Total Cost of Ownership in Global Sourcing: A Case Study at Siemens Industrial Turbomachinery AB

125 Pages·2013·3.5 MB·English

MASTER'S THESIS
Total Cost of Ownership in Global
Sourcing
A Case Study at Siemens Industrial Turbomachinery AB
Emma Andersson
Desirée Holmér
2013
Master of Science in Engineering Technology
Industrial and Management Engineering
Luleå University of Technology
Department of Business, Administration, Technology and Social Sciences
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Total!Cost!of!Ownership!in!!
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Global!Sourcing
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" A!Case!Study!at!Siemens!Industrial!Turbomachinery!AB!
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Emma!Andersson!&!Desirée!Holmér!
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Civilingenjörsexamen//
Industriell/Ekonomi/
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Luleå/Tekniska/Universitet/
Institutionen/för/Ekonomi,/Teknik/och/Samhälle///
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Abstract!
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Today&Global&Sourcing&has&become&a&central&part&of&many&companies’&business&strategies.&Given&
the& constant& pressure& to& reduce& costs,& many& companies& identify& Global& Sourcing& with&
opportunities&to&capitalize&on&lower&cost.&For&this&reason&there&has&been&a&substantial&interest&
among&European&companies&to&source&from&China,&previously&known&as&the&country&with&low&
labour&costs&and&production&costs.&For&this&reason&Global&Sourcing&has&become&an&integrated&
part&of&the&purchasing&strategy&of&many&companies.&Although&due&to&an&increased&awareness&of&
the& consequences&of& allowing&the&purchasing&price&to& be&the&dominant&supplier&selection&
criteria,&there&has&been&a&growing&concern&for&the&Total&Cost&of&Ownership&(TCO).&Also,&given&
that&China&is&becoming&more&equalized&to&Eastern&Europe,&being&highly&comparable&to&the&
standards&and&cost&structure&in&Europe,&there&is&an&obvious&tendency&of&companies&changing&
their&direction&from&Chinese&to&Eastern&European&suppliers.&&&
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The&purpose&of&this&study&is&to&address&the&differences&in&sourcing&from&China&and&Eastern&
Europe&by&adopting&the&concept&of&TCO.&This&comprises&the&mapping&of&the&value&chain&process&
of&a&specific&product&and&the&identification&of&the&ingoing&activities&serving&as&significant&and&
relevant&cost&drivers.&By&doing&so,&a&comparison&between&the&sourcing&differences&in&the&TCO&
between&Eastern&Europe&and&China&will&be&possible.&This&is&by&developing&a&model&capturing&the&
most& significant& and& relevant& cost& incurring& activities& within& the& value& chain& of& a& high&
importance&component,&by&applying&a&deductive&and&qualitative&research&approach.&&&
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The&study&involves&three&different&cases,&all&aiming&to&contribute&to&the&research&problem&of&the&
study.&The&first&case&concerns&the&development&of&a&TCO&model&of&a&high&important&component,&
derived&from&interviews&with&employees&at&SIT&AB.&&The&second&and&the&third&case&concerns&
supplier&insights&into&the&implications&of&Global&Sourcing&generated&by&interviews&from&two&
important&suppliers&of&SIT&AB.&&
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The&study&shows&that&by&applying&a&TCO&perspective&to&the&supplier&evaluation&process,&a&
supplier&selection&based&on&a&holistic&valuation&of&the&differences&in&Global&Sourcing&will&be&
possible.&Apparently,&the&tendency&of&allowing&the&purchasing&price&to&serve&as&the&major&
selection&criteria&is&a&mistake&since&it&only&reflects&a&fragment&of&the&TCO.&Hence,&a&TCO&
approach&reveals&that&the&cost&for&transportation,&inspection&of&suppliers,&lacking&information&
transferring&routines,&and&cultural&and&communication&barriers&serves&as&major&cost&drivers&
