Purchasing Strategies for Sara Lee/DE’s New Instants (Public Version) Jan Veldhuizen University of Groningen Faculty of Management & Organization Section Production & Service Management March 2005 Important Note: Because of the confidentiality of the information regarding the New Instants (i.e. supplier names, volumes, spend, etc.), some data has been changed. This does not have consequences for the research and conclusions. The study with the original data is known at Sara Lee/DE. 2 Preface This report is based on the research I have conducted at the Procurement Department of Sara Lee/DE in Utrecht, the Netherlands. As a graduation thesis, this is the final piece of my study Management & Organization at the University of Groningen in the Netherlands. I would like to thank my supervisor from Sara Lee/DE, Michel van der Broek, who gave me all openness in business and taught me how purchasing works in ‘the real world’. Also I would like to thank Jacqueline Lisseburg, Henriette van der Elzen, Anne-Maaike Molter, Marije Gast and all others colleagues involved in my period within the organization of Sara Lee/DE. Bart and Eric, our ‘secret’ meetings in Sara Lee/DE’s coffee corner were unforgettable, cheers for that. I would like to thank my supervisors at the University, especially Dr. Van der Vaart. His patience with me and his willingness to help out were necessary were outstanding. Also I’d like to mention my time in Groningen. Clayton, sharing a canal-boat with you was amazing. Jeroen, Tim, Joeri and Maarten; Groningen will never be the same without us! Last but not least, I’d like to thank my mom and dad, who have been extremely supportive. Hoevelaken March 2005 Jan Veldhuizen Student nr: 1085298 Supervisors from the university: - Dr J.T. van der Vaart - Dr J. de Vries Supervisor from Sara Lee/DE: - M. van der Broek 3 Abstract This research has been concerned with the improvement of the purchasing strategies of the New Instants product portfolio. A few problems have been the reason for this research: - Proliferation of different products, names and packaging - No co-ordination between United States and non United States business - Many different suppliers Together with the objective of the Procurement Department, to enrich their knowledge of purchasing and achieve transparency in their processes, the following research question has been defined: Which purchasing strategies should Sara Lee/DE use to achieve her goals and how should these be developed? The analyses can be divided in three different parts: - Product portfolio - Make-or-buy issues - Buyer-supplier relationships With regard to the product portfolio, the following can be said. With the help of theory, it has been shown that most of the cost savings can be made in the specification process. Streamlining the product portfolio makes the purchasing process easier. There are many opportunities to streamline the New Instants portfolio. There are 350 different SKU’s and 109 of these SKU’s represent a volume of only 17.500 kilograms or less. Getting rid of these SKU’s would simplify the portfolio, it is however not sure if these SKU’s have the same recipes as other SKU’s. If so, there would not be that many cost savings. Secondly there are many different weights per consumer unit. A lot of these weights have very low volumes or the weights have values very close to each other. Combinations could be made to reduce the number of different weights per consumer unit. There are various packaging types, which come in very low volumes, which should be reconsidered. Especially when a lot of these packaging types could be replaced by others, because they have matching weights per consumer unit and the commonality is high. This research has also outlined the make-or-buy issues. It becomes clear that the cost element is not the only factor in making a decision on this topic. Making coffee, which is used in the cappuccino products is a core competence of Sara Lee/DE. Theory suggests that the company should make this herself. Especially, because SL/DE has got an over capacity at the moment, which makes the production cheaper. It is however not known if this over capacity is structural. Partial outsourcing could be an option for the cappuccino products. In this case the use of coffee of Sara Lee/DE should be a restriction for suppliers. The Creamer and Chocolate products should be outsourced completely. In the relationships with the suppliers, there is a balanced situation of mutual dependency. Most important factors for the power of Sara Lee/DE is her attractiveness for suppliers. On the other side, all the special/unique requirements which are asked give her a weaker position. Streamlining the product portfolio and making the specifications more general would give Sara Lee/DE more power as a buyer. More should be