Reducing Inventory Value by Advanced Purchasing

Esa Huotari Reducing Inventory Value by Advanced Purchasing

Metropolia University of Applied Sciences Master of Business Administration

Supply Chain Management (Procurement) Master’s Thesis 22.11.2020

Abstract

Esa Huotari Author Reducing Inventory Value by Advanced Purchasing Title

Number of Pages 74 pages + 7 appendices Date 22 November 2020

Degree Master of Business Administration

Degree Programme Supply Chain Management (Procurement)

Specialisation option

Tuomas Akkanen, General Manager, Rapala VMC Corp. Ba- Instructor tam Hanna Harilainen, PhD, Principal Lecturer

The purpose of this thesis was to analyze reasons for high inventory level of Rapala VMC Corp. Batam factory and to define corrective actions so that the inventory value could be decreased in control without endangering production. The first target was to significantly reduce the inventory value, and the secondary target was to define and develop purchasing processes and procedures to support the main target that could later on be used at other Rapala business units.

The thesis was conducted using Action research methodology and qualitative methods to gather sufficient data for analysis. The main research method was a purchasing consultation workshop that took place on site Rapala VMC Corp. Batam factory in the beginning of Feb- ruary 2020, but it also included other preliminary preparations and reporting afterwards.

During the workshop, the root causes for excessive inventory were identified. Also, a purchasing process development plan was created to mitigate the root causes for high inventory value including the targets and key point indicators for an active follow up. The development plan was split into different phases, and the first phase developments were implemented into practice by the factory management. The results were actively measured and commu- nicated in weekly and monthly meetings. The development plan also included change management topics taking into account cultural differences as the business environment in In- donesia is completely different from Finland.

As the outcome of the thesis, the targeted reduction of inventory value was reached and even exceeded. New purchasing procedures were also developed and implemented. The analysis methods and project framework could be used at other business units as planned.

Abstract

Keywords Procurement, categorization, supplier management, change management, performance measurement

Contents

1 Introduction 1

1.1 Rapala VMC Corporation 2 1.2 PT Rapala VMC Batam 3

2 Research overview 3

2.1 Problem statement 4 2.2 Research targets 5 2.3 Research questions 5 2.4 Scope and key performance indicators of the research 6 2.5 Research design and action plan 6 2.6 Action research 8 2.7 Research type and data collection methods 9 2.7.1 Qualitative research 10 2.7.2 Processing of collected data 11

3 Strategic approach to procurement 12

3.1 Reactive and proactive purchasing 13 3.2 Segmentation of purchases 14 3.3 Purchasing and supply development model 15 3.3.1 Transactional orientation 16 3.3.2 Commercial orientation 17 3.3.3 Purchasing co-ordination 17 3.3.4 Internal integration 17 3.3.5 External integration 18 3.3.6 Value chain orientation 18 3.3.7 Conclusions of the development model 18

4 Change management and cultural factors 19

4.1 Change management 22 4.1.1 Change management best practices 22 4.1.2 Change management in Indonesia 23 4.2 Implementation of change management 24 4.3 John Kotter’s eight-step model 24 4.3.1 Sense of urgency 25 4.3.2 Powerful guiding coalition 26

4.3.3 Creating a vision 26 4.3.4 Communicating the vision 27 4.3.5 Empowering others to act on the vision 27 4.3.6 Planning for and creating short term wins 28 4.3.7 Consolidating gain and producing more change 28 4.3.8 Institutionalizing new approaches 29

5 Current state analysis 29

5.1 General findings 31 5.2 Purchasing strategy 32 5.3 Inventory 34 5.4 Purchasing software 35 5.5 Improve delivery performance 35 5.6 Other findings from interviews 36

6 GAP analysis 36

6.1 Findings 38 6.2 Conclusions 38

7 Kraljic purchasing portfolio 39

7.1 Leverage items & suppliers 40 7.2 Non-critical items & suppliers 41 7.3 Bottleneck items & suppliers 42 7.4 Strategic items & suppliers 42

8 Implementation plan 43

8.1 General development plan 44 8.2 Category management plan 46 8.2.1 Leverage items & suppliers 47 8.2.2 Non-critical items & suppliers 49 8.2.3 Bottleneck items & suppliers 50 8.2.4 Strategic items & suppliers 51 8.3 Activation of early involvement and communication between sales, R&D and purchasing departments 52 8.4 Single source and high dependency to certain suppliers 53 8.5 Negotiations and possibilities 54 8.5.1 Know your supplier 55 8.5.2 Win-win 56 8.5.3 Purchasing power 56

8.5.4 Developing cooperation with suppliers 57

9 Key performance indicators to support development plan 59

9.1 Supplier performance 60 9.2 Purchasing process performance 60 9.3 Financial performance 61 9.4 Daily KPI’s 61 9.5 Weekly KPI’s 63 9.6 Monthly KPI’s 64 9.7 Checkpoint KPI’s 65

10 Research outcomes 65

10.1 Primary research problem and target 65 10.2 Secondary research problem and target 66 10.3 Purchase portfolio outcomes 67 10.4 Findings of KPI data collection 68 10.4.1 Purchase order figures 68 10.5 Phase two action plan suggestions 69 10.6 Recommendations of stakeholders 70

11 Conclusions, validity and reliability 72

11.1 Personal learning 72 11.2 Validity and reliability 73 11.3 Closing words 74

Appendices

Appendix 1. Current state analysis (CSA)

Appendix 2. GAP analysis

Appendix 3. Kraljic Vendors

Appendix 4: Kraljic Overview

Appendix 5. Action plan

Appendix 6. Kraljic Overview vol2

Appendix 7. Kraljic Vendors vol2

1 Introduction

The importance of procurement function is continuously growing as businesses are recognizing the possibilities of reaching clear competitive advantages by optimizing procurement and supply chain functions. Each penny saved in procurement is directly a penny added into company profit. However, the image of a saved penny is only touching the surface of positive possibilities a well-arranged procurement function can bring to a company. The importance is described in the article by Spiller (2014) “The importance of procurement agility: how to turn volatility into a competitive advantage” that companies with high-performing procurement functions consistently outperform their competitors on financial indicators. Purchasing is not anymore about only bargaining and saving a penny on each purchase. It’s more of an extensive function that directly effects production, financial indicators, adds more value to end customer and can serve as a very useful tool in creating new product or service innovations. “More efficient supply chain or supply network reduces costs, shorten lead times and reduce tied-up capital, improve quality and provide faster product or service reforms” (Logistiikan Maailma). By only focusing on bargaining, the company is missing the great range of opportunities a successful procurement function can create. Also the root causes a company might be facing in production or financial aspects can often be fixed by optimized procurement and planning as shown in this research.

Rapala VMC Group has decided to take determined actions to improve its profitability and working capital efficiency as well as improve operational performance. Future strategies are built upon utilizing and capitalizing the brand portfolio, manufacturing and sourcing platforms. The execution of the group strategy is progressing on all levels of the organization. Rapala VMC Group initiated in 2019 a restructuring program, which aims at increasing efficiencies in operations to consequently decreasing operational expenses and reducing net working capital. Significant focus is allocated to streamline internal supply chains and to develop sales and operations planning to achieve improved service levels and lower group-wide inventories. In order to develop global manufacturing operations, lean projects are ongoing in several factories of which one of the key projects for the Group is to execute a sustainable profitability turnaround for the Indone- sian lure manufacturing operations in Batam. (Financial Statements 2019, 4.)

PT Rapala VMC Batam factory manufacturing operations has been under ongoing extensive lean projects since 2019. Lean thinking is based on a history of Japanese manufacturing techniques which aims to provide more customer value by continuous business process improvements (Kanban Zone). In phase one factory operational excellence program in 2019 the main focus was on improving delivery performance and outsourcing operations. After having successful results of phase one, the next phase was planned for 2020 which included optimization and cost reduction. It was notified that current inventory levels are not on acceptable levels and inventory value must be decreased in a controlled manner without creating operational risks for manufacturing process. In the process of first investigations of possible reasons for high inventory levels also the effectiveness of source to pay process got questioned as a possible root cause. This resulted in the demand for extensive project to thoroughly analyze current procurement processes and practices if there would be clear possibilities to improve procurement effectiveness which in the end would enable lower inventory levels. (Factory presentation 2020.)

Thesis is based on a purchasing consultation workshop and project for PT Rapala VMC Batam factory that was commenced in January 2020. Most of the project was done on site Rapala VMC Batam factory in Indonesia but the project also includes preliminary preparations and follow up meetings after checkpoints that were defined during the project. The main checkpoint in regards to this study is in the end of June, when KPI’s are carefully investigated in order to learn about the efficiency of the project. Also a following action plan with updated KPI’s and goals would then be created based on checkpoint figures.

1.1 Rapala VMC Corporation

Rapala VMC Corporation is the leading fishing lure manufacturer. The company was founded by Lauri Rapala in 1936. Today, Rapala products are used in over 140 countries worldwide. The company has always been known for the dedication to quality. The lures are still hand-tuned and tank-tested before packaging to ensure quality and trademark swimming action. (About Rapala) Over 20 million Rapala lures are sold yearly. (Our history.)

From 1936 to 1963 all lures were manufactured in their only factory in Asikkala and was fully owned by the Rapala family. Between 1963 and 1973 they opened two new factories

3 to Asikkala to meet the growing demand. The founder Lauri Rapala passed away on 1974 but the business still stayed within the family. In 1988 Rapala reached the milestone of one million lures manufactured throughout its history and 1995 the production was already 14 million lures per year. Rapala got listed to Nasdaq Helsinki in 1998 and in 2000 Rapala acquired a French fishing hook manufacturer VMC and name of the company was then changed to Rapala VMC Ltd. (Rapalan historia) The main manufacturing facilities are in Finland, France, Estonia, Russia, Indonesia and the UK (Stock Exchange release 2020).

Currently the biggest shareholder of Rapala VMC is a French company Viellard Migeon Et Compagnie Sa (VMC), which holds 38,46 % of stocks. Second biggest shareholder is Sofina S.A. with 19,23 % of stocks. Rapala VMC Ltd owns only 1,16 % of stocks nowa- days which means the main ownership has shifted outside of Finland in 2000’s. (Osakkeenomistajat 2020.)

In 2019 Rapala VMC reached net sales of 275,4 million euros with operating profit of 26,0 million euros. North American sales continued the positive growth that began in 2018 but changes in distribution agreements caused slight uncertainties in Europe. How- ever, Nordics and rest of Europe markets still grew from the previous year. (Financial Statements 2019, 2.)

1.2 PT Rapala VMC Batam

PT Rapala VMC Batam factory is located on Batam Island in Indonesia. Operations at the factory started in 2011 when production was transferred from China. In 2019 PT Rapala VMC Batam factory produced 6,7 million packs of lures. Main products in the factory are hard and soft baits as metal lures were outsourced in 2019. The factory has about 700 employees at the moment of which about 200 are permanent employees and about 500 are contracted employees. Total revenue of 2019 was 9,4 million euros. Com- parable EBIT of 2019 was -2,9 million euros. (Factory presentation 2020.)

2 Research overview

“The purpose of a research is to discover answers to questions through the application of scientific procedures” (Kothari 2004, 2). The main idea is to find new information and carefully evaluate which of the information is true. (Kothari 2004, 2)

Thesis is based on a purchasing consultation workshop and project commenced in Jan- uary 2020 for PT Rapala VMC Batam factory. Most of the project was done on site Ra- pala VMC Batam factory in Indonesia but the project also included preliminary preparations and follow up discussions after checkpoints that were defined during the project. The main checkpoint in regards to this study is in the end of June, when KPI’s were carefully investigated in order to learn about the efficiency of the project. The duration of the project completely was about six months.

In this project I am acting as a neutral professional from outside of the organization in responsible to conduct a workshop in order to analyze current state of purchasing and to create a purchasing development plan. This project is highly linked to Batam turnaround program phase 2 “Optimization and cost reduction” (Purchasing development 2020).

2.1 Problem statement

The problem definition process is conducted by the researcher and the purpose is to recognize an existing phenomenon that could be modified into researchable research problem. (Jonker 2010, 13). “A problem definition consists of both a research objective and a logically derived research question which precisely establish what needs to be examined and why and under which conditions it should take place” (Jonker 2010, 13). Kothari (2004, 24) mentions that the first and most important step in the process is to select and define the research problem. The problem should refer to an existing situation that the researcher is looking to find a solution for. A clearly recognized and defined problem will help the researcher to keep focus on the right things during the process as it’s important to understand the origin and nature of the research problem. (Kothari 2004, 24-28.)

The main practical problem of the study is high inventory value which ties too much working capital and decreases the possibilities for profitable business. The inventory value of the factory must be decreased with control without endangering manufacturing operations and sales. (Factory presentation 2020). In January 2020, the inventory value was 2,9 million euros whereas the budgeted inventory value was 3,26 million euros. (Ba- tam KPI 2020)

Secondary practical problem of the study is the current unclear and uncontrolled purchasing process which causes uncertainties whether or not purchasing is done effectively to support factory development plan and goals.

2.2 Research targets

The secondary target of the research is to define purchasing processes and development tools for Batam factory which would support the main target of reducing inventory value. These procurement development models could then later on be considered to be utilized to other Rapala business units as well.

The primary target of the study is to improve Batam factory inventory value to 2,6 million euros by July 2020.

As main metrics for the research, development of inventory value will be closely followed. In regards to secondary target of defining purchasing processes and suggesting development goals, the final appraisal of factory management will be considered as relevant metrics to indicate success.

2.3 Research questions

Defining research questions can often be problematic as the questions might not be visible and cannot be recognized properly as the problem might not have a clear form. There can also be a problematic situation in the company which can be approached from multiple angles and therefore the question might not also be very well defined and look like researchable at first sight as it really depends on the nature of the question. An open question leaves space for various interpretations with a broad look at the problem whereas an initial question might change the course of research which often can’t be fully determined in advance. (Jonker 2010, 11.)

Following research questions are broad topics and assumptions that would have to be investigated during the project. It is uncertain if answers to all questions can be found on this study and if some will be further investigated as secondary topics.

1. What are the root causes for high inventory?

2. Is current high inventory value a consequence of ineffective purchasing process?

3. Could better supplier relationship management solve recognized supply issues, which result to high inventory values?

4. Can short term and long term wins be recognized and defined during the project that would lead to more effective purchasing?

2.4 Scope and key performance indicators of the research

The development project includes factory’s both direct and in-direct purchases but ex- cludes investments, which are handled as separate projects.

As root causes for high inventory value can be very varied, the focus on the first step is to investigate current state of purchasing by utilizing analyzing tools and to then be able to create development action plan. The action plan will very likely be divided into primary and secondary topics.

