is exactly what he's like all day, every day. And he needs to be.
Schultz was hired in 2003 to lead the transformation of procurement at Vodafone Group. As global supply chain management director he has already done much to overhaul purchasing. But he believes he has around three years left in "lovely Newbury" to complete his plan. So what is his aim?
"We don't want to be average - just another purchasing department - we want to be the benchmark. We want people to look up to the status we have achieved, not just within Vodafone, but everywhere. I want everyone to talk about us and how we do supply chain and I want to leave a legacy that will be valued for another decade at least."
Schultz runs the strategy and operation of Vodafone Group supply chain management in three major areas: network infrastructure, IT and services. The purchase of handsets is handled by marketing. He leads a 150-strong function that is supported by teams across the globe. The heads of the purchasing departments at each operating company, such as Vodafone UK, report into him. But they are also his customers. Immediately conscious of this tension, Schultz was wary about centralising procurement.
"When I arrived I asked how much we spent on each supplier and we didn't know. Each operating company has an ERP system but we didn't have one that showed what we spent with whom overall. The vendors had more information than we did.
"So the job was one of leadership - to pull in one direction to take advantage of our global scale and scope. It was not centralisation, we deliberately didn't do that and we are careful about using the word. But we thought, 'wouldn't it be great if we had global price books in place?'"
One of his first actions was to introduce catalogues containing pre-agreed prices for frequently bought items. These price books go out to all operating companies and are used by departments - such as engineering - when making a purchase. This is no mean feat given that it was initially difficult to get the heads of supply chain at the operating companies to the table. Each was convinced they already had the best deal.
In addition, a three-year business transformation programme is now under way to implement an operating model supported by a single ERP system, which covers HR, finance and supply chain.
The supply chain function at Vodafone has also been driving down prices through the use of e-auctions and standardising specifications for base stations, accessories and operating costs. In the 2006 financial year, purchases of more than £800 million were made through e-auctions, which produced "significant cost savings".
While wary about dominating from the centre, Schultz knew procurement at Vodafone would benefit from being better connected, instead of buying teams at the various businesses behaving like separate entities. He pulled together the 17 disparate purchasing departments into one supply chain management "community" to increase savings and mend links between buying teams.
The communications giant introduced service level agreements in April between each of its operating companies and the corporate headquarters. These were formal written commitments setting out who would save what.
Previously each had independently set savings targets. Now Vodafone in Germany, Italy, Spain, UK, Albania, Greece, Ireland, Malta, Netherlands, Portugal, Australia, Czech Republic, Egypt, Hungary, New Zealand, Turkey and Romania must negotiate individually with Vodafone Group and agree savings targets. This is formalised in annual service level agreements and signed off by Schultz and the supply chain management head and chief financial officer at each operating company.
This is the first year the group and its divisions have jointly reached agreements on savings targets. Previously a lack of clarity meant there was finger pointing if efficiencies were not found. "If your success is dependent on collaborating with your colleagues you will collaborate with your colleagues. Our heads are now jointly in the noose if we don't deliver." The purchasing functions now have an agreed governance structure and targets are measured regularly and jointly reviewed.
Schultz believes the change will help to unite buyers worldwide and boost the morale and pride of individual teams: "It's great because before, we didn't have clear expectations, so how can you judge if you've done a good or bad job? We are now pulling in one direction - as one entity with one goal." The 2007 annual report says: "The alignment of all objectives and targets across the entire supply chain management was completed during the year.
The group currently expects to meet its savings target of 8 per cent of Euros 3.3 billion external network spend this coming year, as planned." The team's objectives are summarised on cards that Schultz and the heads of supply chain at the operating companies carry with them as a daily reminder of their aims.
Vodafone chief executive Arun Sarin is also acutely aware of procurement's progress. "We used to just be a purchasing department. People just threw stuff over the fence and said 'do things faster and cheaper'. Now we're on the CEO's agenda - global supply chain is on his scorecard. There aren't many companies across the globe who can say that."
Schultz also established category management at Vodafone. Category managers are made up of experts, brought into the group function from across the globe, to encourage more specialised product purchases and pricing.
"We have more than 200 categories. We have clarified what belongs where and for each category we're developing strategies. We're asking questions like: 'How do we want to deal with this category? What is our market position? Are we a great demand force or a little one? If we're great, who do we want to do dual sourcing/multi-sourcing/single-sourcing with?' We don't yet have all 200 strategies, some we're still working on - it's a continual process."
The strategies are devised in close consultation with the relevant department, such as finance, engineering and marketing. Each has a board on which the representative from the operating company sits - such as a technology board, where there are 17 chief technology officers, plus the head of group networks, Schultz and his boss Steve Pusey, the chief technology officer. "If they approve the strategy, we implement it."
The supply chain team also looks at how to purchase the goods or service - whether it should be done locally or globally. "We have best practice teams for categories that cannot be sourced globally, which must be sourced, managed and negotiated locally. When you buy base stations, for example, that can be done globally - but when it comes to installation, you cannot do it on that basis."
But most marketing is done globally, with the exception of local adverts. The general rule is that operations are handled at a local level with categories more likely to be procured centrally. "For some material categories global takes charge and for others the local guys do it. Nothing we do is dogmatic, everything's pragmatic. If it turns out we have the wrong procurement model for a category, we will change it."
Another change introduced by Schultz was to standardise the way Vodafone suppliers' performance is judged and monitored. "Some operating companies measured this and some didn't. There was no tool that joined them together. Some of it was just based on who knew them [the suppliers] and how they thought they were doing."
So Vodafone's Supplier Performance Management system was introduced. It provides performance feedback from across Vodafone Group, covering its six key supplier performance "pillars". They are corporate responsibility, financial stability, technical capability, delivery and quality of service and the strength of the commercial relationship.
Vodafone manages a number of key suppliers in this way and also applies the system when considering relationships with new vendors. "Suppliers say we're easy to work with because we're clear about what we want." There are measurable questions behind each category and more than 2,500 evaluations have already been completed. "We introduced it for the top 30 suppliers because they cover the largest spend. The operating companies liked the tool so much they started using it for local suppliers."
In May, Vodafone presented awards to three of its key suppliers for meeting the group's business requirements and consistently delivering outstanding service and value over the previous year. The allocations were made based on the findings of the supplier performance management system. Telecommunication systems and smart cards supplier Giesecke & Devrient won the "Supplier of the year" award. Telecommunications networks specialist Huawei won the award for "Outstanding performance" and the "Corporate responsibility engagement" award went to Sun Microsystems.
"These awards are designed to recognise where our suppliers have demonstrated a spirit of true strategic partnership by understanding Vodafone's needs, then going the extra mile to deliver excellent service and value." Global suppliers are also required to comply with the group's code of ethical purchasing, which sets out labour and environmental standards.
Schultz and his team have achieved much in the past few years, but he's not ready to relax. "Are we where we want to be yet? No. But we're on the way and we're in a very different place than we were in 2003." He says the group is yet to have a product management lifecycle, with a total cost of ownership model, and he wants to increase standardisation. "We know where we want to be, we've made progress since we started this journey but it will take us another two to three years to reach our destination. You don't want to be out and leave things half done."
1. What problems did Schultz face when hired in 2003?
2. What purchasing structure did Shultz decide to adopt as part of his attempt to address the problems?
3. Within that structure, how did Schultz go about improving the management of the spend? Think about both the policies and his approach.
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