done to reduce the supply risk and make the spend per SKU bigger. This can be done through combining several SKU’s, which gives potential scale advantages. Currently there is a single sourcing policy, however multiple sourcing could result in higher cost savings. The product portfolio has got a great potential for globalization. Adjustments within the productportfolio have to be made to lower the local dependency. This globalization will need a tighter coordination of the firm’s 4 activities. An integrated sourcing strategy would be a good option, instead of the current multi domestic sourcing strategy. The main conclusion is that the purchasing strategy starts with reconsidering the product portfolio. When this is completed, it is important to think about the make-or-buy decisions. Finally, the focus should be on the buyer-supplier relationship. The main recommendations are listed below: - Reduce number of SKU’s - Reduce number of packaging types and weights per consumer unit - Sara Lee/DE should make coffee ingredient for cappuccino products herself - Globalization to increase the potential scale advantages - Multiple sourcing to increase power - More authorities Coreline Manager to prevent proliferation 5 Index Preface 3 Abstract 4 Index 6 Introduction 8 1 Sara Lee/DE 9 1.1 Introduction 9 1.2 Sara Lee/DE 9 1.3 Finished Products 12 1.4 Conclusion 17 2 Research Design 18 2.1 Introduction 18 2.2 Reason of this research: Project Streamline 18 2.3 The research 20 3 Problem Focus 28 3.1 Introduction 28 3.2 Costs as main performance objective 28 3.3 Lowering costs by improved purchasing 29 3.4 Conclusion 31 4 Purchasing at Sara Lee/DE 32 4.1 Introduction 32 4.2 General information and products 32 4.3 Organization 33 4.4 (Development of) Purchasing strategies 36 4.5 Conclusion 39 5 Analysis – The Productportfolio 41 5.1 Introduction 41 5.2 (Theoretical) Relevance 41 5.3 The Productportfolio in short 42 5.4 Streamline/ Rationalization 43 5.5 SKU 43 5.6 Weight 45 5.7 Packaging type 48 5.8 Packaging material 50 5.9 Conclusion 51 6 Analysis – Make or buy? 52 6.1 Introduction 52 6.2 Triggers of make-or-buy questions 52 6.3 To make or not to make? That’s the question 53 6.4 Factors in decision-making 54 6.5 Implications for purchasing 56 6.6 Summary advantages and disadvantages outsourcing 57 6.7 Outsourcing: Partial or complete? 57 6.8 Conclusion 58 6 7 Analysis – Buyer-Supplier relationship 59 7.1 Introduction 59 7.2 Market Analysis 59 7.3 Relationship 62 7.4 Single or multi source 66 7.5 Global strategy 68 7.6 Conclusion 71 8: Conclusions and Recommendations 72 8.1 Conclusions 72 8.2 Recommendations 73 Literature 75 Appendix 1: Team ‘Streamline’ 76 7 Introduction This research is concerned with the improvement of purchasing strategies at Sara Lee/DE, with the objective to increase cost savings. The focus of this research will be on the purchasing strategy of a specific product category, New Instants. Examples of these products are cappuccino powder and cacao powder. The objective of this research is: Presenting recommendations for purchasing strategies and the development of these strategies – regarding the purchasing of New Instants – with which Sara Lee/DE can achieve cost savings and improve her profit. The first chapter will give a general description of Sara Lee/DE. Also, it will describe finished products and in particular a category of finished products: New Instants. Secondly, the research design is presented. This chapter will deal with the reason of this research. Also, the objectives and research question are presented. The next chapter will discuss the problems stated in the research design. The question which will be answered in this chapter is: ‘Why are these problems so important?’ Chapter three will describe the purchasing organization within Sara Lee/DE. The analysis will start with a closer look at the Productportfolio of Sara Lee/DE’s New Instants. This chapter starts with a description of the theoretical relevance of looking to the portfolio. After this, strong and weak points will be described, and the threats and weaknesses will be given. The second chapter of the analysis will focus on Make-or-Buy dilemmas. This chapter will investigate the issue if Sara Lee/DE should make the New Instants herself, or if she has to buy them. Other options will be discussed as well, for example partial outsourcing. The analysis will end with the buyer-supplier relationships. Issues like dependency, relationships, multi- or single-sourcing, and global purchasing strategies will be discussed in this chapter. This research will end with the most important conclusions and recommendations. 8 Chapter 1: Sara Lee/DE 1.1 Introduction To get a better view of the organization where the research has been performed, this chapter will introduce Sara Lee/DE in general.