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New models for Purchasing Management / Suppliers Resources and Maturity Management

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After thirty years of existence, Purchasing function is always looking for increased maturity. New important issues are coming, such as collaborative purchases and co-innovation with suppliers, requiring new skills to face SRM (Supplier Relationship
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  1  New models for Purchasing Management Suppliers Resources and Maturity Management The 5th International Virtual Conference 2016 (ICTIC 2016) Slovakia,  March 21 - 25, 2016 Jean Potage Practitioner and Teacher in Purchasing KEDGE/MAI Paris & Bordeaux, ESCP Europe, Versailles Saint Quentin University, IAE DESMA UMPF Grenoble, ESPRIT Redon, ESTP, ESIEE Mat’Achat, Franconville, France  jean.potage.1972@asso-supelec.org https://independent.academia.edu/JeanPotage  Abstract  —    After thirty years of existence, Purchasing function is always looking for increased maturity. New important issues are coming, such as collaborative purchases and co- innovation with suppliers, requiring new skills to face SRM (Supplier Relationship Management) and more globally what we call Supplier Resource Management. Is “cost killer forever” the definitive scenario for this function? Probably not. In order to drive the change in purchasing skills, new models are necessary. Resulting from twenty years of experience in Purchasing Management, three of them are presented in this paper, and integrated in a unified and single maturity model, directly usable by practitioners, aiming to create value with maturity development, whatever the size of their department or the business sector activity. Keywords  —   Supplier, Purchasing Maturity, Matrix, Model, Competitiveness, Trust, Innovation, Value. I.   I  NTRODUCTION  In previous papers, and mainly at IPSERA 2011, we  proposed and described in detail three models for Purchasing Management. A first one, CTG as Competitiveness, Trust and Growth [1]; a second one, PRIME as Purchasing Relationship Management for Enterprises [1]; and a third one, PIMM, as Purchasing Integrated Maturity Model [2]. The recurrent financial paradoxical injunctions from CFOs (Chief Financial Officer) have helped the Purchasing function to settle it s “cost killer” role. In order to avoid a “tambourine man” second scenario for buyers trying to implement more or less quickly new skills for the future issues, a smart way is possible, by driving purchasing maturity with a unified model. In this paper we will identify and describe the new issues for SRM and by combining the three new models we will show that it’s possible to have a smart way to manage change by maturity increase. II.   FINANCIAL   PARADOXICAL   INJUNCTIONS   IMPACT   ON   PURCHASING  A.   CFO’s  PARADOXICAL INJUNCTIONS For at least five reasons, CFO’s are used to make those injunctions:    Multi-national Companies quarterly report accounting and reporting,    Cash to generate for the business within three or four months,    Shareholder value maximization,    Direct impact of savings on the bottom line,    High value of CFOs bonus. The impact is then dramatic for the Purchasing evolution.  B.   Consequencies for CPOs (Chief Procurement Officers) Facing CFO’s injunctions, and as recently observed by R. Calvi in a recent Excellence Achats French Review, CPOs may have two attitudes: “ stress or distance” . In the first case « goodbye my bonus ” ; in the second « come what may, and  prepare the lateral move! » From the SRM point of view: « if the CPO barks, his buyers will bark! ” A third way is really possible, having new models in mind.   C.   Consequencies for Suppliers Panel Management Pure economic criteria used for panel clustering such as ABC classification after a Pareto ranking, leads to focus only main suppliers; in such a way Small and Medium Enterprises or key suppliers eventually strategic for co-innovation, are neglected. The reality of interdependence between companies is not yet accepted and managed, so the relationship with suppliers is not driven and correctly managed, and trust or distrust may be observed.  D.   Consequencies for Purchasing Job Family Management Purchasing Job Family Management for right sizing of departments is not often a priority. As a consequence, management of jobs and skills is not always CPOs priority, and remains a fuzzy process. If SRM job could be defined as a mix of key practices such as Early Supplier Involvement, Key supplier Management, Supplier Development, Supplier Innovation Management, nowadays only cost cutting focus seems to be the roadmap for the CPOs. Is there a future for  buyers beyond cost killer job?  2  E.   