The main key performance indicator to measure the success of the project is the change of inventory values during the project timeline. Other key performance indicators will be defined during the project to support improvements on smaller scale depending on findings of analyses.

2.5 Research design and action plan

“Research design is needed because it facilitates the smooth sailing of the various research operations” (Kothari 2004, 32). The research design is a set of assumptions and considerations leading to guidelines that connects theoretical information and tools to strategy for collecting empirical material including various methods and techniques. The basic requirement is to be able to make clear choices to structure the research which should link together theory, methodology and research question. (Jonker 2010, 39.)

Research can be compiled into traditional model which has theoretical and empirical parts clearly divided. Or alternatively to a model in which theory and practice are combined side by side. (Kananen 2010, 44) I’m mainly following alternative model combining

7 theory and practice side by side but also having one paragraph including general procurement information.

Research design and action plan for this project is described below.

Figure 1. Research design.

Figure 2. Action plan.

I received a small package of preliminary information from Rapala Batam factory management in order to study basic information of the factory beforehand. Current state analyses, GAP analyses and purchasing portfolio studies are done on site during the project with factory’s management and purchasing team. Findings of these analyses are then analyzed utilizing common theories and presented to management and purchasing with suggestions of key improvement areas. I then presented an action plan suggestion to the management which lead to discussions and decisions of actual development action plan that were to be implemented. I also presented variations and possibilities of purchasing KPI’s to the management. Implementation and selection of KPI’s to be used were done in co-operation with the management. Checkpoints for KPI’s were set together with the management for continuous monitoring that development is going into the right direction. After main KPI checkpoint, I analyzed the results and shared the information to the management with suggestions of possible future improvement areas.

Following schedule was used on site to collect required data and to process it.

Table 1. Workshop and project schedule.

2.6 Action research

Jean McNiff (2013, 25-26) states that action research contains two words; action and research. The word “action” of “action research” refers to what you do and the word “research” refers to how you find out about what you do. “Action” includes careful consideration about the circumstances and causes for the current situation and if your per- ceptions of it are accurate and relevant. “Research” then again is about data collection methods generating evidence and making claims to knowledge based on conclusions from authentic evidence. It’s not enough to only list a description of activities when producing a research but instead you also need to give explanations for the activities. (McNiff 2013, 25-26.)

The researcher will be able to come up with his own conclusions of the problem by participating with the people involved with the problem by also supporting the introduction

9 of changes. The risk in action research is the subjectivity if the main target in the research process swifts to creating a change instead of focusing on developing a clear understanding of a specific situation. (Jonker 2010, 86.)

Roadmap for action research as Jean McNiff (2013, 38) explains it:

• “Identify a research issue • Formulate a research question • Explain why the issue is important • Monitor practice and gather data to show what the situation is like • Take action • Continue to gather data and generate evidence • State the findings so far and make a provisional claim • Test the validity of the claim • Explain the significance of the research • Decide on potential future action” (McNiff 2013, 38.)

When planning an action research, it’s important to recognize what you are doing including questioning of how and why you are doing it. Also you should be able to explain what you want to achieve and how you can evaluate outcomes. It also includes careful consideration of how you these changes can be carried out in practice. Research is also always about creating new knowledge. (McNiff 2013, 89-90.)

2.7 Research type and data collection methods

This research is done as a qualitative action research. Data collection of the company and their processes are based on personal and group meetings as well as both public and confidential factory management data (see Table 1 Workshop schedule). Findings of analyses are then compared to common procurement strategies from literature and reliable publications. Gathered knowledge is utilized in creation of practical action plan for PT Rapala Batam VMC factory that furthermore could be modified and implemented to other Rapala business units as well.

2.7.1 Qualitative research

In qualitative research the researcher tries to understand organizational reality and oc- curring phenomena from the perspective of those involved. The researcher’s basic atti- tude must be unprejudiced in the process of trying to understand people’s behavior in certain situations. The objective should be theoretically driven rather than spoiled by technical considerations. (Jonker 2010, 77-78) Conversations followed by observations by the researcher is the most common way of generating data in qualitative research. (Jonker 2010, 88)

The basic principle for unstructured interviews is flexibility of approach to questioning whereas structured interviews follows strictly a set of pre-determined question patterns. Unstructured interviews allow discussions to lead to supplementary questions instead of strictly following pre-determined questions which requires deeper knowledge and greater skill on the interviewer’s part as in structured interviews. It’s a common data collection technique in case of exploratory research studies. (Kothari 98-99) Time factor also comes into play and must be carefully considered when selecting the interviewing technique as unstructured interviews tend to take a lot more time compared to structured interviews. (Kothari 2004, 112)

Preliminary data to this research was supplied by management of PT Rapala Batam VMC factory. Process figures that were available from company it-systems were also utilized to collect exact data of performance. Analyses were done during the purchasing consultation workshop on site in cooperation with management and purchasing team. Semi-structured interview techniques were mostly used during the project as Sreejesh (2014) explains it. Semi-structured interviews are allowing flexibility to the interview but are mainly following the pre-set topics of the researcher (Sreejesh 2014, 48). Besides a few non-formal exceptions, all interviews were done in groups instead of personal one to one interviews.

On site I gathered more detailed information by various interviews. I had prepared a question pattern to collect exact information in order to create a current state analysis as well as GAP analyses. This included interviews with only the factory management, with only the purchasing team and with all parties involved together. Interviews were following the general question pattern that I created but plenty of room were left for more detailed discussions to gather possible further information that were left unnotified in the question pattern. The purpose was to find differences and similarities how the management and

11 team would be seeing the current state of purchasing to have a good understand to analyze and come up with my own conclusions of the situation. I presented my conclusions of the analyses and conclusions the following day after interviews on site to the team and management to have a discussion about these findings and to correct incorrect conclusions if found. The purpose was to gather as realistic picture of the current state as possible from the interviews.

Also on site I requested more detailed and specific data that was available in the factory’s IT systems that could be evaluated together with findings from the interviews. The main reason for this was to take into account possible deviations when numeral data and interview material were compared to each other and on the other hand to have reconfir- mation that figures and interview findings were reliable and logical. After the consultation project on site, I wrote a summary of the findings and development plan which was presented to the management and purchasing team and requested for additional specific information in regards to the project. After checkpoint at the end of June I requested for updated data from the factory management in order to compare results to figures in the current state analyses in the beginning.

2.7.2 Processing of collected data

The collected data must be processed and analyzed to serve the purpose of the research plan by following the outline laid down for the purpose. Careful data editing is required and done to be convinced of data accuracy and that the data would be well arranged. (Kothari 2004, 122.)

The data collected was processed immediately after each data collection sessions so both the data and conversations would still be very clearly in mind. The processing of data was partly done in cooperation with the management but first raw processing and editing was done by myself which were then presented to the management and purchasing team for further discussions. The purpose was at first to have an “outsiders” look and conclusions which would then be discussed with the management and purchasing team to see if there were any remarkable differences to how they saw the same situation. Key points of each data collection were pointed out after processing the data to always have the most relevant topics brought up from each session. The next day of sessions with the team were started by first going through key points of data collected of the past session to confirm whether or not there are correct or incorrect assumptions or interpretations on either side and to discuss about those matters if any inconsistencies were found.

This arrangement enabled a second check for the processed data to be looked with criticism and if the data would still require further processing. The idea was to have a clear cycle in data collection so that all data would be collected and processed the same way by first collecting data through interviews and various materials, then process it by myself and then present the outcome and get feedback and confirmation to validate the data and conclusions.

3 Strategic approach to procurement

Efficient change in procurement strategy requires a lot of commitment and resources from the company including development of professional knowledge to respond to growing demands. When purchasing has earlier seen only as an obligatory must-do process in order to enable production and sales, should procurement be considered as a great possibility to increase company’s competitive advantage. It’s good to remember every saved dollar in purchases equals to same amount of dollars on company profit (Huuhka 2017, 28). Considering the cost of purchases is normally 50-80 percent of the company’s total costs (Iloranta 2015, 21), the possibility for direct financial savings through better pricing and planning and indirect savings through better allocation of work hours should already be very tempting when carefully considering current state of procurement. Van Weele highlights that developed procurement influences profitability in three ways; through reduction of direct materials cost, through a reduction of the net working capital and through improving company’s revenue-generating potential (Van Weele 2018, 14). By utilizing supplier field efficiently, a company has also a great potential to recognize and develop new innovations. Purchasing strategy’s focus is to develop worldwide competitive supply base which should be integrated to effectively into the company’s business processes (Van Weele 2010, 35.)

The nature and location of business are strongly affecting on how purchasing can be effectively arranged. Different procurement strategies can have surprisingly strong influence on profitability of the company and it requires wide professional knowledge of procurement strategies. Unfortunately, it’s still common that purchases are seen only a must-do operation in order to fulfil daily material requirements instead seen as a possible competitive advantage by utilizing well-planned and extensive procurement strategies. (Sakki 2009, 183.)

There are basically two types of procurement strategies; procurement strategy itself and category management strategy. Procurement strategy consists of long term plans and goals and how procurement activities should be developed to meet targets. Category management strategy responds to how different purchase categories should be managed and developed including up to date information of supplier field and markets. (Huuhka 2017, 63.)

A coordination and planning of purchases enables creation of common companywide procedures. It’s important to understand the basics of company’s own purchasing actions and to organize them in a more controlled way. In order to create purchasing strategy, it’s vital to recognize how much is purchased, from where, price levels, how much time is consumed, supplier selection principles and how all of these effect on company’s profitability. In rearrangement of procedures a common problem can be that some employees might experience it’s lack of trust and restricting their authorization from company’s side. (Iloranta 2015, 142-145.)

3.1 Reactive and proactive purchasing

When going to the basic principles of the matter, it comes down to whether a business is looking to be a leader or a follower. By reactive purchasing I’m referring to last minute unplanned spontaneous purchases of which needs were not noticed earlier. This often leads to lower negotiation power and therefore higher item prices, worse lead times and unfortunately, often to worse quality. Proactive purchasing however takes into account future demands and collaborates well with suppliers in order to recognize upcoming requirements early enough to ensure company receives quality products on good price levels smoothly when required. Jouni Sakki (2009, 183) mentions that proactive purchasing in its purest is about controlling of external resources, which is basically choosing the right partners with active cooperation that leads to better execution of the purchasing process and therefore eventually to better results (Sakki 2009, 183).

If decision making is always a step behind, it is quite obvious the amount of possible decisions is limited and the best options might already be out of question at this stage. On the other hand, when upcoming demand is recognized well in advance and supplier management is on a good level, top urgent last minute decision making is not anymore often required which most of the times results on better prices and terms. It’s often rec-

14 ognized that only by centralizing purchases to selected suppliers will result to much better prices (Iloranta 2020, 84) and that is only a very small step towards proactive purchasing. It’s common that purchasing responsibilities are shared too widely in the company when same products are purchased from multiple suppliers by personal prefer- ences and therefore the company is losing benefits from bigger volume. Also this causes waste of work hours as many buyers are simultaneously searching similar suppliers for similar products compared to a situation where all similar purchases are handled by one purchaser from one contracted supplier. (Iloranta 2012, 84.)

As per Iloranta & Pajunen-Muhonen (Iloranta 2012, 95-97), the following steps are common in taking steps from reactive to proactive purchasing:

• Procurement strategy integration to company strategy

• Developing the level of knowledge and resources for procurement

• Strategic segmentation of purchases and continuous search for new innovative sources to create more added value

• Utilization of low cost sources through globalization

• Building a competitive supply chain

• Developing the level of cooperation to suppliers

(Iloranta 2020, 95-97.)

3.2 Segmentation of purchases

As purchases consists of very different kinds of products and services from various type of suppliers, categorization is a relevant method to control the differences. Same type of approach shouldn’t be used for all purchases as the importance, value and availability might be completely opposite from each other. To gather sufficient information to recognize differences, items and suppliers can be categorized by various methods so that strategies could be more precisely planned when differences of suppliers and items are taken into consideration.

The main purpose of segmentation is to maximize the profit by resources that are available (Iloranta 2015, 106). Different methods include internal and external segmentation. The most commonly used methods include segmentation as per items economic importance, by categorizing supplier field, by nature of competition and intensity of the markets of by complexity of items. The designer of strategic segmentation as per complexity of items is considered to be Peter Kraljic, who designed a new method to approach risks in purchases and supplier field in his article “Purchasing Must Become Supply Manage- ment” in 1983. (Kraljic 1983.) Analyses and segmentation should provide accurate information to the management to support decision making and purchasing policies in order to make better purchasing decisions. (Van Weele 2018, 66)

I am utilizing Kraljic matrix (1983) as a central method in the research to analyze and develop purchases alongside current state analyses and GAP analyses.

3.3 Purchasing and supply development model

A five step procurement maturity model was presented by Keough (1993) which was later modified by Van Weele (2005) by adding a sixth step in the model. The model consists of six different steps describing the professionalism level of company’s purchasing and supply chain starting from a very reactive and passive transactional oriented purchasing to fully proactive value chain integration in which procurement strategy is fully integrated into company’s strategy and carefully controls the whole supply chain including partnerships with suppliers and paying close attention to end user satisfaction at all times in decision making. Below is a picture of the model by Van Weele (2005).

Figure 3. Procurement maturity model (Van Weele 2018, 72).

3.3.1 Transactional orientation

The primary purpose of purchasing is to serve factory by finding a supplier for required materials to ensure that production is not running out of materials. Even pricing is not the central factor in decision making as the main focus is only to guarantee material supplies. Indirect purchases in this category are normally handled by each user themselves without any centralized purchasing and it might be very difficult for the organization to even recognize actual costs of purchases. (Iloranta 2015, 91-92.) No actual purchasing strategy exists in this stage and purchasing is very intuitive and spontaneous and purchases are steered by day to day requirements by production personnel. Management of purchases are mainly based on complaints by no received complaints meaning the purchasing has been on a satisfactory level. (Van Weele 2018, 71.)

3.3.2 Commercial orientation

Commercial orientation is not far from transactional orientation but with a difference that the focus in purchasing is more into price negotiations and finding the cheapest price possible. (Iloranta 2015, 92) There can already be categories for purchases and special- ized buyers for categories but still the main focus is only in aggressive price negotiations which is in the main interest of the management as well in this stage. Performance measurement is purely on price, cost savings and delivery performance. The effectiveness of purchasers is also measured purely by cost saving indicators. Skills required from a purchaser are negotiation skills and ability to make price comparisons. (Van Weele 2018, 73.)

