Purchasing Strategies for Sara Lee/DE's New Instants

Purchasing Strategies for Sara Lee/DE’s New Instants

(Public Version)

Jan Veldhuizen

University of Groningen Faculty of Management & Organization Section Production & Service Management

March 2005

Important Note:

Because of the confidentiality of the information regarding the New Instants (i.e. supplier names, volumes, spend, etc.), some data has been changed. This does not have consequences for the research and conclusions.

The study with the original data is known at Sara Lee/DE.

Preface

This report is based on the research I have conducted at the Procurement Department of Sara Lee/DE in Utrecht, the Netherlands. As a graduation thesis, this is the final piece of my study Management & Organization at the University of Groningen in the Netherlands.

I would like to thank my supervisor from Sara Lee/DE, Michel van der Broek, who gave me all openness in business and taught me how purchasing works in ‘the real world’.

Also I would like to thank Jacqueline Lisseburg, Henriette van der Elzen, Anne-Maaike Molter, Marije Gast and all others colleagues involved in my period within the organization of Sara Lee/DE.

Bart and Eric, our ‘secret’ meetings in Sara Lee/DE’s coffee corner were unforgettable, cheers for that.

I would like to thank my supervisors at the University, especially Dr. Van der Vaart. His patience with me and his willingness to help out were necessary were outstanding.

Also I’d like to mention my time in Groningen. Clayton, sharing a canal-boat with you was amazing. Jeroen, Tim, Joeri and Maarten; Groningen will never be the same without us!

Last but not least, I’d like to thank my mom and dad, who have been extremely supportive.

Hoevelaken March 2005

Jan Veldhuizen

Student nr: 1085298

Supervisors from the university: - Dr J.T. van der Vaart - Dr J. de Vries

Supervisor from Sara Lee/DE: - M. van der Broek

Abstract

This research has been concerned with the improvement of the purchasing strategies of the New Instants product portfolio. A few problems have been the reason for this research: - Proliferation of different products, names and packaging - No co-ordination between United States and non United States business - Many different suppliers

Together with the objective of the Procurement Department, to enrich their knowledge of purchasing and achieve transparency in their processes, the following research question has been defined:

Which purchasing strategies should Sara Lee/DE use to achieve her goals and how should these be developed?

The analyses can be divided in three different parts: - Product portfolio - Make-or-buy issues - Buyer-supplier relationships

With regard to the product portfolio, the following can be said. With the help of theory, it has been shown that most of the cost savings can be made in the specification process. Streamlining the product portfolio makes the purchasing process easier. There are many opportunities to streamline the New Instants portfolio. There are 350 different SKU’s and 109 of these SKU’s represent a volume of only 17.500 kilograms or less. Getting rid of these SKU’s would simplify the portfolio, it is however not sure if these SKU’s have the same recipes as other SKU’s. If so, there would not be that many cost savings. Secondly there are many different weights per consumer unit. A lot of these weights have very low volumes or the weights have values very close to each other. Combinations could be made to reduce the number of different weights per consumer unit. There are various packaging types, which come in very low volumes, which should be reconsidered. Especially when a lot of these packaging types could be replaced by others, because they have matching weights per consumer unit and the commonality is high.

This research has also outlined the make-or-buy issues. It becomes clear that the cost element is not the only factor in making a decision on this topic. Making coffee, which is used in the cappuccino products is a core competence of Sara Lee/DE. Theory suggests that the company should make this herself. Especially, because SL/DE has got an over capacity at the moment, which makes the production cheaper. It is however not known if this over capacity is structural. Partial outsourcing could be an option for the cappuccino products. In this case the use of coffee of Sara Lee/DE should be a restriction for suppliers. The Creamer and Chocolate products should be outsourced completely.

In the relationships with the suppliers, there is a balanced situation of mutual dependency. Most important factors for the power of Sara Lee/DE is her attractiveness for suppliers. On the other side, all the special/unique requirements which are asked give her a weaker position. Streamlining the product portfolio and making the specifications more general would give Sara Lee/DE more power as a buyer. More should be done to reduce the supply risk and make the spend per SKU bigger. This can be done through combining several SKU’s, which gives potential scale advantages. Currently there is a single sourcing policy, however multiple sourcing could result in higher cost savings. The product portfolio has got a great potential for globalization. Adjustments within the productportfolio have to be made to lower the local dependency. This globalization will need a tighter coordination of the firm’s

activities. An integrated sourcing strategy would be a good option, instead of the current multi domestic sourcing strategy.

The main conclusion is that the purchasing strategy starts with reconsidering the product portfolio. When this is completed, it is important to think about the make-or-buy decisions. Finally, the focus should be on the buyer-supplier relationship.

The main recommendations are listed below:

- Reduce number of SKU’s - Reduce number of packaging types and weights per consumer unit - Sara Lee/DE should make coffee ingredient for cappuccino products herself - Globalization to increase the potential scale advantages - Multiple sourcing to increase power - More authorities Coreline Manager to prevent proliferation

Index

Preface 3

Abstract 4

Index 6

Introduction 8

1 Sara Lee/DE 9 1.1 Introduction 9 1.2 Sara Lee/DE 9 1.3 Finished Products 12 1.4 Conclusion 17

2 Research Design 18 2.1 Introduction 18 2.2 Reason of this research: Project Streamline 18 2.3 The research 20

3 Problem Focus 28 3.1 Introduction 28 3.2 Costs as main performance objective 28 3.3 Lowering costs by improved purchasing 29 3.4 Conclusion 31

4 Purchasing at Sara Lee/DE 32 4.1 Introduction 32 4.2 General information and products 32 4.3 Organization 33 4.4 (Development of) Purchasing strategies 36 4.5 Conclusion 39

5 Analysis – The Productportfolio 41 5.1 Introduction 41 5.2 (Theoretical) Relevance 41 5.3 The Productportfolio in short 42 5.4 Streamline/ Rationalization 43 5.5 SKU 43 5.6 Weight 45 5.7 Packaging type 48 5.8 Packaging material 50 5.9 Conclusion 51

6 Analysis – Make or buy? 52 6.1 Introduction 52 6.2 Triggers of make-or-buy questions 52 6.3 To make or not to make? That’s the question 53 6.4 Factors in decision-making 54 6.5 Implications for purchasing 56 6.6 Summary advantages and disadvantages outsourcing 57 6.7 Outsourcing: Partial or complete? 57 6.8 Conclusion 58

7 Analysis – Buyer-Supplier relationship 59 7.1 Introduction 59 7.2 Market Analysis 59 7.3 Relationship 62 7.4 Single or multi source 66 7.5 Global strategy 68 7.6 Conclusion 71

8: Conclusions and Recommendations 72 8.1 Conclusions 72 8.2 Recommendations 73

Literature 75

Appendix 1: Team ‘Streamline’ 76

Introduction

This research is concerned with the improvement of purchasing strategies at Sara Lee/DE, with the objective to increase cost savings. The focus of this research will be on the purchasing strategy of a specific product category, New Instants. Examples of these products are cappuccino powder and cacao powder. The objective of this research is:

Presenting recommendations for purchasing strategies and the development of these strategies – regarding the purchasing of New Instants – with which Sara Lee/DE can achieve cost savings and improve her profit.

The first chapter will give a general description of Sara Lee/DE. Also, it will describe finished products and in particular a category of finished products: New Instants. Secondly, the research design is presented. This chapter will deal with the reason of this research. Also, the objectives and research question are presented. The next chapter will discuss the problems stated in the research design. The question which will be answered in this chapter is: ‘Why are these problems so important?’ Chapter three will describe the purchasing organization within Sara Lee/DE.

The analysis will start with a closer look at the Productportfolio of Sara Lee/DE’s New Instants. This chapter starts with a description of the theoretical relevance of looking to the portfolio. After this, strong and weak points will be described, and the threats and weaknesses will be given. The second chapter of the analysis will focus on Make-or-Buy dilemmas. This chapter will investigate the issue if Sara Lee/DE should make the New Instants herself, or if she has to buy them. Other options will be discussed as well, for example partial outsourcing. The analysis will end with the buyer-supplier relationships. Issues like dependency, relationships, multi- or single-sourcing, and global purchasing strategies will be discussed in this chapter.

This research will end with the most important conclusions and recommendations.

Chapter 1: Sara Lee/DE

1.1 Introduction To get a better view of the organization where the research has been performed, this chapter will introduce Sara Lee/DE in general. This research focuses on a smaller part of the organization, called Finished Products, within the Coffee and Tea Division. This area will be described into more detail. The first part will describe Sara Lee/DE in general: the organizational structure, the policy, and the products sold by Sara Lee/DE. This chapter can be seen as part of the orientation component of this thesis.

1.2 Sara Lee/DE Chicago-based Sara Lee Corporation is a global manufacturer and marketer of high-quality, brand-name products for consumers throughout the world. The three lines of business are: • Food and Beverage • Intimates and Underwear • Household Products Sara Lee has operations in 55 countries, markets branded products in nearly 200 nations and has 145,800 employees worldwide. (source: Sara Lee inSite)

Sara Lee/DE is an international marketer of high quality branded products, and is part of Sara Lee Corporation, Chicago, USA. The origin of Sara Lee/DE dates back to 1753.Sara Lee Corporation's leading brand names are known around the globe. As Sara Lee/DE says on their intranet ‘Sara Lee/DE InSite’:

“Our preeminent brands are built on consumer needs and expectations, offering exceptional quality and value. Sara Lee Corporation builds and maintains leadership positions through innovation and responsiveness. Some of our brands are decades - or even centuries - old, and many are leaders in their respective categories.”

Strategy It’s important to be aware of the corporate strategy. This will affect all decision made in a company. This could also limit this research. The official strategy statement of Sara Lee/DE is:

Our mission is to feed, clothe and care for consumers and their families the world over. We focus our efforts on building leadership brands in three global businesses: Food and Beverage, Intimates and Underwear, and Household Products. Seeking to be innovative in everything we do, we follow four operating principles to create long-term shareholder value:

1. Drive profitable top-line growth by: anticipating and meeting our consumer's needs; partnering with our trade customers; investing our cash flow behind internal opportunities and strategic acquisitions. 2. Achieve the lowest possible costs by leveraging our skills, scale and technology, while striving for functional excellence in all business processes. 3. Be an employer of choice for highly talented people, retaining and attracting world-class individuals through a philosophy of empowerment and a system of providing rewards commensurate with performance. 4. Adhere to the highest standards of ethical business conduct, treating fairly, and with respect, all those we touch as a company.

(Source: Sara Lee/DE InSite)

Sara Lee Corporation

Sara Lee|DE

Intimates & Underwear Household products Food & Beverage

House- Direct Coffee & hold & selling Tea Bodycare

Figure 1: Sara Lee/DE as a part of Sara Lee Corporation (Research has been done within the Coffee and Tea division, see arrow)

Lines of business To get a good view of all products Sara Lee/DE has got to offer, this paragraph will describe the different lines of business. Sara Lee/DE manages Sara Lee’s world-wide Coffee and Tea and Household and Body Care activities, including Direct Selling operations, as can be seen in figure 1 (red markings). Sara Lee/DE markets a wide range of brands across the world scene, most of which are leaders in their markets. Meanwhile, international brands like Douwe Egberts coffee, Pickwick tea, Natreen sweeteners, Sanex body care products, Delial sun care products, and Ambi-Pur air fresheners are established success-stories in regions across both hemispheres. Sara Lee/DE also has an impressive offering of local brands, many of which are household names in their home countries. In Spain, connoisseurs of good coffee cherish their Marcilla brand. And it is a similar picture in France with Maison du Café, in Denmark with Merrild and in the USA with Superior. Meanwhile, in the United Kingdom, their Radox brand of body care products is a deeply embedded household name. In Germany the same applies to Duschdas.

Coffee & Tea Division This division has strong brands in the areas of coffee, coffee systems, tea, sweeteners and grocery products, including rice and nuts. With brands like Douwe Egberts, Jacqmotte, Maison du Café, Marcilla, Merrild, Moccona, Superior, Chock Full o’Nuts, Harris and the recently acquired Brazilian Pilão, Sara Lee/DE is one of the world’s leading suppliers of coffee. A wide variety of tea products is offered to consumers throughout Europe under the brand name Pickwick. In Spain SL/DE has a leading position in tea with her brands Hornimans and Sueños de Oro. Natreen is one of the world’s largest sweetener brands. Nuts are marketed in the Netherlands, Belgium and France under the Duyvis and Bénénuts brand names.

Household & Body Care The principal focus of the Household and Body Care activities are the Shoe Care, Body Care, Air Fresheners and Insecticides product categories. The Kiwi brand, available in over 130 countries, is the world’s leading shoe care brand. Vapona, Catch, Bloom and Ridsect products offer solutions to any insect problem of consumers throughout Europe and Asia. Our Ambi-Pur air freshener brand leads the market in several European countries with the liquid toilet bloc Ambi-Pur Flush. And with brands such as Sanex, Badedas, Brylcreem, Delial, Duschdas, Monsavon, Radox, Williams, Zendium and Zwitsal, Sara Lee/DE has secured a leading position in many markets for body care products.

Direct Selling Sara Lee/DE’s direct selling operations House of Fuller, House of Sara Lee, Nuvó Cosméticos, NaturCare, Avroy Shlain, Swissgarde and Nutrimetics distribute a wide assortment of cosmetics, fragrances, toiletries and personal products directly to the consumer in over twenty countries. Today, some 860,000 independent sales representatives deliver Sara Lee/DE branded products directly to the consumer.

(Source: Sara Lee/DE InSite)

1.3 Finished Products

Description finished products The department where this research takes place is the department Finished Products. This department has got a purchasing function and buys finished products. Also they are responsible for other outsourcing projects, but these projects are more like a heritage from the past. Their main business is buying Finished Products for the OpCo’s (operating companies of Sara Lee/DE) in Europe . Finished products are products which are directly ready for use. The value added by Sara Lee/DE is design, brandname and distribution. Examples of finished products are milkcups, papercups and cacaosticks. These products are made for out-of-home business or the retail, and sometimes for both markets. The focus of this research is on one product category: New Instants. A detailed description of this product category will be presented in the next paragraph. More information about the other Finished Products will be given in chapter 4. This chapter will outline the purchasing situation at Sara Lee/DE, focussed on the Department Finished Products.

New Instants As stated earlier, the focus of this research will be on the New Instants. Sara Lee’s definition of New Instants is:

‘all soluble/ instant products, excluding pure instant coffee, soup, sugar, lemonade and teas’

Four categories have been set: - Cappuccino All products containing instant coffee, milkpowder and sugar as main ingredients. This product is mixed with hot water only, either through a dispenser or in a cup.

180.000.000 157.000.000 160.000.000

140.000.000 Spend in Euro 120.000.000

100.000.000

80.000.000

60.000.000 29.000.000 40.000.000 9.000.000 5.000.000 20.000.000

0 Cappuccino Chocolate Milk/Creamer Other Category

Figure 2: Purchasing spend of New Instants worldwide per category per year (Euro)

- Chocolate All products containing milkpowder, sugar and cocoa powder as main ingredients. This product is mixed with hot water only, either through a dispenser or in a cup. - Milk/ Creamer All products containing only milkpowder, sugar, dairy and non dairy creamers as main ingredient. This product is used to mix brew or liquid coffee. - Other

Other but mentioned above, including products that contain both instant coffee and cocoa.

All New Instants are sold in the Out-Of-Home industry (restaurants, coffee bars, etc.) or in Retail (products to be used at home). Some products are for both markets (see appendix). Also, the products vary in sizes and packaging types. (see appendix).

Examples of these New Instants are the 1.5 kg bags filled with cacao powder, or little (12.5 grams) sticks with cappuccino powder. Products with the biggest purchasing spend per year are shown down below.

Top 3 Cappuccino Products Country Stock keeping Unit Spend (x1000 Euro) USA Cappuccino 1 50.000 USA Cappuccino 2 40.000 USA Cappuccino 3 9.000

Top 3 Milk/ Creamer Products Country Stock keeping Unit Spend (x1000 Euro) USA Milk 1 2.500 USA Milk 2 2.000 USA Milk 3 1.200

Top 3 Chocolate Products Country Stock keeping Unit Spend (x1000 Euro) USA Choc 1 6.500 USA Choc 2 4.500 USA Choc 3 4.400

The network structure It is very important to be aware of the network structure of an organization. Slack (Slack et. al. 1995: 209) defines three reasons why an organization should take a total supply network perspective: - The first benefit is that it helps any operation to understand how it can compete within the network. According to Slack this is because a supply network approach requires operations manager to think about their suppliers and their customers as operations. - Taking a supply network perspective can also help to identify particularly significant links within the network and hence identify long-term strategic changes which will affect the operation. - The starting point for all these advantages is taking a broad perspective not only of the immediate supply network (that is the customers and suppliers with which an operation has immediate contact) but also of the total supply network (that is all the significant operations on the supply side and the demand side of an operation).

Although there are always exceptions, there is a general network for most Finished Products. In the figure below, the network for New Instants products has been explained. This network is representative for most of the Finished Products.

Supply of coffee ingredients

Factory Joure no (Netherlands) Local Retail

Supplier Finished? Local OpCo’s

yes Local or Local global Local OOH product?

