Michael A. Stolle From Purchasing to Supply Management

Michael A. Stolle From Purchasing to Supply Management

GABLER EDITION WISSENSCHAFT Einkauf, Logistik und Supply Chain Management Herausgegeben von Professor Dr. Christopher Jahns Die Schriftenreihe stellt den State-of-the-art betriebswirtschaftlicher Forschung am Supply Management Institute SMI im Bereich Einkauf, Logistik und Supply Chain Management dar. Die Verbindung von Theorie und Praxis steht dabei ebenso im Vordergrund wie die internationale Ausrichtung und die unmittelbare Verknüpfung der Themen Einkauf, Logistik und Supply Chain Management.

Michael A. Stolle From Purchasing to Supply Management A Study of the Benefits and Critical Factors of Evolution to Best Practice With a foreword by Prof. Dr. Christopher Jahns GABLER EDITION WISSENSCHAFT

Bibliographic information published by Die Deutsche Nationalbibliothek Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at <http://dnb.d-nb.de>. Dissertation European Business School Oestrich-Winkel, 2007 D 1540 1st Edition 2008 All rights reserved Betriebswirtschaftlicher Verlag Dr. Th. Gabler GWV Fachverlage GmbH, Wiesbaden 2008 Editorial Office: Frauke Schindler / Britta Göhrisch-Radmacher Gabler-Verlag is a company of Springer Science+Business Media. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, mechanical, photocopying or otherwise without prior permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Printed on acid-free paper Printed in Germany ISBN 978-3-8349-0887-2

Foreword Supply management has received increased attention both in research and practice only recently. For decades, purchasing management was considered one of the least complex business functions. However, in a world of decreasing in-house value add in nearly all industries, it has become strategically critical for most companies to pay closer attention to purchasing spend. Many companies found that there is a lot more to have from suppliers than "the right goods at the right place at the right time". Several researchers investigating the transition from traditional purchasing to strategic supply management found a discrepancy between the general discussion of strategic supply management and reality in most companies. Given the well-known examples of high-performing purchasing organizations and the myriade of books both by researchers and practitioners on what good practices in supply management look like, this is an interesting observation. This dissertation investigates reasons for this discrepancy to help companies overcome the barriers of purchasing evolution. Michael Stolle combines organizational theories on organizational learning, resource-based view, and principal-agent conflicts to explain the challenges such a profound change of mindsets and culture presents. He develops a theoretical framework of purchasing evolution that shows the complex interactions of different driving factors that have to go together to make a successful transition possible. Finally, an interview-based empirical study is used to verify this framework empirically. To research, this thesis is a significant contribution in two distinct ways: On the one hand, Michael Stolle is the first to present a comprehensive and empirically verified framework of purchasing evolution. Prior research has always been limited to either partial problems or conceptual frameworks only. On the other hand, the evaluation of interview-based survey data using Partial Least Squares structural equation modeling provides researchers across business research disciplines with an interesting alternative to questionnaire-based empirical research. Practitioners who want to understand what it takes to make a real difference in their purchasing organization, will find this book particularly helpful. Michael Stolle describes the critical building blocks of successful supply management in detail. More important though, his empirical research shows how these building blocks

VI Foreword interact and influence each other. It becomes clear that implementation of individual "best practices" is not effective, maybe even impossible. Purchasing organizations have to go through a holistic evolution. Univ.-Prof. Dr. Christopher Jahns

