2006:320 CIV M A S T E R ' S T H E S I S Developing a Strategic Procurement Process A Case Study at Boliden AB Magnus Blomberg Luleå University of Technology MSc Programmes in Engineering Industrial Business Administration Department of Business Administration and Social Sciences Division of Industrial Logistics 2006:320 CIV - ISSN: 1402-1617 - ISRN: LTU-EX--06/320--SE Abstract Abstract Boliden is one of the leading mining and smelter companies in the world. Boliden have mines in Sweden and Ireland and smelters in Sweden, Norway and Finland. Their main products are copper, zinc, lead, gold and silver. To make it easier to standardize the procurement process and introduce new lead- buyers, Boliden has decided to create a procurement manual. The primary purpose of the Manual is to provide an overview of Bolidens procurement operations, procurement processes and procurement information systems. As such, this Manual provides an awareness of mandatory requirements, policy considerations, guidelines, procedures and best practices. The manual will contain job descriptions for all roles involved in procurement, instructions on how to handle communications, purchasing ethics and policies and detailed descriptions of the procurement process and its sub processes. In this project this manual is created through interviews and workshops with relevant personnel. The manual is adopted for presentation at the company intranet. In the process of creating this manual five main processes are identified: Governance and administration, strategic sourcing, contracting, operative procurement and supplier management. These processes are mapped in flowcharts and presented in the report. The final conclusions of this report is that in order to be able to control and measure the procurement process in order to improve it, it has to be properly mapped. Preface Preface During the summer and autumn of 2006 I have conducted this study for my master thesis at Boliden Mineral AB outside Skellefteå. This master thesis is the final piece of my educational puzzle and I would like to thank everyone who made it possible. First of all I would like to thank Mats Gustavsson CPO at the Boliden Group for trusting me with this project. I would also like to thank Mattias Berggren Commodity Manager at Boliden Group for all the time that he has invested in this project. An other important person that deserves a my gratitude is Stefan Sandberg, at the time management consultant at Cap Gemini, I would like to thank him for the support that he gave me in the early stages of the project. I would also like to thank Torbjörn Wiberg at Luleå University of Technology for his supervision during this project. Finally I would like to thank my classmates for their invaluable tips and support during the project and all the friendly people at Bolidens procurement and logistics department for the positive way that they have welcomed me into their fellowship. Boliden 3 October 2006 Magnus Blomberg Table of contents Table of contents 1. INTRODUCTION 1 1.1. BACKGROUND 1 1.2. PURPOSE 1 1.3. LIMITATIONS OF THE STUDY 1 2. RESEARCH METHODOLOGY 2 2.1. RESEARCH STRATEGY 2 2.2. METHODOLOGICAL APPROACH WHEN CREATING THE MODEL 2 2.3. LITERATURE REVIEW 4 2.4. SELECTION OF RESPONDENTS 4 2.5. DATA COLLECTION 5 2.5.1. SECONDARY DATA COLLECTION 5 2.5.2. PRIMARY DATA COLLECTION 5 2.6. RELIABILITY AND VALIDITY 6 3. THEORETICAL FRAMEWORK 8 3.1. THE STRATEGIC ROLE OF PURCHASING 8 3.2. PURCHASING ORGANIZATION 10 3.2.1. LEVELS OF TASKS, RESPONSIBILITY AND AUTHORITY 10 3.2.2. CENTRALIZED VERSUS DECENTRALIZED PURCHASING ORGANIZATION 11 3.3. THE PROCUREMENT PROCESS 12 3.3.1. THE GOVERNANCE PROCESS 12 3.3.2. THE STRATEGIC SOURCING PROCESS 14 3.3.3. THE CONTRACTING PROCESS 20 3.3.4. THE SUPPLIER MANAGEMENT PROCESS 21 3.4. PURCHASING POLICY 23 3.4.1. RISK 23 3.4.2. ETHICS 24 3.5. AUTHORITY 25 4. SITUATIONAL DESCRIPTION 27 4.1. COMPANY DESCRIPTION 27 4.1.1. ORGANIZATION 27 4.2. THE SITUATION AT THE PROCUREMENT AND LOGISTICS DEPARTMENT 28 5. RESULTS 31 5.1. PURPOSE, TARGET GROUP AND LAYOUT 31 5.2. MAIN PROCESSES 34 5.2.1. GOVERNANCE AND ADMINISTRATION 35 Table of contents 5.2.2. STRATEGIC SOURCING 35 5.2.3. CONTRACTING 35 5.2.4. OPERATIVE PROCUREMENT 35 5.2.5. SUPPLIER MANAGEMENT 35 5.2.6. LAYOUT OF MAIN ACTIVITIES 35 5.3. SUB-PROCESSES AND ACTIVITIES 36 5.3.1. GOVERNANCE AND ADMINISTRATION 37 5.3.2. STRATEGIC SOURCING 48 5.3.3. CONTRACTING 53 5.3.4. OPERATIVE PROCUREMENT 60 5.3.5. SUPPLIER MANAGEMENT 62 6. ANALYSIS 64 6.1. THE STRATEGIC ROLE OF PURCHASING 64 6.2. PURCHASING ORGANIZATION 64 6.3. THE PROCUREMENT PROCESS 65 6.3.1. THE GOVERNANCE PROCESS 65 6.3.2. THE STRATEGIC SOURCING PROCESS 65 6.3.3. THE CONTRACTING PROCESS 65 6.3.4. THE SUPPLIER MANAGEMENT PROCESS 66 6.4. PURCHASING POLICY 66 7. CONCLUSIONS 67 8. REFERENCES 68 BOLIDENS PROCUREMENT MANUAL _____________________Appendix 1 BOLIDENS PROCUREMENT POLICY ______________________Appendix 2 ABBREVIATIONS AND ACRONYMS________________________Appendix 3 1. Introduction 1. Introduction This chapter will give a short introduction to the company and the present situation. Other important parts of this chapter are the purpose of the study and limitations. 