contributing& to& the& total& cost& when& purchasing& an& air& intake,& which& is& considered& a& high&
importance&component.&Thus&the&supplier&being&favourable&in&terms&of&lowest&price&may&not&be&
the&best&alternative&considering&the&TCO.&&&(
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(
Sammanfattning(
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Global& Sourcing& har& blivit& en& central& del& i& många& företags& affärsstrategier.& Den& konstanta&
kostnadspressen&har&gjort&att&många&företag&inför&Global&Sourcing&i&större&utsträckning&för&att&
reducera&kostnader.&Detta&har&medfört&att&Europeiska&företag&fått&ett&ökat&intresse&för&att&göra&
inköp&från&Kina,&som&tidigare&varit&ett&land&känt&för&låga&löneP&och&produktionskostnader.&Därför&
har&Global&Sourcing&blivit&en&integrerad&del&av&företags&inköpsstrategier.&I&samband&med&att&
användandet& av& inköpspris& som& den& avgörande& faktorn& vid& leverantörsutvärdering& har&
ifrågasatts&så&har&TCO&fått&ett&ökat&fokus.&Dessutom&så&har&Kina&blivit&mer&jämförbart&med&
Europa&gällande&standarder&och&kostnadsstrukturer,&vilket&resulterat&i&en&ökad&trend&bland&
företag&att&göra&inköp&från&Östeuropa&istället&för&Kina.&
&
Syftet&med&studien&är&att&belysa&skillnaderna&mellan&inköp&från&Kina&och&Östeuropa&utifrån&ett&
totalkostnadsperspektiv.& Detta& innefattar& kartläggandet& av& en& specifik& produkts& värdekedja&
samt&identifieringen&av&de&ingående&aktiviteterna&och&relevanta&kostnadsdrivarna.&Därigenom&
är&det&möjligt&att&göra&jämförelser&av&inköp&ur&ett&totalkostnadsperspektiv&mellan&Östeuropa&
och&Kina.&Jämförelsen&kommer&att&möjliggöras&genom&att&utveckla&en&modell&som&identifierar&
de&mest&signifikanta&och&relevanta&aktiviteter&som&skapar&kostnader&i&en&strategiskt&viktig&
produkts&värdekedja,&genom&att&använda&en&deduktiv&och&kvalitativ&forskningsansats.&
&
Studien&innefattar&tre&case&som&alla&bidrar&till&studiens&forskningsproblem.&Det&första&caset&
innefattar& utvecklingen& av& en& totalkostnadsmodell& för& en& strategiskt& viktig& produkt& utifrån&
intervjuer&med&anställda&på&SIT&AB.&Det&andra&och&tredje&caset&omfattar&inköpsinsikter&av&Global&
Sourcing&genererade&genom&intervjuer&med&två&av&SIT&ABs&leverantörer.&
&
Genom&att&utgå&ifrån&ett&totalkostandsperspektiv&under&leverantörsutvärderingsprocessen&är&
det&möjligt&att&välja&en&leverantör&baserat&på&en&holistisk&värdering&av&skillnaderna&mellan&olika&
länder.&Uppenbarligen&så&är&trenden&att&låta&inköpspriset&vara&det&avgörande&kriteriet&ett&
misstag&eftersom&inköpspriset&bara&speglar&en&del&av&den&totala&kostnaden.&I&studien&har&det&
visat& sig& att& den& verkliga& kostnaden& innefattar& förutom& inköpspriset& kostnader& såsom&
transportkostnader,& inspektionskostnader,& bristfälliga& informationsöverföringsrutiner& och&
kulturella&och&kommunikationsbarriärer&som&alla&driver&den&totala&kostanden.&Således,&den&
leverantören&som&erbjuder&det&lägsta&inköpspriset&är&inte&alltid&det&bästa&alternativet&utifrån&ett&
totalkostnadsperspektiv.&
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Table(of(Contents(
1.0(Introduction(.................................................................................................(1(
1.1&Global&Sourcing!...............................................................................................................................................!1!
1.2&Supplier&Selection!...........................................................................................................................................!2!
1.3&Research&Incentive!.........................................................................................................................................!4!
1.4&Preliminary&Study!...........................................................................................................................................!4!
1.5&Problem&Discussion!........................................................................................................................................!7!