Acknowledgements This dissertation could not have been written without continuoued support and contributions by several people. The research this book is based upon resulted from a research cooperation between the Purchasing and Supply Management Practice of McKinsey & Company, Inc. and Supply Management Institute of ebs European Business School. Many researchers and practitioners from both organizations have contributed significantly to the findings presented in the following. First of all, I would like to thank Dr. Nicolas Reinecke with McKinsey & Company, Inc., for providing me with the unique opportunity to participate in this research effort as part of my professional career and for allowing to use the findings for my doctoral thesis. His practical experience, intellectual curiosity, and valuable guidance made this research effort possible and successful. I am also deeply grateful to Prof. Dr. Christopher Jahns, the Executive Director of Supply Management Institute and my doctoral supervisor, both for the great contributions he and his team made to our research cooperation and the support provided for my doctoral thesis. I appreciate his open and honest feedback. I thank Prof. Dr. Jean-Paul Thommen for the fast and positive review in his role as 2nd supervisor for this doctoral thesis. Many researchers and practitioners have been involved in the research effort this doctoral thesis is based upon and I appreciate their contributions. For significant contributions, I owe special thanks to Prof. Dr. Evi Hartmann, Prof. Dr. Roger Moser, Julia Wolf, and Dr. Handik Widiarta with Supply Management Institute; Peter Spiller, Christian Herge, and Christian Baier with McKinsey & Company, Inc., and all the McKinsey partners who helped us by inviting their clients for our empirical study. Moreover, I would like to thank all Chief Purchasing Officers who took the time to participate in our interview-based empirical study. I really do hope that the feedback and insights we were able to provide were found to be helpful in practice. Finally, a big thank you goes to my wife Stefanie, my family, and friends. They made the time of my doctoral studies a special period in life for me. Michael A. Stolle

Table of contents Table of figures Table of tables List of abbreviations XIII XV XVII 1 Introduction 1 1.1 Problem definition 1 1.1.1 Well-described "best practices" in research literature 2 1.1.2 Many companies struggling with transformation 3 1.1.3 Little prior research on how to manage PSM evolution 4 1.2 Research objectives 6 1.3 Study outline 8 2 A brief overview of the status quo in PSM evolution research 11 2.1 Purchasing and supply management Claim and reality 11 2.1.1 Historic review of purchasing and supply management in literature 11 2.1.2 Indication on the current status in practice 13 2.1.3 Differentiation and definition of purchasing and supply management 15 2.2 Theoretical models of purchasing evolution 19 2.2.1 Prior purchasing evolution models in literature 19 2.2.2 Models of purchasing and supply management in literature 22 2.3 Empirical evidence on the benefits of PSM evolution 27 2.3.1 Systematization of studies 27

X Table of contents 2.3.2 Empirical studies using first generation evaluation methods 30 2.3.3 Empirical studies using structural equation modeling 37 2.4 Interim summary 41 3 Organization theories perspectives on PSM evolution 45 3.1 PSM evolution as a source of sustained competitive advantage 45 3.1.1 Introduction to resource-based view theory 46 3.1.2 Introduction to dynamic capabilities theory 49 3.1.3 Discussion of implications for the potential impact of PSM evolution efforts 52 3.2 The PSM evolution process from an organizational learning perspective 53 3.2.1 Introduction to organizational learning theory 53 3.2.2 Discussion of implications for a dynamic model of the PSM evolution process 61 3.3 PSM value creation as a principal-agents conflict 62 3.3.1 Introduction to agency theory 62 3.3.2 Discussion of implications for the management of PSM evolution efforts 64 3.4 Interim summary 65 4 A new conceptual model of drivers of PSM evolution 67 4.1 Enablers of PSM evolution 68 4.1.1 Mindsets and aspirations 69 4.1.2 People management 73 4.1.3 Structures and systems 77 4.2 PSM value creation 81

Table of contents XI 4.2.1 Category value creation strategies 82 4.2.2 Strategy implementation 86 4.2.3 PSM performance contribution 91 4.3 Development of hypothesized relationships 94 4.3.1 Influence of enablers on PSM value creation 95 4.3.2 Influence of PSM value creation practices on performance 99 4.3.3 A dynamic model of PSM evolution 102 4.4 Interim summary 106 5 An empirical analysis of drivers of PSM evolution 107 5.1 An interview-based survey approach 107 5.1.1 Scale development and operationalization of constructs 108 5.1.2 Data collection approach 116 5.1.3 Population and sample 126 5.2 Evaluation approach 130 5.2.1 Evaluation concept 130 5.2.2 Data hygiene and control for noise 137 5.2.3 Validation of interview-based data collection approach 153 5.3 Results of PLS model estimation 158 5.3.1 Validation of PLS measurement model 158 5.3.2 Validation of PLS structural model 164 5.3.3 Discussion of empirical findings 170 5.4 Interim summary 182 6 Summary and conclusions 185 6.1 Contributions to management research 185