Consequencies for Purchasing Process Management Among the regular four main steps in purchasing process such as Specification Statement, Selecting Suppliers,  Negotiation and Contract, Contract Follow up and Management, there remains a strong emphasis on the third one: Negotiation and Contract. This focus leads to install the myth of the “ Buyer Superman” in negotiation and buyers resources are mainly devoted to this step; upstream purchasing practices are then neglected (Total Cost Ownership approach, Value Analysis, for example) and SRM practices are either terra incognita  or a dream. Is B2B  buyer becoming a negotiation robot?  F.   Consequencies for co-innovation with suppliers A schizophrenic cost killer attitude may be destructive of value in co-innovation for a simple and mechanical reason, contained in this following vicious circle: hard negotiations and contracts imply supplier margin attrition; that implies R&D investment reduction; that implies at the end a supplier innovative attractiveness reduction. G.   Consequencies for Purchasing Consulting companies In connection with the previous observations, the maturity of Multi-National Companies purchasing functions grows very slowly, leading general managers to watch miscellaneous “Purchasing Observatories”  highlights, to make use of consulting firms, and to buy expensive training courses for their  buyers. At the end and in front of SRM big change, Multi- National Companies are not really ready. III.   FEEDBACK    FROM   A   PRACTITIONER  A.   Convictions and vision After ten years of experience as CPO in a hi-tech group, and ten years as Partner in Purchasing Consulting, two major convictions may be highlighted. SRM as Suppliers “ Resources ”  Management became a new deal for companies and their buyers. Purchasing Job Family management being a long term task, the first conviction could  be: “ internal governance via maturity development is key”, even if top management is not always aware in that matter. The second conviction could be: “governance of SRM with appropriate skills is key”.  B.   Where are the models? That is the question. To drive purchasing activity and process with models and only one if possible, became necessary. Scientists, physicians or economists follow this way for their own discipline. Model(s) in purchasing activity should permit to understand, correct or adapt roles and missions, to motivate  buyers and implement the right tools. Unfortunately there are no efficient models available now and practitioners must create them such as proposed in that paper. C.   Theory in models creation A model is always built in order to analyze a given question in a given context: here the customer-supplier relationship. In order to have a mathematical formalization of the model, we must choose variables and formulate equations which describe the interaction modes between actors and stakeholders of the relationship. The model can then identify possible trajectories which depend on the values given to parameters, either observed (relationship behaviors) or measured (value creation, economical savings against budgets) or dreamed by the management (future of the purchasing function as mentioned  below in our conclusion). The model must permit also to elaborate a realistic theory by reducing the range of possibilities in order to explain the current reality of purchasing function and SRM in the business field.  D.    Building models for purchasing function The way followed for this choice is described in four steps which are described below in details in this paper.    Step 1: defining a model decomposing the panel of suppliers in coherent categories of SRM. CTG Model (Competitiveness, Trust and Growth) is described  below in chapter IV.    Step 2: defining a model describing the relationship whatever its category. PRIME Model (Purchasing Relationship Integrated Model for Enterprises) is described below in chapter V.    Step 3: defining a maturity model based on purchasing  practices aligned with the depth of each relationship category. PIMM (Purchasing Integrated Maturity Model) is described below in chapter VI.    Step 4: calibrating the levels of maturity with value creation. Purchasing performance trajectories of the function are described below in chapter VII. IV.   IMPLEMENT   AND MANAGE THE   TARGET   SUPPLIERS   PANEL   WITH THE CTG MODEL (C OMPETITIVENESS ,   T RUST AND G ROWTH )  A.    