Supply management and procurement at a South African FMCG company : a practical example of developing a decision support tool for managing direct material cost

Wacker, Christian Oliver (2016-03)

Thesis (MComm)—Stellenbosch University, 2016.

Thesis

ENGLISH ABSTRACT: One of the functions within the supply chain of manufacturing companies is the procurement of direct materials that are needed for the production of products sold to consumers. Even though the process of purchasing materials was always required within the manufacturing process, it only recently gained attention on management level. Today, organisations set up centralised procurement functions that develop global sourcing strategies in order to align procurement processes, people and technology. The goal is to reduce total cost while maintaining high quality, availability and service levels. However, procurement functions are challenged by a number of risks during its global sourcing activities that can have major impacts on direct material cost. Johnson & Johnson is a major global player within the Fast Moving Consumer Goods (FMCG) industry and acknowledged a significant sense of uncertainty relating to the identification and measurement of direct material cost drivers within their global procurement function. Even though Johnson & Johnson is aware that the economic environment has an impact on its procurement spend, it has a limited ability to measure and quantify these effects. Based on the case of Johnson & Johnson, this study’s objective was to develop a decision support tool that measures and analyses the impact of cost drivers on direct material cost. The aim was to develop a model that can be used by procurement professionals in industry in order to provide insight into the procurement cost structure and to identify opportunities that can lead to risk and cost reduction. A case study research design was followed, which included secondary and primary research to collect qualitative and quantitative data. The research methods included observations and input discussions at the company, as well as a comprehensive model development process, which was used in order to create the decision support tool. As the decision support tool was developed on the case of Johnson & Johnson, data were collected from the company in order to test the model and generate outputs. Following the individual process steps of the development process resulted in a highly structured and documented approach to develop the decision support tool. Two major cost drivers of procurement spend when conducting global sourcing were identified: fluctuating exchange rates and volatile commodity markets. Both of these cost drivers were analysed and included during the decision-support tool development process. As a result, a decision support tool is presented that provides functionality to measure the exposure and the potential impact value of the first-tier currency impact, second-tier currency impact as well as the inflation impact. Furthermore, “what-if” and scenario analyses provide a predictive view based on actual forecasts. As an additional output, the decision support tool provides detailed insight and transparency of the total procurement spend, providing important information for decision makers.

AFRIKAANSE OPSOMMING: Een van die funksies in die voorsieningsketting van vervaardigingsmaatskappye is die verkryging van direkte materiaal wat benodig word vir die vervaardiging van produkte wat aan verbruikers verkoop word. Hoewel die proses van materiaalaankope nog altyd binne die vervaardigingsproses nodig was, het dit eers onlangs op bestuursvlak aandag getrek. Vandag stel organisasies gesentraliseerde verkrygingsfunksies saam wat globale strategieë ontwikkel vir die verkryging van hulpbronne om sodoende verkrygingsprosesse, mense en tegnologie met mekaar in ooreenstemming te bring. Die doel is om totale koste te verminder terwyl hoë gehalte, beskikbaarheid en diensvlakke gehandhaaf word. Tydens die globale verkrygingsaktiwiteite word daardie funksies egter deur ’n aantal risiko-uitdagings in die gesig gestaar wat ’n groot impak op direkte materiaalkoste kan hê. Johnson & Johnson is ’n vername wêreldspeler binne die industrie vir vinnig bewegende verbruikersgoedere (VBVG) en herken ’n beduidende gevoel van onsekerheid wat verband hou met die identifisering en meting van direkte materiaalkostedrywers binne hulle globale verkrygingsfunksie. Hoewel Johnson & Johnson daarvan bewus is dat die ekonomiese omgewing ’n impak op hulle verkrygingsbesteding het, beskik hulle oor beperkte vermoë om hierdie effekte te meet en te kwantifiseer. Gegrond op die geval van Johnson & Johnson, was hierdie studie se doelwit om ’n besluitsteunhulpmiddel te ontwikkel vir die identifisering en meting van direkte materiaalkostedrywers. Die oorhoofse doel was om ’n model te ontwikkel wat deur verkrygingsberoepslui in die bedryf gebruik kan word om insig in die verkrygingkostestruktuur te voorsien, en om geleenthede te identifiseer wat na risiko en kostevermindering kan lei. ’n Gevallestudienavorsingsontwerp is gevolg wat primêre en sekondêre navorsing ingesluit het vir die versameling van kwalitatiewe en kwantitatiewe data. Die navorsingsmetodes het waarnemings en besprekings by die maatskappy sowel as die omvattende modelontwikkelingsproses ingesluit om hierdie besluitsteunhulpmiddel te skep. Aangesien die besluitsteunhulpmiddel op die geval van Johnson & Johnson berus, is data van die maatskappy versamel om sodoende die model te toets, en uitset te genereer. Die volg van die individuele stappe van die ontwikkelingsproses het gelei tot ’n hoogs gestruktureerde en gedokumenteerde benadering in die ontwikkeling van die besluitsteunhulpmiddel. Twee belangrike kostedrywers van verkrygingbesteding in die uitvoer van globale verkryging is geïdentifiseer: wisselkoersfluktuering en onbestendige kommoditeitsmarkte. Albei hierdie kostedrywers is ontleed en ingesluit tydens die ontwikkelingsproses van die besluitsteunhulpmiddel. Gevolglik word ’n besluitsteunhulpmiddel gebied wat funksionaliteit verskaf om die blootstelling en potensiële impakwaarde van die eerstevlakvaluta-impak, tweedevlakvaluta-impak, sowel as die inflasie-impak te meet. Verder verskaf “wat as”- en scenario-ontledings voorspellende beskouings wat op werklike vooruitskattings gegrond is. As bykomende uitset verskaf die besluitsteunhulpmiddel gedetailleerde insig en deursigtigheid van die totale verkrygingbesteding, en verskaf sodoende belangrike inligting vir besluitnemers.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/98810
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