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Abstract Number: 008-0236

MEASURING SUPPLY MANAGEMENT’S BOTTOM LINE IMPACT

– the Necessity of Participatory Action Research

Prof. Dr. Michael Henke, Head of Chair of Financial Supply Management, Supply

Management Institute (SMI), European Business School (EBS), Soehnleinstrasse 8, 65201

Wiesbaden, Germany, henke@supplyinstitute.org, phone: +49 (611) 360 18 838.

Anna Quitt, Research Assistant, Supply Management Institute (SMI), European Business

School (EBS), Soehnleinstrasse 8, 65201 Wiesbaden, Germany, quitt@supplyinstitute.org,

phone: +49 (611) 360 18 860.

POMS 19th Annual Conference

La Jolla, California, U.S.A.

May 9 to May 12, 2008

Summary: Since Supply Management has become a strategic business partner, top

management expects its corporate value contribution to be accurately measured. However, a

framework for the measurement of the bottom line impact of Supply Management, which is

acceptable for both practitioners and researchers, does currently not exist. By pursuing an

Action Research approach, the theoretical measurement concept, designed by the authors of

this paper, is further developed towards a measurement framework that is scientifically

funded and also viable in practice. In this context, the significance of the participatory

paradigm for future Supply Performance Measurement research is emphasized.

Key Words: Supply Performance Measurement, bottom line impact, category planning,

Action Research.

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1. The Importance of Measuring the Bottom Line Impact of Supply Management

During the last decade the discussions about the development of Supply Management to

become more strategic and to loosen its original role of being the ‘lone commodity buyer’

have been going on (Zheng et al., 2007). However, due to the highly competitive business

environments and complex corporate structures they have become more intense and focused

on the aspect of value creation. “The perception of ‘value added’ is critical to every function

or department in any organization in today’s business environment” (Bales and Fearon, 1993).

Executives want Supply Management in its strategic role to capture value from supply

markets (Blascovich and Markham, 2005). They want to be shown the money by means of

financial bottom line measures (Singhal and Hendricks, 2002), especially in the context of the

value contribution discussion. Therefore, Supply Management has to be concerned about

measuring its solid contribution to the bottom line and to business success in an accurate

manner (González-Benito, 2007).

In today’s perspective, purchasing performance and value creation do not only comprise cost

reductions any more. Supply Management as integral part of the corporate system is expected

to foster the interrelationships of the supply chain, enhancing the “strategic-oriented

philosophy of competitiveness” (Mehra and Inman, 2004). Value creation occurs when

Supply Management shares its knowledge cross-functionally to reach a maximum degree in

transparency, aligns processes, participates proactively in strategic planning, considers risk

management and contributes positively to cost, quality, innovation and flexibility (Blascovich

and Markham, 2005).

In this context, Supply Management is expected to participate proactively in the firm’s

strategic planning process, to be able to align commodity planning, and to integrate with other

business processes (Giunipero et al., 2006), forming cross-functional teams, as it shows that

purchasing as a process is performed by many non-purchasing professionals. By achieving all

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this, a solid network structure – the requirement for facing global competition successfully –

can be established (Gadde and Håkansson, 1994; Zheng et al., 2007).

As a consequence, Supply Management claims to make a major contribution to the overall

business success, which shall be realized by top management (Carter et al., 2005).

Management, hence, asks for an integrated, solid and applicable Supply Performance

Measurement system, in order to entirely capture the bottom line effects, achieved through

Supply Management activities. Thus, Supply Management appears permanently in an internal

and external justification position. On the one side, it reports realized cost savings and

performed measures; on the other side, there is no positive change in the budgets noticeable at

the end of the year (Henke and Jahns, 2007). This is primarily due to the fact that internal

customers use the economized budget for unplanned and hence non-budgeted purposes.

Therefore, it becomes obvious that a contemporary Supply Performance Measurement

concept has to consider the results of these strategic achievements, relate them directly to

corporate success, and enhance thereby Supply Management’s strategic role.

So the general research question can be formulated as follows: How does a concept for

measuring Supply Management’s bottom line impact have to be designed, in order to satisfy

scientific as well as practical standards and requirements?

In the further progress, firstly the state-of-the-art in measuring Supply Management’s bottom

line impact is analyzed. By means of a literature review, current measurement approaches are

explored, and requirements and deficiencies identified. An optimized theoretical measurement

approach is derived from these findings and explained in detail in the subsequent section.

However, the research goal is not only the design of a theoretically valid measurement

concept, but also the assurance of its practical applicability, as the demand for solving this

measurement problem primarily derives from corporate side. Therefore, Action Research,

selected to be the adequate scientific approach, is the focus in the remaining part of this paper.