3.3.3 Purchasing co-ordination

This is the first stage where purchases are starting to be properly centralized to purchasing department. The main focus is trying to gain more negotiation power by combining volumes to selected suppliers. The purchasing department negotiates contracts centralized for the whole company and coordinates purchases. The effect of indirect purchases is normally noticed at this stage as those are centrally purchased from selected suppliers with existing contracts. Internal cooperation within the company in regards to purchases is getting more common and persons involved in purchasing are more skilled. (Iloranta 2015, 92-93.) Formalization of procedures and processes is getting more common and top management begins to notice the added value purchasing can bring to the company. However, the risk is that purchasing bureaucracy at this stage is causing lack of respon- siveness as the trust to mutual benefits of centralized buying might not be widespread. (Van Weele 2018, 73.)

3.3.4 Internal integration

More attention is being paid to total cost of ownership and cross-functional teamwork within the company at this stage. Purchasing is becoming more process-oriented and is starting to effect on companywide decisions for example in make-or-buy situations. Buy- ing is more relying on forecasts and planning instead of reactive operational buying due to utilized IT systems. Suppliers are taking part in problem solving and partnership sourcing is getting more common. The focus of purchasing however is still mainly internal. (Van Weele 2018, 73-74.)

3.3.5 External integration

Suppliers are actively taking part to product development and are also often invited to product development teams. Purchasing concentrates on creating maximum leverage of external resources by for example trying to obtain solutions from suppliers rather than one-sidedly dictate product specifications to them and the whole concept of supplier management changes more towards supply chain management. Web-enabled catalogue systems area created by partner suppliers so that users can order items themselves using corporate contracts and purchasing is focusing on making ordering simple for internal customers. IT systems are fully integrated internally but also externally between key suppliers. (Van Weele 2018, 74.)

3.3.6 Value chain orientation

The main focus in value chain orientation is in the value added for the end customer and how the amount of added value could be increased. This requires close relationships and cooperation within the supply chain with contracts and shared strategies and vision. A very innovative and non-traditional approach to business is a must. As this stage can be a very time consuming and complex, it can be seen as the ultimate model in the perfect world but is often not preferred as it might take a lot time and money comparing to possible gains. (Iloranta 2015, 94.)

3.3.7 Conclusions of the development model

It’s important to notice that even if the sixth stage in the model might sound perfect, it is actually not at all the stage all companies in all purchasing activities should be aiming for. Whereas it is the most innovative and end customer based model, the road to reach it is also difficult, it’s also expensive and requires a lot of work hours. A lot of purchases just simply do not need to have a perfect purchase model so that those could be purchased efficiently and on good terms. The last stages of the model are mainly suitable and useful to be used on the most expensive and important purchases (Iloranta 2015, 94). This is however still a good model to evaluate and consider different steps of strategic purchasing to be able to recognize the desired stage for company and to create actions how to reach it. According to Van Weele (2018), stage three could be sufficient when buying commodities but when buying complex technical systems, the input from suppliers is very valuable and stage five principles would be suggested (Van Weele 2018, 75). This development model is not actively used in this project and mostly served

19 as informative example in recognizing different steps in the roadmap from reactive to proactive purchasing. I presented this development model in one of the first workshops so that each person involved could evaluate current state of purchasing activities how they see it and so that we could have an open discussion on what kinds of thoughts the model brought up.

4 Change management and cultural factors

In order to understand Indonesian business behavior, it’s important to understand the background and general information about Indonesia as it’s the fourth biggest country in the world and very different to Finland in all aspects of life.

Indonesia population has a very wide variety of different groups. The great majority of the population is Asian related but there is also a considerable mixing with Arabs, Indians and Europeans. The country includes more than 300 different ethnic groups and more than twice as many languages and also most of the major world religions. However, most of the people are of Malay ancestry, speak Austronesian languages and Islam is the most common religion which nearly nine-tenths of the Indonesian population profess. (Legge 2020).

Indonesia is made up of over 17,500 islands. Each province has its own language, ethnic make-up, religions and history. Due to the diverse nature of Indonesian society, a strong pull towards the group, whether family or village of island exists. This causes that most people will define themselves locally first before nationality. (Commisceo Global (1).)

Religion plays a central role in normal life but also in business behavior. Following issues are common in Indonesian behavior:

• Hierarchical relationships are respected, emphasized and maintained (Commis- ceo Global (1)) • Respect is usually shown to those with status, power, position and age (Commis- ceo Global (1)) • The family is the basic unit of life. • Harmony is important in social and business life. Confrontations are to be avoided if possible.

• Loss of face is very serious. Consequently, people are very careful how they in- teract and speak (Commisceo Global (01)). • Conversations are roundabout and indirect in the interest of politeness and avoid- ing offense. • Etiquette and good manners are mandatory • The work ethic is noticeably absent. • Punctuality is not observed • Drive and ambition are less interested in profit and material success. (Lewis 2006, 453-454.)

Indonesians are normally talkative but conduct their conversations in a quiet voice without displaying intensity of emotion. Confrontations are tried to be avoided and problems are informed in an indirect manner. Indonesians are very polite and use respectful language and shows deference in their own proposals. Indonesians are good listeners as well but due to language barriers do not always understand the content and do not indicate it. This however causes they tend to not admit they don’t know the answer to questions and are very clever to say what a person wants to hear. Therefore, it’s common that meetings end with a few loose ends. (Lewis 455-457.) Indonesians are indirect communicators and therefore don’t always say what they mean. It’s up to the listener to read between the lines and to pay attention to gestures and body language to get the real message. If an Indonesian begins to avoid you and acts coldly towards you, there is a serious problem. (Commisceo Global (1).)

It’s important that in meetings considerate listening and quiet speaking are practices to maintain harmony as no one must be made to feel ashamed. Indonesians are hardly ever aggressive in negotiations and meetings but it’s common a lot of patience is required to reach goals and it might take a lot of time. Hierarchies come into play commonly and older people are expected to do most of the speaking and be responsible for the progression of the meeting. Indonesians tend to shy away from too much Western di- rectness and repetition is often required. (Lewis 2006, 457-458.)

Indonesians are very friendly and courtesy and gentleness are mandatory. They respect and value the people that treats them with respect. Below are some key points to empa- thize with Indonesians:

• Be patient in business meetings. Things cannot be rushed as in Indonesian atti- tude everything has its time and place (Commisceo Global (1)). • Show compassion and be personable but do not be confrontational or let emotion get in the way of negotiations. • Expect Indonesians to ask many questions about your family and personal life in effort to get to know you. Doing so in return will signify respect. • Good harmony and relations are the most important components to successful business meetings. (Cultural Atlas.) • Show gentleness and respect. • Show respect for the size of their markets as they are proud of being the fourth largest country in the world. • Bribery and corruption are very common. Deal with it pragmatically and with grace. • Conformity is valued above individuality. • Indonesians value smooth business relationships. • Indonesians are positive and motivated for work only if it’s fun. Try to maintain a pleasant atmosphere in the workplace. • Leaders are expected to be paternalistic. • Always be open and ready to give advice as they will often turn to you in difficult cases. • Always speak in a quiet voice and show little emotion except compassion. • Westerns are expected to be clean and well-dressed as Indonesians respects Westerns. • Small talk before business is valued. • Speak slowly and clearly as the level of English language is not always high. • Avoid pressuring Indonesians. • Avoid being confrontational. • Avoid getting involved in political issues. (Lewis 2006, 459-460.)

I considered it very important to learn about local habits in order to create a productive and open atmosphere to the workshop. Since there was a very limited timeframe for the project on site, it was very important to gain trust as soon as possible so that we could effectively concentrate on the project. It’s often multiple little gestures that are valued

22 which creates mutual respect but the trust can also be lost quickly if you don’t pay attention to local culture and sometimes even by a mistake end up offending participants. By learning and respecting the local culture you multiply your chances for pleasant and productive cooperation.

4.1 Change management

V. Tamilarasu (2012) mentions basic principles for change management in his journal “Change Management”. It’s important to understand that different people react differently to chance and everyone has fundamental needs that should be taken into account. Change also often involves loss so expectations need to be realistically managed. Peo- ple should be involved and supported at all times during the project. It’s common that fears take place in the process so those should always be dealt with. It’s vital to understand of where the organization is at the moment and where you want to be, why and what the measures will be in order to reach them. And maybe most importantly always make sure to communicate, involve, enable and facilitate involvement from people as early and openly as possible. (Tamilarasu 2012, 2.)

4.1.1 Change management best practices

David Jones and Ronald Recardo presents best practices in change management as they see them in their book “Leading and implementing business change management”. They point out six topics as the most important ones; decisive leadership, engagement, organization alignment, culture alignment, balanced measurement and program management and change integration. (Jones 2013, 29-30.)

Decisive leadership requires a clear vision for change. The change must be strong enough for teams and individuals to realize the goals of change initiative. The vision should also include measurable goals. Change team members must be able to imagine the new, transformed state for the organization and believe in it. New processes only work if people in the process are dedicated for the change. Positive drivers and goals must be emphasized but negative sides must not be hidden either which might include for example job losses or changes. The business consequences of not moving forward with the change must be explained. It’s also vital to explain the benefits individuals will gain from the change. Leaders of the change must be able to make tough calls when required as there will always be roadblocks that must be removed in order to progress

23 with the change initiative. It’s required that leaders are also honest, empathetic and trans- parent with themselves as inconsistent behavior breaks down trust. (Jones 2013, 30-32.)

Communication is essential to counter change inhibitors. The change should be clearly informed to clarify boundaries between the old and new models. Specifying what will be changed and what won’t be changed and identifying why certain things must be changed removes unnecessary uncertainty towards the change. Roadmap for the change is required and milestones should be highlighted when achieved. (Jones 2013, 36-37.)

Change process must always be measured to stay updated about progress. It includes milestone dates and targets and need to be cascaded from the top to subsequent levels of the organization to ensure consistency. (Jones 40.) Leaders create the conditions for culture change by prioritizing, supporting and enforcing the new culture characteristics, values and behaviors (Jones 2013, 117).

4.1.2 Change management in Indonesia

Due to cultural factors, management style must also be carefully planned and maintained. Same management standards to what we’ve used to or are commonly practiced in Finland cannot be directly implemented in Indonesia. Very punctual and fast forward management style we’ve used to in Finland is quite often conflicting with Indonesian culture, which must be respected in order to maintain effective operations. As Commis- ceo Global notifies that for a successful cross cultural management in Indonesia, you need to be aware of the strict protocols and rituals that exists (Commisceo Global (1)).

It’s important the manager try not to disregard the hierarchy by being over friendly with the staff as behaving like you’re “one of them”, as this might lead to losing the trust of your subordinates. Managers are expected to be directive in their approach as staff follows the directions of their manager. In change management, it’s important to have track record of history noting the benefits of innovations if they are to accepted and implemented. Failure might cause long-term loss of confidence. To support the change and sensitivity, group meetings and discussions of contributions with participating individuals are required. Successful cross cultural management will depend on the individual’s ability to meet deadlines, so advisable to reinforce the importance of deadlines and how that may affect the whole organization, even if Indonesians might not to be very punctual. Middle managers are recommended to be actively utilized in change and give them the

24 responsibility to consult with their subordinates due to hierarchies. Personal relationships are very important for effective cross cultural management as business is normally based on respect and trust. (Commisceo Global (2).)

Change management of the factory and within this project is more accurately described in following chapter’s implementation plan. Due to cultural differences and big changes in processes, the management plan is planned by mostly factory management. However, same procedures were used during the workshop as well to guarantee smooth sailing throughout the process. As I already made sure to learn about local culture before the workshop, the personal approach was carefully considered to make sure each participant would feel respected but also by informing a clear structure for the process and making sure the schedule was followed. Also it was important we defined an actual plan with deadlines with the factory management so that each participant is thoroughly informed of responsibility areas, deadlines and would be involved in the process.

4.2 Implementation of change management

Rapala VMC Corp. have recognized that strong management and leadership is the key in Batam factory turnaround. They have utilized Kotter eight-step model for their own purposes. This general model is used widely across all functions in the factory and further modified to each function separately.

4.3 John Kotter’s eight-step model

John Kotter (1996) created an eight-step change process in his book “Leading Change”, which according to him would produce successful change of any magnitude in organiza- tions if managed accordingly. The eight different stages in the process are as follows; a sense of urgency, the guiding coalition, a vision and strategy, the change vision, broad- based action, short-term wins, gains and producing more change and new approaches in the culture. (Kotter 1996, 20-21.)

Figure 4. Eight-step model (Batam development 2019).

4.3.1 Sense of urgency

Establishing a sense of urgency is essential in building up cooperation in a change. With low urgency, the people included in the change will not be motivated as they might think it’s unnecessary and it’s difficult to convince them to spend the required time to create and communicate a change vision. (Kotter 1996, 36) Kotter (1996) suggest that one way to raise urgency level is to set revenue, income, productivity targets to high that they can’t be reached by conducting business as usual and by insisting that more people would be held accountable for broader measures of business performance. (Kotter 1996, 44)

The management of the factory had already started monthly and weekly meetings with the staff in order to raise awareness of current situation and development requirements during improving delivery performance process. The purpose was that purchasing information and goals were also openly shared during the workshop.

Key persons of factory staff took part in training and development workshop in Batam. This involved factory management team, all purchasers, IT-support and finance department representative. Not all were present at all times but were invited to join when discussion topics were on their specific field. Current state analysis was constructed by myself in cooperation with all before mentioned parties but mainly with purchasing team and factory management. Findings were presented to all parties involved. The purpose for this was that all would understand the need for process re-design and that they would all be able to give their insight and ideas, which would then also motivate them for the change.

4.3.2 Powerful guiding coalition

The key to creating a guiding coalition is to finding a group with enough power to lead the change and getting the group to work together as a team (Kotter 1996, 21). A team with the right composition a sufficient trust to each other can be highly effective in new circumstances and can process more information, more quickly (Kotter 1996, 55). Four characteristics are essential when building up the guiding coalition; position power, ex- pertise, credibility and leadership. The purpose is to have enough key players in the team that can steer the change as well as expertize and credibility so that intelligent decisions are made and the team would be taken seriously. (Kotter 1996, 57.)

At the end of the workshop, a procurement process optimization management team was formed by Factory Director Tuomas Akkanen to continuously follow up and measure success. The requirement for a new team was brought up several times by myself and management during the workshop as the development process will only keep going as long as it is controlled and closely paid attention to. The key purpose was also to have persons from different levels to join the team to have wide understanding, motivation and ideas for continuous development as well as to build up credibility and trust towards the team within the factory. The formed team eventually involved persons from management, purchasing team and finance department and the purpose was also to work more closely with sales and R&D departments. The team was aligned to similar daily/weekly/monthly management routines as other functions in the factory. My role in this team forming process was to give my opinions on which parties and persons I would see as relevant choices for the team.