1.1. Background Boliden is one of the leading mining and smelter companies in the world. Boliden have mines in Sweden and Ireland and smelters in Sweden, Norway and Finland. Their main products are copper, zinc, lead, gold and silver. Boliden has recently acquired new facilities in Ireland, Norway and Finland. These facilities have different routines and practices for procurement than the other facilities in the company. This means that all purchasing has been done at each site and all possibilities to purchase with the full strength of the corporation has been made impossible. Boliden has decided to change this situation and strives to maximize the efficiency of the procurement function and save money. In order to do so they have decided to go from a decentralized procurement organization to a centralized one, where the purchasing will be organized based upon commodity groups instead of facility. Each product group will be represented by a lead-buyer who is responsible for all contracting within his/her product group. At the present time there are no common routines for this process and the process has not been mapped. This is a problem when commodities are to be moved from the old decentralized organization in to the new strategic procurement organization. To make it easier to standardize the procurement process and introduce new lead- buyers, Boliden has decided to create a procurement manual. The primary purpose of the manual is to provide an overview of Bolidens procurement operations, procurement processes and procurement information systems. As such, this manual provides an awareness of mandatory requirements, policy considerations, guidelines, procedures and best practices. The manual will contain job descriptions for all roles involved in procurement, instructions on how to handle communications, purchasing ethics and policies and detailed descriptions of the procurement process and its sub processes. 1.2. Purpose The purpose of this thesis is to create a substantial contribution to the procurement manual involving: • A complete mapping of the future procurement process and its sub process. • A proposal for Bolidens procurement policy. • Identify, and where needed create, routine descriptions, tools and templates for all relevant procurement processes. • Present all these parts in a clear and easy to use model 1.3. Limitations of the study The responsibility for the advanced IT-support and implementation of the procurement manual onto the company intranet is not in the span of this project due to the need of special competence to handle the company intranet and document system. 1 2. Research methodology 2. Research methodology This chapter will explain how the study was conducted, what methods were used and why. 2.1. Research strategy In order to create the model best adapted to the company’s situation, the research has been based heavily on empirical data from the interviews. The information gathered through interviews and workshops, has then been compared to present research to make sure that the solutions reached are in line with best practice according to those sources. The data gathered in this research is mainly qualitative data although some quantitative data has been used mainly in the spend maps, and other material related to the spend. 2.2. Methodological approach when creating the model When this project started the company was in the middle of a restructuring of the procurement department, with fragments from the old organization working side by side with fragments from the new organization. Because of this special situation the classical approach to process mapping, where a snapshoot picture of the present situation is first created then possible improvements are identified and finally a future process map are created. Due to the ever-changing processes in the present organization it was decided that a snapshoot image of the present situation would be hard to create and would contribute very little value to the process. Instead a future process description was created that the ongoing changes in the department could be steered towards. I have created 14 steps through which I intend to approach this issue: 1. The first step was to identify all present procurement activities in the company. This was done through secondary data in the form of documents routine descriptions and tools and template collected from the different sites. Some interviews with people in the organization also contributed to the identification of different procurement activities. Some ideas for necessary procurement processes were also collected from the literature review. However in this stage not only present activities were collected but also ideas for new processes that could improve purchasing. Basically an activity long-list was created of all activities that might have to be included in the new process map. 2. The second step was to organize the activities into groups so that main processes could be identified. It was also important to identify any connections between activities to be able organize them into sequential flows. 