Developments and disruptions for the future in Purchasing Purchasing function is now facing heavy trends such as    Purchases complexity due to hi-tech impact (systems, systems of systems),    Multi-National Companies core business focus strategy,    Pervasive technologies impact,    Irreversible worldwide companies interdependence,    Financial short term pressure,    Offsets obligations in the worldwide business,    Digital impact of Big Data and Internet on buyers jobs and skills,    Risk flow down though sophisticated supply chains. As a consequence complex SRM must be anticipated.  B.   The “ CTG ”  model ( Competitiveness, Trust, Growth) to drive three very different types of SRM [1] A symbolic representation of this model is represented on Figure I, showing a new way to split the panel of suppliers in an enterprise or a Business Unit.   FIGURE   I   :   T HE “ CTG ”   M ODEL    3 With the CTG model, three types of purchasing business and SRM must be considered:    Competitiveness SRM (Delta 3), driven by priority given to  price, quality and On Time Delivery performances,    Trust SRM (Delta 2) driven by pro-activity and continuous improvement plans with key or strategic suppliers,    Growth SRM (Delta 1), driven by the research of complementary expertise and co-innovation. Identifying those three types of SRM in the purchasing  portfolio, leads immediately to identify also the suppliers in each type. We can observe a decreasing number from Delta 3 to Delta 1 SRM: some thousands for Delta 3 SRM, some hundreds for Delta 2 SRM and some tens for Delta 1SRM. C.    Purchasing function readiness assesment facing CTG model Regarding the French buyers community, Competitiveness skills seem to be overdeveloped, Trust skills in consolidation, and Growth skills only starting in construction. A Mediation [3] dedicated to solve big crisis and disputes in the client-supplier relationship field had to be created some years ago by the French government. The Mediator identified not less than thirty six malpractices concerning SRM Delta 3 and 2. And about SRM Delta 1 in co-innovation management, bad practices were also observed:    “Full Pareto management” of the suppliers panel ,    Abusive exclusivity clauses in “foreground intellectual  property management” ,     No “risk sharing” practices ,    Refusal of long-term contracts, And if SRM was really Suppliers Resources Management? V.   C OME BACK TO BASICS IN SRM  WITH A MODEL :   PRIME   (P URCHASING R  ELATIONSHIP I  NTEGRATED M ODEL FOR ENTERPRISES )  A.    Purchasing upstream stakes in terms of SRM The “extended enterprise” concept generates complex relationships via cooperation, partnerships, and sometimes coopetition. But who is clearly aware or appointed as “ conductor  ”  of these relations into the Multi-national Companies? Must the relationship be organized and managed or not? How to have coherence in that matter?  B.    Brief state of the art in SRM In 1994, T. Milman, and A.F. Wilsom proposed a Relational Development model based on five levels: Exploratory, Basic, Cooperative, Interdependant, Integrated [4]. In 1998 J. Potage proposed a first Purchasing continuous capability maturity model (practices oriented) and some years after different maturity staged models (more or less project  process oriented) [5]. In 2000, R.C. Lamming proposed the RAP (Relationship Assessment Process) model which permits to evaluate relationship as a whole [6]. In 2008, M.A. Le Dain and R. Calvi proposed the PRAXIS model which permits to evaluate supplier capability to move upstream in a collaborative context and proposed also innovative and appropriate indicators [7]. C.    Modeling SRM as a layer telecom protocol Telecommunications world has been able to organize and normalize protocols for transmission links establishment with the OSI (Open System Reference Model) as shown in Figure II, whatever the size of the system and the number of these links. The famous Internet protocol is a typical example in that matter. The Open System Reference Model is based on seven layers, each of them having a “service” to provide.  Figure II: THE OSI REFERENCE MODEL LAYERS 7 APPLICATION 6 PRESENTATION 5 SESSION 4 TRANSPORT 3 NETWORK 2 DATA LINK 1 PHYSICAL The same concept is the basic approach of PRIME: relationships and exchanges with suppliers may be seen through a six layers model, represented in Figure III. FIGURE III: THE 6 LAYERS OF PRIME 6 VALUES 5 POLICY 4 COMMUNICATION 3 CONTRACT 2 TRANSACTIONS 1 ACCOUNT PAYABLE In such a model, described in details in [1], the services provided  by each layer are indicated Table I TABLE I: MISSIONS BY PRIME LAYER (here explained from the customer side) PRIME Layer number Layer Service description 6   The Values layer covers the values statement of the enterprise, driving behavior in its business and SRM. CSR (Corporate Social Responsibility) is the basis of this layer.   