Stored in the Netherlands Global

Figure 3: The network structure for New Instants

Three situations For the products, there are three different ‘route’ possible. This depends on two things. Is the product actually ready for use, when it is purchased? Or does it need extra work? The second question is: is the product a global or a local product? Local products are bought by each OpCo individually and global products are sourced by Divisional Procurement.

The product delivered by the supplier is not completely finished Supplier delivers different components to the Sara Lee/DE factory in Joure. This factory will finish the product. The next step is storing the product and sending it to internal customers, also called local OpCo’s. These OpCo’s will take care of the local distribution part.

The product delivered by the supplier is completely finished and is purchased locally. In this situation local OpCo’s are responsible for the process of purchasing the product. The general idea in this situation is that there is a need for local products, which have unique specifications. These products are designed locally and often bought locally, because of the little amounts. In Hungary, for example, a Hungarian supplier is responsible for the supply of a local product.

The product delivered by the supplier is completely finished and is purchased for global use. These products are purchased by Divisional Procurement. This is a centralized department, which is responsible for strategic purchasing. In brief, they try to get a good view of all different needs of the different OpCo’s. If possible, they will try to come up with a product, which suits more than one OpCo’s preferences. Information about ingredients and more can be read in different languages on the packaging. Divisional Procurement arranges the deal, but local OpCo’s need to order for their selves. All global product are stored in the Netherlands, before being shipped to the local OpCo’s.

Sara Lee/DE as coffee supplier In some situations, suppliers of Sara Lee/DE are enforced to use the coffee of Sara Lee/DE in their products. A very good example is the product ‘Instant Cappuccino’. A substantial part of this product is coffee, which is produced by Sara Lee/DE in Joure. The only thing the supplier is responsible for, is mixing the ingredients and packaging.

One exception: United States and Canada There is however one exception. The Sara Lee Coffee and Tea Division in the USA supplies the Canadian OpCO. Looking to the figure, one could say about the New Instants which are bought in the USA, that they are: 1) finished products, no extra handling 2) ‘global’ products (they are not used all over the world, but they are used in more than one country) Instead of the products being stored in the Netherlands, they are stored in the USA, before being shipped to Canada. The principle however, is the same.

OpCo’s The network applies to all OpCo’s of Sara Lee/DE which buy and sell New Instants. OpCo is short for operating company. Worldwide there are many operating companies. The ‘New Instant’ OpCo’s are the following (including yearly purchase spend):

Spend per Country Country Spend (€) USA 178.069.882 Netherlands 6.058.052 United Kingdom 4.683.568 Belgium 2.276.064 Hungary 1.990.087 Denmark 1.421.390 Canada 1.383.950 Australia 1.032.389 Germany 847.509 France 692.773 Brazil 522.623 Czech 429.286 Russia 282.790 New Zealand 232.828 Spain 170.369

As can be seen in both the table and the charts, the United States is by far the biggest player. Taking a look at the spend overview when the US is excluded, one can see that the Netherlands and the UK are relatively big. Belgium and Hungary are fairly big, where Russia, New Zealand and Spain have very low volumes.

Spend Overview per country

USA

Hungary Belgium

United Kingdom Netherlands

Figure 5: spend overview per country

Spend Overview per country (US excluded)

France Brazil 3% Germany 2% Netherlands 4% United Kingdom Netherlands Belgium Australia 29% 5% Hungary Denmark Canada Canada 6% Australia Germany Denmark France 6% Hungary United Kingdom Brazil 9% Belgium 21% Czech 10% Russia New Zealand Spain

Figure 6: Spend per country (US excluded)

Suppliers This topic will be dealt with in more detail in chapter 4. Because suppliers are a vital part of the network, the top supplier are shown in the figure below. There are 40 different suppliers: a few big ones (7 with a spend of more than1 million Euro per year), and a lot of small local suppliers (21 suppliers with a spend less than 400.000 Euro per year).

Top 5 Suppliers (spend per supplier in Euro)

160.000.000 150.000.000

140.000.000

120.000.000

100.000.000

80.000.000

60.000.000

40.000.000 20.000.000 20.000.000 10.000.000 6.000.000 4.500.000 0 Supplier A Supplier B Supplier C Supplier D Supplier E

Figure 7: Top 5 suppliers

1.4 Conclusion This chapter has presented a general view of the organization Sara Lee/DE. It’s important to know what the company does, what kind of products they make and what their strategy is. This can be of influence of this research. Also, a more detailed view of the research area has been described. Finished products and in particular New Instants have been outlined. The network has been presented. It’s clear how the different New Instants are transported from supplier to customer. This network applies to most Finished Products too. Concluding we can say that we know now what kind of product we’re talking about and how the product is moved from start to end-user. Chapter 3 will describe how these product are purchased; the purchasing part of the Finished Products and in particular for New Instants. Chapter 2 will give insight in the research objectives.

Chapter 2: Research Design

2.1 Introduction This chapter discusses the research in more detail. It consists of a description of the problem, the research question, the sub-questions, the research constraints and the data collection. The research objective defines the framework of this research: for whom the research is performed, what the results are and why the results are of importance for the principal of this research. The research constraints are the limitations for the results and methods of the research. The chapter will end with a description of how the desired data is obtained.

2.2 Reason of this research: Project Streamline This research has been triggered by a project called Streamline. This the name of a rationalization project of Sara Lee/DE. This paragraph will give a more detailed description of the project. As earlier stated, the project is called streamline. This paragraph will first describe the essence of the project; why is it started in the first place? Secondly, the targets of project Streamline will be made clear. Also the scope will be dealt with. At last, the teammembers and the role of the project in this research will be outlined.

New Instants The definition of New Instant products is: ‘all soluble/instant products, excluding pure Instant coffee, soup, sugar, lemonade and teas’ Examples are cappuccino powder or powder for hot chocolate.

Why Streamline? There are a few different reasons why this project has been set-up: Proliferation of blends, SKU’s, pack types No co-ordination US and non-US Many different suppliers

Proliferation of blends, SKU’s, pack types Although there’s no insight in this issue, the feeling at Procurement and Core Line Management is that there are too many different blends, SKU’s and packaging types. All OpCo’s are relatively free in developing and introducing new blends, SKU’s and packaging types. A lot of different blends will probably hardly differ from other blends. The same is true for SKU’s. There are too many different product names, which means extra costs because of switching machine-settings.

No coordination US and non-US The New Instant business in the United States is a very big part of the total New Instant business. However, there’s no real coordination between US and non-US business. Insight should be gained in both businesses, so SL/DE will be able to see differences and similarities. Also, non-US businesses could gain advantage by cooperating with US. Both businesses could share knowledge and achieve scale advantages by combining their purchasing activities.

Many different suppliers The feeling is that there are too many suppliers for New Instants. A lot of countries have got their own supplier for their own little product. SL/DE would like to find out if there are possibilities to cooperate and reducing the amount of suppliers. Potential scale advantages could be achieved by these actions.

Objectives of Streamline Four objectives have been set by the team. Improve Harmonization Maximize Leverage Purchasing Clear Rules for Product Amendments Synergy US and Non-US

These objectives are worked out into more detail down below:

Improve Harmonization The experience of all people/OpCo’s involved is that there are too many processes running independent of each other. Getting insight in procedures, like ordering or selecting suppliers is necessary. This project aims to harmonize the processes.

Maximize Leverage Purchasing Unfortunately, the spend of the total purchase volume is unknown. By the total purchase volume is meant the volume of all new instants worldwide purchased by Sara Lee/DE. The general assumption is that this value is somewhere around the 160 million Euro, although nobody is sure about this and the information source is not more than a feeling. If this is really the amount, Sara Lee/DE possesses a lot of potential purchasing power, which is only partly used. If the total value is known, Sara Lee/DE can use her purchasing power better than they do now.

Clear Rules for Product Amendments In the current situation all OpCo’s are relatively free to do whatever they want to do. If they think that the market needs a new product, they have the ability to develop a new product and to introduce it to the market as well. Looking positive you could say this is a good thing, because the local OpCo’s have a good view of the market. By acting this way, they can provide the market exactly what she want. The problem is that this causes proliferation of blends, packaging types, SKU’s (Stock Keeping Units) etc. This is why one of the objectives is to develop clear rules for product amendments. This means that product developments really have to have a significant benefit compared to the current situation. If there are more different products, the less purchasing power Sara Lee/DE will keep.

Synergy US and Non-US At the moment there’s no significant co-operation between the US and the other countries. It has always been thought that transport costs would never be compensated by benefits gained by combining the US-volume and the non-US volume. However, some suppliers have production locations at more places around the world, so transport costs would not be more than normal. If transport should have to cross the Atlantic Ocean, this shouldn’t have to be a problem because of the big amounts which have to be shipped. The bigger the amount, the lower the transport costs per unit. This is why it is important to know if there are any similarities between US and non-US products and if the volumes are big enough.

The Team For this project a team has been set up. In this project a lot of stakeholders are involved. All members of the team will represent one of these stakeholders. The reason of this is that it broadens the view on the problems. More people from different disciplines, means a multiform view on the problems. Members of the team are purchasers, marketers, the manager of new instants, research and development employees and a supply chain consultant. More information about the team can be found in the appendix.

2.3 The research Now it has been made clear what Project Streamline is all about, this paragraph will describe the research design of the student’s research.

Problem description This paragraph will describe the reason of this research. Why is it important and for who is it important? Basically there are two parties involved: - The Procurement Department - Coreline New Instants (manager) The answer on the question ‘why is it important for these parties?’ is given below.

Coreline New instants (manager) As stated earlier, the Streamline project is initiated by the Core Line Manager of the Instant Products. Within this project there are a lot of different areas of interest, but the main one is procurement. This is why the chosen project manager is one with a purchasing background. The following problems (explained earlier) can be seen as the reason for the research and will lead to the research goal and question: Proliferation of blends, SKU’s, pack types No co-ordination US and non-US Many different suppliers

The targets set by the team are the following: Improve Harmonization Maximize Leverage Purchasing Clear Rules for Product Amendments Synergy US and Non-US

Procurement Department The Procurement Department is a stakeholder as well. There are some general purchasing strategies, but it’s not really clear how they work and how they are developed. The potential benefit for this department is to see how different strategies are developed for different situations. Summarizing this, this department would like to enrich their purchasing knowledge. Besides this, SL/DE would like to be identified as a company with transparent processes. This includes the development of purchasing processes.

Research objectives The objective of this research is to develop new purchasing strategies for the new instant products so cost savings can be made. This inflects that no explicit attention will be given to the sales side. Of course will be looked to the consequences of changes in the strategies, but we will not try to increase sales. The emphasize will be on cost savings. During the process of strategy development will be looked to the current method for strategy development as well. Recommendations for improvements at this level will be given too, if proven necessary.

Research question To achieve the stated objectives, the following research question has been defined:

Which purchasing strategies should Sara Lee/DE use to achieve her goals and how should these be developed?

To answer these research questions, several other questions need to be answered. These sub-questions will be described later on in this chapter. All together, the answers on the sub- questions will lead to the answers of the research questions.

Conceptual model To get a better view of the purchasing costs a conceptual model shall be presented. According to De Leeuw (Leeuw, 1996: 141) the goal of conceptualizing a problem is:

Developing valid conceptual definitions and/or conceptual models which give insight in the problems and which are operational.

To get a better insight in purchasing costs, Saunders (1994) uses the concept of Total Costs of Ownership. Purchasing costs are split up in three different factors:

1. ‘Costs of acquiring’ a product. As well as the profile of the unit purchase cost of the product (purchasing price), other costs of acquisition include costs of specification evaluation, sourcing, negotiation and selection of supplier, as well as those of expediting, receiving and inspection. 2. ‘Costs of possessing’ a product. These are defined as the costs of ‘ensuring that a conforming product is available for manufacture’. Under this heading can be included various internal and external failure costs associated with faulty products, the costs of holding stocks of the item and handling and transportation costs. 3. ‘Costs of sustaining’. These costs are associated with activities to ensure that conformance will be maintained in the future. Among these are the costs of supplier audits and certification, and the costs of other preventive measures with regard to supplier education and development. (Saunders, 1994: 234)

Cost-based Specifications pricing Number of Purchasing Price suppliers Market-based pricing Demand and xxx supply Costs of Power and acquiring a Competitive yyy dependency product bidding

Transport Purchasing Costs of Costs possessing a product Holding stock

Costs of Audits sustaining Supplier education

Figure 1: Conceptual model.

This research will focus on the costs of acquiring a product. Costs of sustaining are important especially when one switches to another supplier. Is this supplier as good as promised? However, these costs are important when the supply starts, and it’s really hard to influence these costs before this point. Also, Sara Lee/DE’s purchasing policy obliges that all suppliers are regularly audited. These costs will be the same for all suppliers. As a rule, SL/DE will not invest in development and education of suppliers. They will look for suppliers which are already up to the standard or are willing to invest in themselves. Costs of sustaining are therefore not involved in this research. This research will not focus on ‘costs of possessing’ a product either, but factors of these costs, like transportation and holding stocks are relevant factors in decision making about purchasing strategies. Time and resources were not enough to research both acquiring and possessing costs. Within the costs of acquiring a product, this research will focus on the purchasing price. Costs of specification are important, but most of the time these costs are internal, because specification is done by Sara Lee/DE herself. These costs won’t be different per supplier, which makes these costs not important during the selection of suppliers. Costs like expediting, receiving and inspection of goods are again internal. However, these costs will depend on the way suppliers deliver their goods. Together with negotiation and selection costs, these costs are too vague to be involved in this research. Limited time and resources will not make this possible. This is the reason why this research focuses on purchase price, which has a big influence on the total costs (especially with finished products) and is realistic to achieve a good research result with the limited time and resources.

According to Van Weele there are 3 different ways to get to the right purchasing price: Cost- based pricing, Market-based pricing and Competitive bidding.

1. Cost-price pricing: The price of the product is directly derived of the cost-price. Normally a standard profit is added to the cost-price to get to the purchasing price. (Van Weele, 1999: 261). In this research one can think about reducing the number of suppliers to achieve scale advantages, so costs can be reduced. Or for example changing the specifications of the products. 2. Market-based pricing: The price of the product is agreed on the market, because of market-factors like demand and supply, stocks on the market, politics, economic situation. (Van Weele, 1999: 261). Important elements in this research are demand and supply. How many suppliers can make what Sara Lee/DE wants? Which parties are dependant of one other? Is it a buyers market? 3. Competitive bidding: The price of the product is both cost-price driven and market- based. This situation is the most common situation (Van Weele, 1999: 261).

The conceptual made clear what is meant by purchasing costs in this research. Also the focus of this research has been made clear: the purchasing price. However, important elements, which can influence cost like transport and stock holding will be dealt with as well.

Approach This paragraph will deal with the research approach. The starting point of the approach is the goal of this research. Sara Lee/DE wants to define a purchasing strategy for their New Instants. Before anything can be said about how to purchase these New Instants, one should investigate the product portfolio. The general thought is that there are too many products, which actually don’t really differ that much; so-called proliferation. The first step is to get more insight in this issue by collecting the relevant data. The second step is rationalizing this product portfolio. Different products should add different values. One can think about different packaging for the same product, or a small difference in recipe, etc. Once this step has been made, one should think about make-or-buy-decisions. The current situation is unknown, so research is necessary to find out if products or ingredients are produced in-house or is this production outsourced. It’s important to gain insight about this

subject by finding out advantages and disadvantages in general, but also specific elements in the situation of Sara Lee/DE (i.e. management statements about this issue). This research will not go into detail at the make-side. The focus of this research is the buying side. By looking to the current suppliers and potential suppliers insight is gained of the supplier market. How many suppliers does Sara Lee/DE use at the moment? Are there many suppliers? Is it a monopoly, a cartel market or a competitive market? When this is defined, it’s important to know where the power is in these markets. Is Sara Lee/DE more dependant of the suppliers than vice versa? This will lead to the purchasing strategy that will fit Sara Lee/DE’s situation the best.

Defining the purchasing strategy

Productportfolio rationalization Specify

Make vs buy

Buy Make vs vs

Supplier Market Analysis

Monopoly market Cartel market Competitive market

Managing monopoly Circumventing Competitive supplier cartels advantage matrix Sourcing strategy

Dependency

Selecting one or more suppliers suppliers more or one Selecting evaluation

Single Multiple source source

Relationship decision

Arm’s length Cooperative Collaborative Partnership Market forces Mutual deterrent contractual alliance vision & synergy Contracting

Fig 2: Research approach

Summarizing, there are three important steps: • Specifying: what do we have to buy? • Selecting suppliers: how many and which suppliers will we select? • Contracting: what relationship with the suppliers will suit us the best?

These three steps are also called the sourcing strategy of the company, or strategical buying. The sourcing steps are followed by an operational part, which consists out of ordering, monitoring and evaluating. However, the focus of this research will be on the strategical part.

This approach is a combination of the theory of Van Weele (Purchasing process) and Steele & Court (Contract strategy model, page 135 of Profitable Purchasing Strategies).

The first part of the research will be one of collecting and analyzing the data; a diagnosis of the current situation with the help of scientific theories. The second part will include recommendations to develop a better purchasing strategy.

Sub-questions To answer the research question, the following sub-questions have to be answered:

Background information about Sara Lee/DE - Sara Lee/DE in general - Current situation regarding Finished Products and in particular the New Instants

Background information about purchasing (at Sara Lee/DE) - How does the purchasing organization look like? - What kind of purchasing strategies does Sara Lee/DE have? - How are these strategies developed?