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At first, the necessity for and the theoretical background of Action Research are outlined. The

description and analysis of the realization of the first feedback loop within corporate context –

leading to the advancement of Category Planning processes – and the detailed discussion on

the obtained insights round this paper off.

2. State-of-the-Art – The Measurement of Supply Management’s Bottom Line Impact

Even though Goh et al. concluded already in 1999 that “with growing emphasis on the

purchasing function, it is especially essential and interesting to have a better understanding of

its role in and its contributions to the organization”, the general research focus still seems to

lie upon the ‘better understanding’ – proving several facets of Supply Management as

significant performance driver – but not yet on the analysis of its concrete contribution.

Doing literature research on Supply Management’s bottom line impact it becomes obvious

that this research topic is addressed by several authors (e.g. Ellram et al., 2002; Chen et al.,

2004; Day and Lichtenstein, 2006). However, it is noticeable that most publications

concentrate on proving causal relationships between single Supply Management elements and

performance, rather than on the design of Supply Performance Measurement systems or on

the measurement of Supply Management’s impact on corporate performance. Certain

requirements and prerequisites, which have to be met by a balanced measurement framework

in order to correspond to the currently expected strategic role of Supply Management, are

only found in literature on general Performance Measurement.

Fearon and Bales (1997) triggered a controversial discussion by asking if there can even “be a

magic formula when each organization has specific goals and objectives that may, and often

do, change over time?” They conclude that to get some degree of generalization, at least

certain elements should be covered when establishing a measurement concept: alignment with

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organizational objectives and management expectations, constant review and adaptations of

measures and the measurement process. The establishment of a balanced relation between

financial and operational measures and the avoidance of one-dimensionalism are identified by

Easton (2002) as further necessary characteristics.

Lewis (1936) was one of the first authors who elaborated on the measurement topic. He

already put the focus on measuring effectiveness, rather than efficiency. The goal of

performance measurement is to “[identify] the success and potential of management

strategies, and facilitating understanding of progress and position” (Chan and Qi, 2003).

Consequently, performance measurement is regarded as management tool (Gunasekaran et al.,

2004), which has to be comprehensive, dynamic and transparent, tied to incentives and

backed up by human resources, why coherent and aligned measurement frameworks become

essential.

This aspect also supports the perspective of Holmberg (2000), who calls for integrated, rather

than interfaced organizations, since measurement is all about relationships: between

functions, between measures and drivers, and between targets and actual figures. He addresses

the problem that due to the weakly established corporate interconnections, different corporate

functions have developed their individual set of metrics and failed to achieve a balanced and

integrated corporate measurement framework; a fact that is counteracting the efforts to foster

the strategic role of Supply Management and integrate it in corporate decision and strategy

processes through the formation of cross-functional teams. Chan and Qi (2003), therefore,

claim especially in the context of Supply Performance Measurement to go beyond

organizational and functional boundaries, and redefine and substantiate Supply Management

within the organization.

One obstacle for successful measurement is measurement in itself, saying that definitions and

baselines of measures are not communicated clearly to those who work with and interpret

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them (Bourne et al., 2002). Another leakage of currently applied financial metrics is their

biased focus, showing only the result of past actions, but not indicating future performance.

However, a management steering tool – in the context of proactive decision-making – should

be forward rather than backward oriented, and not deduct future from past performance, but

base its forecasts on cross-functional systematic knowledge exchange.

Chen et al. (2004) stated that “a systematic empirical investigation […] would go a long way

in establishing the extent to which strategic purchasing contributes to the firm’s bottom line”.

So far it seems that nobody has yet developed the optimal one-size-fits-all-solution.

It can be summarized that a concept, which is capable of measuring Supply Management’s

bottom line impact holistically and strongly, should align its sourcing strategy with corporate

strategy and integrate Supply Management early in strategic planning processes, reaching for

a future-oriented measurement system. Furthermore, all measurement steps – especially the

realization of planned activities – need to be aligned within an integrated framework that also

provides objective monitoring. In order to capture the bottom line impact comprehensively,

cross-functional collaboration has to be established. A standardized measurement variable, for

objectivity and comparability reasons, and Supply Management considered as strategic

function need to form the relevant basis for solid and innovative measurement.