1.6&Research&Problem!..........................................................................................................................................!8!
2.0(Literature(Overview(.....................................................................................(9(
2.1&The&Supplier&Selection&Process!..................................................................................................................!9!
2.1.1$Problem$Definition$...................................................................................................................................$9$
2.1.2$Formulation$of$Criteria$.......................................................................................................................$10$
2.1.3$Qualification$.............................................................................................................................................$13$
2.1.4$Final$Selection$.........................................................................................................................................$13$
2.2&Total&Cost&of&Ownership!............................................................................................................................!14!
2.2.1$Introduction$to$the$Concept$of$TCO$...............................................................................................$14$
2.2.2$Application$Areas$...................................................................................................................................$16$
2.2.3$Approaches$to$TCO$................................................................................................................................$17$
2.2.4$Cost$Categorization$Approaches$.....................................................................................................$20$
2.2.5$Advantages$of$TCO$................................................................................................................................$23$
2.2.6$Implementation$Barriers$....................................................................................................................$23$
2.3!The!Value!Chain!Process!........................................................................................................................!24!
2.4!Discussion!of!the!Literature!Overview!.............................................................................................!26!
2.5!Research!Questions!..................................................................................................................................!26!
3.0(Frame(of(Reference(....................................................................................(28(
3.1!Identification!of!the!Supply!Chain!Process!and!its!Activities!.................................................!28!
3.2!Identification!of!Cost!Drivers!...............................................................................................................!29!
3.3!Cost!Categorization!...................................................................................................................................!31!
3.4!Design!of!TCO!Model!................................................................................................................................!31!
3.5!Summary!of!the!Frame!of!Reference!.................................................................................................!31!
4.0(Research(Method(.......................................................................................(33(
4.1&Research&Purpose!........................................................................................................................................!33!
4.2&Research&Approach!.....................................................................................................................................!34!
4.3&Research&Strategy!........................................................................................................................................!34!
4.4&Sample&Selection!..........................................................................................................................................!36!
4.5!Research!Techniques!and!Analysis!Procedures!...........................................................................!37!
4.5.1$Data$Collection$Methods$.....................................................................................................................$37$
4.5.2$Analysis$Procedures$..............................................................................................................................$40$
4.6!Research!Credibility!.................................................................................................................................!41!
4.6.1$Reliability...................................................................................................................................................$41$
4.6.2$Validity$........................................................................................................................................................$41$
4.6.3$Research$Method$Problems$...............................................................................................................$41$
4.7!Research!Procedure!.................................................................................................................................!42!
5.0(Case(I:(SIT(AB(Air(Intake(..............................................................................(44(
5.1&Development&of&the&Value&Chain&Process!...........................................................................................!44!
5.1.1$Summary$of$Interview$Responses$...................................................................................................$44$
5.1.2$Analysis$of$the$Value$Chain$Process$...............................................................................................$51$
5.1.3$Discussion$of$the$Value$Chain$Process$at$SIT$AB$......................................................................$54$
5.2&Cost&and&Cost&Driver&Identification!........................................................................................................!55!
5.2.1$Summary$of$Interview$Responses$...................................................................................................$55$
5.2.2$Analysis$of$Costs$and$Cost$Drivers$..................................................................................................$65$
5.2.3$Discussion$of$Costs$and$Cost$Drivers$..............................................................................................$69$
5.3&Discussion&of&Qualitative&Implications!.................................................................................................!72!
5.3.1$Strategic$Procurement$........................................................................................................................$72$
5.3.2$Strategic$Project$Procurement$........................................................................................................$72$
5.3.3$Supplier$Quality$Management$.........................................................................................................$73$
5.3.4$Project$Management$............................................................................................................................$73$
5.3.5$Commodity$Management$...................................................................................................................$73$
5.3.6$Auxiliary$System$Engineering$..........................................................................................................$73$
5.3.7$Operations$Quality$.................................................................................................................................$74$
5.3.8$Logistics$&$Packing$...............................................................................................................................$74$
6.0(Case(II:(Donaldson(......................................................................................(75(
6.1&Cooperation&implications:&Donaldson&–&SIT&AB!.................................................................................!75!