Analysis Productportfolio: - What does the theory say about productportfolio’s? - How does the New Instants product portfolio of Sara Lee/DE look like? - What are the strong and weak points of the current portfolio? - What are the threats and opportunities?

Make-or-buy? - What is meant by make-or-buy? - What is the current make-or-buy situation at Sara Lee/DE? - Can Sara Lee/DE make (parts of) products herself? - What are advantages and disadvantages of making? - What are advantages and disadvantages of buying? - What are the relevant factors at Sara Lee/DE, which are important for a decision about this issue?

Supplier relations - How dependant are the suppliers of Sara Lee/DE and vice versa? - What kind of contracts does Sara Lee/DE have with their suppliers? - What does theory say about supplier relations and purchasing strategies? - What are the strong and weak points of the current strategies? - What are the threats and opportunities?

Recommendations - Which aspects need more research? - Which directions can be given in the development of a purchasing strategy, which will decrease costs? - Which aspects of the new purchasing strategy could cause problems and how should SL/DE deal with these potential problems?

Action Plan This paragraph will deal with the question of ‘how to find the answers on the sub-questions’. First, the general information about Sara Lee/DE is gathered by interviews. In addition to this, more specific information about the New Instants will be collected by making use of a questionnaire which will be send to all OpCo’s around the world. This will give a good insight in the different SKU’s, the packaging, the main ingredient, prices and volumes. Secondly, background information about purchasing within Sara Lee/DE will be obtained by using interviews and existing information like presentations and InSite (intranet). To find the answers on the questions concerning the product portfolio, statistical analyses will be used. The focus will be on the amount of different products, different weight per consumer unit and different packaging types. This analyses will point out the strong and especially the weak points. For example, packaging types which are hardly used or SKU’s which have a very low turn-over. To answer the questions concerning the make-or-buy issues, statistical analyses will be used as well. This will illustrate what is made by SL/DE herself and what is outsourced. Interviews and theory will be used to find more background information about this topic. To get a better insight in the supplier relations, interviews are used, but also statistical information about the suppliers (how many and what is their share). To get a better view of the dependency, various theories will be used. Also the products will be plotted in the Kraljic matrix, which will result in recommended (moving) strategies. All answers will result in recommendations concerning redesigning the product-portfolio, reconsidering make-or-buy decisions and rethinking buyer-supplier relationships.

Constraints This paragraph will give insight in the main focus of this thesis, but also emphasize the elements which will not be researched. Looking at organisations, many things deserve attention, but looking to all aspects will not give a satisfying result. Van Weele (Weele, 1999, 131) thinks that the company’s topmanagement should make choices in three different areas: Customers, Competitors and Suppliers. All three together he names this ‘the strategic triangle’.

1. Customers Products can’t satisfy everybody at the same time. Choices have to be made about which product and which part of the market. The company can’t serve everybody. The product has to suit the customers preferences. To achieve success in this area, one needs a good marketing strategy. This research however, will not deal with these issues. Although the importance of this issue is high, the recourses are not available to include this subject in this study. 2. Important competitors Not only is it important that companies deal with the needs of customers, also important is the way they do this. It’s essential that a competitive advantage will be achieved and – even more important – kept. Products and services need to have a clear difference with those of the competition, to guarantee enough customers choosing for their product or service. Van Weele states that an international approach is essential. This second part of the strategic triangle is called ‘competitive benchmarking’: identifying the most important differences in position of the company herself and her important competitors (direct and indirect). Because of the limitations in time and manpower this subject will not be dealt with in this thesis. 3. Important suppliers Developments in supplier-markets make it necessary to reconsider the company’s core activities. The company should analyze the execution of their core and non-core activities (both production and supporting activities) and compare it to the standards of the market. This issue is named the ‘make-or-buy’ decision. When a company finds out that she can’t run (a part of) her activities cheaper, at the moment or in the future, she should investigate the possibilities of cooperation with suppliers. This research will deal with the make-or-buy decision and the purchasing strategies.

Customers

Marketing

COMPANY

Competitive Sourcing/ benchmarking partnering

Competitors Suppliers

Figure 10: Strategic Triangle (Weele, 133)

Definitions

OpCo Operating Companies

SLC Sara Lee Corporation

SL|DE Sara Lee Douwe Egberts UOM Unit of Measurement

AOP Annual operating plan: Estimated volume per year (per uom)

OLII Outlook 2: Adjustment of AOP.

Data Collection In the study, different ways of data obtaining will be used. Baarda & De Goede identify three ways of data collection: usage of existing information, obtaining of data through observation and obtaining of data through written or oral interviews. In this study the observation method won’t be used, because no measurements are needed. To obtain data oral interviews and existing information are used.

Oral interviews To get a good view of the company, oral interviews have been used. In this orientation phase there were a lot of ad-hoc interviews as well. Going further in time, research became more specific and so were the interviews.

Written interviews The data used for the case of Core Line Instants is obtained by written questionnaires. Different OpCo’s all over the world were asked to fill in an information sheet and send it back. The questionnaire had to satisfy the following points: - Right questions The questionnaire has to contain the right questions, so the needed information will be collected. - Easy to analyze The format of the questionnaire has to limit the freedom of the respondents, so the information will be easy to analyze. This will result in a range of pre-set answers. - User-friendliness It’s better to know a lot about little, than knowing nothing about a lot. Experiences of the past and learnings from teammembers emphasized the importance of user friendliness. All respondents work with a very busy time schedule and have to prioritize their tasks. For that reason they will first work on the tasks for which they are responsible. Also, managers will not start filling out very complicated questionnaires. This is why the questionnaire is very easy to fill out.

Usage of existing information Presentations and InSite (intranet) were used to get a good view of the company and the purchasing vision.

Relation between student’s research and project The student will support the project team in setting up a questionnaire and will be responsible for sending out these questionnaires. Also, the student has to make sure, the questionnaires are filled out and will be returned when completed by the respondents. Besides that he will be involved in team meetings and asked for suggestions to achieve cost savings. This research will focus on purchasing and should end with recommendations to improve the purchasing within Sara Lee/DE so costs will go down and profit will go up.

Chapter 3: Problem Focus

3.1 Introduction This chapter will take a closer look to the problem of this research. Zooming in on the problem will give an answer on two questions. Is it really a problem? In this case, is it necessary that purchasing costs have to go down? And the second question is if one can justify that this research tries to solve the problem from within the purchasing area.

3.2 Cost as main performance objective Slack (Slack et.al.1995) says that the operations function contributes to achieving an operation-based advantage through five basic ‘performance objectives’. These five will be outlined in this paragraph. Also the current status of these objectives will be described and the need for improvement. What kind of things are you likely to want to do in order to contribute to competitiveness?

Quality advantage This objective is about doing things right the first time. Sara Lee/DE wants to satisfy her customers by providing error-free goods which are ‘fit for their purpose’. If the operation succeeds in achieving all this it is giving a quality advantage to the company. Sara Lee/DE is satisfied with the current quality level.

Speed advantage You want to do things fast; that is you would want to minimize the time between a customer asking for goods or services and the customer receiving them in full. In doing this the company would be increasing the availability of her goods to customers and would be giving the company a speed advantage. In interviews not much has been said about this subject. Because the New Instant market is relatively predictable, the right volumes can be kept in stock, so customers can get the right product quickly.

Dependability advantage A company wants to do things on time. This means keeping to delivery promises which have been given to customers. This means being able to estimate a delivery date accurately, communicate this clearly to the customer and then deliver exactly on time. If the operation can do this, it is giving a dependability advantage to its customers. This objective hasn’t been a problem, according to interviews.

Flexibility advantage A company would like to be able to change what she is doing. That is being able to vary or adapt the operation’s activities, either because you have to cope with unexpected circumstances or because customers require individual treatment, so the range of goods and services which you have to produce has to be wide enough to deal with all customer possibilities. Either way, being able to change far enough and fast enough to meet customer requirements gives a flexibility advantage. Sara Lee/DE offers a very wide range of New Instants and products are developed constantly. This gives them a flexible advantage. Also, their hands are not tied by contracts. If Sara Lee/DE wants, they can switch to another supplier.

Cost advantage You would want to do things cheaply; that is produce goods at a cost which enables them to be priced appropriately for the market while still allowing for a return to the organization. When the organization is managing to do this, it is giving a cost advantage. There are a few factors which indicate that cost are too high at Sara Lee/DE. At first, the economic developments. It’s a global development that the economic situation is declining,

so you need to lower costs to keep the profit up. The following text shows that this is also the case in the coffee and New instant markets.

“Ground coffee sales account for almost 65% of the market, with instant coffee sales responsible for just over 20%. But compared with 2001, sales are down in two segments, both in dollar value and by amount sold. Among manufacturers’ brandresults were mixed. Ground coffee sales of Proctor & Gamble’s premium brand Millstone rose 37.5% from 20011-03, while leader Folgers saw sales drop by 7% over the same period – but most of the major brands saw fall. One exception is Starbucks, which achieved third place in the ground coffee segment among branded coffees for the first time (private-label coffees together equal the third-highest sales amount), partly due to a sales increase of almost 23% over 2001, while former third- placed declined 26.4% in the same sales period.

Although, overall, instant/freeze-dried coffee sales have fallen by 9% from 2001-03, some flavored instants are faring better. Nestle was the only manufacturer in the instant segment to increase its sales, in particular sales of Nescafe Frothe, which saw a 49% increase from 2001- 03.

Declining prices and consumption Wholesale coffee prices have been declining since the 1990s, reaching a 30-year low in 2002. In response most coffee manufacturers lowered the prices of their products. Sales by volume have also declined. Among coffee drinkers per capita coffee consumption continues to drop, with more consumers reporting occasional usage in 2003 than previously. While retail prices rose in 2003over 2002 causing a 1.1% gain in the U.S. coffee market, over the period 1998- 2003 the market has declined by 15% in current prices”

(from Coffee: U.S. consumer intelligence, January 2004, Mintel International Group Ltd., Chicago)”

The main focus of this research will be on costs. However, other performance objectives must be kept in mind. Michel van den Broek, manager Finished Products, claims that you should find a way to lower total costs, and at the same time keeping the other four objectives at an acceptable level.

3.3 Lowering costs by improved purchasing This research tries to lower costs and gain higher profits by improving the purchasing at Sara Lee/DE. In particular the purchasing of New Instants. Because of the economic developments, people start to look closer to the supply side. At Sara Lee/DE the emphasize has always been on the demand side, Sara Lee/DE is a market-driven company. However, now even top-management is convinced that the easiest savings/profits are made at the supply side. To illustrate the impact which price-conscious purchasing can have on profits, Slack (Slack et. al.1995: 478) comes up with a simple example of a manufacturing operation with the following financial details:

Total sales = $ 10,000,000 Purchased services and material = $ 7,000,000 Salaries = $ 2,000,000 Overheads = $ 500,000 Therefore, profit = $ 500,000

Profits could be doubled to $ 1 million by any of the following: - increase sales revenue by up to 100 per cent - decree salaries by 25 per cent - decrease overheads by 100 per cent - decrease purchase costs by 7.1 per cent

Again, this is an example, but this example makes clear that if a company wants to increase her profits, the easiest and most realistic way is by decreasing purchasing costs. It’s very unlikely, especially in the current situation of the declining coffee-market, to double sales revenue. The coffee market is not a very-fast growing market. Lowering salaries with 25% is not even possible and wouldn’t make things any better probably. Decreasing overheads with 100% isn’t very realistic either. According to Slack, the reason for the dramatic impact which purchase price savings can have on total profitability is that purchase costs are such a large proportion of total costs. Relatively small changes in purchase costs will therefore, be large compared with profits. The higher purchase costs are as a proportion of total costs, the more profitability can be improved in this way. This is illustrated in the next example:

A 5% reduction in material costs in operations with the following cost structure means increase of profits of…. Situation 1 Situation 2 Situation 3 Materials 60% 70% 80% Labour and overheads 30% 20% 10% Profit increase 30% 35% 40%

This example illustrates the importance of purchasing within any organization. Within the company Sara Lee/DE however, purchasing deserves specific attention. As can be read earlier, prices and consumption of coffee has declined over the years and still is. Looking to the product life cycle, one can say that coffee is in its last phase. To survive, a company has two options: Product Development or lowering costs. Especially for Finished Products Purchasing has a coordinating role in both of these issues. If Sara Lee/DE would have made most of the Instants herself, the focus to lower costs would be at production. Now other companies are responsible for the production, which makes the influence of purchasing on the price very high. Also for product development, purchasing has got, or should have a coordinating role. Purchasing could involve suppliers in product development for example or coordinate different ideas within the organization. This last bit is important, because not all of the ideas can be produced by the current suppliers.

Also, there are other reasons why it is interesting to take a closer look to the purchasing policy and organization. They will be outlined in the next paragraphs.

Synergy and scope advantages US and non-US There is no coordination between the operations in the United States and the other non-US operations. If one takes a closer look to the purchase spend in the US compared to non-US, one can say that it should be interesting to do things together. US Spend 178 million Euro Non US Spend 22 million Euro Coordination between the two ‘parties’ could lead to scale and synergy advantages.

Number of suppliers As already stated in chapter 1, Sara Lee/DE has got 21 suppliers with a yearly spend of 400.000 Euro or less. Looking at the total value of 200 million Euro, one can see that these volumes are relatively low. The general opinion at Sara Lee/DE is that reducing suppliers will lead to higher volumes per supplier, which can result in scale advantages.

Proliferation of brands/ sku’s According to the coreline manager New Instants, there is a high proliferation level within the New Instants market. On local level, a lot of initiatives are developed. Unfortunately, there’s no or little coordination involved. His statement is supported by the fact that there are now over 350 different New Instants. A lot of the products have the same characteristics, but are slightly different. Different packaging, different name or different sizes. Coordination in the

design phase (which is the first step in the purchasing process) could help lowering the amount of different products. This makes the situation easier to control and could lead to scale advantages.

3.4 Conclusion At the end of this chapter it can be said that the decision to look to the costs of the New Instants is a fair choice. It is hard to improve the demand side in this economic situation. To lower the costs, this research will investigate the purchasing policy and organization of Sara Lee/DE. Achieving cost saving on purchasing is the most realistic way to improve profits, especially because it concerns finished products. Because there are no real problems which needs to be solved right away, this research will make a general scan of the purchasing situation for New Instants. Areas where cost saving can be achieved will be pointed out.

Chapter 4: Purchasing at Sara Lee/DE

4.1 Introduction This chapter will describe the purchasing situation at Sara Lee/DE. In particular the purchasing department of the Coffee and Tea Division will be described. This chapter will also focus on the Finished Products department. First, this chapter will outline the products which are purchased by the purchasing department of the Coffee and Tea Division. Secondly, the purchasing organization will be described. The final part of this chapter will describe the current purchasing strategies of Sara Lee/DE and the development of these strategies.

4.2 General information and products To get a good view of the purchasing function at Sara Lee/DE Coffee and Tea Division it’s important to know that the Division Coffee & Tea has divided purchasing into the following categories: - Finished Products Europe - Global Finished Products nuts and tea - Packaging materials - Production equipment + spare parts - Tea and Rice These categories will be explained and examples of products will be given. A more detailed description will be given of Finished Products Europe, because this is the department where the research will be performed.

Global Finished Products nuts and tea This department purchases products worldwide. The products are directly ready for use, although sometimes they need extra processes. Examples are Duyvis nuts.

Packaging Materials This department sources the packaging materials for European OpCo’s. Examples are packaging for coffee products made in Utrecht.

Production equipment + spare parts This department is responsible for the sourcing of equipment and spare parts, which are used in OpCo’s.

Tea and Rice This department buys tea, which is used in the tea-factory in Joure, to produce Pickwick Tea. Also Rice is bought, for production in Wormer.

Finished products Finished products are products which are directly ready for use. This department is responsible for the sourcing of these products in Europe and a few other countries like Australia.

Examples: • Plastic and paper vending cups (branded) • Milkcups (plastic cups containing milk to be used in coffee for one consumption unit) • Cacao sticks (paper sticks, sealed, with powder for one cup of instant hot chocolate • Retail instants (bags with instant powder for more than one cup of instant cappuccino, chocolate etc.) • Coasters (to be used in restaurants and coffee bars, when serving coffee)

4.3 Organization This section will describe the organization of the purchasing department of the Coffee and Tea Division, Divisional Procurement Coffee and Tea. At first, the mission and the objectives of the department are outlined. Secondly, this paragraph will focus on the centralized/decentralized purchasing issues. To get a better view of the purchasing function within Sara Lee/DE, the development and perceived position of purchasing will be described. Also, the organogram will show the different departments within the department.

Mission and objectives Divisional Procurement Coffee & Tea Sara Lee/DE finds it really important to optimize the supply chain. Important issues are the use of scale advantages and reducing complexity. The mission and objectives ar stated below:

‘We focus on optimizing the supply chain by using scale and reducing complexity Divisional procurement mission: • Ensure best in class, transparent processes for sourcing / transactional and supplier integration. • Enable maximum controlled freedom at users and have local execution. • If central sourcing, then central cost measurement. • Have OpCo’s/ factories as customers and follow their priorities. • Have local purchasers as colleagues, be 100% transparent both from central as from local point of view. • Have skilled purchasing people. Focus on globalization of sourcing and on an excellent procurement process in Europe.’