3. A Framework to Measure Supply Management’s Bottom Line Impact

It can be shown that from the theoretical perspective no appropriate approach or concept for

the measurement of the bottom line-effectiveness of Supply Management activities is

presently existent, as “[i]n the measurement community, there is always a debate whether

performance indicators should be focused on activities and processes, or on results” (Chan

and Qi, 2003). An ideal measurement concept, however, should combine both: the concretion

of efficiency and effectiveness, pursuing an anticipative “feed-forward approach” (van Hoek,

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1998), in contrast to the traditional and criticized retrospective approach, which is oriented

towards reaction rather than action.

Measurement

of Supply

Management’s

bottom line

impact

Monitoring

Planning Realization

Standardized variableStrategic Supply Management

Performance Measurement (Effectiveness)

BOTTOM LINE IMPACT- MANAGEMENT

Outcome Measurement (Efficiency)

Co

mm

un

icati

on

flo

w

Figure 1: Concept for Measuring Supply Management's bottom line impact.

Therefore, the newly developed measurement approach (Figure 1) is designed to be capable

of showing exclusively but completely all bottom line effective contributions, beginning the

measurement process with the planning period. ‘Bottom Line Impact Management’ as new

term is introduced, which shall express that the general measurement focus lies upon outcome

measurement. But in order to gain full transparency over the outcome achievement process, a

performance management approach has to precede.

Planning: Supply Management, which impacts budgets and the bottom line directly through

its activities (Ellram and Birou, 1995), is seen as essential and proactive participant in

corporate planning processes (Carr and Pearson, 2002) to address its planned budget savings

already in the planning phase (Mehra and Inman, 2004) and to concretize their realization

through supply measures. The comparison of the originally planned budget with the achieved

budget, under consideration of the realized measures defines Supply Management’s bottom

line impact basically as the difference between plan budget and actual, since an actual-plan-

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comparison is regarded as key of performance measurement (Gleich, 2001). Thereby, budget

savings function as homogeneous, standardized and comparable variable, in contrast to the

currently criticized cost savings (Aramyan, 2007). Via Supply Management’s active

involvement in the budget planning process, also cost avoidance and thus qualitative aspects

can be quantified and the required link between quantitative and qualitative measurement

aspects (van Hoek, 1998) be created.

Realization: To avoid the occurrence of a moral hazard-problem – i.e. Supply Management

benefits from exogenous, non-purchasing-related effects – and to exclusively but

comprehensively record all Supply Management achievements, the realization of the planned

budget savings should be directly linked to the corresponding measures. During the

realization phase, planned measures shall be performed and the focused operationalization of

planned budget savings occur (Wagner and Weber, 2007). It is observable in current research

that there are many Supply Performance Measurement approaches present, but the majority

lacks consistency (Beamon, 1999; Holmberg, 2000). Via this realization step an aligned

measurement system can be achieved (Neely et al., 1995) and the calculation of the outcome

measure performed and traced accurately.

Monitoring: Current measurement frameworks are criticized to be too static, i.e. they are not

easily adaptable to dynamic environments. An optimized measurement concept continuously

needs to equip employees with information that can directly be applied in the context of

decision making and actions in the supply chain (Shepherd and Günter, 2006). Management

and employees have to be flexible with the help of a reporting and controlling system that

monitors the realization of the measures under the year, guarantees the validity of the

measured results, in order to react flexibly to new business challenges, to introduce on time

corrective actions in case of goal offence, and to pursue pro-active, rather than reactive

decision-making.

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Communication flow: Carter et al. (2005) and Holmberg (2000) state that all measurement-

relevant information can only be considered and lead to reliable and complete results when all

affected corporate functions have exchanged strategic information. They pursue the idea of

cross-functional teams, in which experts from different disciplines collaborate and discuss

conjointly future strategic developments and movements and hence lay a solid basis for a

plan-actual-comparison. Thereby, Supply Management – under integration aspects – should

take the lead and contact the other functions pro-actively. Since the supply chain consists of

different actors with diverging interests, cross-functional teams are expected to lead to

transparent and open discussions and to decrease information asymmetries during the

planning period.

Measurement: At first, budgets have been planned by the respective internal customer,

Management Accounting and Supply Management, considering all planning relevant

information. Thereby, Supply Management is able to concretize planned budget savings in the

sense of cost avoidance. As a consequence, budgets are based on solid information and

allocated more efficiently. With a consistent and systematic tracking process during the

business year, the realization of the planned savings can be monitored and measured against

realized savings. With this approach – the combination of planned and on-top budget savings

– Supply Management’s performance can be identified holistically and solidly.

4. Participatory Action Research as Appropriate Research Approach

The presented general measurement framework has been deduced from literature analyses and

constitutes a theoretical concept. Since the research question does not only call for scientific

but also practical relevance and validity, the question concerning the appropriate research

methodology has to be addressed for further validation and verification reasons.