5   The Policy layer covers the purchasing policy definition and statement whatever its level (company level, worldwide level, country level, policy by project or by segment).   4   The Communication layer covers all kinds of information exchanged with suppliers preliminary to a contract. 3   The Contract layer covers the negotiation and signature of the contract.   2   The Transactions layer covers the physical exchanges (order, delivery, approval) and may be seen as the contract implementation and flow down.   1   The account payable layer covers the economic exchanges only.   Each layer thus achieves a precise job in the customer-supplier relationship.  D.    Modeling SRM as a telecom system : stakeholders by layer Having split the supplier relationship in layers, the “conductor” or stakeholder of each layer may be clearly identified and committed into the organizations, as shown in Figure IV.  4 FIGURE IV: STAKEHOLDERS BY PRIME LAYER Customer side Stakeholders by layer PRIME LAYERS TITLE Supplier side Stakeholders by layer President and CEOs 6-VALUES President and CEOs CPO 5-POLICY Sales Director Buyers Prescribers 4-COMMUNICATION Sales Managers CPO & Legal Department 3-CONTRACT Sales Director & Legal department Supply Department 2-TRANSACTIONS Shipping Department Account Payable Department 1-ACCOUNT PAYABLE Billing Department  E.    Dynamic operation of PRIME model Each layer having his stakeholder, a coherent operation of the relationship may be described by using the model, as shown in Figure V. FIGURE V: PRIME IN ACTION Content of exchanges by layer Customer side Stakeholders by layer PRIME LAYERS CONTENT Supplier side Stakeholders by layer President and CEOs Layer 6 Values driving relations and managers behaviors President and CEOs CPO Layer 5 Information exchanges concerning purchasing and sales policies Sales Director Buyers Prescribers Layer 4 Request for Information Request for Quotations Sales Managers CPO & Legal Department Layer 3 Purchasing Contract Sales Director & Legal department Supply Department Layer 2 Orders, Calls for delivery in application of the contract Shipping Department Account Payable Department Layer 1 Billing and supplier  payment Billing Department  F.    Relationship management with PRIME model at company  scale Having introduced three types of SRM with a first CTG model (see section IV B) we can use PRIME to describe the content of the 6 layers of exchanges for each SRM type: Competitiveness, Trust and Growth. As it appears in Table II each type of SRM must follow an appropriate way to manage the relationship and the exchanges with the suppliers. TABLE II: FULL SRM VISION WITH PRIME PRIME LAYERS TITLE COMPETITIVENESS SRM TRUST SRM GROWTH SRM 6-VALUES Competitiveness is the basic value + CSR values Trust is the basic value + CSR values Growth end Innovation are the basic values + CSR values 5-POLICY Cost reduction Purchasing policy Suppliers panel  policy   Co-performance Key Suppliers Performance Management Supplier development Co-business Co-innovation  policy 4-COMMUNICATION Request for Information Request for Quotation   Suppliers reviews and conventions Sharing business vision & forecasts   Innovative suppliers reviews and conventions Request for Innovation 3-CONTRACT Contract as usual Contract as usual + Improvement Plan   Contract as usual + intellectual  property clauses + supplier future capability to deliver    2-TRANSACTIONS Order Call to deliver Approval & Recipe Supplier  performance management with adapted Key Indicators   Technology Readiness Assessment and Indicators   1-ACCOUNT PAYABLE Estimates Invoices Payment Co-investment if necessary in  process improvement Co-investment if necessary in innovation More details for each CTG sub model may be consulted in [1]. Thanks to such a modelling approach with CTG and PRIME, and in order to improve the customer-supplier relationship, an assessment of this relationship is then easy, either for each SRM type of the CTG model or individually with a key supplier, as illustrated in Figure VI in which a CPO may give a note from 1 to 5 to each kind of his suppliers panel and SRM. FIGURE VI: SRM ASSESSMENT BY A CPO FOR EACH SRM TYPE OF HIS SUPPLIERS PANEL What is interesting after an assessment is the identification of offsets in notes for a particular layer. Here, in Figure V, Policy and Contract layers seem to have a problem. Then the stakeholders of that layers may the implement corrections in a common communication or discussion with the suppliers concerned. PRIME assessments deliver easily a diagnosis of the relationship. VI.   H OW TO INTEGRATE SRM  IN PURCHASING MATURITY DEVELOPMENT WITH PIMM   (P URCHASING I  NTEGRATED MATURITY MODEL )?  A.    