Source: Sara Lee/DE InSite

As can be read above, Sara Lee/DE emphasizes on the cooperation between the strategic buyers (division) and the local buyers. Also transparancy in processes is very important.

Centralized and/or decentralized purchasing The organization of the procurement function at Sara Lee/DE is both centralized and decentralized. This paragraph will describe these different types.

First, centralized purchasing. As stated earlier, at Sara Lee/DE there is a division which is called ‘Divisional Procurement’. For the division Coffee and Tea, this department is located in Utrecht and partly in Joure (both in The Netherlands). The organizational structure of this department is flat. There are only three levels. The director of Divisional Procurement C&T manages six senior buyers, who are responsible for different product-groups. These senior buyers are all managing one of main product categories stated earliers, like Finished Products or Packaging Materials. The senior buyers are managing one or more buyers (see organizational chart). What does this central purchasing department do? The main task of divisional procurement is the sourcing of product(-groups) with a value above 1 million Euro. To explain sourcing, all senior buyers use the purchasing steps, as defined by Van Weele (1999: 13). Van Weele divides purchasing into 6 steps (figure 1): 1. Specifying the product 2. Selecting the most capable supplier 3. Contracting the supplier including negotiation about conditions 4. Ordering the goods 5. Monitoring the order 6. Evaluation The first three steps are called sourcing, so Divisional procurement doesn’t order the goods, but they only ‘make the deals’.

Purchasing function

Initial/ tactical Ordering/ operational Purchasing Function Purchasing Function

1. 2. 3. 4. 5. 6. Customer Specify Select Contract Order Monitor Evaluate Supplier

Purchasing/supply management

Sourcing

Buying

Procurement

Figure 1 : Purchasing Process (Weele, 1999: 13)

Decentralized purchasing is also called ‘local purchasing’ at Sara Lee/DE. Through Europe there are several OpCo’s where local buyers are responsible for the purchasing. This can be in two different forms. When the purchase spend per category is more than one million Euro, divisional procurement is responsible for the sourcing part and local buyers will be responsible for the ordering part. Sometimes products are ordered directly at the supplier, in other occasions products are stored in the Warehouse in Utrecht, from where the products are shipped to the local OpCo’s. When the purchase spend is less than 1 million Euro, local purchasers are responsible for the total purchasing process. This means they are responsible for the tactical part of the purchasing function (specification of the product, selection of the supplier, contracting suppliers) as well as the operational part (ordering the product, monitoring the order and evaluation).

A summary of the main rule is shown in the table below:

Spend of product(-group) Responsible

> € 1.000.000 Divisional Procurement < € 1.000.000 Local buyers

However, there are a few exceptions at the rules, but if local buyers want to do things different, they should have a good reason. If this is the case, they need permission of Divisional Procurement. In theory, there are three scenarios for local buyers. Local buyers are always buying for a specific OpCo, also known as customer.

A-Customer Æ Follow An OpCo is called an A-customer for a certain product, when the volumes are relatively low compared to other OpCo’s. It’s not worth going through the whole sourcing process, because of two reasons. It will cost the local purchaser a lot of time and the volumes are so low that

the negotiated conditions are not as maximized. This is why SL/DE wants A-customers to use divisional contracts. Volumes are collected of all participating countries so Divisional Procurement improves their negotiating position. Divisional Procurement can negotiate good conditions and OpCo’s can order their products to these conditions. All contract summaries are placed at the network by using public folders. These contract summaries contain information about specifications, order-quantities, prices, rebates etc.

B-Customer Æ Follow + Challenge Just like A-customers, the B-customers will use divisional contracts, but B-customers have a higher involvement than A-customers. B-customers need a bigger volume and this increases their interest in the right sourcing method. The procedure for B-customers is to use divisional contracts ánd to make benchmarks by using Freemarkets.com. This is a web-site for online tenders and reversed auctions. When OpCo’s use this tool, they can compare prices negotiated by Divisional Procurement with potential prices, achieved in the auction or tender. When prices are lower than prices out of the divisional contracts, OpCo’s will challenge Divisional Procurement to renegotiate their conditions.

C-Customer Æ Active In this situation the OpCo becomes an active team-member of Divisional Procurement. An example of a situation is when Spain needs a product which is (exactly) the same as a product used in Belgium and France. The problem for Belgium and France is that they use low volumes, so if they source these goods themselves, they won’t get the best conditions. In this situation, Spain should not only arrange the best conditions for herself only, but should take the lead and let the other countries take advantage of the negotiated conditions. In this case Spain will get divisional responsibilities. The result is that they have to make divisional contracts as well. Divisional Procurement will support these activities, but the C-customer is responsible.

Type Volume Action

A-Customer Relatively Low Follow B-Customer Relatively Normal Follow + Challenge C-Customer Relatively High Active

In reality, the A-customer is the most common one. OpCo’s are happy with their role of buying goods with a value below one million Euro. B-customers are rare, but their presence is stimulated by the e-sourcing trend within Sara Lee/DE. This tool makes it easier to benchmark, because it uses less time than the traditional way of benchmarking. More and more OpCo’s are now working with this tool and are starting to challenge divisional contracts. C-customers currently exist only in theory. Managers of Finished Products think that the circumstances to act as a C-customer are in place, but OpCo’s are not willing or capable to take divisional responsibilities. Reasons for this are: - not enough time (leading a project takes a lot of time) - insufficient knowledge (it’s not clear how to do it) - fear for the unknown (they rather choose the save option than taking the lead) development of the purchasing function Purchasing at Sara Lee/DE used to be very locally orientated. All OpCo’s were seen as different companies who had to take care of themselves. This counted not only for functions like marketing, but for procurement as well. The arguments were simple; what you make local, you source local. When the worldwide trend turned to global sourcing, Sara Lee/DE changed as well. According to the Senior Buyer of Finished Products, Sara Lee/DE turned around 180 degrees. They started a department called Divisional Procurement. This department controlled en ruled the OpCo’s. This is nicely illustrated by the following example: three different OpCo’s purchase their cups separately. A and B pay 120 each and C pays a

price of 80. Divisional Procurement takes over the sourcing part and negotiates a standard price of 100. This means an advantage of 20 for company A and B, but a disadvantage for C. OpCo’s had no choice, but participating in this divisional deal. Nowadays Divisional Procurement aims to treat OpCo’s as customers. This means that the price offered by Divisional Procurement will never be lower than the current price of the OpCo’s. When we go back to the situation stated in the example, the following can be said: C keeps the price of 80 and this is compensated by A and B. Depending on the relative volume of C the prices for A and B could be 110. position and perceived importance of purchasing Sara Lee/DE is a marketing driven organization. As mentioned before, Sara Lee/DE has got a very differentiated Product Portfolio. The perception of Divisional Procurement is that Marketing has too much power, in making decisions about products. This is the reason that buyers mention the role of the top-management. When buyers try to change things, they usually need the support of the top-management to convince stakeholders like the Marketing department of the importance of the action. A good example is the ‘milk-cup case’. One of the two senior buyers of Finished Products investigated this category for all European countries. The conclusion was that every country had different milkcups, varying in size, weight, fat, packaging etc. In order to achieve scale and scope advantages, he came up with the plan to reduce all these differentiated products to a small number of standards. So instead of 20 different fat percentages, there should only be a choice out of 4. The argumentation of the Procurement department was that nobody would notice the difference between a fat percentage of 5,4% or 5,5%. However, Marketing departments of the various countries stated that the ‘uniqueness’ of their product was more important than the potential savings calculated by Divisional Procurement. Roles changed when top-management got involved in the project. Instead of convincing the marketing departments, marketing departments had to convince top management of the consequences of the standardization project. Just a few countries were able to convince top-management that joining this standardization would be harmful for Sara Lee/DE in the long term. One of them for example had an extreme high fat percentage, which made the product indeed unique. But even with the support of top-management actions like these are really hard. Especially collecting the information of the different OpCo’s and the implementation of the plan takes a lot of time, at least half a year. Also the President of Procurement has to report to the President of Operations, not directly to the CEO. This indicate a relatively low position in the organization. At the other hand, buyers experience a small shift. With the current economic situation, the top management of Sara Lee/DE starts looking for new opportunities to achieve more sales or lower costs. Especially the cost part is made more important, because they believe that big savings can be achieved by using professional procurement. Still, Procurement has to come with initiatives. In conclusion the position and perceived importance of Procurement within Sara Lee/DE looks relatively low, but when Procurement comes up with action-plans supported by facts, the department will get the support of top-management. As they say: ‘At the end of the day it’s all about money’.

4.4 (Development of) Purchasing strategies This paragraph will describe not only the current purchasing strategies, but also the development of the strategies. First the basic principles for purchasing strategies will be outlined. Secondly, this paragraph will focus on the purchasing strategies and the supplier relations. The final paragraph will describe the purchasing rules, which are specific rules for purchasers at Sara Lee/DE for specific situations.

Basic principles for purchasing practice The purchasing strategies used at Sara Lee/DE are based on the Kraljic matrix, which will be explained later on. For now, it’s important to know that SL/DE classifies her products with the help of two dimensions: - Spend per product category The spend of all products which are bought in Europe and fit in the product category as defined by Divisional Procurement. - Supply risk per product category This is measured by the total of potential suppliers. Many suppliers indicate a low supply risk, where little or only one available supplier means a high supply risk.

Leverage Strategic Spend per subcategory > € 1 mln Few / single suppliers: High Many suppliers switchingcosts Event RFI, PO, RA Spend > € 1 mln Frequency: Min. Yearly Event: RFI, PO, optional RA Template Owner: Divisional Frequency: Yearly or every two years Template Monitor: Divisional Template Owner: Divisional Template Execution: Divisional / Template Monitor: Divisional Local / Users Template Execution: Divisional

Routine Bottleneck Spend per subcategory < € 1 mln Spend per subcategory < € 1 mln Many suppliers Few / single suppliers Event: RFI, PO, RA Event: RFI, PO Frequency: Yearly Frequency: Ad hoc Template Owner: Local Template Owner: Local Template Monitor: Local Template Monitor: Local Template Execution: Local / Users Template Execution: Local

With the help of these dimensions, the product categories fall into four different quadrants which have the following labels: - Leverage (low supply risk / high spend) - Strategic (high supply risk / high spend) - Routine (low supply risk / low spend) - Bottleneck (high supply risk / low spend)

Purchasing strategies Divisional Procurement does not have general purchasing strategies. Buyers are free to do whatever they think is necessary to achieve their targets. The general trend is focussing on price and trying to standardize on every possible level. This can be in processes, but also in the specification of the product. When strategies are implemented different internal stakeholders are involved. All buyers name the following parties: - Marketing - Operations (quality) - Technical Development (equipment) - Procurement

Supplier relations There is no management statement about having long-term relations with suppliers, although the general idea is that Sara Lee/DE should have enough possibilities to switch from one supplier to another. This is, however, not always possible. Especially with product categories with a high supply risk, it is hard to switch to another supplier, because with the current specifications there are no other suppliers. Sara Lee/DE is a big organizations and because of this, they always have a little advantage. Normally they are not really dependant on one supplier and suppliers are really keen on becoming a preferred supplier. Sara Lee/DE is ideal as a reference for other projects. Also, Sara Lee/DE is seen as a strong company without any financial problems. Suppliers can be sure they will get their money. Most buyers think that strategic product categories need a give-and-take strategy; looking for a win-win situation. Leverage product categories are dealt with another vision with more conflicts and more switching. As mentioned before, SL/DE does not like to invest in their suppliers.

Purchasing rules Rules have been set up for all four different product categories. This includes the type of action (events), the measurement of the product categories and the responsible buyers.

Event - Request for information (RFI) Sara Lee/DE aims to use this tool in every situation. The only restriction is that one needs time. An RFI is used to gather general information about suppliers and their capabilities. - Private offer (PO) A PO is used to gather market and specific information on the ability of suppliers to conform to certain requirements (product/ service specifications) and their related price information. An PO could also be used for benchmarking. Private offers are advised (by Sara Lee/DE) in every quadrant, although they think they should primary be used in the quadrants where the supply risk is high. - Reversed Auction (RA) Sara Lee/DE invites several suppliers to participate in a live online auction. The supplier with the lowest price does not always ‘win’ the project. RA’s are mainly used in the quadrants with low supply risk. Most of the time these are simple products, which makes it easy to compare prices.

Responsible Divisional Procurement created three roles in the sourcing process: - template owner The template owner is the ‘brain’. He or she is responsible for the purchasing plan. - template executor This role can be seen as an operational one. This person is responsible for the execution of the plans which are made by the template owner. - template monitor The template monitor should check the progress of the template executor.

It is not uncommon that one person is responsible for all three roles. There are no clear rules for this. When the spend is below one million Euro (per product category), these roles are filled in by local buyers. When a spend is above this amount, divisional buyers are responsible for all three roles. However, when the supply risk is low, local buyers or users can be made responsible for the execution.

Measurement For every quadrant a period has been set when supply risk and spend are measured: - Strategic Æ yearly or every two years - Leverage Æ minimal yearly - Routine Æ yearly

- Bottleneck Æ ad hoc

4.5 Conclusion It has become clear that purchasing is getting more important within Sara Lee/DE. Specialized departments are responsible for specific product categories. The purchasing strategies used within Sara Lee are based on a few rules which has been outlined in this chapter.

Analysis

Introduction In the first chapter the current product portfolio will be described and analyzed. The second chapter will deal with make-or-buy issues at Sara Lee/DE. The last chapter detail will discuss the buyer-supplier relations at SL/DE into more detail.

Chapter 5 Analysis – The Productportfolio

5.1 Introduction This chapter will investigate the New Instants productportfolio of Sara Lee/DE. It will give answers on the following questions: - What does the theory say about productportfolio’s? - How does the New Instants product portfolio of Sara Lee/DE look like? - What are the strong and weak points of the current portfolio? - What are the threats and opportunities? At first, the relevance of this issue will be dealt with. Secondly this chapter will explain the essence of rationalization and streamlining. After this, the product portfolio will be examined on several aspects, which could be important for streamlining the business. Aspects are SKU-name, weight per consumer unit, packaging type and material. These aspects will be described and the current situation of these aspects will be analyzed. Strong and weak factors will be pointed out, and also opportunities and threats will be dealt with

5.2 (Theoretical) Relevance To achieve cost savings, it is very important to start with reconsidering the product portfolio. Steele and Court (1996: 117)) emphasize the importance

The objective of this specific requirements identification stage: By working in a multi-functional team, to establish the true nature of the requirement and ensure that the initial interaction with suppliers and the supply-market is managed to produce the optimal result. To be really effective, the purchasing considerations and opportunities – and therefore professional purchasing input – must be taken into account at the earliest stages of this part of the process. Early purchasing involvement is very important because there are several fundamental questions to be addressed, the answers to which could have a dramatic bearing on the overall outcome. In terms of costs, quality, time to market, etc.

The impact of purchasing on costs is illustrated in figure 1, which relates potential savings to the stage of development of a project. This same figure clearly shows that the potential at the concept stage is very large indeed and reduces to much more modest levels by the time the production/implementation stage is reached. Improvements at this level come about from careful evaluation of the true needs of the business thus enabling specifications or indeed requirements to be changed dramatically.

40 Potential for cost reduction 30 as percentage of total value of purchases (%) 20

Concept Design Production

Project phases Figure 1: Potential for cost improvement during project phases.(Court & Steele 1996, 118)

Van Weele (1999) emphasizes that when the design continues and progresses, the buyer will get less space to influence the costs. At the start of design-project one can choose out of an endless amount of materials and suppliers. While the design will get closer and closer to the final design, the amount of materials and suppliers to choose from will reduce. To improve his space it is important that requirements will be set functional. Some requirements are set in such a way, that only one supplier or brand can do the job. This will reduce the number of alternatives. (Weele 1999).

According to Steele and Court (1996), there are several factors important in reconsidering the specifications: - Identification of a significant problem - Early involvement of purchasing expertise - Multi –functional approach throughout - Full analysis and understanding of the supply chain and its cost elements - Understanding the true needs of the enterprise - Full understanding of the supply market and suppliers - Cooperation of the manufacturer - Willingness to challenge all assumptions - Willingness to adopt a bold solution

In this Sara Lee/DE case the main reason is cost savings, but another one is the willingness to challenge all assumptions. If it can be shown, that by streamlining the product portfolio, cost savings can be made, the willingness to change is likely to improve. Figure 2 shows possible savings during the design stage when cooperating with suppliers. Although it is hard to tell if the products have low or an average complexity or uniqueness, it shows the potential for cost savings.

Amount of design-complexity or uniqueness of the product

Design stage Low Average High (%) (%) (%)

Initial Design 2.5 10-25 30-50 Changing existing design 1.3 3-15 15-25 Redesign to improve quality 10 15-30 40-60

Figure 2: Involving supplier to new product development can lead to significant savings.(the numbers represent the savings [%] on the cost price).(Weele, 1999:170)

5.3 The Productportfolio in short The productportfolio consists out of three different product categories; Cappuccino, Chocolate and Milk. For a more detailed view of the productportfolio, see appendix. Products are either sold for Out-of-Home purposes or Retail. Some do however fit both purposes.