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The Need for Participatory Action Research

In the context of the conducted literature research it has become obvious that authors mainly

apply quantitative empirical analyses with the research focus on the identification of Supply

Management-related performance drivers and their theoretical correlation with corporate

success. Thus, most past and current research approaches are apparently performed under the

positivist paradigm, aiming at the formulation of cause-effect-laws and hardly integrating

practice directly into the research process.

So here the question arises if these currently performed research approaches and streams shall

and can be perpetuated on the search for a scientific as well as feasible measurement solution?

Ulrich (1995), who considers traditional business economics as ‘scientific management’,

responds to the controversially discussed problem – researchers’ active integration in solution

finding processes – that their task should be to acquire knowledge empirically as well as

methodologically, reflect it critically, systemise it and transmit it understandably back to

practice. Especially practitioners’ cognition shall function as effective source of knowledge

(Ulrich, 1995).

In the introductory thoughts, it was outlined that the problem of measuring the bottom line

impact of Supply Management is primarily driven by practice concerns. The positivist

approach implies that a one-size-fits-all measurement concept can be designed (Näslund,

2002). This is, however, not achievable, considering inner-corporate complexity, which is not

capable solely through quantitative methods.

A measurement framework shall be valid under scientific aspects, but simultaneously, since

the problem is primarily addressed from managerial side, fully applicable in practice. In order

to satisfy both claims, the interaction between practice and science is to be established

(Dickens and Watkins, 1999; Gleich, 2001). It becomes essential in the case in which best

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practice can be identified neither in practice nor in theory, to enable the researcher to consider

all practice-relevant aspects already in the conception phase.

Cooper et al. (1997) and van Hoek (1998) claim especially for the field of Supply Chain

Measurement and Näslund (2002) for the field of Supply Chain Management a more action-

oriented research approach, since corporate supply chains have become highly complex.

Applicable and sophisticated concepts are necessary to capture corporate complexity as

delineated above, which cannot be developed only via traditional research approaches

(Cooper et al., 1997; van Hoek, 1998). Thus, positivist findings are an essential and necessary

basis for applied sciences, which try to develop feasible solutions in cooperation with

practice, thereby adopting an Action Research approach under the Participatory Paradigm.

To validate an innovative concept within established organizational structures of the target

corporation, the affected parties – researcher and practitioner – have to be directly involved in

the implementation and verification process. The effect is not only that the resulting change

will be accepted more easily, but also the validation process will be more substantiated

(Marrow and French, 2006). Affected practitioners have to deal directly and personally with

the concept introduction, why their feedback on its practicability and improvement potential

will be more specific – reflecting their personal reality. As a consequence, the researcher’s

task is not only to reflect on the concept structure, but also on personal and interpersonal

effects and implications. The introduction of a measurement concept through Action

Research, thus, advances to a change management project (Coughlan and Coghlan, 2002),

which validates the theoretically designed measurement concept from the scientific as well as

from the practice perspective in a holistic way.

Considering these arguments and additionally the fact that currently no ideal measurement

solution is present in practice – why traditional case study research (Eisenhardt, 1989b; Yin,

2003), in which the researcher as objective observer does not become personally involved in

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the problem solving process, appears suboptimal be applied – field research in the context of

Action Research is selected to be the adequate method to approach the ideal concept to

measure Supply Management’s bottom line impact.

The General Approach of Participatory Action Research

Action Research in general is research in action rather than about action, i.e. in the context of

a three-step cyclical process (planning, taking action, and evaluating action) the solution to a

social or organisational issue is developed by the researcher in direct interaction with those

who are affected by the problem. Hence, the respondents are not research object but research

participants. As a consequence, the resolution leads to a more efficient practical process and

simultaneously to new scientific knowledge (Coughlan and Coghlan, 2002). Kemmis and

McTaggart (2005) see the Action Research process as “spiral of self-reflection” (Figure 2):

planact & observe

reflect act & observe

reflect

revised plan

Source: Kemmis/McTaggart (2005)

Figure 2: Action Research spiral.

Corresponding to the outlined characteristics of the participatory paradigm, the researcher has

to be familiar from beginning with the contextual factors and the problem set itself

(Checkland, 1991; Kemmis and McTaggart, 2005). This social aspect, that the Action

Researcher works within a complex and dynamic system, consisting of the researcher, the

practitioners and the contextual problem is contained by Kaplan (1998), who introduces

Action Research in the field of Management Accounting. The researcher becomes a change

agent, who directly takes influence on the results and on the underlying phenomena. He is

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subjective actor and not objective observer, with the goal to improve and to involve (Dickens

and Watkins, 1999).