6.2&Sourcing&Implications&–&Eastern&Europe&vs.&China!...........................................................................!75!
6.3&Summary&of&Supplier&Insights!..................................................................................................................!78!
6.4&WithinPcase&Analysis!...................................................................................................................................!79!
7.0(Case(III:(Camfil(Farr(.....................................................................................(80(
7.1&Cooperation&Implications:&Camfil&Farr&–&SIT&AB!................................................................................!80!
7.2&Sourcing&Implications&P&Eastern&Europe&vs.&China&&&Mexico!........................................................!81!
7.3&Summary&of&Supplier&Insights!..................................................................................................................!83!
7.4!WithinScase!Analysis!................................................................................................................................!84!
8.0(CrossNcase(Analysis(of(Case(II(&(Case(III(......................................................(86(
8.1&CrossPcase&Analysis&of&Donaldson&&&Camfil&Farr&–&China!...............................................................!86!
8.2&Donaldson&vs.&Camfil&Farr&–&Eastern&Europe!......................................................................................!88!
8.3&Summary&of&the&CrossPcase&Analysis:&China&vs.&Eastern&Europe!.................................................!89!
9.0(Findings(......................................................................................................(91(
10.0(Conclusions(..............................................................................................(97(
11.0(Comparison(of(Major(Quantifiable(Cost(Drivers(......................................(101(
11.1&Purchasing&Price!.....................................................................................................................................!101!
11.2&Transportation!........................................................................................................................................!101!
11.3!Inspections!of!Supplier!......................................................................................................................!102!
11.4!Total!Cost!.................................................................................................................................................!103!
12.0(Implications(for(Management(................................................................(104(
13.0(Implications(for(Theory(&(Further(Research(............................................(105(
13.1&Implications&for&Theory!........................................................................................................................!105!
13.2&Proposals&for&Further&Research!.........................................................................................................!105!
References(.....................................................................................................(107(
Appendix(I(N(Company(Presentation(...............................................................(111(
Appendix(II(–(Interview(Guide(at(SIT(AB(.........................................................(116(
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Tables(&(Figures(
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Table(2.1:!Summary!of!Criteria!for!Supplier!Selection! 12!
Table(2.2:!Summary!of!TCO!Cost!Drivers!! 23!
Table(2.3:!Primary!Activities!within!the!Value!Chain! 25!
Table(2.4:!Supporting!Activities!within!the!Value!Chain! 25!
Table(3.1:&Primary!Activities!within!the!Value!Chain!! 29!
Table(3.2:!Supporting!Activities!within!the!Value!Chain!! 29!
Table(3.3:!TCO!Cost!Drivers! 30!
Table(3.4:!Cost!of!Quality! 30!
Table(4.1:!Relevant!Situations!for!Different!Research!Strategies!! 35!
Table(4.2:!Summary!of!Research!Strategies! 36!
Table(4.3:!Interview!Respondents!at!SIT!AB! 39!
Table(5.1:!Summary!of!Cost!Drivers!at!SIT!AB! 63!
Table(5.2:!Primary!Activities!within!the!Value!Chain!at!SIT!AB!&!its!Cost!Drivers! 68!
Table(5.3:!Supporting!Activities!within!the!Value!Chain!at!SIT!AB!&!its!Cost!Drivers! 69!
Table(6.1:!WithinScase!Analysis!of!Supplier!Insights! 80!
Table(7.1:!WithinScase!Analysis!of!Supplier!Insights! 85!
Table(8.1:!CrossScase!Analysis!of!Sourcing!Implications!in!China! 87!
Table(8.2!CrossScase!Analysis!of!Sourcing!Implications!in!Eastern!Europe! 89!
Table(9.1:!Emerged!TCO!Model!for!the!purchase!of!an!air!intake!at!SIT!AB!! 96!
Table(11.1:!The!purchasing!price!offered!by!Camfil!Farr!&!Donaldson! 102!