Spend (Euro) Yearly Volume (kg) Out-of-Home 82.584.115 51.708.545 Retail 11.516.362 4.308.398 Both 339.193 115.252 Figure 3: Overview of New Instants spend and volume, categorized in OOH, Retail and both

5,4 Streamline/ Rationalization Before going into further details, it is good to clear up the words “streamline” and “rationalization”. When talking about streamlining the product portfolio or rationalizing processes it is important that everybody knows what is meant by these words.

Streamline: “To organize, to simplify” (www.dictionary.com)

Rationalization: “the organization of a business according to scientific principles of management in order to increase efficiency” (www.dictionary.com)

Rationalize: “weed out unwanted or unnecessary things” (www.dictionary.com)

Looking to these meanings, it becomes clear that both words have something to do with organizing. Also, simplifying, efficiency and shaking off unnecessary things. This is the essence of streamlining and rationalizing. Examples are: - Lose products with low volumes (get less SKU’s) - Use the same type of packaging for more products - Join different weights (results in less weight possibilities) It is important to know that all of these actions could have consequences. Maybe the customer of a product with a low volume is also a customer of a product with a high volume. In this situation it is not smart to lose the low volume product without the involvement of the customer. Some products might sell better, because of the packaging type. In this situation it might not be the best decision to change the packaging to a standard (even though it will result in lower costs). The bottom line is that looking at the cost side only is not sufficient. However, it will give a signal to other parties. If Procurement can show potential benefits, it is up to the other stakeholders to show that the consequences are more important. At this stage, the other parties have to prove their statement. The Sara Lee/DE culture is one of “facts & figures”, so if other parties can’t prove the importance of differentiation there will be a big chance that top-management will support the actual rationalization plans.

5.5 SKU To get a better view of what is meant by the word SKU, Slack proposes a product structure (Slack et. al., 1995). Figure 4 illustrates the product structure of the New Instant SKU. An SKU consists of a recipe and packaging. A recipe consists of different ingredients, which are mixed in a certain way. Packaging can be different in type (kind of packaging for example pouch), but also in weight (for example 2 grams) and the actual printing on the packaging (For example Douwe Egberts instant cappuccino). When two products have identical values for all of these elements, they will have the same SKU name. When one of these elements is different, the SKU name will be different as well. For example, if the same ingredients are used in an identical mix, and the type and weight of the packaging are identical, but the printing is different, than the SKU name will be different. In this research it is however not always clear which of the elements are responsible for different SKU-names. The packaging type and weight are clear, and so is the print (which is the same as the SKU-name). However, because of the complexity, the recipes have not been included in this research. It is generally thought that these recipes differ for different SKU names (of course not for SKU names which only differ in weights like “Cacao Fantasy sticks” and “Cacao Fantasy bag block bottom”), however this has not been researched. Future research should include the recipes as well. The first reason for this is that when one wants to succesfully streamline her productportfolio, one should know the recipes. If different recipes correspond with each other, or maybe they are almost the same, they could be brought together to one recipe. This would increase efficiency, because it could be produced in one run, instead of 4 seperate ones. It could still be packed into different packaging. Or to make it even more efficient, all

elements could be made identical, so it becomes one SKU. This would increase the volume and could result in more scale advantages.

Ingredients Recipe

Mix SKU Type

Packaging Weight

Printing

Figure 4: Product structure of New Instant SKU Although this research gives a good general view of the strong and weak points of the product portfolio, this research is not complete because of the lack of information about the recipes. Still, it can point out important areas of potential benefits. However, future research will have to point out if these changes are justified and how they would have to be executed in a more precise way.

Within Sara Lee/DE there are 350 different SKU’s. This is rather much for three different product categories. Of course some products need to be for one consumption only, other products contain large amounts. Also, it is not clear if the 350 differ in recipe and/or packaging. Some products are for retail and other for Out-of-Home purposes. However, 350 SKU’s is a lot, especially when 109 SKU’s have a volume of 17.500 kilograms or less. The question is if all of these 109 SKU’s have unique, local specified recipes. Because of the low volumes it is worth to focus new research on the recipes. On the way to streamline the portfolio it is important to be aware of this. If all recipes are unique, it might be worth to pool requirements and come to more standard specifications. The same thing applies to the packaging. Having a great amount of SKU’s helps to differentiate, but if the volumes are low it causes more problems than benefits. Extra costs have to be made and potential scale advantages are lost because of the choice for many ‘little’ products. Reducing the amount of products could simplify the process. This can only be done when volumes are low, or if SKU’s have enough similarities with other products. The most important limiting condition is that all 5 elements of the SKU should be known. Although it is thought that most SKU’s have different recipes, this has not been proven in this research. However, this research does show that there is potential for simplifying. The next step will be: including the recipes, so more definite action can be developed.

5.6 Weight This paragraph will take a closer look at the different weights of the product. Because of the streamlining operation, this is important. As has been said before, streamlining is about efficiency, simplifying and getting rid of unnecessary things. Are there too many different weights? Is it possible to streamline this aspect of the portfolio? This paragraph will analyze the strong and weak points of the portfolio in regard to the different weights per consumer unit. Also, opportunities and threats will be dealt with. The New Instant products are sold in 41 one different sizes. In figure 6, these different weights are illustrated. Important information like the total spend in Euro’s, volume in kilograms, number of products and average price per kilogram is shown as well. Weight per cu (kg) Spend (Euro) AOP (kg) 0,0028 131.710 29.174 0,0031 1.101.210 305.368 0,0094 0 0 0,0138 474.622 61.478 0,0165 179.131 42.810 0,0171 215.316 39.608 0,0176 52.779 8.365 0,0198 191.046 29.248 0,0209 334.876 40.331 0,0243 877.604 191.684 0,0254 6.753 928 0,0312 3.080.020 1.149.432 0,0353 55.947 12.250 0,0390 62.549 10.747 0,1093 90.124 22.529 0,1102 316.078 53.323 0,1250 210.909 61.915 0,1323 99.025 0 0,1378 296.633 153.230 0,1543 92.097 20.382 0,1764 2.854 630 0,1874 16.920 5.569 0,2205 8.875.170 2.199.160 0,2425 2.004.963 544.964 0,2502 835.979 164.385 0,2756 588.535 156.466 0,3748 4.140.016 2.107.277 0,4062 39.350 12.701 0,4375 442.187 227.772 0,5000 13.250.308 4.980.483 0,5511 581.548 147.000 0,6000 1.673.613 1.120.192 0,7500 458.545 264.445 0,8267 17.293 7.634 1,0000 152.315.676 81.595.600 1,1023 2.281.374 814.959 1,5000 343.577 141.294 1,6534 3.622.572 1.311.254 8,9999 815 369 12,5000 122.583 72.751 24,9996 349.084 121.013 Figure 6: Sorted in order of Weight per consumer unit.

Figure 7 – Chapter 5 (see attachment)

Strong Points Looking at the table, one can see a lot of different weights per consumer unit. This indicates that Sara Lee/DE takes her clients seriously and wants to satisfy all customers with a unique weight per consumer unit. This sort of differentiation is a strong point of the product portfolio.

Weak Points A weakness of the portfolio seems to be in the weights with low volumes (figure 8). It has to be said that the reason for these low volumes is not clear, therefore it is hard to judge. It is however a fact that 15 of the different weights have a volume below 30.000 kg, 11 below 20.000 kg and even 8 different weights have a volume which is less than 10.000kg. The question is: is it justified to put effort in a unique weight, if not many people are interested? There are however a few strong weights; 12 of all 41 different weights have got a volume of 200.000 kilogram or more.

Opportunities There are several opportunities for Sara Lee/DE to streamline the product portfolio with regard to the different weights. The first one is about the weights per consumer unit with a low volume. If volumes are low, it might not be profitable, to hold on to a unique weight. Within the streamlining operations, these weights could be marked as unnecessary. One could remove these weights out of the product portfolio, or the products could join other weights. Having less different weights, would streamline the business (see figure 8, where different weights are in order of volume). Another opportunity can be found in the same weights per consumer unit, but different packaging type. Looking to figure 7 one can see the different weights combined with the packaging types. For example, looking to cappuccino one can see that all the weights which are packed in a cardboard box can also be found in the packaging category “pouch”. Because of the commonality of the packaging types, the amount of packaging types could be reduced. Looking to figure 7 one can see that the bottle appears in very low volumes and jars have the same weight. If this could be combined, there would be one packaging type less. The same applies for cardboard boxes. Pouches show the same weights, so it should be considered to get rid of the cardboard boxes. (There is one weight which can’t be found in other packaging types, but this is a very low volume). Different printing, different recipe, but the same weight and packaging type. The same applies for more weight-packaging combinations. This research does not contain enough information to make a judgement. Teams including different stakeholders, should look per case what the possibilities are. It is the objective of this research to trigger this way of thinking. A third opportunity can be found in different weights which are about the same. Both figures 6 & 7 illustrate that there are several weights per consumer unit which don’t differ that much. Especially the smaller sizes are sometimes very close to each other. It could be an opportunity to define an amount of standard weights. This would reduce the number of different weights, which would benefit the streamlining process. For example combine 16,5 grams and 17,1 grams (envelopes chocolate, see figure 7). When packaging types would be changed, there are even more possibilities. One could for example combine 16,5 grams, 17,1 grams and 17,6 grams. This could result in a packaging weight of 17 grams per consumer unit (see figure 6, 5th, 6th & 7th line). This will reduce complexity and would benefit the streamlining process.

Threats However, there are also threats. When Sara Lee/DE decides to reduce the number of weights in her product portfolio, this might have a bigger effect than expected. Customers might stop buying other SL/DE products as well, because they can not buy their favorite products in the favorite weight anymore. Another threat is that when Sara Lee/DE starts reducing the weight options, that she loses her uniqueness, or maybe worse, becomes unique. When products have standard sizes in the business and SL/DE is the only product

with a different size, this could stop the consumer from buying SL/DE products. The question is if consumers would notice tiny differences.

Weight per cu (kg) Spend (Euro) AOP (kg) 1,0000 152.315.676 81.595.600 0,5000 13.250.308 4.980.483 0,2205 8.875.170 2.199.160 0,3748 4.140.016 2.107.277 1,6534 3.622.572 1.311.254 0,0312 3.080.020 1.149.432 0,6000 1.673.613 1.120.192 1,1023 2.281.374 814.959 0,2425 2.004.963 544.964 0,0031 1.101.210 305.368 0,7500 458.545 264.445 0,4375 442.187 227.772 0,0243 877.604 191.684 0,2502 835.979 164.385 0,2756 588.535 156.466 0,1378 296.633 153.230 0,5511 581.548 147.000 1,5000 343.577 141.294 24,9996 349.084 121.013 12,5000 122.583 72.751 0,1250 210.909 61.915 0,0138 474.622 61.478 0,1102 316.078 53.323 0,0165 179.131 42.810 0,0209 334.876 40.331 0,0171 215.316 39.608 0,0198 191.046 29.248 0,0028 131.710 29.174 0,1093 90.124 22.529 0,1543 92.097 20.382 0,4062 39.350 12.701 0,0353 55.947 12.250 0,0390 62.549 10.747 0,0176 52.779 8.365 0,8267 17.293 7.634 0,1874 16.920 5.569 0,0254 6.753 928 0,1764 2.854 630 8,9999 815 369 0,0094 0 0 0,1323 99.025 0 Figure 8: Sorted in order of volume

5,7 Packaging type This paragraph will describe the different types of packaging which are used for the different products. Which packaging types are used more frequently and which types are hardly used? Could it be wise to reduce the amount of packaging types? This question is relevant, because the commonality of the packaging types is high. In general, all of the packaging types are suitable for the different instant products. The different packaging types are shown

in figure 9. Per product category one can see the different volumes in kilograms and the spend in Euros. (See appendix for a description of most packaging types).

Cappuccino Chocolate Milk Others Spend Volume Spend Volume Spend Volume Spend Volume (kg) (kg) (kg) (kg) Bag block 5.156.114 1.434.990 2.640.141 989.443 1.013.534 412.085 0 0 bottom Can 12.316.965 4.548.397 0 0 0 0 0 0 Cannister 1.019.278 363.596 89.858 20.927 3.618.483 1.948.519 367.703 201.600 Cardboard 922.040 372.685 645.910 267.034 247.887 56.000 0 0 Box Enveloppe 525.922 69.579 3.470.311 1.229.966 792.056 231.162 90.124 22.529 Jar 405.420 253.750 0 0 208.278 69.172 282.790 33.686 Pouch 129.540.359 65.623.570 19.797.354 14.065.942 2.463.996 1.571.878 4.419.562 2.176.025 Sachet 4.905.733 1.160.999 1.281.553 346.180 82.680 35.000 11.410 2.730 Stick 1.015.880 72.709 986.330 212.299 226.516 51.924 15.964 2.625 Tin 986.691 204.400 0 0 0 0 0 0 Back in Box 0 0 0 0 122.583 72.751 0 0 Cup 0 0 0 0 309.154 74.206 0 0 Bottle 0 0 232.828 32.760 0 0 0 0 Other 0 0 474 110 0 0 0 0 Figure 9: Different packaging types: volume and spend per product category

Cappuccino Looking at figure 9 it is Cappuccino Packaging (without pouch) clear that the pouch is the most frequently used packaging type. However, 5.000.000 because of the enormous 4.500.000 volume, it does not 4.000.000 become clear which other 3.500.000 packaging types are used 3.000.000 frequently. This is shown in the next figure (10). This 2.500.000 figure features the 2.000.000 volumes per packaging (kg) Volume 1.500.000 type, but excludes the 1.000.000 pouch. It shows that three 500.000 different types top the 0 volume of 1.000.000 kilogram; bag block ter up tle s ppe Jar het tick Tin t ttom Can Box S Box C o bottom, can and the o d ac in B b elo S sachet. Fairly big volumes k anni nv C E ack B can be seen in the bloc ardboar ag C canisters and the B cardboard boxes. The Type of Packaging Figure: 10 other packaging types come in (relatively) very low yearly volumes. It should be reconsidered if these different packaging types are really important and if they are worth all the efforts.

Chocolate

The same story applies to the chocolate products. The Chocolate Packaging (without pouch) pouch is by far the most used (fig 9). However, 1.400.000 looking at fig 11, one can see that apart from the 1.200.000 pouch, another 5 packaging 1.000.000 types cross the line of 800.000 200.000 kilograms, however only two of them go over 600.000

400.000 kilogram; the bag (kg) Volume 400.000 block bottom and the envelope. Again it’s the 200.000 question if packaging types 0

with a yearly volume below r x m an in ox up C ste Jar tick T C ottle 200.000 kilograms, or even ni achet S B S an nveloppe below 400.000 are worth C board BoE ack in B d B the extra costs for an extra ar ag block botto C packaging type. B Figure: 11 Type of Packaging Milk/creamer At this product category, with a relatively low turn over, it can be said that again the pouch is most popular, but also the cannister. Best of the rest is the bag-block bottom which is just below 375.000 kilograms. The other packaging types have to be reconsidered, because of their low volumes.(figure 12)

Milk/Creamer Packaging Other than Cappuccino, Chocolate or Milk

2.500.000 2.500.000

2.000.000 2.000.000

1.500.000 1.500.000

1.000.000 1.000.000 Volume (kg) Volume Volume (kg) 500.000 500.000

0 0 Tin Jar Tin Jar Can Cup Can Cup Stick Stick Bottle Other Bottle Other Pouch Pouch Sachet Sachet Cannister Cannister Enveloppe Enveloppe Back in Box Back in Box in Back Cardboard Box Cardboard Box Bag block bottom Bag Bag block bottom Type of packaging Figure 12 Type of packaging Figure 13

Other A few products did not fit in the definition of the different product categories. Looking to packaging type, there are no big surprises. Again the pouch is very well represented (figure 13).

5.8 Packaging material At the beginning of the research it was thought that this was an important issue. The reason for this thought: During the streamlining operation material types used in packaging could be

reduced and this would generate opportunities to exploit scale advantages. For example, Pouches; are different pouches made of different materials? This form of rationalization has not been performed. Besides the fact that the response at this subject was very little, it became clear that packaging types are mostly made with the same materials; the type of packaging is mostly decisive for the choice of material. For example, Pouches are made of foil. This is the reason that this subject is less important in this research and the choice of material will depend on the choices made for packaging types. Scale advantages on material will be made if packaging types could be streamlined. Less packaging types will influence the number of different materials which have to be used. This will lower the cost price of the packaging types.

5.9 Conclusion Looking back, a few things can be concluded. At first, theory shows that most of the cost savings can be made during the specification process. Streamlining focuses on a higher efficiency, simplifying and getting rid of unnecessary things. Secondly, there are several SKU’s with a very low turn-over. These items cause extra work and because of the limited turn-over, very high costs. Also there is a chance that there are different SKU-names for products which are almost identical. However, this has not been included in this research and should be found out in future research. It needs to be reconsidered if these product are different enough to ‘deserve’ different SKU-names. A bit of the same story for the weight and the packaging (type and material). Quite a lot of little differences, of which it is not clear if they are really necessary differences and if they are worth the extra costs (considering the low turn-over of several weights and packaging types). It is a fact that this causes extra operations, which causes extra costs. By pooling requirements, the number of SKU’s can be reduced. Also, the variety of packaging types and weights could be reduced by pooling requirements. This streamlining operation could result in scale advantages, which could reduce cost. On the other side, it could heave effects on the selling side. How will customers react on changes? This is why every case should be looked upon individually by a multifunctional team. This chapter has given a general view of the potential areas of streamlining the productportfolio and the potential cost savings.