During the implementation phase, the researcher does not only learn about the problem and

theory to be implemented, but especially about its drivers and factors for success, relating

Participatory Action Research directly to systems thinking. Systems, as described by

Checkland (1991), are a set of elements, which are connected to each other through individual

relations and form an entity with certain properties. These properties, however, are not the

sum of the system elements, but go well beyond into the interpersonal level, referring to

personal communication and interaction. It is only possible for the Action Researcher and the

practitioners to understand the implementation success or to drive it in advance, when they

analyze and monitor also during the implementation process these interrelationships of the

dynamic and complex organizational problems (Näslund, 2002).

5. Initial Results from the Implementation Process – The First Feedback Loop

So far, the theoretical measurement concept was considered only from the academic

perspective; however, in order to test its validity in practice and to lead it to final

practicability, the concept shall be analyzed in the context of a real implementation process.

For this reason, an internationally leading telecommunication company was selected for field

research.

The company consisted of several independent business units, which focused on distinct lines

of telecommunication. Additionally, they differed in diverging cultures and management

approaches in Purchasing. A central Purchasing Department was existent; however, it

exclusively functioned as strategic coordination unit. All operating purchasing activities were

performed independently within the single business unit purchasing departments, which had

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their individual sourcing strategies and lead buyers, not aiming at the realization of any

corporate bundling or synergy effects.

- Plan -

The field research followed a typical Action Research approach, in which we actively worked

together with a project team on corporate side. The goal was to enable Purchasing to realize

the Chief Procurement Officer’s guidelines: the accurate and sustainable identification of

Purchasing’s bottom line impact. Purchasing reported cost savings annually and claimed

corporate value contribution as a consequence of it. However, at the end of the year it was

only possible through vague estimations to determine retrospectively bottom line effective

savings – Purchasing’s actual value contribution. Thus, the management board required a

substantiated measurement process to obtain reliable and solid results.

Therefore, the introduction and company specific advancement of the theoretically developed

measurement concept was planned to be

the overall project plan (Figure 3). In

order to reduce complexity in this first

implementation phase, one business unit

was selected as pilot.

The field research is planned to cover a period of two years. Since the project has not been

finalized yet, only the first Action Research loop shall be presented in the context of this

paper.

planact & observe

reflectIntroduction

and further

development of

the theoretical

measurement

concept

Figure 3: Action Research Stage 1.

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- Act & Observe -

In the ‘Act & Observe’-stage (Figure 4), the status quo in Performance Measurement and the

readiness for change were analyzed by

means of structured interviews and group

discussions. Also the analysis of open

conversations was taken into

consideration. After having conducted

several interviews with operating

purchasers, the following major deficiencies became apparent:

� General measurement approach: Purchasing was not involved in planning processes.

Therefore, only ex-post measurement of the bottom line impact was possible. At the end of

the year, bottom line effective savings were determined mainly based on estimations and

past experience. Retrospective calculation required high resources and still did not

guarantee accurate results, since realized savings were spent by the internal customers for

unplanned purposes and could, therefore, not be tracked as bottom line effective savings any

more. Consequently, Purchasing never gained full recognition for its performance by top

management, because its savings derivation was based on an unreliable and intransparent

measurement approach.

� Measurement of exclusively cost reductions: Only cost reductions were considered as

savings obtained by Purchasing. As one consequence, Purchasing was concerned about

maximising the difference between planned and realized costs, so called on-top savings, by

indicating higher purchasing prices than actually expected. This circumstance eventually led

to the strengthening of the understanding that ‘the higher the on-top savings were, the better

Purchasing had performed’ and thus to inefficiently allocated budgets always with high

Figure 4: Action Research Stage 2.

planact & observe

reflectStatus quo

analysis

of the current

performance

measurement

approach

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buffers included. Hence, Purchasing was under permanent pressure to reduce costs, also at

the expense of quality and supplier relationships.

Additionally, since Purchasing was not involved in the planning process, cost avoidance

could not be addressed and tracked as its performance. Therefore, holistic performance

measurement was not obtainable and Purchasing again did not gain full recognition for its

achievements, as they were reduced to the realization of exclusively cost reductions.

� Measurement basis: The measurement of savings was based upon baselines which were

intransparent and defined inconsistently. Depending on the arbitrary fact which baseline

was available (market price, last year’s price, lowest offer, etc.), the measurement of cost

savings was based on – within one measurement period – varying baselines, leading to

inconsistent and incomparable measurement results.