4.3.3 Creating a vision

Clarifying the vision serves three main purposes. Clarifying the general direction for change simplifies more detailed decisions. Secondly, it motivates people towards taking action and responsibility in the right direction and thirdly it helps coordinate the actions of different people in a fast and efficient way. (Kotter 1996, 68-69.)

The findings of analyses were presented thoroughly to the purchasing team and management. At the same time, I brought up suggestions of several development possibilities

27 considering the findings. The purpose was to finally present a bigger picture of their procurement performance to participants by informing where they are now and where they could be if processes were improved.

Based on findings on executed analyses, development targets were set for phase one by myself and factory management. These were top priority issues that must be fixed first. Secondary issues were also recognized, which will be more focused on once priority issues are successfully changed first.

4.3.4 Communicating the vision

When communicating the vision, it’s important to keep the message short and clear so that it would be easy to understand and remember. For example, a good verbal picture is sometimes much more than a lot of words. Repetition is required when communication the vision but also the communication must go two ways instead of just one sided information flow from the management. (Kotter 1996, 90.)

The development plan was fully presented to persons responsible in the process so that all would be well aware of current state, vision, targets and a roadmap how to get there. A team was also set up for daily and monthly meetings so that the project will be active and to guarantee regular communication in regards to the project will take place. All involved in the process must have good knowledge of the upcoming change and vision.

4.3.5 Empowering others to act on the vision

It’s vital to remove structures that are blocking the desired development. Those must be compatible with the vision. Give more responsibility, authority and training possibilities to lower-level employees when possible as the change requires certain set of skills and attitudes and also creates more motivation. (Kotter 1996, 115.)

Responsibilities for the tasks in the change were divided to many persons on different levels in the process so that all would stay motivated and management wouldn’t have to carry all workload of the change follow up. Professional training possibilities were informed by the management and supported to improve personal development, which would be of benefit for both the company and the employee. Employees were strongly encouraged to start using new methods even in fear of making mistakes as otherwise

28 innovative ideas will be lost and they will only stick to their old habits. The general message for all in the process was that no one in the process will be left alone and help and guidance is always available when required. “If you never try, you’ll never learn”.

I constantly mentioned and requested during the workshop that staff would be active and take part in the development as by only then they could be gaining personal wins as well by having a more efficient, satisfying and rewarding work.

4.3.6 Planning for and creating short term wins

As major change takes time, it’s important to be able to give evidence that the project is on its course and that the extra effort is paying off. Clear data should be available showing signs of improvement. Running a big change without attention on short-term wins is risky as not seeing any positive results during on regular basis can decrease the attention and motivation. (Kotter 1996, 119.)

Several KPI’s were set during the development planning process in cooperation with myself and the management. These included both short term and long term KPI’s, which were all also in line with each other. The purpose of short term KPI’s was to visualize on very short notice how even small decisions can be very relevant factors in the big picture.

Implemented KPI’s were carefully selected so that those would all be in line with the vision and by creating wins on short term KPI’s, would those have direct effect on long term KPI’s. I also carefully explained the causation how short term KPI’s would affect long term KPI’s and how the bottom line in the big change was actually all about doing little things each day a bit differently. Small choices lead to big results. Short term KPI’s were also short term wins as most of them were causing direct savings for the company even in work hours or financially.

4.3.7 Consolidating gain and producing more change

The guiding coalition must not satisfy to only small wins. They must be ready to use their credibility to request bigger changes and bigger wins continuously once small wins are reached. This will need help from more people that should be involved in the process. The leaders will have to maintain clarity and long term thinking as bigger changes are not happening as swiftly as in small wins. (Kotter 1996, 143.)

Already during GAP analysis, the staff were asked to consider optimal scenarios for many issues that were to be changed at some point. Based on the findings of analyses I also shared the optimal vision; how procurement could be done in the company in optimal case and what kind of benefits would there be for the company financially but also what kind of benefits would there be for the staff. This was later on divided to smaller entities of which I selected the priority issues with the management and secondary issues were left aside in the first phase. The second phase could then be activated once phase one top priority issues were first fixed to a satisfactory level.

4.3.8 Institutionalizing new approaches

Anchoring new approaches in the organization culture is strongly connected to leadership. The connections between new behaviors and organizational success must be able to be presented to give evidence showing how performance improvements were linked to new practices. New ideas normally start being part of the culture only after it’s clear they are working and are much better than old methods. (Kotter 1996, 155-157.)

During the workshop it was several times mentioned by the purchasing team and sometimes by the management that there are certain obstacles out of their reach that would be preventing some of the development requirements. That is partially true in some cases but it was quite often that there just weren’t understanding and knowledge of possible ways to tackle those obstacles. A lot of things were taken for granted but once questioned several times, there actually were possible options that could be tried. The key is how to turn satisfaction and lack of ambition into strong drive to see solutions to problems and actively develop them. Recognition of the root cause to a problem most of the time helped clearing out ideas to see possible solutions. I presented several new approaches suggested to be tried in practice. Once again short and long term KPI’s would be showing signs of improvement very rapidly which creates confidence.

5 Current state analysis

Rapala Batam factory have been undergoing an operational excellence program since 2019 and the process is still ongoing. Each function in the factory are separately investigated in order to find areas for development to optimize the efficiency of the factory. The primary target of the optimization plan is to improve profitability and cost efficiency

30 of Batam factory. Secondary goal of the program is to keep achieved delivery performance and quality level. (Batam factory optimization 2020.)

Batam factory has been suffering of high inventory value, low rotation and a lot of space used for the inventory. By developing and improving the efficiency of the purchasing process, the aim is to reduce raw material inventory value and improve rotation. One hypothesis is that minimum order quantities are too high compared to real demand. Due to the fact that purchasing process and way of working is not clearly defined, it’s seen difficult to lead and manage the purchasing function. Also missing KPI’s and clear target setting makes the management inefficient. (Purchasing development 2020.)

Researcher should select key areas to focus on analyses which has obvious influence to success. Factors that are non-relevant considering success should be left out from the analyses. By doing this, the set of areas to focus on during the analyses will be more controllable and appropriate in regards to conclusions of analyses. (Rope 2005, 467.)

I started the workshop by interviews with the management and purchasing team to gather sufficient information for current state analyses. I created an interview question pattern including following topics: general information, inventory, sales and delivery performance, procurement performance KPI’s, IT and software, professionalism in procurement and improving delivery performance. Also I purposely left space in interviews for more open discussions on other possible topics raised during the interviews and collected relevant information from those into a topic “purchasers view”.

Figure 5. Current state analyses.

I selected topics for the current state analyses to make it a bit easier to structure and divide different topics from each other and to have some structure in the topics we discuss about in the workshop. The reason these exact topics were selected was to have a wide understanding of all possible factors that can be root causes for the high inventory level. I feel that without dividing topics the interviews and information flow could turn out to be uncontrolled and difficult to process and recognize key factors. Also at the same time it could be noticed which of these themes could be preventing the development towards proactive purchasing and in which areas the purchasing function is already working effectively. By that knowledge the main focus in development plan could also be directed towards the biggest problems instead of trying to fix things that are already working.

As I wanted to involve each interviewed person into the development plan creation, I did not accept only simple answers to questions. I added further comments and questions to each answer if possible and requested suggestions for preventive actions how the issue could be solved. The purpose was that each person would really have to think of their answers and also to think about solutions instead of just seeing problems. At the same time, I tried to keep a very friendly and open atmosphere so that each interviewed person wouldn’t be scared or too hesitant to say what they actually think as the whole workshop was for mutual benefit for both the company and individuals working for the company.

5.1 General findings

The general line of the findings of the analyses were that purchasing is clearly divided into two different entities, direct and in-direct purchases, in the factory with very different approaches to how purchasing is done. Whereas direct purchases might not have the most up to date data updated and available to support purchasing, there is still an obvious strategy how it’s done by utilizing software and sales forecasting into purchase planning and scheduling. Indirect purchases are then again handled spontaneously and re- actively without much planning and forecasting. If we think about earlier mentioned purchasing maturity model by Keough (1993) and van Weele (2010), direct purchases could be classified somewhere between commercial orientation and purchasing co-ordination whereas indirect purchases could be seen somewhere between transactional orientation and commercial orientation (see Figure 3). The optimal level for both should be at least

32 on level four but rather on level five where clear purchasing strategies and careful supplier management and cooperation is common and end customer is a central factor in purchasing decision making.

Also very relevant finding is the general unawareness of purchasing strategies; either such don’t exist or are not informed thoroughly. The purchasing team is obviously trying to do the work the best to their knowledge and are skillful in what they do. But what is clearly missing is the reasoning why certain things are done on certain ways. The quite common answer “because it’s always done this way” is quite often heard when purchasing activities are questioned. It’s not that the purchasing team wouldn’t want to do purchasing more effectively but it’s more that they are unaware of how it could be done. The strength, on the other hand, is that the purchasing team is motivated to learn and is very open minded for a change. (Appendix 1.)

Common problems that were brought up during the interviews were that received forecasts from the distribution are seen as unreliable or are completely missing. Purchasing is often based on historical consumption whereas forecasting by sales estimates should be utilized more commonly. Also purchasing has been strongly focusing in finding the lowest unit price case by case instead of recognizing total cost of ownership and benefits that could be reached by active supplier management. This has often led to issues with minimum order quantities as lowest unit price has been for a large amount of items which then again loads up inventory costs. Guiding to better purchasing has also been missing partly due to lack of clear targets and KPI’s to follow up performance. Indirect purchasing activities have been suffering from missing spare parts lists of equipment and lack of accurate maintenance plan, which causes the purchasing to be very reactive as upcoming requirements are not recognized until failures in equipment. A very common finding was also that placed purchase orders were having insufficient specifications or explanations and caused extra workload when trying to identify what kind of items are really requested. (Appendix 1.)

5.2 Purchasing strategy

Factory spend in 2019 was 4,4 million US Dollars. Quantity of suppliers used in 2019 was 132 which has not been categorized to different segments. Therefore, purchasing approach for each supplier is basically the same; lowest unit price is the main factor in decision making. This has caused a lot of small orders, averaging to 3,8 item lines per

33 order, which in optimal case could be combined into bigger orders to actually reach better pricing, terms and service. Also it’s causing lack of cooperation with suppliers. The company is missing the possibility to seek competitive advantage utilizing supplier’s professional knowledge in order to develop more efficient solutions including possible innovations of which could be beneficial for both parties. (Appendix 1.)

The purchasing team felt like they could be able combine smaller orders if only the inventory levels were promptly updated so they could use inventory levels more efficiently in forecasting. It’s seen as difficult to buy wisely when forecasting calculations or not trustworthy and safety stock levels are not kept up to date. Missing forecasting and unreliable inventory levels are also causing a lot of urgent orders. This is partly due to unclear responsibilities and persons involved in the process might not understand requirements. Safety stock levels are updated by IT team whereas for accurate up to date info warehousing personnel should be involved by updating inventory levels in case of changes when software is not doing it automatically utilizing production and sales figures. It’s seen as unclear who even is actually in charge to inform IT team about changes in inventory. The relevant question is why the IT team is even involved in updating inventory levels as their main focus should be on completely other topics? (Appendix 1.)

Single source issues and dependence to certain suppliers are seen as an obstacle for better purchasing in some cases. My conclusion is that some suppliers are exploiting Rapala’s lack of supplier management by setting one sided rules for the cooperation for example by high minimum orders quantities and long lead times. When dependence is obvious for the supplier and buyers approach is to only negotiate better prices, it’s unfortunately an easy target for the supplier. (Appendix 1.)

Purchasing process itself is seen as a bit stiff in interviews. This is mainly caused by lack of licenses to purchasing software. Below is a picture of the process.

Figure 6. Purchase process flow (Purchase process v1 2020).

In most of the cases person creating a purchase request does not have access to purchasing software. Hence they must hand the request on paper to purchasing team. The purchasing team then takes the same paper to approver, which is normally management, to have approval for the request. Most of the times the inquiry is also sent and quotation received before the request is inserted into the purchasing software. Quotation requires another approval from first the purchaser and then from a second approver, which is the management again. As the request is inserted to the software sometimes only after quotation is already approved, the company is missing a lot of relevant data in the software comparing to situation when the request in the first stage is already inserted in the software. The whole request-approval-inquiry-quotation-approval process could be done in the software in which case there would also be all history of past requests and quotations including pricing information of each supplier. Besides the amount of extra work, the process causes the company is missing very relevant data from past quotations and orders, which could be utilized in future orders and also in supplier management.

5.3 Inventory

As mentioned in previous paragraphs, inventory levels that are not kept up to date are causing problems widely in the purchasing process. The management of the factory has informed of the requirement to decrease inventory levels which is the main research

35 problem in this study as well. The problem is that there was no accurate plan how the inventory levels could be decreased without endangering production. The inventory can surely be decreased but it has to be carefully planned how it could be done. This has unfortunately caused production stoppage in the past due to running out of materials. At the time of the workshop, there had been some negotiations with suppliers in regards to minimum order quantities and if those could be reduced but with very little results so far. Some suppliers allowed lower quantities to be purchased but with much higher unit prices. However, minimum order quantities are only a part of the problem as the main solution lies in keeping inventory levels up to date and creating a more optimized purchasing strategy including efficient cooperation between sales, production, purchasing and suppliers. (Appendix 1.)

5.4 Purchasing software

The current purchasing software is seen as a very good tool to enable more efficient purchasing but unfortunately it is not utilized even nearly to its full capacity. Successful companies control and utilize efficiently all data in regards to their business (Huuhka 2017, 191). As mentioned earlier, purchase requests are delivered to purchasing team on a paper instead of inserting them immediately in the software. This is due to lack of user licenses, which are very expensive comparing to added value and also to cost of labor locally. It’s cheaper to hire extra person or persons to manually insert requests into the system than to buy licenses for all persons that should be using the software. As not all persons who should be using the software do not have access, the persons with access are loaded with extra work in order to insert all requested information into the software. Purchasing team adds new items, purchase requests and handles orders, IT team updates inventory levels and safety stock figures and finance team updates item prices into the software. All this extra work is unfortunately out of the work hours that could be otherwise dedicated to better purchasing and supplier management.

5.5 Improve delivery performance

Improving delivery performance was the main target in phase 1 of factory’s long term development plan (Batam factory optimization 2020) and it has to be notified on purchasing development plan as well. The problem with improving delivery performance and at the same time reducing inventory levels is a complex issue which requires very careful planning. Successful execution would require close cooperation between purchasing,

36 sales, R&D and production but the cooperation is not seen to be on a satisfactory level. Purchasing team often receives information of new component requirements only after the products has already been confirmed to end customers. This is causing severe stress in purchasing as material availability is not confirmed earlier and can lead to single source issues and once again, high dependency to certain suppliers. (Appendix 1.)