Chapter 6: Analysis – Make or buy?

6.1 Introduction This chapter will deal with the current make-or-buy policies of Sara Lee/DE. The objective of this chapter is to show Sara Lee/DE the importance of make-or-buy issues. Very frequently, Sara Lee/DE uses coffee which is sourced external. Rare occasions show that Sara Lee/DE’s own coffee is used in the New Instant products. Is this the right situation for a company which is specialized in making coffee? This chapter will give background on make- or-buy issues and will apply these backgrounds on Sara Lee/DE. Although not all information was available, this chapter will emphasize the importance of further research on this issue. In the first paragraph the importance of decisions in this matter will be outlined. This will be done with the help of the current situation. Secondly, the question ‘when to buy or to make’ will be outlined. After this, the chapter will deal with factors in making a decision in these situations. The final paragraph will give a summary with (dis)advantages of outsourcing or not. This chapter will answer the question: “What are important factors in the make-or-buy issues at Sara Lee/DE, regarding the New Instant situation?”

6.2 Triggers of make-or-buy questions In recent years, many companies, which have had a high degree of vertical integration, have pursued a policy of vertical disintegration. A number of reasons for this trend are: - Recognition that past decisions are wrong - Pressure from financial markets to restructure - Changes in world markets have reduced the risk and cost of buying - Acceptance of the difficulty in maintaining excellence in all areas.

There is however, a danger that decisions have been taken without thinking carefully about the long term strategic implications of the erosion of internal capabilities. The failure to identify developments of distinctive competences necessary to secure the future survival of the firm may contribute to the build-up of threats in the future which may be difficult to counter. “Hollowing out” of the firm may be fashionable and may produce short term benefits, but it may create positions in the future which cannot be defended against competitors. (Saunders, 1997:158)

Source coffee Spend € (x1000) External 171.670 Joure CT&S 10.921 Unknown 727

Source Coffee in Cappuccino Products

Unknown Joure CT&S External Joure CT&S Unknown

External

Figure 1: This figure shows the source of coffee used in cappuccino products.

Looking to Sara Lee/DE’s situation for the New Instants (fig 1), one can say that it is particularly strange that a company which is excellent in making coffee buys instant coffee products externally. Research has proven that most of the coffee used in the products has an external source. Only 6% of the coffee used in the products finds her origin within Sara Lee/DE (location Joure, the Netherlands). 94% is sourced externally (0,5% is unknown).

6.3 To make or not to make? That’s the question According to Chadwick and Rajagopal (1995) all organizations need to consider very carefully what their chosen role really is. Where are their areas of specific expertise? What is it that differentiates them from the rest? What are the core activities that management resources should be dedicated to, to preserve that leading edge? What are the non-core activities that might be better done by a supplier who leads and concentrates in that particular field? The simple make-or-buy decision is in fact an extremely complex one involving the need to maintain or improve cohesion in the organization in the eyes of customers, employees and shareholders, as well as the vital requirement of identifying and concentrating on core activities. A core activity of SL/DE is making coffee, according to Chadwick and Rajagopal this means that SL/DE should concentrate on making this herself. Making Milk products and Chocolate products are not core competences of SL/DE. Also, activities like packaging are not core competences. These activities should be outsourced. In addition to this, Saunders (1997) states that a firm will normally have a wide range of make-or-buy questions and it’s sensible, therefore, to consider drawing up of guidelines for managing them. Saunders makes a distinction between short- or long-term situations, and strategic or non-strategic situations. Initially there is a need to differentiate between short- term, operational and long-term situations. The first is concerned with maintaining a high usage of current capacity and with varying the levels of outsourcing to adjust to changes in levels of demand. Long-term perspectives are concerned with more permanent employment and development of internal resources, as opposed to using the resources of the suppliers. Comparisons between in-house supply and outsourcing in the long term case are less concerned with specific products, more with design and manufacturing capabilities and their potential for future supplies. Some activities involve a significant level of resources from the overall business point of view and decisions in this strategic category may have a profound effect on the boundaries of the company. Design and process skills, as well as investment in specialized assets may be the basis for establishing distinctive capabilities. Non-strategic activities may be regarded as less significant from the point of view of customers requirements and are not seen as a basis for establishing a competitive advantage. External supplier are likely to be able to provide better deal.

Saunders proposes the following actions for the different situations: Short term: Comparison of proposals with regard to internal and external supply possibilities will tend to be based on relevant technical and commercial assessment of current capabilities Long-term – strategic: As regards the long-term sourcing of strategic items. It may be necessary to make a distinction between the design skills and the process capabilities, when comparing internal and external candidates. The two might be considered as a combination for either subsystems or components, but there is the chance of retaining much of the design capability and only subcontracting the ‘make’ portion of the work. Indeed, as in the case of ‘own brand’ products bought by some retailers, there is a scope for subcontracting the manufacture of the complete product, but retaining technical knowledge and design skills. In the situation of SL/DE it is possible to keep the design part of the product or other subsystems. It could be possible to make the own coffee and let an external company be the coordinator and be responsible for mixing all ingredients and packaging. Long-term – non-strategic: There are no strong reasons for continuing to make commodity items, for which the firm has no particular advantage. Also in Saunders’ opinion, Chocolate and Milk products at Sara Lee/DE should be outsourced.

If an organization chooses to buy, the new partner should be able to provide: - An established quality system with regular internal audits, and management review, backed by approval status in the BS 5750 or ISO 900o series. - Access to a wide range of up-to-date, well maintained, and calibrated machinery, process plant, and test equipment - The full range of specialist manufacturing skills with ongoing skill development programmes. - A sophisticated communication system with comprehensive progress reporting. - An integrated materials management system. - The flexibility to absorb increases and decreases in demand levels as requirements change. - Quick reaction to new demands to get your products to market without having to wait for investment decisions and extended lead-times for the purchase of new plant and equipment. - Advice and guidance on new developments in subcontract manufacturing. (Chadwick and Rajagopal, 1995: 85)

As stated in an earlier chapter, good requirements are very important. Especially external suppliers will be much more demanding of a full specification of all aspects of the work carried out. The result can be a fresh examination of service requirements and a significant transformation in performance levels. This might be seen as a useful by-product of a make- or-buy strategy.

6.4 Factors in decision-making There are several important factors in decision making. Saunders states that in the first place, there is the nature of the good or service. Is it fundamental to the basic function or essence of the business or is it merely a support item? (Saunders, 1997) Steele and Court (1996:134) state that make-or-buy decisions are based on a number of perspectives. The most important are: • Cost analysis • Power/dependence • Strategic resource

Cost analysis perspective In the cost analysis perspective, the make or buy decision is related to the economic base. Here the organization tries to quantify the financial implications of outsourcing or not. The alternative that affords the lowest costs route is chosen if one looks at cost considerations only. The only real issue here is ensuring that the comparative costs are equal footing. There is of course plenty of scope to distort the figures to meet the hidden objectives of the proponents. Chadwick and Rajapogal (1998) add to this that the problem of this approach lies in that of inactivated capacity. From this sort of analysis angle there may actually be savings to be made from bringing inside more of the work which is currently going out to external suppliers. This would work on the basis that because the internal facility is loaded below capacity the proportionate spread of overhead costs is reduced by being spread over a larger number of jobs. Fixed overhead costs have to be met whether or not the facility is up to capacity. Cost comparison alone should not be the final deciding factor.

Power/dependence perspective It is not possible to restrict the basis for make-or-buy decisions solely to economic or cost parameters even if they can be accurately and fairly assessed. Such an analysis takes no account of the possible future behaviour of the parties to the arrangement, or how the buying organization sees its role in the market place. A major consideration is whether the buying company can allow itself to become too dependent on any one supplier, either from a

commercial or security standpoint. Buying-organizations must therefore weigh up whether a decision to outsource rather than to perform in-house will be in the long term as well as the short-term interest of the organization. Such organizations will have to assess the likely future behaviour of the supplier which may depend on management attitude and the possibility of introducing competition in the future.

Strategic resource perspective This is in some ways similar to the power/dependence perspective. It emanates from a division of the company’s resources into those unique to the company (and therefore are kept and developed within the company) and those that are less central (and therefore be externalized). Thus, even though the assessment may be that the risk of exploitation by suppliers will not be significant even in the long-term, nevertheless it is felt that the activity is so key to the future of the company that it can never be allowed to pass into the hands and control of others. On the other hand an economic assessment may indicate that the organization should start or continue to provide capability in-house whereas the management may not wish to get involved in the organization of activities which at best are peripheral to the main objective. For example, the management might accept additional costs in order to streamline and simplify the business, while at the same time allowing greater focus on core tasks. All of these factors must be taken into account in arriving at the make-or-buy decision.

The scheme used by Saunders (1997:157) is almost identical:

Operational cost-based approach Cost savings and operational benefits, in adjusting, for example, to existing capacity shortage or surpluses are examined, but with no concern for overall strategy.

Business approach A more proactive approach is demonstrated, with a system of continuing evaluation of parts of the business in relation to possible suppliers. Multifunctional teams might be used and a longer time horizon and a wider range of criteria might be taken into account.

Policy approach Assessment is based on views of the strategic direction and technological capabilities of the business, but there may be problems of gaining full functional integration.

Which approach suits SL/DE Especially in the case of Sara Lee/DE it will not be wise to choose for the first approach only. Evaluating the costprice of external parties with internal suppliers will not be fair, because at the moment there is a spare capacity (according to the Supply Chain manager). Because it is really hard to predict the overcapacity available in the future and the limited time of this research, it is not clear how big and structural this is. However, there is space available to produce the coffee, needed in cappuccino products internal. From this sort of analysis angle there may actually be savings to be made from bringing inside more of the work which is currently going out to external suppliers. This would work on the basis that because the internal facility is loaded below capacity the proportionate spread of overhead costs is reduced by being spread over a larger number of jobs. Fixed overhead costs have to be met whether or not the facility is up to capacity. Cost comparison alone should not be the final deciding factor. There is also the fact that top-management can’t understand why external coffee is used. They would like to be given good reason for not using Sara Lee/DE coffee in the products. This point of view fits in the strategic resource perspective. Regarding the situation from this perspective it is not uncommon that non-core activities like packaging, making milk-products and chocolate-products is being outsourced, but it is strange that the cappuccino-products, which relatively contain a lot of coffee, are completely outsourced as well.

Hughes, Ralf and Michels(1998:42) mention several issues which need to occur when evaluating the make-or-buy dilemmas: - Recognize that coordination by the market rather than through internal hierarchy has potentially serious risks and disadvantages as well as benefits - Retain an unwavering in-house vertical integration policy over products, services and capabilities where you are confident that you possess and can sustain long-term proprietary advantage - If that cannot be attained, for financial or business expansion reasons, then ensure that very tight control is exercised with closely managed suppliers - Be exceptionally wary of the loss of control over critical strategic capabilities and be skeptical of the ability of contractual arrangements or intellectual property law to provide adequate safeguards - Outsourcing and the integration of third party suppliers always poses strategic, managerial and operational challenges – expect the worst, and plan for it - Avoid outsourcing becoming a means of dealing with troublesome peripherical activities – sort the function out before you subcontract it - Retain in-house expertise to manage the overall process

Vulnerability Assessment Insource vs. Outsource Skills development

Is there any sourced or No Buy off the shelf Needs Leverage tools business vulnerability Tactical negotiation with this product?

Is it containable Yes Lock in contractually Needs Market analysis through commercial Sourcing strategies controls?

Is it related to a crucial Yes Make it yourself Needs Investment appraisal strategic capability? Project management

Figure 2: Sourcing strategies and make-buy decisions should be based on a thorough assessment of potential future vulnerability (Hughes a.o., 1998: 39)

Figure 2 illustrated above is a tool, which should help making a decision to buy or make. When it is filled in for the situation of SL/DE it becomes very clear that the milk and chocolate products can be locked in contractually. However, this decision is harder to make for the cappuccino products. It is containable through commercial controls, so the model would advise to lock it in contractually. Also one of the ingredients of this product is related to crucial strategic capability, so the model suggest that this ingredient should be made by the company herself.

6.5 Implications for purchasing In the cases where the sourcing decision outcome is to use external suppliers, purchasing can be confronted with a variety of problem types depending on the extent of suppliers input that is required in relation to design and manufacturing services. These will have a varying impact on the nature of the arrangements and relationships that will have to be developed with suppliers in resolving the problems (Saunders, 1997:162):

Design and manufacturing services – design and make to order

The selected supplier is expected to design and develop products, so that design and manufacturing services are being purchased, the outcome of which will be products tailored to the needs of the purchaser. For this strategic approach to be successful, it will be necessary to form close working relationships on a multifunctional basis between supplier ad purchaser organizations.

Manufacturing services – make to order The purchaser firm may decide in some instances to keep the main design initiative inside the firm and the sourcing situation is one in which the supplier is expected to provide the manufacturing service to make to the purchaser’s specification. Therefore, liaison with suppliers will focus primarily on production issues.

Supplier’s proprietary products The supplier is responsible for design and manufacture, but in this case the supplier also sells these products to a more general market. The degree of involvement needed between buyer and supplier is less, and is likely to be concerned with purchasing, scheduling and logistic issues.

‘Commodity products’ What is being purchased is a standard item which many suppliers make and sell to a general market. A more distant and less intensive relationship may be sufficient and purchasing will be the main point of contact with the supplier

The current situation at Sara Lee/DE is a combination of manufacturing services and design & manufacturing services. In some situations, Sara Lee/DE is responsible for the design, however, in some situations the design is known by the supplier. Sometimes it is just not possible to choose to make, because Sara Lee/DE does not know the recipe. In other situations, where Sara Lee/DE is responsible for the design it could be dangerous to share this (strategic perspective), because of the fear for competition.

6.6 Summary advantages and disadvantages outsourcing Van Weele summarizes the advantages of disadvantages in the table below.

Advantage outsourcing Disadvantages outsourcing • Investment focus on core activities • Company will be more dependant on supplier • Optimal use of knowledge, equipment and • Continues governing of costs is needed experience of supplier • Possible communication and organization • Improvement of flexibility; easier to deal with problems changes in work-load • Possibility that confidential information leaks • Outsourcing will streamline the basic process out. • Independent vision of supplier will generate • Possible social and juridical problems at alternative views supplier while working on the project • Risks are shared with supplier Figure 3: (Dis-)advantages of outsourcing (Weele, 1999: 88)

6.7 Outsourcing: Partial or complete? According to Van Weele (1999), there are two different forms of outsourcing: partial and complete. Especially in this case, this is a very important difference. It is not only the question if Sara Lee/DE should make or buy the complete products, but there’s also a question of using own coffee in the product and outsource the other activities. Complete outsourcing brings the responsibility for the complete order at the supplier. The supplier is responsible for the right quality, so she should find the right suppliers to deliver the right ingredients. When an order is partially outsourced, the order will be divided in separate sub- orders. The demanding company will have an coordination role. Often this will result in savings and better quality. All advantages and disadvantages can be seen in figure 4.

Advantages Disadvantages Complete • Minimal interference of customer • Limited influence at costs of the outsourcing during project project for the customer • Customer doesn’t need any • Limited influence on ingredients and experience in similar projects quality • In general there are no problems experienced by customer during the project Partial • More influence and control at costs • The customer needs to have outsourcing for customer knowledge of the different sub- • More influence at used ingredients processes. and quality for customer • The customer needs to have • Specific advantages (like organizational skills to cope with the compensation-orders) can lead to a coordination and integration. reduction of price • Communication and coordination problems can lead to a delay Figure 4: (Dis-)advantages of partial and complete outsourcing (Weele, 1999: 54)

If Sara Lee/DE will choose to stay with their decision of outsourcing, also a choice will have to be made about complete or partial outsourcing. Having limited influence on ingredients is a major disadvantage when choosing complete outsourcing. On the other hand, Sara Lee/DE will not experience any problems during the project, because everything is arranged by the supplier. Partial outsourcing will have the advantage of high influence on the ingredients, but there will be more organization and the communication & coordination issues can lead to delay. A note has to be made regarding the coffee ingredient. According to a buyer, the taste of the product could change significantly by using the own coffee instead of external coffee. Flavour tests would have to prove this statement.

6.8 Conclusion Looking to the current situation it is strange that a coffee producer like Sara Lee/DE does not make her own cappuccino products. They don’t even supply the coffee for their products, because they choose for complete outsourcing, instead of partial outsourcing. The only value added by Sara Lee/DE is the brand and the design. It’s important to reconsider the make-or- buy dilemma. An organization needs to know her role. Where are their areas of specific expertise? What is it that differentiates them from the rest? There are a view perspectives which help to make a decision. When looking to the cost side, it becomes clear that the prices for coffee paid externally are less than the price which has to be paid internally. However, because of the overcapacity, the real price of the internal supply will lower a bit. When looking to the power/dependence side one could say that the core business of SL/DE is coffee and that they should not buy this externally. This is also the fact when looking from a strategic perspective, but at the other hand tells this perspective that management could choose to outsource, because this will simplify the process. Other important advantages are the factors ‘risk-sharing’, ‘higher flexibility’ and ‘an independent view of the supplier will generate alternatives’. But this does not mean that the organization will have to choose for complete outsourcing. Partial outsourcing will have the benefit that they could keep the core business (coffee) in house, and other things like packaging and mixing external. It will be necessary to get more insight in the current overcapacity, and also the future. When this is done, Sara Lee/DE will be able to get a better insight in the costs and investigate the possibilities of partial outsourcing.