� Time reference: Additionally to the previous concern, measurement baselines did not

consistently correspond to the 12 months-rhythm of the planned business year, required for

measuring P&L-effective savings. Therefore, Purchasing’s value contribution could not be

applied precisely to the P&L-period.

� Consistency: Since exclusively positive savings were identified and reported, negative

effects were neglected and did not lead to a reduced performance. As a consequence, in the

case of rising budgets and reduced Purchasing performance, it could happen that positive

savings were shown anyway. This again led to a strong distrust from corporate side in the

performance announced by Purchasing.

These deficiencies affected the core of measuring Supply Management’s bottom line impact:

The measurement approach and process itself. They prove that the budget approach, which

was to be introduced, apparently provides solutions for these deficiencies: It starts with

planning budget savings for the particular business year, which changes the measurement

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process from past to future oriented; it uses these solidly planned budgets, which include

planned cost avoidance and refer to the particular business year only, as consistent baseline.

However, the following deficiency appeared to be most important and essential to be changed

in order to be able to strongly implement the measurement concept:

� Purchasing as re-active, non-integrated corporate function: “The internal customer knows

prices and conditions on supply markets and plans its budgets autonomously. Afterwards it

tells Purchasing what has to be bought.” Following this statement, Purchasing did not

consider itself as essential corporate function that disposes of the capacity to add significantly

to corporate value. It lacked entrepreneurial spirit. Purchasing was told top-down to see the

necessity to measure its bottom line impact, but simultaneously did not realize the necessity to

change its mind-set: From the ‘lone commodity buyer’ (Zheng et al., 2007) to the strategic

business partner that was integrated in all those planning process, for which it could deliver

significant informational input. Purchasing was neither ready nor intrinsically motivated for a

change, which was to be triggered through the implementation of an innovative measurement

concept, because its organizational structures were traditionally oriented and strongly

established.

Since this aspect appeared to us pivotal for an implementation success, the focus of the

‘Reflect’-stage was decided to be laid upon the resolution of this deficiency (Figure 5).

- Reflect -

The above statement shows that the self perception of Purchasing corresponds to the image of

a traditional operating Purchasing department, which was not integrated in any strategic

decision making processes, even though it was supposed to be the expert in supply markets

and purchasing price planning. The further goal for this first feedback loop had to be that

isolated operating Purchasing became integrated strategic Supply Management (Figure 6).

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The internal customer planned as budget owner

in correspondence with Management

Accounting – in the context of the established

corporate strategic and financial planning

process – its strategy and budget. Especially

among the different internal customers, regular

information and knowledge exchange took

place, to get an overview of the planned

activities, events and projects for the corresponding business year and to plan external and

internal demand as precise as possible.

Re-actionPro-action & Integration

Financial

Planning/

Budgeting

Purchasing

Financial

Planning/

Budgeting

Figure 6 : From re-active to pro-active – from Purchasing to Supply Management.

In this planning process, Purchasing pro-actively neither conducted market research, nor

supplied internal customers and Management Accounting with information for efficient

budget planning. Purchasing only reacted on request, which is illustrated through the dotted

arrow in Figure 6. This procedure led to the following negative effects:

� Inefficient budget allocation: In the planning procedure, there was no control instance that

monitored the real budget requirements of the internal customer. Due to this typical

planact & observe

reflect

Supply Management’s self-perception

and perception of the other as pro-

active and equal business partner, and

early planning integration as essential

measurement pre-requisites.

Figure 5: Action Research Stage 3.

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principal-agent problem (Eisenhardt, 1989a), budgets were likely to be allocated

inefficiently, since internal customers declared broader budgets.

� Insufficient category planning: Because Purchasing was not actively involved in the budget

planning process, it did not basically receive information on future demand and purchasing

volume in advance. As a result, the category manager was not able to plan its category

holistically, which led among others to supply shortages in case of unexpected higher lead

times and higher purchasing prices.

Therefore, Purchasing – not yet with the ambition to prove its corporate value contribution –

remained reactive in the background, avoiding an increased aspiration level, and the internal

customer – without the ambition to introduce a monitoring instance – pursued the

continuation of the traditional planning structure. Because organizational and working

structures had been well consolidated by Purchasing as well as by the internal customers and

Management Accounting, the need for change was not realized on either side.

Thus, after having identified Purchasing, the internal customer and Management Accounting

as the parties which should be involved in the planning process, it became our prevalent task

to construct the planning phase in such a way that all three departments realized the necessity

of cooperation, accepted each other as equal strategic business partners, and obtained the

possibility to conduct this new planning process in a systematic way.