Purchasing maturity concept Purchasing performance is obtained by seven main levers which operate together: Purchasing performance integrated in the company business case, Purchasing strategy and process  5 alignment, Skills, Methods, Tools, and SRM. Those levers are often called KPAs (Key Process Areas) in the Quality literature. A maturity level describes “how” dedicated practices must  be under control to verify this level. More the maturity level is high, more it’s difficult . According to the layout of the levers, we can observe two types of maturity models.  B.   Continuous models are generally based on a“maturity matrix”   This maturity matrix is defined by as many columns as KPAs. The number of lines is defined by the same scale of ability for each KPA; for example the ability scale is 1 for easy and 5 for very difficult. Typical KPAs are upstream purchasing  practices, downstream practices, skills, tools, etc…  Continuous models advantages:    Matrix easy to create and to adapt to the company size,    Easy to use,    Assessment by assessors or self-assessment. Continuous models disadvantages:    Subjectivity and partiality if self-assessment,    KPAs (Key Process Areas) not driven as a whole,    More or less holistic at company scale,    What is the best ability profile for a Business Unit?    Mean value of abilities assessed not relevant. C.   Staged models are generally based on five standard levels of maturity A five levels vocabulary is here more and more currently used: Initial, Repeatable, Defined, Managed, Optimized. For a given level, the practices, tools and skills to master are precisely defined and must be mastered together. If anyone is not mastered, the level is not “verified”.  Staged models advantages:    KPAs organized in a holistic approach,    Each level implies precise practices to be under control. Staged models disadvantages:    Model definition sometimes complex, such as CMM-ACQ (Capability Maturity Model for Acquisition) developed by the Carnegie Melon Software Engineering Institute [8],    Developing a proprietary model is a huge investment, unless to use CMM-ACQ as it is.  D.    Feedback about seven years (1998 to 2005) of maturity management of buyers at a multinational-company scale A staged model (ThalPRICE) has been developed in 2000 [5] and preferred in comparison with a continuous one (ThomPRICE). Indeed, with a staged model objective assessments are easy to manage whatever the business units: only practices required for the required level are assessed. So,  benchmarking between pairs are possible, and a concise reporting to top level management may be done. A staged model permits also to evaluate purchases amounts managed per level of maturity at the company scale. For example, as CPO I could demonstrate in 2001 that 10 % of the  purchases amount was at level 1, 60% at level 2, 30% at level 3 and 0 % at levels 4 and 5. More the maturity was increasing, more the amount of  purchases managed with higher performance increased. A link  between maturity increase and value creation is developed in [2]. If it is not so difficult to reach level 2, to move from this level to level 3 is quite long and difficult (typically 18 months for a  best in class unit) and this change must be managed as a project in purchasing departments.  E.    A holistic model is also necessary Upstream purchasing practices and collaborative SRM involve many stakeholders (Manufacturing, R&D). Quality Directions are involved in supplier development and Sales & Marketing or R&D are together involved in innovation and co-innovation with suppliers. Then, purchasing maturity stakes are shared by many actors and new maturity models must be holistic and integrated. This remark is the principle of PIMM (Purchasing Integrated Maturity Model).  F.    PIMM (2010) is organised as a staged model Our approach has been based on the following strategy:  basics and fundamentals of the COMPETITIVENESS Delta 3 SRM type must be installed in priority in the purchasing organization, before introduction of more complex practices such as collaborative   (TRUST Delta 2 SRM type) or co-innovation (GROWTH Delta 1 SRM type) in project management. Following that strategy, the three SRM types have been used to define five maturity levels, according to the breakdown indicated in Figure VII. FIGURE VII: CALIBRATING “ CTG ” MODEL  vs PIMM ’s MATURITY LEVELS  PIMM has been built as a set of three sub matrices, one for Skills, another one for Means, and a last one for Stakeholders. Each matrix has 5 lines but a variable number of columns, depending on the number of KPAs.    PIMM’s staged model : Skills submatrix (2 columns) is described in Table III.
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