5.6 Other findings from interviews

Purchasing team feels like they don’t get enough information in regards to their tasks and there is a clear demand for regular meetings. Professional training possibilities are hoped for as that would build up motivation and professional knowledge to be able to perform on better level. Both company and employee would benefit from the training possibilities. Especially basic procurement and negotiation training courses were desired. (Appendix 1.)

6 GAP analysis

The purpose of GAP analyses is to improve efficiency. It’s a four step method which defines current state and optimal state to notice the gap in between them. (Leconte) The first step is to analyze current state of activities with purpose to find a root cause for recognized problems. The second step is to define optimal state in how activities are handled in the best case scenario. This means the optimal state does not have to be even realistic to reach and can include highly idealistic visions. Third step is to define the gap between current state and optimal state and to create actions to minimize the gap. The purpose is not to find actions to each issue that has been brought up but more to recognize the essential gaps which are the most efficient ways for improvement. Fourth step is to create an action and implementation plan to reduce gaps. (Lucidchart 2018.)

Figure 7. GAP analysis (Leconte).

Conducted GAP analyses were largely based on current state analyses. I collected key information from current state analyses to the first step of GAP analyses. After filling up topics to first step, I started working together with the purchasing team and management to discuss and think about the optimal scenarios for the second step. In the workshop the participants came up with some additional comments to the first step which were then added. When thinking about the optimal scenarios, I tried to keep my role as a listener that tried to inspire others to come up with suggestions so that all would be actively involved. At times I tried to direct the thinking towards the directions I was planning for but tried to avoid giving direct answers. Once writing up the scenarios, I helped out in forming the sentences to a clear and short form.

Same approach was used when discussing about corrective actions to minimize the gap. I was leading the discussion but tried to avoid giving straight answers at first. However, in this stage I had to take more part also in problem solving due to further understanding of possible options. Once a corrective action was figured, we discussed why such action could be beneficial in each case to create better understanding of why certain things should be done on certain ways and also how completely different topics can be linked together when looking at the bigger picture. Management also took more part in this stage when creating possible solutions as they have a better understanding of possibilities and limitations locally.

We added one extra phase, additional comments, into the analyses with the management. This was due to the fact that we felt some of these were such important topics that required a bit more investigating. Additional comments were figured out and created by the management and myself in cooperation and the purchasing team wasn’t present at this state anymore.

6.1 Findings

Once all comments were made, I sorted out the top priority findings to three different categories, depending on the nature of the finding. This was to visualize a bit further to what are the direct and primary root causes for the findings. The categories were forecasting and planning, IT system and purchasing strategy. In total the analyses had 33 findings and 21 of them were sorted out to before mentioned categories. Eight priority findings were linked to insufficient forecasting and planning, nine to missing purchasing strategy and four to IT system. (Appendix 2.)

The remaining 12 findings that were not categorized are not considered to be any less important. Those are just not that directly linked to bigger entities which should be prior- itized in the development plan in the first stage. (Appendix 2.)

6.2 Conclusions

The nature of findings was clearly showing that majority of them are linked to only a few key problems, which all can be fixed. Recognizing the root causes for these findings is essential when creating a development plan as only then the plan can be targeted to selected key issues. Basically by developing and implementing extensive purchasing strategy, utilizing IT systems on a satisfactory level and focusing on forecasting and inventory level reliability, 21 findings from all 33 could be fixed or at least the solution is very visible. That doesn’t naturally mean the fixing process would be easy and quick but at least there would be clear guidelines and areas that should be focused at. (Appendix 2.)

The plan was that the GAP analyses would be used as a useful tool when following up the development in order to keep track which findings have been fixed, which are under process and which are still left without action.

7 Kraljic purchasing portfolio

Kraljic (1983) published an article “Purchasing Must Become Supply Management” in Harvard Business Review in 1983, which was a ground breaking portfolio approach to procurement strategic segmentation. The basic idea behind the portfolio was that as suppliers have different motivations and interests to the company and sold commodities are highly varied, there must also be different strategies utilized in purchasing. (Van Weele 2019, 174.) The segmentation is done in a four field matrix considering the purchasing items relative importance and complexity of the supplier field (Iloranta 2015, Whereas in some categories aggressive price competition by utilizing purchasing power is the key word for better results, some other category might be very sensitive and de- fensive to aggressive purchasing. Originally the matrix is only used for purchases in regards to services or goods but not categorizing suppliers even if in a lot of cases suppliers and products can be linked together. (Iloranta 2015, 114-115.)

However, in this research I decided to use modified segmentation to categorize only suppliers using the same basic idea. The reason for this is that most of the factory’s suppliers are delivering only certain types of supplies that are relatively easy to categorize.

The purpose of the matrix is to assist in development of different strategies towards different purchases for example by considering the balance of power between the company and suppliers. Also it should give answers if strategic items are purchased using best-in- class methods or treated just the same way as leverage commodities. As 20-80 rule normally applies to purchasing spend, it’s very relevant to recognize the 20% that repre- sents about 80% of spend and this analyses is also one step towards recognizing these items. (Van Weele 2019, 174.)

The matrix is divided into four fields depending on supply and financial risks. Financial risks are considered to be for example volume compared to total purchasing volume, products share in overall cost price, cost savings potential and price elasticity. Supply risks include for example the availability and level of standardization of products, availability of substitutes and market structure. (Van Weele 2019, 175.) The four fields are named as leverage items, non-critical items, bottleneck items and strategic items (Ilor- anta 2015, 118).

Figure 8. Kraljic Matrix (1983).

It must be noted the exact categorization is also subject to person doing it as there will be many items or vendors being in the borderline of two or even three different categories. It depends where the line is drawn and on the interpretation in regards to criticality. Once main lines are decided, it should be relatively easy to regularly update categorization to measure if any planned changes have happened.

7.1 Leverage items & suppliers

Leverage items consists of items which are purchased in large volumes including quantity and price. There are various suppliers in the market supplying similar items so standardization of products is not common in this category. Therefore, also the competition in the markets is often aggressive and expenses to change suppliers in order to reach better purchasing terms are low. A very common strategy in this category is aggressive price negotiations by active tendering as even a few percentage difference can cause remarkable savings due to high volumes. At the same time, it’s still good to keep in mind possible downsides of aggressive tendering and how suppliers might be reacting to such behavior. The power positions and dependence between supplier and company should also be taken into account in aggressive tendering as motivation on supplier’s side to bargaining might vary significantly depending on the power. (Iloranta 2015, 119.)

Gelderman and Laeven (2004) are reviewing and comparing alternative solutions to the basic principle of very aggressive tendering on leverage items in their research. They are suggesting both competition and cooperation are useful strategies for leverage items. While the goal in aggressive tendering is to reduce prices on short term normally without contracts being involved and cooperative approach should be used to remove performance uncertainties and to have medium and long term competitive prices and low total cost of ownership utilizing also contractual relationships. (Gelderman 2004, 4.)

Before categorization started I set the qualification criteria as follows: several suppliers in the market can supply same non-standardized items and yearly spend is over 30.000 USD. All contractors were also directly chosen to this category due to combined yearly spend. Rapala Batam factory had 24 vendors in leverage items category at the time of the workshop. Total spend of these vendors is around two million USD which makes up for 46% of total purchases. That being said, there are quite obvious possibilities in this category for development and remarkable price savings. (Appendix 4.)

7.2 Non-critical items & suppliers

Non-critical items consist of different kinds of purchases which have relatively small value, are non-standardized and there are several similar suppliers in the market. Typical commodities in this category are for example office supplies, work clothes, basic tools, cheap raw-materials which are purchased in low volumes. (Iloranta 2015, 119.) As costs of handling can be often higher than the product itself, the purchasing of these items should be tried to arranged effectively with as little time consumed as possible (Van Weele 2019, 177). Automation of purchases and delegation to users are useful strategies to control costs and time spent. As an example for office supplies there can be an existing web catalogue with selected product available from which the user can order suppliers for own use. Also vendor managed inventories are common for non-critical items. (Ilor- anta 2015, 120.)

Criteria for non-critical vendors was chosen as follows: spend less than 30.000 USD and several similar vendors in the market. This is a category which have a lot of opportunities for also quick fixes as 88 suppliers are currently in this category of which 70 supplied less than 5.000 USD in 2019. As we are talking about non-critical items that are relatively easy to find on the market, 88 suppliers are way too many suppliers for this category. By

42 minimizing the quantity of suppliers in this category, a lot more purchasing power can be utilized on other selected suppliers in supplier management. (Appendix 3.)

7.3 Bottleneck items & suppliers

Typical items in bottleneck category are technical spare parts in which you are often tied to equipment maker and therefore possibilities are very limited to use multiple suppliers. This can also consist of suppliers that supply in small volumes but there are very limited options of possible suppliers that could be used. As Van Weele describes items in this category: “These items represent a relatively limited value in terms of money, but they are vulnerable with regard to their supply” (Van Veele 2019, 177). Running out of stock of items in this category might cause significant risk for the company even if purchasing value or volumes are low. Therefore, a bit bigger stock of bottleneck items is justified to mitigate risks (Huuhka 2017, 52). Standardization of items is typical and is often causing high dependency towards supplier as there might not be any alternative suppliers for the item. Due to dependency and standardization there is often basically no possibilities for efficient price negotiations. Commonly bottleneck items for the company are caused by insufficient R&D which didn’t take product availability and sourcing possibilities into account when designing a new product. (Iloranta 2015, 121.)

The basic criteria for this folder was the total spend per year 60.000 USD or less with very limited amount of possible vendors. In 2019, Rapala had 31 vendors and approximately 350.000 USD spend on this category. Considering the spend, this was the smallest category of all. (Appendix 4.)

7.4 Strategic items & suppliers

Strategic items have high value and are highly critical for the company. Due to standardization of items and existing patents there is often only one supplier for an item. It is common these items are also long lasting equipment which will require regular maintenance and spare parts and is causing very strong dependency towards the supplier. Hence the process of changing to a new supplier is very difficult and expensive. Tradi- tional tendering cannot normally be used at all in this category and completely new approaches must be considered. Cooperative on partnership level is commonly seen as the solution to efficiently control purchases in this category but it also requires high social and cooperative skills not excluding very good professional and technical knowledge.

(Iloranta 2015, 122.) Real partnership cooperation can however be difficult to reach due to dependency and often so called partnership programs tend to be quite one-sided (Van Weele 2018, 176).

In the research this category has basically the same approach as bottleneck items but over 60.000 USD spend per year. There were only six suppliers in this category with total spend of approximately 1,46 million USD. With that small quantity of suppliers and big spend, this category should be carefully focused at in supplier management. (Appendix 3.)

8 Implementation plan

Rapala is utilizing PDGA Cycle project management model widely in the Batam factory project management including this development plan (Rapala project model). In brief, the PDGA is an abbreviation from the words Plan-Do-Check-Act (Leanopedia).

Figure 9. PDGA cycle (Leanopedia).

As stated in the picture above, the cycle has four steps, plan, do, check and act. In sim- plicity, the model is utilized in this project as follows:

• Plan - Inventory level must be decreased from 3,26 million USD to 2,6 million USD in six months. Analyze current state and root causes and create a development plan.

• Do - Implement new processes. Create a communication plan and form a project team.

• Check – Implement key point indicators to support follow up.

• Act – Track performance and act based on performance.

8.1 General development plan

I created a summary of development requirements and notations that was presented to the factory management. The purpose of the summary was to keep key development targets very visible. Each topic in the summary was opened more briefly both verbally during the workshop and written after the workshop.

• Purchasing strategy

o Aim to be one step ahead

• Forecasting and planning

o Include sales forecasting 3/6/9/12 months

o Include upcoming production data, 3 months

o Include past consumption, 12 months

• Purchase performance

o Increase number of item lines per order to 4,5 in Q2 and 5 in Q3.

▪ 2019 statistics: 3922 orders / 14967 item lines = 3,8 item lines per order

▪ In case item lines can be increased to 4,5 per order, the amount of yearly orders decrease by approximately 600.

▪ In case item lines can be increased to 5 per order, the amount of yearly orders decrease by approximately 1000.

▪ In case item lines can be increased to 6 per order, the amount of yearly orders decrease by approximately 1500.

▪ If handling of a single order takes about 20 minutes in average of purchaser’s time, the time saving by increasing item lines to 5 per order would mean about 33 work days in saved work hours.

• Control safety stock values

o Utilize forecasting and past consumption

• Control inventory

o Full inventory check

o Remove insufficient and expired items

o Keep inventory levels constantly updated

o Decide which units to be used (pcs/pkg)

• Re-implementation of purchasing software

o Whole purchasing process under one system

o Smooth approval process

• Control supplier field

o Category approach

o Reduce the amount of suppliers

o Reduce the dependence to single suppliers

• Single source and minimum order quantities

o Do not satisfy to bad terms

o Constant search for new suppliers

o Investigate product re-spec possibilities

o Study purchasing power against supplier’s financial status

o Make your company more attractive to suppliers

• Key point indicators

o Supplier performance

o Purchase process performance

o Financial performance

• Personal development

o Involve training

o Encouragement for innovation ideas

8.2 Category management plan

As per findings on Kraljic (1983) matrix analyses, I suggested a development plan to the management for each category. Below are explanations and terms of how the categorization was done including my notes of each category findings and development suggestions.

8.2.1 Leverage items & suppliers

In this category, purchasing power should be utilized as much as possible. Use of multiple similar suppliers is not recommended and the focus should be instead on two to four similar selected suppliers for each type of items. For example, only two to four general suppliers are preferred instead of current 15 suppliers (Appendix 4). Consolidate purchases as much as possible especially from non-critical items category to reduce the number of suppliers in non-critical category utilizing the added purchasing power to existing leverage suppliers. This way more purchasing power can be created which can then be used as an asset in negotiations. When focusing on smaller quantity of suppliers, development of cooperation with the supplier must not be forgotten even if aggressive price competition is supported and constantly used. Abuse of power might however be harmful to a supplier motivation and can turn against the buying company in a long run.