- Revised Plan -

As long as Purchasing did not realize the need for change, it would not cooperatively

elaborate on the measurement concept. Before the actual measurement process could be

initiated and tested, the planning phase emerged to be the most essential stage for a successful

implementation of the measurement process.

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On the one side, it is necessary to lay the basis for transparent and traceable performance

measurement. All relevant

information has to be discussed and

documented in order to found

planning assumptions and budgets

properly. On the other side,

planning is the phase in which –

especially when first implementing the concept – Purchasing and the other planning partners

are affected most by the mindset change. Formerly following traditional consolidated

procedures, now a new player enters the system, causing systemic imbalance.

Thus, the ‘Plan’ had to be revised: Now the focus is laid on the conception of a systematic

and change-fostering planning process that facilitates the first step towards a mutual approach

(Figure 7).

Ferguson et al. (1996) state that ideal purchasing planning through its constant monitoring of

and interaction with internal and external environments adds significantly to corporate

competitive advantage. Thereby, the supply environment, product features and quality,

marketing and corporate strategy have to be considered as planning aspects, which also

constitute the revised planning procedure (Figure 8).

In order to enable Supply Management to integrate in the corporate strategic planning

process, templates as planning tool were developed, which are to be completed in cooperation

with the category-specific internal customer. Management Accounting thereby functions as

monitoring instance, driving the accuracy of the indicated contents. The effect is the

establishment of cross-functional collaboration and the creation of a systematic planning

checklist and information-collecting tool. With the help of these templates, each category-

relevant planning aspect is covered in a structured way.

planact & observe

reflect revised plan

Development of sys-

tematic planning templates

and establishment of cross-

functional planning work-

shops.

Figure 7: Action Research Stage 4.

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Corporate &

Environmental Analysis

• Attractiveness

of Supply

Market

• Purchasing

Power

• Supply Chain

Management

Category

Strategy

• Assessment of

expected budget.

• Documentation and

evaluation (also

concerning risk) of

planned measures.

• Reporting of planned

budget effects.

• Solid identification of

planned budget.

Measures &

Budgeting

Strategic Category Planning Budgeting

Update and coordination with Controlling

(prepare for budget)

1.

2.

3.

5. 6.

Corporate Strategy

Innovation & Technology

Internal &

External

Customers

Supply

Market

4.

Figure 8: Revised Planning Procedure.

The templates are not only used for planning reasons, but also function during the period and

especially at the end of the business year as document, which contains all information and

assumptions on which the planned budgets were based. In case of planning adjustments, this

information becomes especially important.

� Corporate & Environmental Analysis: This section consists of four individual templates

(T1-T4), which treat Corporate Strategy, Innovation & Technology, Internal & External

Customers, and the Supply Market in the form of a traditional corporate and environmental

analysis. The following corresponding question shall be discussed holistically within each

template:

T1: Which corporate strategies and projects will have impact on my category?

T2: Which technological developments and innovations will have impact on my strategy?

T3: How will the demand of my internal and/or external customers develop?

T4: Which developments of the supply market and price will have impact on my category?

Each template, containing category-relevant planning parameters, e.g. corporate growth

scenario (T1), new technology (T2), marketing events (T3), seasonalisation (T4), asks the

- 22 -

supply manager and internal customer to evaluate and concretize the relevance of the

corresponding parameter for the particular category, to indicate sources of knowledge, and

additionally in T3 and T4 to provide substantiated quantitative effects of the single

parameter on purchasing quantity and price respectively on product level. These four

templates enable the purchaser to primarily collect all necessary planning information, make

sound planning assumptions, and document them systematically for the measurement

process during the business year. By means of a status report-system, it can be guaranteed at

the end that each parameter was addressed for planning purposes, even if it was identified to

be irrelevant.

� Category Strategy (T5): After having indicated in Templates 1-4, if the particular planning

parameter was relevant for strategic (mid- to long-term) and/or budget (short-term)

planning, based on this information the category strategy can be formulated in Template 5.

The category strategy, which is primarily of operating character and therefore to be adapted

during the business year, shall enable the category manager in a concrete way to optimize

procurement patterns for his or her category. It functions as a moving roadmap for Supply

Management. The category manager gains in flexibility, because with the help of the

Templates he or she becomes aware well in advance of potential or assured events or

activities, which do not only have to be triggered on the supply market but also by the

management board or the internal customer. As a consequence, the basis for Supply

Management to perform its activities as efficiently and thoroughly as possible is laid in

Templates 1-5.