“Each firm can perhaps develop its own unique approach, depending on the competitive advantages it is trying to establish and its profiles of competitive scope it decides to pursue. Different solutions can succeed at different times.” (Saunders, 1997:161)

Chapter 7 Analysis: Buyer-Supplier Relationship

7.1 Introduction This chapter will analyze the buyer-supplier relationship issues at Sara Lee/DE, especially the relationships with New Instant suppliers. At first, a market analysis will be made, in which the dependency situation will be outlined. Next, the buyer-supplier relationship will be analyzed in further detail. After this paragraph, the single-or-multiple sourcing problems will be dealt with. At last, the issues will be placed in a global perspective.

7.2 Market analysis It is important to be aware of the market situation of the New Instants.

Supply-side There are a lot of suppliers who can supply New Instants. Most of these companies buy their ingredients and the only things they do is mixing and packaging.

Demand-side Procter & Gamble, Kraft, Starbucks, Nestle and Sara Lee/DE are big players. Also, there are many private labels (e.g. Supermarkets).

Competitive Market With a reasonable amount of demand and a fairly big amount of supply, it can be concluded that the New Instant market is a competitive market.

Dependency Evaluation Steele and Court suggest that when the outcome of the market analysis is a competitive market, one should find out which of the two parties (buyer or supplier) has got an competitive advantage. The tool they suggest is the competitive advantage matrix (figure1). The matrix is filled out for the general situation of Sara Lee/DE with regard to the supply market. Of course there are individual cases, but it is not the objective of this research to deal with them. In the future, SL/DE could use this matrix to analyze her position with regard to individual suppliers. This paragraph will make clear which elements will have an influence on the competitive advantage of SL/DE.

The competitive advantage matrix filled out for SL/DE in general 1. There is an acceptable amount of acceptable suppliers (there are many suppliers, but not all of the potential suppliers are acceptable) 2. There is a lot of capacity currently available on the market (it’s a buyers market) 3. Existing share of shortlisted suppliers’ current capacity is high 4. The demand growth of required products is average 5. Because of the strict specifications there are not many substitution possibilities at the moment. 6. The knowledge of the costprice breakdown is average. (see appendix) 7. Knowledge of suppliers pricing policy is average 8. Supply logistics importance is average (good logistics is important for SL/DE, but the product does not need special logistics (like for example flowers) 9. SL/DE is very attractive to relevant suppliers (being the supplier of Sara Lee/DE will help suppliers to get new customers, it is a good reference. 10. Barriers hindering a change of supplier are significant. It is not the fact that other suppliers can’t make it, but the specifications are often very rigid and complex.

Competitive advantage matrix

Procurement Considerations Weight- Buyer Bal- Supplier

ing strong anced strong

1. Number of suppliers x acceptable High Low

2. Production or service x capacity currently available in the market from suitable suppliers High Low

x 3. Existing share of shortlisted suppliers’ current capacity High Low

4. Demand growth for x Low/ product or service required High none

5. Substitution possibilities Exist x None

6. Knowledge of product cost Exten- x breakdown sive Poor

7. Knowledge of supplier’s x pricing policy Yes No

8. Supply logistics (e.g. x geographical or Disad- transportation Advant- vanta- considerations) ageous geous

9. Attractiveness to relevant x suppliers Strong Weak

10. Barriers hindering a change x of suppliers (e.g. cost of change; rigid user Insigni- Signi- requirements) ficant ficant

Advantageous

Balanced

Disadvantageous s The buyer may consider weighting the importance of the ten considerations if deemed appropriate (e.g. if one is seen to be twice as important as other issues, it would receive two ‘ticks’ in the appropriate column). However, the buyer must not be drawn into mechanistic use of the matrix and an unquestioning acceptance of the conclusion. Figure 1: Assessing competitive advantage (Steele, 1996:150)

According to this schedule, there is a balanced relationship at the moment. (However, it should be noted that this schedule has been filled out based on a limited amount of interviews and therefore it is not meant to give a precise view of the situation. The purpose of this matrix is to give a general view of the situation. Also, it shows that when one or more of

the 10 elements of the matrix are manipulated, the competitive advantage of Sara Lee/DE with regard to her suppliers can be increased) There is enough capacity available and suppliers find SL/DE a very attractive partner, this gives SL/DE a strong position. However, because of the current lack of challenging the specifications, there are little substitutes and because of the complicated specifications there are significant barriers to change suppliers. This makes the buyer weak. In summary, a balanced situation, with the potential to become advantageous.

On individual basis, there are not many differences. Important differences are, for example that for the bigger suppliers, which are responsible for a bigger share of the business, there is more information about costprice breakdown. Also there are more barriers hindering a change when the volumes per supplier are higher. This will be for both the supplier and SL/DE. As stated earlier, it is important, that it becomes clear that elements of the matrix can be manipulated to increase the competitive advantage with regard to the supply market. Examples are: lowering the requirements will have the effect that more suppliers will be marked as being ‘acceptable’. This will result in a better position for the buyer. Also, when requirements will be set in more general terms it will be easier to switch suppliers. Again, this will make the buyer stronger. It has to be noted, that these changes will also have effects on the other side of SL/DE, the demand side. When SL/DE will require less of her suppliers, this can result in a lower demand for her products. When changing these elements, one has to look closely to the consequences of the change.

Other ways of assessing the dependency There are however other ways of assessing the dependency on one another. Competitive advantage can also be secured through access to and joint control of technological capabilities with suppliers. (figure 2)(Hughes,1998:53)

When looking at the situation of Sara Lee/DE, one can say that there are many competitors. However, they all have slight differences in their products. Different taste, different packaging, etc. There is more than one supplier who can supply the technology asked by the customers. This brings Sara Lee/DE in the Quadrant labeled as Tailored. This is correct, standard products are tailorized by using SL/DE recipes and standards. However, in the current situation, a lot of New Instants are moving towards the quadrant in the right top corner: custom designed. By moving towards this quadrant, SL/DE will become more dependant on one supplier.

Single supplier Proprietary Custom of the Designed technology

market Multi suppliers Generic Tailored of the technology Structure of the supply

Many Single customer customers for for the the technology technology

Suppliers marketing strategy Figure 2: Competitive advantage can be secured through access to and joint control of technological capabilities with suppliers (Hughes,1998:53)

7.3 Relationship According to Gelderman (2000), not all products and not all buyer-supplier relationships are to be managed in the same way. In general, purchasing portfolio models aim at developing differentiated purchasing and supplier strategies. Kraljic (1983) introduced the first comprehensive portfolio approach for purchasing and supply management. Kraljic’s approach includes the construction of a portfolio matrix that classifies products on the basis of two dimensions: profit impact and supply risk (‘low’ and ‘high’). The result is a 2x2 matrix and a classification in four categories: bottleneck, non-critical, leverage and strategic items, see figure 3. Each of the four categories requires a distinctive approach towards suppliers. Non-critical items require efficient processing, product standardization, order volume and inventory optimalization. Leverage items allow the buying company to exploit its full purchasing power, for instance through tendering, target pricing and product substitution. Bottleneck items cause significant problems and risks which should be handled by volume insurance, vendor control, security of inventories and backup plans. A further analysis of the strategic items is

Leverage Strategic Figure 3: Dimensions and categories in the Kraljic Profit Matrix (Gelderman, 2003:2) impact Non-critical Bottleneck

Supply-risk recommended. By plotting the buying strengths against the strengths of the supply market, three basic power positions are identified and associated with three different supplier strategies: balance, exploit, and diversify. The general idea of Kraljic's model is to minimise supply risk and make the most of buying power (Kraljic, 1983, 112).

To take a look at the current situation for Sara Lee/DE instants, first the dimensions have to be set. There are no clear rules to decide whether the spend in any situation has a high or a low profit impact. The line between high impact and low impact in this situation has been set at 450.000 Euro. This is based on the Pareto principle (Hughes: 1998). This theory states that in many organizations 80% of purchase categories and suppliers represent less than 20% of the total expenditure. In this situation 19% (67) of all products are above the horizontal line and 81% is under the line. 19% of the products are responsible for 86% of the total spend value.

Leverage Strategic Figure 4: The Kraljic filled out for all New Instants

Non-critical Bottleneck

The first figure (figure 4) shows that when looking at product-level, a lot of the products are under the 450.000 Euro line. There’s not a high impact on the profit. Most of these products are non critical, because of the amount of possible suppliers. However, there are also a few bottleneck products, which have a high supply risk. The reason is according to buyers the complicated set of requirements. Because of the uniqueness of the products there are not many suppliers who can supply these products. Above the line, there are leverage products and some are just strategic. There are enough suppliers, but in practice it is very hard to change to another supplier.

Leverage Strategic Figure 5: The Kraljic filled out for the three product categories Non-critical Bottleneck

The second figure (figure 5) shows the three product categories. All of the three categories are in the right half corner. Because of the huge amount of variances in the productportfolio’s of the categories, it is really hard to find a supplier who will be able to supply all products in all different weights and packaging. The total amount of each category easily crosses the line of 450.000 Euro, which would make the categories strategic. But because of the relative character of the Kraljic model, the dimensions have been changed. With a spend of nearly 157 million Euro (80% of the total spend), Cappuccino product category is a strategic category. The spend of milk products just tops the 9 million Euro (5%) and is a bottleneck product category. The chocolate category has got a spend just below 29 million Euro (15%). This category will be around the line between bottleneck and strategic. (note: It is realized that the values of the dimensions are subjective, but the objective is to give a view of the differences between the categories and therefore need different approaches)

According to Gelderman en Van Weele (Gelderman: 2003) 2 types of strategies can be derived from the Kraljic approach: 1. actions to hold the same positions in the matrix, and 2. actions to pursue other positions in the matrix. Holding on to a position implicitly means that current circumstances are taken for granted. It has been observed that a position in the matrix can be accepted for different reasons, sometimes positive, sometimes referring to a negative choice. A position might be preferred because a firm is convinced that it is the best position for a certain item. In other cases a position might be accepted, because there are no realistic possibilities for change. The first type of strategies are of a more active, radical nature. When possible and desirable, other positions in the matrix are identified and pursued. This dichotomy between 'holding position' and 'moving to another position' has laid the foundation of the conceptual model of strategic directions in the Kraljic- matrix, as is visualised in figure 6.

Exploit buying power Terminate partnership, find new supplier (‘partner of convenience’) Accept the locked-in ‘partnership’ Develop a strategic partnership Maintain strategic partnership high leverage strategic 7 6 8 9 5 Profit impact 2 3 1 4 low non-critical bottleneck low high Supply risk

Individual ordering, pursue Reduce dependence and risk, efficient processing find other solutions Pooling of requirements Accept the dependence, reduce- the negative consequences Figure 6: Overview of strategic directions for all categories (Gelderman, 2003:7)

If one takes a look at the bottleneck and the strategic quadrant at the right side of the matrix, those movements are pursued that reduce the supply risk. In terms of the matrix, this means moving to the left. Non-critical items are moved upwards, leverage positions could be exchanged for strategic positions. The strategic directions that can be identified in the conceptual model will be elaborated.

Bottleneck items (1) moving to another position: “decomplex the product, find a new supplier” Bottleneck items are by definition of low value and of high risk. It should be interesting enough, especially from an economic point of view, to search for other solutions. The most common alternatives refer to the product (broadening specifications/decomplex) or to the supplier (searching, managing and developing suppliers, or cross sourcing). These measures must lead to a lower level of supply risk and a lower level of the dependence on a supplier. This means a shift towards the non-critical quadrant. (2) holding the position: “accept the dependence on a supplier, assurance of supply” If no other options are feasible, then the category remains the same. Common responses to unfavourable bottleneck-positions are contingency planning in combination with risk analysis, consignment systems, long term contracting with an emphasis on quality and assurance of supply, and ultimately keeping (extra) stocks.

Non-critical items (3) moving to another position: “pooling of requirements” Preferably, non-critical items are put together in large quantities, increasing the buying power of the firm. If necessary, a process of standardisation is pursued. The pooling- strategy is executed by a framework agreement with a preferred supplier, systems contracting, a Vendor Managed Inventory system, or an e-procurement solution. The strategic direction is in all cases toward the leverage quadrant, resulting in lower direct and indirect purchasing costs. (4) holding the position: “individual ordering, efficient processing” Whenever it is not possible to pool the purchasing requirements, the only remaining option is some type of individual ordering, for instance by means of a purchase card.

The purchasing strategy is aimed at reducing the indirect purchasing costs which are connected with administrative activities (ordering, invoicing and buying processes).

Leverage items (5) holding the position: “exploit buying power, maintain a partnership of convenience” The generally preferred leverage position can be used for a rather aggressive supplier management. Competitive bidding and short-term contracts are feasible options to exploit the leverage position. The dominant power position allows for a command strategy. In one of the investigated cases leverage suppliers are aptly referred to as 'partners of convenience'. (6) moving to another position: “develop a strategic partnership” Exceptionally, the leverage position is abandoned in search for a more strategic partnership with a supplier. A co-operative strategy is only pursued, if the supplier involved is willing and capable of contributing to the competitive advantage of the firm. Such a new role is only feasible for technologically advanced suppliers. The case studies revealed that the move from 'leverage' to 'strategic' should be considered as an exception to the rule.

Strategic items (7a) holding the position: “maintain a strategic partnership” Long-term relationships with key suppliers should always contribute to the competitive advantage of the firm, as we have underlined. Such relationships include mutual trust, mutual commitment, and an open exchange of information. These relationships were found to be rare in the case studies. A successful partnership can be very valuable for both parties. (7b) holding the position: “accept a locked-in partnership” On the other hand, a position in the strategic quadrant may be due to unchosen, unfavourable conditions. The resulting 'locked-in' situation is commonly caused by a patent position, a monopoly position, high switching costs (asset specificity) or by the directions of a major customer. These circumstances produce an involuntary stay at the strategic quadrant. (8) moving to another position: “terminate a partnership, find a new supplier” A partnership may develop in an undesirable way. A supplier’s performance may become unacceptable and incorrigible. This may start a painful process of reducing the dependence on the supplier involved. The firm will have to search, develop and contract another supplier, while bringing the relationship with the non-performing supplier to an end. (Gelderman: 2003)

Evaluating this, it is clear that usually the best place to be in is the leverage quadrant. This will give the company more buying power, because off the low supply risk, and will have a big effect on the profit. The current strategies of Sara Lee/DE are very static. They accept the locked in partnerships and accept the dependencies in the bottleneck quadrant. There are also products in the leverage quadrant, which is good.

The following figures (7 & 8) will give better options for the situation of Sara Lee/DE. When looking to the situation at product-level (figure 7), there are two ‘moving’ strategies necessary. First, reducing dependence and risk for the bottleneck items. This can be done by broadening or decomplex the specifications. Secondly, by pooling of requirements, non- critical items can be transferred to the leverage quadrant. Combining similar products to one product, or buying more products of one supplier. Reconsidering the specifications of similar products will lose low volume products and will result in one strong product. At category level (figure 8), it could be wise to think about a move towards the left quadrant. By streamlining the product portfolio’s and reducing the amount of variances, the supply risk will be reduced, which will increase the buying power. For the milk category, the products could be made less

complex, but if for example marketing shows that this will have negative effects on the whole of Sara Lee/DE, the position should be accepted.

Leverage Strategic Figure 7: The Kraljic filled out for all New Instants with arrows standing for movement withinin the matrix Non-critical Bottleneck

Leverage Strategic Figure 8: The Kraljic filled out for the three product categories with arrow standing for movement within the Non-critical Bottleneck matrix

In addition to Kraljic’ approach, figure9 gives practical tips for the three types of dependency. Sara Lee/DE’s situation is balanced, maybe slightly advantageous. According to the theory, they could do with less suppliers. This is because the volume is so fragmented in the current situations that scale advantages can not be made. When the situation would have been advantageous, they could have driven a sharp bargain, by using the competition between suppliers.

High Buyer’s strength relative to market Low

Element Strength Weakness of plan Advantageous Balance Disadvantageous

Price Drive a sharp bargain Drive reductions by Do not emphasize price, optimizing the timing of concentrate on other order placement aspects of the deal

Contract Spot/short term; maybe Combination of spot and Long term in combination medium term

Volume Split between suppliers Induce supplier’s Centralize interest (e.g. keep Combine volumes supplier unclear about total demand; hide volumes)

Sourcing Possibly multiple Consider dual Search for/ develop of new supply sources

Inventory Supplier stock Consignment stock Buyer stock

Figure 9: Actions arising from competitive advantage analysis (Steele, 1996:151)

7.4 Single or Multi Source This paragraph will describe the current situation regarding the number of sources. Is the current situation satisfying or are there better options which would suit the situation?

Single sourcing In this situation the buyer chooses to buy just from one supplier. This type of sourcing should be distinguished from sole sourcing where, because of monopoly conditions, it is only possible to order from one supplier (Lysons, 1996:248)

Multiple sourcing The conventional purchasing wisdom is that multiple sourcing provides (Lysons, 1996:249): - an insurance against a breakdown in supplier - an incentive to suppliers to maintain a high level of performance Multiple sourcing may be undertaken provided the business placed with each vendor is large enough to be attractive. One approach is according to Lysons a 60/40 percentage allocation on the grounds that the smaller supplier has an incentive to increase market share, while the larger vendor is aware of the threat posed by the competitor.