Table(11.2:!Total!Cost!for!Transportation!of!an!Air!Intake!to!Port!Norrköping! 103!
Table(11.3:!Total!Cost!for!Inspection!of!Suppliers! 103!
Table(11.4:!The!Total!Cost!for!Inspection,!Transportation!and!Purchasing!Price! 104!
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Figure(3.1:!Cost!Drivers!Integrated!in!the!Value!Chain!Process! 32!
Figure(4.1:!Research!Procedure!! 43!
Figure(4.2:!Components!of!the!Research!Design! 43!
Figure(5.1:!The!Value!Chain!Process!at!SIT!AB!! 53!
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1.0(Introduction(
In#the#initial#chapter,#the#area#of#concern#in#the#study#will#be#introduced.#Commencing#with#the#
concept#of#Global#Sourcing#and#its#shifting#characteristics#followed#by#a#discussion#regarding#the#
emerged#focus#on#the#Total#Cost#of#Ownership#(hereby#denoted#TCO)#in#the#supplier#selection#
process.#Further,#the#research#incentive#of#the#study#will#be#presented#followed#by#a#preliminary#
study.#The#chapter#will#conclude#with#a#problem#discussion#regarding#the#presented#areas.##
1.1(Global(Sourcing(
The&business&environment&is&an&everPchanging&phenomenon,&forcing&companies&to&continuously&
explore&new&ways&to&compete&(Trent&&&Monczka,&2005).&The&global&competition&multinational&
companies& are& being& exposed& to& have& emerged& the& concept& of& Global& Sourcing& (ibid.).&
Consequently,&today&Global&Sourcing&has&become&a&central&part&of&many&companies’&business&
strategies.&Also,&the&constant&pressure&of&reducing&costs&has&resulted&in&a&shift&of&sourcing&from&
local&suppliers&to&lowPcost&country&suppliers,&hereby&referred&as&LCCS&(Hultman&et&al.,&2012).&For&
this&reason,&Global&Sourcing&has&turned&into&an&inevitable&challenge&for&purchasing&and&supply&
chain&managers&in&order&to&keep&up&with&the&growing&competition&cross&boarders&(ibid).&
&
As&stated&earlier,&the&emerging&competition&between&global&companies&caused&by&the&increased&
presence&in&foreign&markets&is&one&of&the&main&strategic&drivers&of&Global&Sourcing&(Trent&&&
Monczka,&2005).&Moreover,&given&the&reduced&transportation&costs&over&the&past&few&years&in&
combination&with&the&increased&access&to&world&markets,&an&interest&among&companies&have&
risen&to&explore&the&opportunities&to&source&materials&and&components&globally&(Holweg&et&al.,&
2011).&Other&incentives&for&Global&Sourcing&has&been&identified&as&the&possibility&to&capitalize&on&
the&lower&cost&of&wages,&machinery,&production,&and&overhead&costs&(Trent&&&Monczka,&2005;&
Nassimbeni,&2007;&Juan&et&al.,&2010&).&Also,&Global&Sourcing&allows&companies&to&take&advantage&
of&new&technology,&access&particular&resources,&improve&quality&and&the&benefits&of&being&
present&in&a&foreign&market&(ibid).&Thus,&Global&Sourcing&can&be&seen&as&a&possibility&to&contract&
suppliers&who&best&fulfill&the&requirements&of&the&sourcing&company&(Akamp&&&Müller,&2012).&
Moreover,&in&a&study&conducted&by&Monczka&and&Trent&(2005)&it&was&found&that&73&%&of&173&
companies&surveyed&argued&that&the&TCO&declined&after&introducing&Global&Sourcing.&&&&&&
&
However,&Global&Sourcing&is&not&a&new&phenomenon&but&has&been&a&target&for&academic&
research&since&the&1980s&(Holweg&et&al.,&2011).&The&modernized&definition&refer&Global&Sourcing&
to&the&ultimate&stage&in&a&company´s&attempt&to&cooperate&with&international&suppliers,&as&an&
integrated&part&of&the&purchasing&strategy&(ibid).&This&is&as&the&purchasing&process&has&become&a&
1!
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