� Measures & Budgeting (T6): If in T3 and T4 the individual planning parameter was

indicated relevant for budget planning, concrete effects on purchasing quantity (T3) and

price (T4) had to be indicated respectively. The calculation of the expected budget for the

planned period, which is carried out in Template 6, follows the price x quantity-logic and

- 23 -

includes the in T3 and T4 indicated quantity- and price-relevant information. Continuing on

the product-level, expected budgets per category-product are calculated.

Expected budgets reflect this volume which would have to be determined if Supply

Management would not perform any cost-decreasing activities. It functions as the

measurement baseline within the new measurement approach, against which all savings – in

our budget-approach newly defined ‘budget effects’ – are measured.

As next step, Supply Management has to address its savings potential, which is planned and

expected by Supply Management to be realizable during the planned period. Purchasing

activities, which are deducted from the Category Strategy in T5 (e.g. bundling, supplier

diversification, global sourcing, etc.) have clearly to be indicated and substantiated by

means of quantitative budget savings. These planned budget savings (Cost Avoidance), after

the consideration of their realization-risk potential, are offset against the expected budget

and lead eventually to the planned budget, which is ideally approved by Management

Accounting (Figure 9).

The planned measurement continuation is outlined along general lines, based on the current

practice insight and initial results from this first phase: At the end of the business year, the

final comparison of the Planned Budget and Actual (considering external effects, which were

not caused by Supply Management) result in on-top budget savings. Since the planned budget

effects have been tracked during the business year and the realization of the measures can be

attributed to the realized budget effects, planned and on-top effects can clearly be

distinguished. The sum of planned and on-top budget savings eventually equals to Supply

Management’s total bottom line impact.

- 24 -

bottom line

impact

On-top

budget

savingsExternal

effects

Actual

* Expected budget without active involvement of Supply Management.

** Exclusive consideration of realized effects in the context of the measurement process.

Planned

Budget

-/+-/+

Expected

Budget*

Planned

budget

savings**

Realization MeasurementCategory-Planning

Figure 9: Measurement Logic.

6. Discussion and Conclusion

This Action Research project was initiated with the plan to implement the theoretically

developed measurement concept, beginning with the planning phase. However, it was not

conceivable in theory that these corporate issues, discussed above, will have a significant

impact on the design and success of the planning phase.

In theory, it was obvious that in order to be able to measure the bottom line impact at the end

of the year, Supply Management’s planning integration is necessary. How this is achievable

and which obstacles have to be overcome, became only evident through this field research.

Based on the interaction with practitioners, Templates 1-6 were created and designed such a

way, that not only a systematic category planning process was guaranteed, but especially a

basis and guideline for strongly establishing the system change was provided: The acceptance

– on side of the internal customer and Management Accounting to integrate Supply

Management equally in the budgeting process, and on the side of Purchasing to develop itself

- 25 -

to a strategic function that is of major importance for corporate success – by means of

systematic cross-functional correspondence and collaboration.

In the context of the second feedback loop, the task will be to implement the Templates and

reflect on the reactions of the affected parties. It is expected that the pure introduction of the

Templates will not suffice, but that upstream workshops, especially treating the benefits of the

systemic change for all affected parties, will have to be hold.

The goal of the measurement concept was to early involve Supply Management in the internal

financial planning and budgeting process, in order to support the creation of realistic budgets

and to complement the planning process through the supply market perspective. It could be

observed that the awareness for a change in mindset was triggered on corporate side only

through this change project. With this external systemic irritation, purchasers started to realize

the gap between their actual and expected corporate role and capacity and with this step

enabled us to support them in their further advancement.

The expected increased compliance of the internal customers is another positive effect of the

targeted measurement approach. Since Supply Management accomplishes with the help of the

Templates a transparent and well-documented measurement approach, the tolerance toward

the internal customer to spend saved budgets for unplanned demand is expected to decrease,

as can be deduced from internal customers’ reactions towards our measurement concept.

These initial insights from our field research have proven that a theoretically substantiated

concept design cannot address all practice relevant measurement aspects and obstacles.

Action Research becomes necessary. However, they also imply that after considering the

challenges, emerged in practice, in the concept design, Supply Management’s reputation can

be visibly increased and the bottom line impact be measured in a transparent and reliable way.

In the course of this paper, it should have become apparent that in theory only the general

framework of measurement concepts can be developed; its contents and details, however,

- 26 -

which make the concept applicable and valuable for science as well as for practice, can only

be reached through direct interaction between researcher and practitioner – through

Participatory Action Research.

- 27 -

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