Suggested actions should in the end effect on price levels as your vendors know you are cooperating with them and are ready to give them more purchase orders as long as prices are on a competitive level. Naturally some items might still be more expensive compared to a one-time spot supplier but as per common logics, unit prices tend to get cheaper when there is more purchase volume. This will also require constant cooperation and work with suppliers to teach them about price levels and noticing them when single items are by far more expensive than from their smaller competitors. It’s good to keep in mind that when you are about to purchase just a few items from a supplier you use only once or twice a year, the negotiation power is very low and most likely you’ll never get the best price. At the same time, it’s very likely a bigger general supplier already works with the same manufacturer or supplier and purchases from them in much bigger volumes per year and therefore get better prices. A basic and quite common example:

Due to better purchasing power, a general supplier gets an item with 30% discount from a manufacturer. When selling the same item to you, they add 10% margin to have sales income. In this example you are left with 20% discount from the original price which you more than likely would be paying if purchased directly from the manufacturer. There are of course exceptions on these as well but in general that’s a very common case.

While there is high competition in market for leverage items, these suppliers are also very important due to spend on this category, it’s also important to build up the level of cooperation.

Key points:

• Utilize and try to build up purchasing power.

o Better prices, lead times, response times, invoicing terms etc.

• Maintain price competition and tendering between chosen main suppliers. When this is a common practice, prices should be decreasing as suppliers are well aware you want to work with them as long as prices are on a competitive level.

• Make sure your dependence to any of the chosen main suppliers wouldn’t increase considerably higher than others.

• Pay attention to lead times as then you also have better possibilities to control inventory levels.

• Communicate and cooperate with selected suppliers.

• Create win-win situations so both parties would benefit from the cooperation and stay motivated.

o “More purchase orders for the supplier, better prices and terms for the purchaser”

• Be aware of your negotiation power against the supplier. Are you a lot more dependent on the supplier than they are on you? Try to avoid choosing unmotivated suppliers to be one of your main suppliers as a very one sided business relationship sets limitations to your power in negotiations.

• If unit prices are not going lower even if there are much bigger purchasing volumes, change the supplier. Most likely that means the supplier doesn’t have proper motivation to work with you.

8.2.2 Non-critical items & suppliers

As per figures, suppliers in this category are difficult to control and the factory is losing a lot of purchasing power that could be beneficial in negotiations with more important suppliers. Many of the items delivered by suppliers in this category could most likely be delivered also by existing bigger suppliers from leverage supplier category. Part of orders within this category could be consolidated and shifted to leverage category suppliers.

IT and safety equipment are typical items in this class which will most likely also stay in this category unless a standardized catalog can be designed for safety equipment with selected general suppliers. it is very likely that some general suppliers are also supplying safety items as that is quite common product category for general suppliers.

Key points:

• Consolidate orders as much as possible in this category to bigger suppliers to create more purchasing power.

o Try to shift non-critical purchases to leverage vendor category.

• Each time an order must be placed for items in this category, reconsider and check before ordering if current bigger vendor could deliver same.

• Create an ordering process as smooth as possible to minimize the amount of work hours required for purchase orders.

o Utilize automation and smooth approval process when possible.

o Coordinate and cooperate with vendors to create smooth processes.

o Order bigger quantities at once and more rarely. Items in this category are mostly cheap so these will not cause any relevant stress to inventory levels.

• Investigate vendor managed inventory possibilities for standard items.

o Higher cost versus less work stress.

8.2.3 Bottleneck items & suppliers

Due to problematic supply channels of bottleneck items, a bit more imagination should be used when considering of different approaches how purchases in this category could be handled. Purchases should be managed by supplier control, safety stock and back up plans but also alternative suppliers could sometimes be found (Lee 2010, 6654).

• Source actively to build up supplier base for these items. Even if that haven’t been considered earlier or haven’t thought it would be a possible, there can still be opportunities to use other suppliers. Some could even be supplied by selected general vendors and thus be shifted to leverage item category. It might be very possible a general vendor has the manufacturer already in their supplier catalog as they might be supplying items from same manufacturer to other companies.

• Check possibilities to re-spec products in this category. It might be you are facing single source issues or very limited vendor possibilities to due to too strict specifications of the product which might not be required. A very small change in specifications that has no actual affection to end product quality, might multiply the amount of possible suppliers. This option will cause work load as R&D must be involved in the process but the end result then again reduces a lot of work load and generates much better pricing and delivery term possibilities. Not all products of course can have re-spec but this is something that should be considered as an option.

• Accept the situation as it is if the yearly spend is not considerable and sourcing and re-spec process would cause too much work load compared to possible gains. This is a very common option as well in bottleneck category as it’s not often worth it to spend a lot of time in trying to create the most optimal solution.

• Build up communication and cooperation with the supplier. This applies to all suppliers in bottleneck category and is very relevant in terms of risk management as we are talking of important items. Limitations in purchasing power or alternative suppliers do not mean nothing can be done in developing supplies in this category.

• Aim to make your company more interesting to supplier. Discuss about lead times so at least you have those recognized and can avoid possible urgent requirements. Use forecasting when possible to make supplies easier for the supplier to arrange as they know when and what you will most likely be requesting for. Dis- cuss with the supplier if there is anything other in the order process that you could do better in cooperation with them that would help suppliers sales processes and purchase order handling. Check if vendor would be willing to keep a safety stock for you and inform them accordingly of your critical requirements.

• Check possibilities to use general suppliers from leverage category also for supplies in the bottleneck category.

8.2.4 Strategic items & suppliers

In this category timely supplies should be guaranteed as far as possible. This requires active cooperation with the supplier in order to recognize requirements and delivery times. Safety stock limits must be set accordingly to be able to place purchase orders early enough to avoid business critical situations for example production stoppages. The more your supplier is able to keep stock of items required by you the better. However, quite often due to your dependency on them, they might not be willing to do so.

Maintaining strategic partnership is essential in managing strategic items purchases. There should be constant information exchange between the supplier and purchaser including frequent visits. A long term relationship increases the intensity between buyer and supplier. (Lee 2010, 6653.)

If you are able to find any competition in the market, those should be carefully investigated. Build up communication and try their services or products first on testing purpose. Building up any competition, even very little, can be a big asset in this category since the suppliers are often used to being the party with negotiation power that can decide one sided terms in the business. When the dominant position gets challenged, it’s not uncommon they will agree to completely different terms to get rid of even the smaller possible competitors.

Key points:

• Actively build up cooperation with suppliers.

• You don’t have much negotiation power due to very limited amount if any competitors in the market. Figure out if there is anything you could do more which would help the suppliers operations and processes by for example better forecasting or e-commerce platforms to save time on processes.

• Keep sourcing actively in order to find alternative suppliers. Trade fairs can often be very beneficial for sourcing in this category.

8.3 Activation of early involvement and communication between sales, R&D and purchasing departments

A company can itself cause bottleneck issues by lack of cross-functional cooperation. Sales might already be giving sales guarantees to customers of something that is not even fully designed. At the same time R&D are working on product development without consulting sales or purchasing departments and might end up using items in a new product that has specifications not purchased before which might not have any major influence on the quality of the product to the end user. It is obvious R&D has the most knowledge of product development and requirements for a new product but also it is guaranteed that purchasing department has the best knowledge of availability of commodities and possibilities in the supply chain. Sales department should be able to give indications from the consumer markets of upcoming trends which might have an effect on R&D and therefore also purchasing. Forming a team that includes participants from each team would be highly supported. Most likely several single source and high de- pendencies to certain suppliers could be avoided by only just increasing the level of cross-functional cooperation.

It starts with little things. Just by passing proper information of upcoming product development and requirements, a purchasing department could already start working on building a sufficient supply chain as per new product requirements. The worst case scenario, which unfortunately have happened several times in the factory already (Appendix 1 & 2) is that the purchasing department are informed of required item specifications only when the production should be commencing and have very little possibilities anymore to set up proper and efficient supply chains.

When thinking about the previously presented Purchasing and Supply Development model modified by Van Weele (2018), forming a cross-functional team would be classified as integral integration. The formed team is much more capable in creating functional and cost efficient solutions to new products than any of the departments alone. If a company would start involving also suppliers in giving more insight and ideas into product development, the possibilities in product development, sales and satisfaction of the end customer would be exceeding current arrangement by far.

8.4 Single source and high dependency to certain suppliers

Suppliers are no hesitant to benefit from high dependency whereas possible as it gives them a great possibility to raise prices since purchaser have very little tools to control the situation (Iloranta 2015, 283).

This issue came up quite a few times during the workshop as the factory is tied either purposely or accidentally with single source difficulties (Appendix 1 & 2). If we are not talking about a highly critical equipment manufacturer to which there might not absolutely be no possibilities to find any alternative suppliers for, this is a matter that attention must be paid to. Driving yourself into single source issues can and most likely will be very harmful to the business in a long run. It can be expensive, delivery terms can be bad, the level of cooperation with suppliers can be questionable. It just generally creates a very weak spot in the production and further on is a very vital risk to sales delivery performance.

If we think about possible cases of a supplier factory burning down or a supplier goes bankrupt and a company is tied to them by single source items, it will generate a massive stress for the factory. If a company is not completely forced to single source, always avoid the situation, even if the cooperation with a single source supplier would be on a good level at the moment. A production relying on single supplier on any of the production materials is highly vulnerable.

Sourcing is the key to the matter. Also current suppliers should be checked if any of them would possibly have capabilities to start production of requested type of items for the factory in which process Rapala could be teaching them in case of need. Paint products for example must not be single source as there is a very wide variety of paint producers

54 in the world, also present in Southeast Asia. If a single paint is difficult to find, it’s expected that another paint producer should be able to copy the receipt and start producing similar paint. Some paint suppliers might even have similar paint available already but that was just never discussed of before.

Price can be an issue sometimes on secondary suppliers as it’s very possible the cheapest supplier is used at the moment. However, it is also a risk management issue to avoid single source situations and therefore it can be justified to also use another supplier. In single source issues it is also common practice to start using alternative supplier even if they are a bit more expensive but for example on 80/20 ratio by sending 20% of PO’s to the more expensive supplier. This keeps the business relations open to more than one supplier and in case of delivery difficulties at the main supplier, you would already have another supplier to guarantee the productions is not in risk.

Some single source issues can also be fixed by cooperating between purchasing, sales and R&D as mentioned in the previous paragraph. It’s quite common a product in manufacturing process has complicated specs and therefore has very limited amount of suppliers but by changing the spec just a bit might open up competition for a wide variety of suppliers. In Rapala’s case for example fish eyes could possibly be an example of such.

8.5 Negotiations and possibilities

As already recognized in the supplier categorization, there are completely different kind of suppliers which requires different kind of approaches in negotiations as well. There- fore, you have to be able to understand your position and possibilities in negotiations and carefully plan tactics for negotiations.

Traditionally the goal in negotiations on both sides have been one sided financial benefit on cost of the opposing party. However, often a win-win type agreement in which active development of cooperation takes place will be much more beneficial for both parties. Expectation and impressions on the opposing party builds expectations but also limitations to the negotiations. Impressions are strongly influenced by power and dependency of each other, common interests short and long term and importance of the business for both parties but also cultural differences can have impact on negotiations. (Iloranta 2015, 257-258.)

Targets for negotiations should be carefully considered before going into actual negotiations. Minimum and maximum targets should be defined and have a plan what to be done in case even minimum targets cannot be reached. This gives purchaser a bit more negotiation power as supplier is led to believe that there are other possible suppliers in case not even minimum levels are met. The negotiator should be able to recognize supplier differences to guarantee correct approach is selected. Aggressive bargaining from bottleneck supplier will quite possibly lead to the end of business relationship whereas that can be a very useful approach on leverage items. Each person that is in contact with the supplier should be informed about upcoming negotiations and selected approaches to guarantee the supplier is not getting mixed information from within the purchasing company. (Huuhka 2017, 136-138.)

8.5.1 Know your supplier

Investigate who you are buying from. These are very relevant questions to start in investigating your suppliers:

• What are their sales figures and how much you are buying from them?

• Are their businesses financially on a good level or are they facing immediate financial risks?

• Are they interested in your company as a customer and do you estimate they would have good motivation to build up cooperation with you?

• How are the supplier’s delivery performance rates and prices compared to their competitors?

• What is suppliers level of customer service?

• Do you consider you get any added value through cooperation?

If purchasing volumes are minimal compared to supplier’s yearly sales, it’s very possible the supplier will sacrifice only the smallest possible effort into cooperation with you and are not very willing to discuss about prices. If you don’t know your supplier, it’s more than complicated to plan any efficient strategies into negotiations.

8.5.2 Win-win

This applies to all categories in different ways. There must be benefits for both sides in order to gain good and long term relationships with suppliers. Even if the competition is high, the supplier must also gain profit from the business in case there is any plans to continue working with the supplier. If it’s only the other party that is winning in the business, it will be a dead end street relatively soon. Imagine being the supplier and see what kind of benefits would you be interested about when not focusing only on pricing. What kind of suggestions you could present at the negotiations of which the supplier would be interested about that in return would give you better terms and pricing?

• Leverage suppliers

o Give more business, get better unit prices. Vendor is winning through increased sales volumes and buyer is winning through better unit prices.

• Bottleneck and strategic suppliers

o Better forecasting, cooperation and purchase process that would be beneficial for the supplier to ease processes and predictability on their side.

Non-critical vendors I purposely leave out as there is not much to win in that category. If anything, the ordering process should be modified to as little time consuming as possible for example by utilizing web stores.

8.5.3 Purchasing power

This can be utilized only if you know your suppliers background and figures properly. Compare your purchasing volumes to supplier’s total sales volumes. If you see yourself as a very important and remarkable purchaser for the supplier, it means the supplier is likely financially very dependent on you. Utilize the power in negotiations by demanding better prices, payment terms and delivery terms. Make them feel appreciated and at the same time to be on their toes by knowing they can lose you if terms are not on a very good level.

Vice versa, also possible weak purchasing power should be recognized. Even if you consider a supplier to be important to you, it might be you are not an important buyer for them at all. Only buy from these suppliers if the service level and prices are still good or when it’s obligatory due to product availability for example but otherwise focus on suppliers that value the cooperation.

8.5.4 Developing cooperation with suppliers

Active cooperation builds trust between purchaser and supplier but at the same time it can reduce suppliers risk of losing a customer which then again can cause lack of ambition for better service in a long run (Iloranta 2015, 285). Creating trust can be a long way but losing it happens very quickly. However, this should not stop pursuing good cooperation and even partnerships with customers as the upsides of good cooperation easily outweighs the possible obstacles. Service and pricing levels of all purchases should be actively measured so that performance is staying on a desired or at least on a satisfactory level. As Van Weele (2010) explains in his article “Value Creation and Purchasing Strategy”, the traditional agenda of purchasing with aggressive sourcing and tendering has changed towards reducing risks by for example early supplier involvement and partnership agreements as relationships with suppliers becomes more strategic (Van Weele 2010, 34).