Single sourcing Multiple Sourcing Short-term • Future uncertain • Future uncertain contracting • Need staffing flexibility • Volume uncertain (0 to 1 years) • Minimal investment • Need staffing flexibility • Deteriorated learning • Will have peaks and through • High selling costs • Minimal investment • Limited quality improvement • Deteriorated learning • Low commitment • High selling cost • Innovation unlikely • Limited quality improvement • Very low commitment • Innovation zero Medium-term • Short time horizons • Short time horizons contracting • Reluctance to take on staff • Need staff flexibility (1 to 3 years) • Short pay-out investment • Minimal investment • Limited efficiency programmes • No efficiency programmes • Improved learning curve • Moderate learning curve • Moderate commitment • Limited commitment • Some innovation • Innovation unlikely Long-term • Future predictable • Volumes uncertain contracting • Optimal staffing and training • Smaller volumes (4+ years) • High capital investment • Staffing uncertain • Product development • Moderate capital investment • Good efficiency programmes • Efficiency programmes • Steep learning curves • Steep learning curve • Minimal paperwork • Maintains competitive edge • High commitment • Moderate commitment • Complacency (potential danger) • Innovation unlikely • Commitment to innovate • Partnership probable Figure 10: Impact of purchasing strategies on supplier response (Steele, 1996:47)

Single vs. Multiple sourcing Lysons says that after an analysis of single as against multiple sourcing strategies seems to indicate that neither has a dominant advantage. Probably the conclusion is that the decision to single or multi-source is situational and depends on the conditions obtaining for a particular purchaser with a particular supplier at a particular time. There is also the fact that single or multiple sourcing is not necessarily a straight choice and that dual sourcing and other variants may be feasible alternatives (Lysons, 1996:249).

At the moment SL/DE has got very short-time horizons. Contracts usually last around a year, but are most of the time extended, because changing suppliers is usually too much effort. All products have just one supplier, however, other suppliers can take over the production of

most suppliers. This shows that Sara Lee/DE chose for single sourcing (and was not forced to, because a lack of suppliers: sole sourcing). Advantages of this choice are scale- advantages and minimal investment. Most important disadvantages are low commitment and little innovation. However, because of the fact that Sara Lee/DE chooses a single sourcing approach does not automatically mean that there are three suppliers, one for cappuccino products, one for chocolate products and one for milk products. As has been shown in the first chapter of this analysis (Productportfolio), there are still a lot of variances to be found in the product portfolio. Every OpCo defines her own requirements which results in more product varieties and also more suppliers. When looking to all of the New Instant products, it becomes clear that a lot of suppliers (21 out of 40) have a yearly spend by Sara Lee/DE of less than 400.000 Euro. This means that the selling costs are relatively high. Also, the portfolio is fragmented so much, that potential scale advantages are lost.

Opportunities for Sara Lee/DE can be found in streamlining their productportfolio. This will simplify processes and will enlarge the potential supply base. When this works out well, this will result in less products, with each of them an increased turn-over. This means that there are more potential scale advantages. This doesn’t mean that, by definition, Sara Lee/DE should stay with their decision for single sourcing. Multiple sourcing will have a great advantage that competition will challenge the (potential) suppliers. An example is that good performing suppliers can be rewarded with a higher share of the business. Longer time horizons will challenge the supplier to invest and come up with efficiency programs.

7.5 Global strategy This paragraph will look at the global strategy of SL/DE: is it local or global, and what are the opportunities? Porter in 1986 proposed four general types of international competitive strategy which the multinational company might pursue, in terms of their organizational or coordination, and geographical or configuration dimension. These are (a) export based (b) multi-domestic (c) basic global, and (d) complex global strategy. Further Porter observes: ‘There is no such thing as one global strategy. There are many different kinds…depending on a firm’s choices about configuration and coordination throughout the value chain’.

Developing this argument Figure 11 Proposes four types of international sourcing strategies which a multinational company might develop. These are shown in terms of their organizational coordination, and geographical configuration dimensions. The three sets of arrows suggest possible strategic development paths (numbered arrows), but it should not be assumed that only one path is inevitable. Each strategic quadrant involves different degrees of geographical concentration or dispersal of value activities. (Chadwick and Rajagopal, Strategic Supply Management, 1998). At the moment Sara Lee/DE is situated in the left corner below; the geographical location of the firm’s activities is very loose, there are many locations. Also, the coordination of activities is very loose. This results in a multi domestic strategy.

Tight Integrated sourcing Basic global sourcing strategy strategy Geographically 2 High geographical dispersed production concentration of with tight coordination production with tightly between overseas coordinated affiliates procurement activities

3 1 2

Multi domestic Import-based sourcing strategy strategy

Coordination of firm’s activities activities firm’s of Coordination Geographically High geographical dispersed production concentration of with a high degree of 1 production with local autonomy loosely coordination Loose procurement activities

Loose Concentrated Geographical location of a firm’s activities

Figure 11: A typology of global sourcing strategies (Chadwick, 1998:185)

This might look a good strategy (small is beautiful). Many companies have pursued this organizational and structural goal by splitting themselves into sectors, divisions, areas, countries, cost centres and strategic business ubits focused on particular product markets and customer groups. (Hughes, 1998:82):

Prime Targets for High High Globalization

Scope for Geographical Consolidations Think Global,

Medium Medium Act Regional

Keep Local Low High Medium Low Local Supplier Dependency

Figure 12: Rationalization of supply and consolidation of expenditure may be undermined by local supplier dependency (real or perceived). (Hughes,1998:82)

Decentralization can also readily lead to a dependency upon local, country specific suppliers. While this may sometimes be appropriate, it is not always the most effective deployment of a company’s total expenditure. It can result in (Hughes, 1998:82): - erosion of total purchasing leverage with external suppliers - different prices being charged in different markets for similar bought-in products and services - differential pricing for identical products and services from the same suppliers, in different countries - nationalistic sourcing, where local staff preference cuts across optimal supply configuration - increase in business and transactional complexity resulting from a proliferation of local suppliers. An assessment is needed of the potential for geographical consolidation and managing suppliers at the right level, across those categories of expenditure where local supply is not a prerequisite for product or service delivery to customers, (Hughes, 1998:82). The New Instants certainly are products in a category of which the customers do not need local supply. In the current situation, there are several European (regional) products, but most of the products are locally sourced. The following figures show the two dimensions of the figure above. They are worked out into 5 different factors each.

Dependency on local supply network Disagree Agree (assess the extent to which:) 1. There is a strong business or functional preference 1 2 3 4 5 *) for local supply

2. There is a considerable variance between country 1 2 3 4 5 and regional specifications

3. The category of expenditure is uniquely supplied to 1 2 3 4 5 this business

4. Local customers specify and/or directly manage 1 2 3 4 5 the supply chain

5. The local supplier has ownership of proprietary 1 2 3 4 5 technologies, patents and property rights.

Scope for geographic consolidation Disagree Agree (assess the extent to which:) 1. Suppliers operate on a regional or global basis 1 2 3 4 5

2. There are few capability differences between local, 1 2 3 4 5 country, regional and global suppliers

3. There is little variance in specification across the 1 2 3 4 5 business for the category

4. There is a commonality with other businesses over 1 2 3 4 5 a specific category

5. The product or service is managed across more 1 2 3 4 5 than one business location

Figure 13: Determine which categories of expenditure and types of supplier should be managed locally, and which regionally or globally (Hughes,1998:83) (* 1 =marked score)

Dependency on local supply network (fig 13) There is not a strong business or functional preference for local supply. The only advantage of local supply could be transport costs, but local supply is not necessary for other reasons. At the moment, there is a (perceived) variance between country and regional specifications. One can think about packaging with multilingual information on them, or other recipes. The category of expenditure is not uniquely supplied to Sara Lee/DE. Other customers, buy instants at the supplier, however, with slight changes in recipes. Local customers do come up with a part of the specifications list, but do not really manage the supply chain. They do not manage the supply chain, because they use normal ingredients, but mixed into their recipe. Suppliers don’t have to buy special ingredients. In some situations the local supplier has ownership of proprietary technologies, patents and property rights, in other situation she does not. At the end, the dependency on the local supply network seems not very high.

Scope for geographical consolidation (fig 13) Suppliers do sometimes operate on a regional or global basis. During contacts with respondents, it became clear that there are suppliers which were able to supply worldwide. There are differences between local, country, regional and global suppliers. Important differences are higher volumes and the capability to make more varieties. There is little variance in specification across the business for the category (competitors make the same products only with other recipes). There is a commonality with other businesses over a specific category (there are also other instant products on the market, for example instant soup). The product or service is managed across more than one business location, however sometimes with slight changes in specifications. At the bottom line, the scope for geographical consolidation seems in between medium and high.

Concluding this paragraph, it can be said that there is definitely potential for putting more focus and effort into globalization. Especially when the specifications can be streamlined, the local supplier dependency will be reduced even more. (Note: It is very hard to fill out schedules like figure 13 very precisely, which means that there will always be subjective influences. However, this paragraph does give a good general view of the potential for globalization of the New Instants)

7.6 Conclusion In general, the competitive advantages of Sara Lee/DE with regard to her suppliers and vice versa seem balanced. Sara Lee/DE is a very attractive buyer, but rigid specifications and a fragmented productportfolio make her buying position weaker. In her current relationships it becomes clear that SL/DE accepts her position. Instead of this, she could try to reduce the supply risk, by making requirements less complex and by pooling requirements, she could get into the leverage quadrant. Most profit can be made in this quadrant. Although Sara Lee/DE chooses for single sourcing at the moment, she has got a lot of suppliers. This is because the product portfolio is very fragmented. Multiple sourcing could increase cost savings, but (a few exceptions) volumes are not big enough to split. When the product portfolio can be successfully streamlined (globally), this will result in bigger volumes of common products. With these volumes, multiple sourcing could be possible. Sara Lee/DE is still acting very local. It seems however, that there is enough potential to globalize the business.

Chapter 8: Conclusions and Recommendations

This final chapter will state the most important conclusions of this research, which have resulted in a couple of recommendations.

The main question of this research was:

Which purchasing strategies should Sara Lee/DE use to achieve her goals and how should these be developed?

The problems which lead to this question were the problems as stated in project streamline: Proliferation of blends, SKU’s, pack types No co-ordination US and non-US Many different suppliers

8.1 Conclusions Purchasing is more than just buying and negotiating about the price. The elements of a good purchasing strategy have been investigated in this research. The product portfolio, make-or- buy issues and buyer-supplier relationships.

The first thing which has been investigated is the purchasing organization. It has become clear that purchasing is getting more important within Sara Lee/DE. Specialized departments are responsible for specific product categories. The purchasing strategies used within Sara Lee are based on a set of rules. However, these rules are very general and leave many decisions to the interpretation of the buyer.

Looking to the product portfolio, the following can be concluded. At first, theory shows that most of the cost savings can be made during the specification process. Streamlining focuses on a higher efficiency, simplifying and getting rid of unnecessary things. Secondly, there are several SKU’s with a very low turn-over. These items cause extra work and because of the limited turn-over, very high costs. Also there is a chance that there are different SKU-names for products which are almost identical. However, this has not been included in this research and should be found out in future research. It needs to be reconsidered if these product are different enough to ‘deserve’ different SKU-names. A bit of the same story for the weight and the packaging (type and material). Quite a lot of little differences, of which it is not clear if they are really necessary differences and if they are worth the extra costs (considering the low turn-over of several weights and packaging types). It is a fact that this causes extra operations, which causes extra costs. By pooling requirements, the number of SKU’s can be reduced. Also, the variety of packaging types and weights could be reduced by pooling requirements. This streamlining operation could result in scale advantages, which could reduce cost. On the other side, it could have effects on the selling side. How will customers react on changes? This is why every case should be looked upon individually by a multifunctional team. This research has given a general view of potential areas of streamlining the productportfolio and the potential cost savings.

Also, this research has focussed on make-or-buy decisions. Looking to the current situation it is strange that a coffee producer like Sara Lee/DE does not make her own cappuccino products. They don’t even supply the coffee for their products, because they choose for complete outsourcing, instead of partial outsourcing. The only value added by Sara Lee/DE is the brand and the design. It’s important to reconsider the make-or-buy dilemma. An organization needs to know her role. Where are their areas of specific expertise? What is it that differentiates them from the rest? There are a view perspectives which help to make a decision. When looking to the cost side, it becomes clear that the prices for coffee paid externally are less than the price which has to

be paid internally. However, because of the overcapacity, the real price of the internal supply will lower a bit. When looking to the power/dependence side one could say that the core business of SL/DE is coffee and that they should not buy this externally. This is also the fact when looking from a strategic perspective, but at the other hand this perspective states that management could choose to outsource, because this will simplify the process. Other important advantages are the factors ‘risk-sharing’, ‘higher flexibility’ and ‘an independent view of the supplier will generate alternatives’. But this does not mean that the organization will have to choose for complete outsourcing. Partial outsourcing will have the benefit that they could keep the core business (coffee) in house, and other things like packaging and mixing external. It will be necessary to get more insight in the current overcapacity, and also the future overcapacity. When this is done, Sara Lee/DE will be able to get a better insight in the costs and investigate the possibilities of partial outsourcing.

When looking to the buyer-supplier relationships the following can be concluded. In general, the competitive advantages of Sara Lee/DE with regard to her suppliers and vice versa seem balanced. Sara Lee/DE is a very attractive buyer, but rigid specifications and a fragmented productportfolio make her buying position weaker. In her current relationships it becomes clear that SL/DE accepts her position. Instead of this, she could try to reduce the supply risk, by making requirements less complex and by pooling requirements, she could get into the leverage quadrant. Most profit can be made in this quadrant. Although Sara Lee/DE chooses for single sourcing at the moment, she has got a lot of suppliers. This is because the product portfolio is very fragmented. Multiple sourcing could increase cost savings, but (a few exceptions) volumes are not big enough to split. When the product portfolio can be successfully streamlined (globally), this will result in bigger volumes of common products. With these volumes, multiple sourcing could be possible. Sara Lee/DE is still acting very local. It seems however, that there is enough potential to globalize the business.

Bottom line This research has not given an exact answer on the research question, however a general direction has been given. Important areas of the purchasing of New Instants have been analyzed and the effects of changes in these elements have been made clear. To come to a more detailed purchasing strategy, more research has to be performed.

8.2 Recommendations The conclusions stated in the previous paragraph have lead to the following recommendations:

Reduce number of SKU’s By reducing the number of SKU’s, Sara Lee could move towards the left of the Kraljic. Especially the SKU’s with low volumes should be reconsidered. It is however not known in which elements these low volumes SKU’s differ from other SKU’s. If the recipe is the same and the only thing which differs is the printing (because of local factors), than the SKU should not be removed from the portfolio, because there are not many extra costs. Also, recipes which are almost identical could be combined to one. However, this research has not included the recipes. In the future, specific research should be done, with a focus on recipes. This is very complicated, but collecting data about the different ingredients and the percentages of them used in a SKU would be a good start.

Reduce number of packaging types and weighs per consumer unit To simplify the processes, unnecessary things should be eliminated. Sara Lee/DE should consider decreasing the number of different packaging types. Also, there are many different weights per consumer unit, including low volumes. Together with other stakeholders like marketing and sales the following question should be asked per weight (for low volumes):

Does this SKU need this specific weight per consumer unit? Is it a competitive advantage? Following the answers the number of weights could be reduced, through development of a set with a limited number of weights. Combining three different weights (16,5/17,1/17,6 grams) to one weight (17) and one packaging type. Product-development should be involved too, to find out this can be realized. This would reduce the number of options and increase the opportunity to achieve scale advantages.

Make coffee ingredient for cappuccino products Sara Lee/DE could oblige the suppliers to use her coffee in the New Instant products. Future research should focus on the actual overcapacity. Is the overcapacity structural and sufficient to satisfy demands? Will the price really be lower (including transport)? And are the differences in taste acceptable?

Globalize Globalization could benefit the organization. There is definitely potential to cooperate. One could think of Europe, but scale advantages could also be gained if Europe would cooperate with the US. The purchasing of packaging, but also the development of recipes. Further research at this topic should include transport-costs. Also, stakeholders like marketing and sales should be included to investigate the possibilities to develop a global product portfolio. This would lead to less packaging types and also less SKU’s, which would increase the potential scale advantages.

Multiple sourcing, increase power When the streamlined portfolio will move more towards the leverage quadrant (more potential suppliers), Sara Lee/DE should switch to a multi-sourcing policy. By doing this, she can exploit her power and obtain lower purchasing prices. The volumes should be big enough to be of any interest for suppliers, especially now they have to share the business with more suppliers. The selected suppliers should be able to make more than just one SKU. When the (potential) suppliers are able to produce more SKU’s, it will be possible to keep the number of suppliers for the total portfolio reasonable low.

More authorities Coreline Manager To prevent future proliferation, the Coreline manager of the New Instants should get more authorities. Worldwide, new product developments should be discussed with the Coreline manager, so he or she can check these developments with current products. This will prevent the organization from doing things twice and will keep the business well-organized.

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