XII Table of contents 6.2 Implications for management practice 188 6.3 Limitations of the study and suggestions for further research 189 References 193

Table of figures Figure 1 - The continuum from purchasing to supply management 18 Figure 2 - Purchasing evolution model by Reck and Long 20 Figure 3 - Purchasing evolution model by Burt and Starling 21 Figure 4 - Supply Management Value Chain by Kaufmann 23 Figure 5 - Supply Management Navigator by Jahns 25 Figure 6 - Four Pillars of Purchasing and Supply Chain Excellence by Monczka, Trent, and Handfield 27 Figure 7 - Overview of selected prior empirical studies 29 Figure 8 - Correlation results found by Tan, Kannan, and Handfield 30 Figure 9 - Framework of strategic role of purchasing by Goh, Lau, and Neo 31 Figure 10 - Confirmation of purchasing competence construct by Das and Narasimhan 36 Figure 11 - Model of strategically managed buyer-supplier relationships by Carr and Pearson 37 Figure 12 - Model of strategic purchasing and supply management by Chen, Paulraj, and Lado 39 Figure 13 - Model of the impact of strategic skills by Eltantawy 40 Figure 14 - Basic assumptions of resource-based view theory by Barney 48 Figure 15 - General model of adaptive behavior by March and Simon 55 Figure 16 - Theory of performance feedback by Greve 56 Figure 17 - Conceptual research framework 67 Figure 18 - The S-curves of PSM evolution 104

XIV Table of figures Figure 19 - Example dimension of interview guide 121 Figure 20 - Contacting process funnel 127 Figure 21 - Representation of the population 129 Figure 22 - Distribution of average survey scores 138 Figure 23 - Conceptual example of missing value influence 141 Figure 24 - Comparison of CPOs' self-assessment to average interview score 156 Figure 25 - Overview of significant path relationships 178 Figure 26 - Simplified example model 179

Table of tables Table 1 - Operationalization of constructs 113 Table 2 - Calculation of company performance measures 124 Table 3 - Distribution of interview-based PSM practice scores 139 Table 4 - Distribution of performance measures 142 Table 5 - Control variable coefficients for PSM practices (1/2) 146 Table 6 - Control variable coefficients for PSM practices (2/2) 150 Table 7 - Control variable coefficients for performance measures 152 Table 8 - Bivariate Pearson correlation coefficients of PSM practices against performance 155 Table 9 - PLS measurement validation 161 Table 10 - Validation of PLS structural model 167 Table 11 - Overview of direct and indirect effects 172

List of abbreviations ADF asymptotically distribution free bn billions COGS cost of goods sold CPO chief purchasing officer (or equivalent titel) EBIT earnings before interest and tax EBITDA earnings before interest, tax, depreciation, and amortization EDI electronic data interchange ERP enterprise resource planning e. g. exempli gratia, for example HR human resources IT information technology i. e. id est, that is ML maximum likelihood mn millions M&A mergers and acquisitions NA North America OEM original equipment manufacturer OLS ordinal least squares PLS partial least squares PSM purchasing and supply management RFx request for x, e. g., proposal (RFP) ROA return on assets ROI return on investment RoW rest of world SEM structural equation modeling TCO total cost of ownership TQM total quality management TRS total return to shareholders ULS unweighted least squares USD U.S. dollars VAF variance accounted for VIF variance inflation factor WLS weighted least squares