When there is not much room for constant price discussions and bargaining lower prices through competition in the market, you have to come up with innovative ideas how you can make yourself more attractive to the supplier. If there is not much competition or even no competition at all, suppliers most likely aren’t very cooperative if your only request and message to them is about getting better discounts. The relevant question is why would they give discounts if they have no competitors? Or why would they develop better delivery times if there is no competition? Why would they develop customer service?

Once again, imagine being on their side and think about possible factors that would make a buyer more attractive that would make you be willing to discuss about pricing. One option is to develop business to business purchase process. Discuss if there is anything you could change in your purchase orders or in your purchase process that would help sales processes on their end. Sharing forecasting information can often be very benefi-

58 cial as it helps the supplier to prepare and estimate their upcoming manufacturing requirements. This can be done for example by yearly estimates and plans that are being updated quarterly.

Can e-commerce platforms be set up? Investigate if your purchasing software have capabilities to send and receive data without typing any emails so that your software would be in connection to supplier’s software. That would save a remarkable amount of time on both ends and can be very profitable for both parties.

Check if discounts could be dependent on required delivery times as that would most likely also help the suppliers forecasting. For example: 30% discount for a three-month delivery, 20 % discount for a two-month delivery, 10% discount for one-month delivery, 5% discounts for two week lead time and no discounts at all for urgent orders. This will once again help supplier to predict and be prepared for their upcoming sales and production requirements.

One option is to try getting some yearly discounts if certain early price levels in purchases were reached. And also similar type of idea can be used by setting a target level for average order sum. This would mean a supplier would receive less orders but each order is bigger which once again leads to direct savings. As mentioned earlier in the research, the same can be of purchaser’s motivation as well.

Discuss extensively with suppliers to recognize their full product range. It might be they have some products you could be buying from them that you weren’t aware of earlier that such products were in their range of supplies. This way the spend of a certain supplier can be built up and gain better purchasing power for negotiations. Also you would be decreasing the quantity of suppliers at the same time.

Investigate if there are possibilities to utilize any kind of automation or to build up standardized routines when ordering from bottleneck or strategic suppliers? For example, au- tomated weekly deliveries could be arranged in cooperation with the supplier that they would always automatically deliver unless further requests arise. This can be done especially for some direct production items which have relatively steady inventory turn year round.

The available options can feel very limited at first but that doesn’t mean there wouldn’t be actually quite many possible options to have better prices, delivery times and invoicing terms by better cooperation. These require innovate approach on purchaser’s side and also a lot of discussions with suppliers. It’s also not uncommon at all that a supplier comes up with a very good suggestion about how to improve cooperation.

9 Key performance indicators to support development plan

There are a wide variety of possible procurement KPI’s and these should generally be carefully thought about as they must be serving a purpose. It also depends a lot on software in use what kind of information and analytics are available. Supply chain and procurement measurement can be approached from multiple angles depending on what is relevant in supporting the development goals (Huuhka 2017, 201). Before implementation of KPI’s, first investigate software is capabilities in supplying sufficient data. Well planned KPI’s improve transparency and improves the level of communication in development process (Huuhka 2017, 201). The purpose of purchasing measurement is to support decision making in the company and can contribute to better motivation as results of development are visible. The measuring should be carried out on regular basis. (Van Weele 2018, 304.)

Iloranta and Pajunen-Muhonen (2015) presents five basic principles for useful measurement as follows:

• “KPI’s are connected to development targets and strategy.

• A KPI is simple and understandable.

• Follow up is done and informed to parties which have a direct effect on results.

• A KPI is extensive and balanced enough compared to targets.

• KPI’s are used as a tool to support continuous development” (Iloranta 2015, 360).

All implemented KPI’s must serve purpose as measuring just for the sake of measuring is only creating unnecessary work load. Such performance shouldn’t be measured of which any beneficial use cannot be identified. I suggested various options for possible

KPI’s to the management of which we selected KPI’s to be implemented together with the management. I divided KPI’s into three categories so the main purpose would be easy to recognize.

9.1 Supplier performance

The purpose to measure supplier performance is to monitor and improve supplier’s performance in regards to quality and delivery reliability (Van Weele 2018, 309).

These KPI’s should actively be utilized in negotiations and supplier management. It makes negotiations a lot easier and effective when you have clear fact based numbers with you to support decision making and negotiations instead of assumptions. This also enables the possibility to set goals for suppliers and to participate them in developing supply performance.

We divided selected KPI’s in groups to support daily, weekly and monthly management. The purpose is that the results of purchasing behavior would be visible on both short and long term and could also be used in communication at weekly and monthly meetings. Following KPI’s are planned for factory purchasing development plan phase one.

However, at development plan phase one the main focus in on improving factory’s internal purchase processes and behavior. Therefore, supplier performance was still left aside in performance measurement as the development should be going step by step to have sufficient focus on key issues. Together with the management we planned that phase two would include more focus on supplier performance measurement such as measuring delivery reliability, service level, claims handling and active cost benchmark- ing including possible freight costs. That does not mean cost and reliability wouldn’t play a clear role in decision making during phase one as those must always be taken into account in decision making. It’s only that those are not measured and followed up actively in phase one.

9.2 Purchasing process performance

The main focus in phase one is to improve purchase process performance which in return would affect positively on inventory levels, which is the main target of the research

61 and development plan. The purpose is to have as smooth and effective purchasing process as possible. This would save a lot of time and money as there would be much more time to focus on critical issues. Also smoother process guarantees quicker and more accurate deliveries.

Most of phase one KPI’s are targeted to improve purchasing process performance.

9.3 Financial performance

These KPI’s would be beneficial to be defined in cooperation with finances department as they might have very relevant requirements and can be interested in certain figures purchasing department didn’t think of. However, in this project we defined financial KPI’s together with the management without involvement of financial team. This was due to focusing on purchasing process KPI’s in phase one that would lead to the main financial target of reducing the inventory level.

It should be understood the figures in these finance KPI’s are mostly results from developed purchasing process and supplier performance. You can’t have any sustainable improvement in financial KPI’s without seeing the same kind of improvement in purchasing process and supplier performance KPI’s. You can of course, for example, increase inventory value just by buying less but that does not count as a controlled way of doing it in the long run if the whole process is not supporting the same goal. The main target however was to reduce inventory levels with control without endangering manufacturing operations. When you focus and excel in the process and supplier management, good results in financial KPI’s will automatically follow as results.

KPI’s that were implemented for phase one are explained in details below.

9.4 Daily KPI’s

• Quantity of purchase orders

o How many purchase orders are done per day, week, month?

o As one of the targets is the reduce the total quantity of purchase orders, this needs active follow up as small decisions in daily activities can cause significant difference in a long run.

o This also creates more volume on single orders and can lead to better choices of which suppliers are used.

• Quantity of item lines per purchase order

o This is to support the same target to reduce the quantity of purchase orders. When purchase orders are well planned, there should be no need for constant one to two item line orders, which in turn will also reduce the quantity of purchase orders.

o 2019 stats: 3,8 items lines per order

▪ In case item lines are increased to 4,5, the quantity of orders decreases by ~600 per year.

▪ In case item lines are increased to 5, the quantity of orders decreases by ~1000 per year.

▪ In case item lines are increased to 5,5, the quantity of orders decreases by ~1500 per year.

• Quantity of purchase requests

o The purpose is to measure quality of purchase requests so that the quality of requests could also be developed so that each link in the purchasing process would be following the same guidelines and principles.

▪ How many purchase requests are deleted? Is the reason for de- leting the request due to insufficient specifications or insufficient planning?

o This helps recognizing whether the root cause for small single orders is due to insufficient requirement planning at the factory or just insufficient buying and consolidating requests to purchase orders.

o Insufficient specifications in requests and unnecessary requests are causing unrequired work load.

• Quantity of purchase orders below three item lines per order

o As the target is to reduce the total quantity of orders and have more items lines per order, the root causes for small orders must be defined.

o These will be actively followed up at weekly meetings to find out reasoning for each small order so that the reason could be discussed and considered if there would’ve been better options available.

o The active follow up is seen as a learning tool for continuous development so that new ways or purchasing could be adapted efficiently.

• Quantity of urgent purchase orders

o The purpose is to identify quantity of urgent orders and root causes for them so that preventive actions could be defined. Each urgent order creates extra work load and can lead to worse purchasing decisions as purchasing options in that stage can be very limited.

9.5 Weekly KPI’s

• Quantity of used general suppliers

o As the target is to create more purchasing volume to selected suppliers and reduce the quantity of similar suppliers, it’s important to follow up how many similar general suppliers were used. If no visible change to previous purchasing behavior, root causes must be defined and use it as a learning tool towards better decision making.

• Quantity of used non-critical suppliers

o The target is to reduce the huge quantity of non-critical suppliers and try to allocate the same purchase volumes to existing bigger suppliers.

o If no visible change to previous purchasing behavior, root causes must be defined and use it as a learning tool towards better decision making.

9.6 Monthly KPI’s

• Raw materials inventory value

o The main target of the research is to reduce the factory’s inventory value. The value must be followed up monthly in order to stay informed how new purchasing behavior is affecting on inventory value.

• Raw materials inventory turn

o Whereas the inventory value should be decreasing, inventory turn should be increasing to guarantee incoming materials are ordered as per better forecasting and therefore also been used for production more frequently. One of the targets was to get rid of items standing still in the warehouse loading up the inventory value.

• Total value of received deliveries

o The purpose is to not order more materials than what is required for the upcoming and forecasted production.

• Total value of purchase orders

o The value of purchase orders must be in line with upcoming production estimates so that unrequired materials are not ordered in advance if actual requirement is only months ahead.

9.7 Checkpoint KPI’s

All previously mentioned KPI’s are also evaluated in the checkpoint but more focus will be paid on supplier data as explained below-

• Total quantity of suppliers

• Category performance

o To measure the spend and quantity of suppliers in each category. As the plan was to reduce the quantity of suppliers and to develop supplier performance and cooperation in the next phase, the categories should be easier to be controlled and therefore positive results should already be visible.

o The purpose is to learn if actual improvements have been made in trying to reduce the amount of non-critical suppliers and also if there has been success in creating more purchasing volume to selected suppliers in leverage category.

10 Research outcomes

10.1 Primary research problem and target

The main target of the research and project was to decrease inventory value from 3,26 million EUR target level to 2,6 million EUR in the timeframe from January 2020 to July 2020. Below is a picture of inventory statistics in 2020.

Figure 10. Inventory net value (Batam KPI 1.9.2020).

According to the inventory level information pictured above, the value of inventory in July was 2,172 million EUR, which is exceeding the research target by 0,43 million EUR. The target level of 2,6 million euros was reached already in March 2016. However, it’s important to note that Covid-19 pandemic crisis started effecting the factory directly in March, which effected the production and therefore possibly affected on inventory values as well. The actual impact of the pandemic to inventory value has not been accurately defined but the matter should still be notified when considering success of the project and research.

10.2 Secondary research problem and target

Secondary problem of the research was to research if current purchasing activities were responding to factory development requirements. The target was to define purchasing processes and development tools that would support factory development plans. These procurement models should also be sufficient to be utilized to other Rapala business units.

Conducted current state analyses, GAP analyses and purchasing portfolio gave accurate information how purchasing was done at the time of the workshop. The corrective procedures suggested by myself served as a useful roadmap to more proactive purchasing with KPI’s in place to support the development. The same analyze methods could directly be utilized to other business units but corrective actions and KPI’s should naturally be designed to meet local requirements. However, I consider the suggestions of preventive actions in development plan would serve as a useful tool when internally evaluating a business unit’s current purchasing methods by comparing current purchasing actions to suggestions in development plan.

10.3 Purchase portfolio outcomes

In beginning of 2020, the factory had 149 suppliers in total of which were distributed to four categories utilizing Kraljic (1983) matrix. I sorted the suppliers similarly using supplier data from 1.1.2020 to 31.6.2020 including total of 93 suppliers. (Vendors JAN-JUNE 2020). To be able to more accurately compare these two supplier base informations and have similar qualifications in categorization, I multiplied the 2020 data by two (Appendix 6), so it would count for the same 12-month period in length as the data from 2019. It’s good to note the overall spend in 2020 is remarkable lower as in 2019.

Below are key figures from 2019 and 2020:

Figure 11. Matrix outcome 2019 (Appendix 4).

Figure 12. Matrix outcome 2020 (Appendix 6).

Overall the quantity of suppliers has reduced by 38%, from 149 to 93, but it has to be taken into account non-critical suppliers often deliver only once per year and therefore it is excepted there will be some more suppliers in non-critical supplier category. The biggest differences at the moment is in total quantity of suppliers as well as the quantity of suppliers in non-critical category. Both were set as targets in purchasing development plan. However, the transition target to have more non-critical suppliers to be removed and same purchasing volume shifted to existing general suppliers in leverage category haven’t been providing notable results so far.

The main purpose of the purchase portfolio project was to identify and reduce the quantity of suppliers and try to optimize supplier base. This part of the project can be considered to be a success only up to certain level as we consider the difference in total quantity of suppliers. In the end this was to serve the big picture and main target of reducing inventory level value and to define purchasing process, which have been successful.

In development phase two, I would suggest focusing more on supplier management and optimization of the supplier field.

10.4 Findings of KPI data collection

10.4.1 Purchase order figures

On 2019 there were in total 3922 orders including 14967 item lines, which averages to 3,8 item lines per order (Appendix 1). Considering the purchasing development project started with the workshop in early February 2020, I calculated order quantities from 1.2.2020 to 31.6.2020 so that the project has been ongoing the whole time used in metrics. During this time period in 2020 there was 606 orders including 3131 item lines, averaging to 5,17 item lines per order. (Batam KPI 2020.)

The average price of a purchase order in 2019 was 1115,96 USD (Appendix 1). The average price of a purchase order in 2020 between start of February to end of June was 1516,50 USD (Batam KPI 2020).

Considering the purpose was to increase item lines per order from 3,8 to 4,5 during Q2 and up to 5 item lines per order in Q3, the target even for Q3 was exceeded already during Q2. The improvement equals to over 1000 orders less yearly in case at least the same rate can be applied for the whole year, which is as well a remarkable save in work hours spent for handling purchase orders.

I discussed several times during the workshop with the purchasing team and also management about the concept of placing less orders with more item lines and more value and strongly supported it due to the positive effects it will have on purchasing figures and processes. The general concern especially from the purchasing team was that such purchasing behavior would load up the inventory value and finance team wouldn’t approve it. My main reasoning for the suggestion was that bigger single orders will be possible and serving the big picture and main targets when other aspects in the purchase process are more carefully planned for example forecasting and planning. By utilizing planning, more accurate and wiser purchase orders can be placed. By looking at the results, it was clearly the correct strategy as inventory levels have decreased by a million euros and at the same time average value and item lines per order have increased remarkably.

10.5 Phase two action plan suggestions

Even if obvious success can be noted in results of the project, there is still a lot room for improvements in purchasing processes and procedures. It requires constant follow up and new target settings to make sure the change remains continuous instead of being only a short term temporary change. Also the chances of coincidental success fall off by showing continuous development in a long run.

I would suggest more active category and supplier management in phase two to make sure the supplier base would be optimized to serve company targets and strategies. At the same time there should be still more focus on early involvement of sales, R&D, management and purchasing so that forecasting and planning would always be one step ahead and upcoming requirements are noticed early enough to guarantee possibilities for successful purchasing. In the big picture all operations and development plans are

70 only focusing to serve end customers by adding more and more value into products. Therefore, highly active cross-functional cooperation must take place as eventually all departments in the company are working towards the same goal of producing better products and quality to the end customer.

10.6 Recommendations of stakeholders

Below are comments from Rapala VMC Corp. Batam General Manager Tuomas Ak- kanen and Factory Director Tuomas Mustonen in regards to the project.

“Improving the purchasing process was one of the main initiatives in Rapala Batam's strategic planning. The main target was to reduce the high inventory level and also train our personnel to learn and improve the way of working. We wanted to use an external consultant to bring new ideas in and to be able to focus on this specific project in more detail. Esa managed to bring know-how and also the way of working with the employees was awesome.

We managed to reduce inventory value according to the plan (Figure 10).

Before this training, we didn't have a proper categorizing done for our supplier base. By using the Kraljic portfolio introduced by Esa, we got a much better idea of our suppliers and how to classify them:

• Create and maintain a long term partnership with suppliers that are critical to our business

• Reduce the number of similar suppliers and use the purchasing power to negotiate better deals with a few selected supplier

• Actively find new suppliers and solutions for suppliers that are a bottleneck or might become a bottleneck in future

We often need to buy strategic components for example from China which is very cus- tomized to our needs. This training made us think about our internal processes and how critical information is available to our purchasing team before going into discussion with suppliers. Very often some small details are needed from the engineering team to be

71 able to negotiate the correct needs and sometimes our purchaser needs to look for these details. To improve this, we learned how we should do the mapping of our sourcing processes and activities.

We also identified that some key data in our ERP was missing or wasn't updated. This key data has since been updated - MOQ's, lead times, and records of received quotations. We also planned to add purchase requesting to ERP, but that hasn't been implemented yet and it’s still done manually in the paper.

We successfully implemented a daily management routine. The KPI's we chose are:

• Quantity of active suppliers

• Quantity of purchase requests and rejections

• Quantity of created purchase orders and the orders with less than 3 order lines

This routine helps us to be active in solving issues and to identify the non-value adding activities. By creating daily tasks and actions to reduce non-value adding time we will eventually be able to put most of our working time in tasks that are not only helping our purchasing team to be more efficient and professional in their work but also will improve our competence as a whole to work as a team and improve the results and profitability of our business.” (Akkanen & Mustonen 2020.)

Figure 13. Purchasing daily management board (Akkanen & Mustonen 2020).

11 Conclusions, validity and reliability

11.1 Personal learning

The purpose of the workshop and project originally was only to give my professional insight and try to create a steering force towards change in the factory’s purchasing activities by analyzing and creating a development plan and thus serving for the factory’s operational excellence program. At the time when the project was planned, agreed and commenced, I had no plans at all that it would actually end up being by subject for thesis. Current state analyses and Kraljic matrix (1983) methods were already familiar to me from my earlier work history but I got to utilize GAP analyses very efficiently in this project for the first time and consider it was giving a lot of extra value in recognizing current obstacles and creating possible ways to overcome those obstacles.

I highly value the trust received and the very open approach to this matter by the client, Rapala VMC Corp. The targets of the workshop were clearly informed when discussing and agreeing about the project and all sufficient and requested material were delivered in due time. Also assumptions of current state and broad suggestions for development areas were presented by the client but basically I was given the responsibility to plan and

73 execute the project using the best techniques, tools and methods to my knowledge. The project included a lot change management in multicultural environment and also the workshop consisted a lot of teaching and explaining about proactive and advanced procurement strategies to local purchasing team.

Indonesia has a very fascinating and interesting working culture which is almost the com- plete opposite from the one in Finland. There are completely different set of standards to working in Indonesia than what we’ve used to in Finland. Understanding the differences and working efficiently under new circumstances requires a good understanding of cultural differences and also pure interest towards the local culture. I see myself as a very open minded person for new challenges and I am sincerely interested about different cultures. I personally felt many rewarding moments during the workshops when people who come from completely different kind of cultural backgrounds can find mutual understanding and a very fruitful, honest and open discussions when working together towards a mutual goal.

The real challenge and fascination at the same time in this project was the fact that time was a very limited resource. The vast majority of the project was done in four days on site the Rapala factory in Batam island, Indonesia. Creating a schedule to have enough time for all required analyses and interviews is challenging and having participants in the factory to also commit to the same schedule is nothing to be taken as granted. I would like to believe the project was a success, taking into account time limitations and adap- tation to local culture. Of course I can’t take any credit for the actual daily execution and follow up of the development at the factory as I was not responsible for that.

Considering my personal learning experience in this project, I feel I got to use my professional knowledge efficiently and also learned a lot from a completely different kind of surroundings and working environment. I honestly feel and hope the project was very rewarding in two ways; to myself and my professional learning and to the factory and their development projects.

11.2 Validity and reliability

Reliability of research means the repeatability of results and the ability to supply non- coincidental results. Validity refers to measurement method’s and research’s ability to

74 measure performance accordingly compared to targets. The research should clearly explain what have been done and by who and how measured end results have been reached and if end results are reliable. The formation of material should be carefully explained in details by also informing parties involved in the process. (Hirsijärvi 1977, 216-217)

The methods and results in this research are openly and clearly explained in order to avoid uncertainties. The theories used are relatively well known and when used on a different way as originally was the purpose, as in Kraljic (1983) matrix, it was clearly explained why and how the method was modified to serve purpose in this research.

Theoretical background to this research has been compiled from various literature sources including also some journal publications of which’s reliability is on a good level to my understanding. Practical knowledge is mostly from my personal work history and several non-formal discussions within the professional network surrounding me.

Some of the sources are classified internal company information which for obvious reasons cannot be published. However, none of those hold information that would cause the research to be unjustified or that the research couldn’t be assessed properly as all relevant information in regards to this research have been informed in the study.

11.3 Closing words

I would only like to express my sincere appreciation and thank you to Rapala Batam VMC Corp. with especially the General Manager Tuomas Akkanen for giving me the great opportunity and trust within this project. None the less I’d like to express my appreciation for Factory Manager Tuomas Mustonen and his professional skills, interest and support during the project and the factory purchasing team for their dedication and will- ingness to share information and interest to learn about new methods.

References

Akkanen, Tuomas & Mustonen, Tuomas 2020. Kommentit. E-mail, dated 23.10.2020. Confidental information.

Commisceo Global (1). Indonesia – Language, Culture, Customs and Business Eti- quette. Commisceo Global. https://www.commisceo-global.com/resources/country- guides/indonesia-guide. Read 18.5.2020.

Commisceo Global (2). Cross Cultural Management Guide – Indonesia. https://www.commisceo-global.com/resources/management-guides/indonesia-management-guide. Read 18.5.2020

Cultural Atlas. Indonesian Culture. https://culturalatlas.sbs.com.au/indonesian-culture/indonesian-culture-business-culture#indonesian-culture-business-culture. Read 18.5.2020.

Gelderman, Cees J. & Laeven, T.A.E. 2004. Competition or cooperation? Alternative purchasing strategies for leverage products: an empirical study. Published at the 20th IMP-conference in Copenhagen, Denmark in 2004. https://www.impgroup.org/up- loads/papers/4691.pdf. Read: 22.10.2020

Hirsijärvi, Sirkka & Remes, Pirkko & Sajavaara, Paula 1997. Tutki ja Kirjoita. 11. painos. Kirjayhtymä Oy.

Huuhka, Terttu 2017. Tehokkaan hankinnan työkalut. 3rd revised edition of the 2016 published book Hankintojen kehittäminen: tehokkaan hankinnan työkalut. Books on De- mand. Helsinki

Iloranta, Kari & Pajunen-Muhonen, Hanna 2015. Hankintojen johtaminen. Ostamisesta toimittajamarkkinoiden hallintaan. Fourth, inspected edition. Tietosanomat Oy.

Jones, David J. & Recardo, Ronald J. 2013. Leading and Implementing Business Change Management. Routledge.

Jonker, Jan & Pennink, Bartjan 2010. The Essence of Research Methodology. Springer Heidelberg.

Kananen J. 2010. Opinnäytetyön kirjoittamisen käytännön opas. Jyväskylän ammattikor- keakoulun julkaisuja-sarja. Jyväskylä.

Kanban Zone. Lean Thinking. https://kanbanzone.com/resources/lean/. Read: 10.11.2020

Keough, M. 1993. Buying Your Way To The Top. McKinsey Quarterly 3: 41-62.

Kothari, C.R. 2004. Research Methodology, Methods and Techniques. Second revised edition. New Age International Ltd.

Kotter, John P. 1996. Leading Change. Harvard Business School Press.

Kraljic, Peter 1983. Purchasing Must Become Supply Management. Harvard Business Review Boston 61 (5).

Leanopedia. How to Use the PDCA Cycle to Improve your Business Performance. https://leanopedia.com/the-pdca-cycle. Read: 22.10.2020.

Leconte, Pierre. Conducting A Gap Analysis: A Four-Step Template. https://www.clear- pointstrategy.com/gap-analysis-template/. Read: 7.1.2020.

Lee, Dong Myung & Drake, Paul R. 2010. A portfolio model for component purchasing strategy and the case study of two South Korean elevator manufacturers. International Journal of Production Research; London Vol 48, Iss. 22.

Legge, John David & Leinbach, Thomas R. & McDivitt, James F. & Adam, Asvi Warman & Wolters, Oliver W. & Mohamad, Goenawan Susatyo 2020. Indonesia. Published 13.5.2020. Encyclopedia Britannica. https://www.britannica.com/place/Indonesia/Soils. Read 18.5.2020

Lewis, Richard D 2006. When Cultures Collide. Revised edition. Nicolas Brealey Inter- national.

Logistiikan Maailma. Economic Importance of Procurement. https://www.logistiikanmaailma.fi/en/buyingselling/procurement-and-purchases/economic-importance-of-procurement/. Read: 24.10.2020.

Lucidchart Content Team, 2018. What is Gap Analysis? 4 Steps and Examples to Use. https://www.lucidchart.com/blog/what-is-gap-analysis. Read: 7.1.2020

McNiff, Jean 2013. Action Research, Principles and practice. Third edition. Taylor & Francis Group.

Rapala VMC. About Rapala. https://www.rapala.com/eu-en/content/rapala-general-information/about-us.html. Read: 19.5.2020

Rapala VMC Corp. 2019. Batam Development. Confidental information.

Rapala VMC Corp. 2020. Batam factory optimization. Confidental information.

Rapala VMC Corp. 2020. Batam KPI 2020. Confidental information.

Rapala VMC Corp. 2020. Factory presentation. Confidental information.

Rapala VMC 2020. Financial Statements 2019. https://ml-eu.globenewswire.com/Re- source/Download/8ebfc819-65c5-4dec-9e71-e3d2937fe0d9. Read: 19.5.2020

Rapala VMC 2020. Osakkeenomistajat. Published 30.4.2020. https://rapala- vmc.com/fi/sijoittajat/osakkeenomistajat. Read: 19.5.2020

Rapala VMC. Our History. https://www.rapala.com/eu-en/content/rapala-general-information/our-history.html. Read: 19.5.2020

Rapala VMC 2020. Purchase process v1. Confidental information.

Rapala VMC Corp. 2020. Purchasing development. Confidental information.

Rapala VMC Corp. 2020. Rapala project model. Confidental information.

Rapala VMC. Rapalan historia. https://www.rapala.fi/content/rapala-general-information/our-history.html. Read: 19.5.2020

Rapala VMC 2020. Stock Exchange Release. Published: 4.3.2020. https://ml- eu.globenewswire.com/Resource/Download/8ebfc819-65c5-4dec-9e71-e3d2937fe0d9. Read: 19.5.2020

Rapala VMC Corp. 2020. Vendors Jan-June 2020. Confidental information.

Rope, Timo 2005. Suuri markkinointikirja. 2. painos. Talentum Media Oy.

Sakki, Jouni 2009. Tilaus-toimitusketjun hallinta, B2B – vähemmällä enemmän. 7th re- edition. Jouni Sakki. Vantaa.

Spiller, Peter & Reinecke, Nicolas & Ungerman, Drew & Teixera, Henrique, McKinsey & Co. 2014. The Importance of Procurement Agility: How to Turn Volatility into a Compet- itive Advantage. IndustryWeek. https://www.industryweek.com/supply-chain/procurement/article/21962743/the-importance-of-procurement-agility-how-to-turn-volatility-into- a-competitive-advantage. Read: 24.10.2020.

Sreejesh, S. & Mohapatra, Sanjay & Anusree, M. R. 2014. Business Research Methods, An Applied Orientation. Springer International Publishing Switzerland.

Tamilarasu, V. 2012. Change Management. Summer Internship Society, Vol. 4, Issue-2. International Journal of Management Prudence.

Van Weele, Arjan J. 2018. Purchasing And Supply Chain Management. Seventh edition. Cengage Learning, EMEA.

Van Weele, Arjan 2010. Value Creation and Purchasing Strategy. International Trade Forum 2010, Issue 4, pp.34-35.

Appendix 1 1 (7)

Current state analyses

Appendix 1 2 (7)

Appendix 1 3 (7)

Appendix 1 4 (7)

Appendix 1 5 (7)

Appendix 1 6 (7)

Appendix 1 7 (7)

Appendix 2 1 (7)

GAP analyses

Appendix 2 2 (7)

Appendix 2 3 (7)

Appendix 2 4 (7)

Appendix 2 5 (7)

Appendix 2 6 (7)

Appendix 2 7 (7)

Appendix 3 1 (5)

Kraljic vendors

Appendix 3 2 (5)

Appendix 3 3 (5)

Appendix 3 4 (5)

Appendix 3 5 (5)

Appendix 4 1 (1)

Kraljic overview

Appendix 5 1 (1)

Action plan

Appendix 6 1 (1)

Kraljic overview vol2

Appendix 7 1 (4)

Kraljic vendors vol2

Appendix 7 2 (4)

Appendix 7 3 (4)

Appendix 7 4 (4)