3. When the present activities where identified it was important to see which activities where interesting to keep in a future procurement process. This was done by interviews with management personal and through investigation of purchasing and logistics departments’ targets and visions as well as the corporations’ targets and vision. Present activities were also compared with theoretical models from the literature review. 2 2. Research methodology 4. When the significance of different activities and their interrelations were established. A first draft of an overall structure could be created based on theoretical models, interviews and collected material. 5. This first draft was presented to a focus group containing procurement personnel from all countries and with different roles in the organization. The focus group provided valuable input into the process and the overall structure were adjusted according to new information that was discovered in the focus group. 6. When an overall structure where established the next phase was to try to place all identified activities in the new structure. This was done through interviews with different persons from the procurement organization who provided their view on where different activities were to be placed. 7. Once all activities were mapped into the structure it was important to validate the new structure. This was done by presenting the structure to different people and get their views on it. As different persons gave different suggestions the structure evolved. 8. Based on the information collected a proposal for detailed structure was presented. 9. Since different persons were interviewed at different times it was important to make sure that the final structure were to everyone’s satisfaction. So the final result were presented to a focus group so that it could be approved. 10. Once the structure was approved all tools and templates that were used by different people in different processes were collected. 11. Then the tools and templates were evaluated and the need for additional tools and templates were assessed. 12. The missing tools and templates were created in cooperation with relevant personnel from the organization. 13. When all necessary tools and templates existed, they were connected to the process map, and integrated into the complete structure. 14. Finally the complete process mapping with the integrated tools and templates were prepared for publication on the company intranet. This process can also be seen in figure 2:1. 3 2. Research methodology Figure 2:1. The stepwise approach of creating a process map to procurement manual. 2.3. Literature Review To gain an understanding of how procurement processes can be organized the project was initiated with a vast literature review. The literature review was conducted mainly through Luleå University Library. The databases used are J-stor, emerald and ebsco. These databases have given some input to the work but most of the input comes from printed material in the form of books. The results from the literature review have been used mainly to verify the information gathered in interviews and workshops. 2.4. Selection of respondents Snowball sampling did the selection of respondents both for the secondary and primary data collection. This means that the first respondent is asked to recommend a few other persons who might also have valuable information for the research (Denscombe, 2000). The advantages of this method is that a large number of relevant respondents can be selected in a short time without detailed knowledge of the organization and the researcher can get a good connection to the respondent since he has been “recommend” by someone else (Denscombe, 2000). Since both these 4 2. Research methodology conditions were met, the knowledge of the organization was limited and there was a great need for good contacts with relevant respondents, it was decided that snowball sampling would be the best sampling method for this study. 2.5. Data collection In this project both secondary- and primary data were used. 2.5.1. Secondary data collection To get a picture of the present situation in the procurement organization secondary data were collected. The data that was collected were routine descriptions, process descriptions, tools and templates for procurement from all facilities in the corporation. This was done via e-mail and all Country Procurement Managers and Lead-Buyers where asked to submit all materials of this type for investigation. All documents that were submitted were then mapped into the different processes. 2.5.2. Primary data collection The primary data collected were in the form of interviews and focus groups. Usually the interviews were used for data collection to create proposals for presentation to the focus groups. Then the focus groups were used to validate the data collected through interviews. Often persons who were interviewed were also in the focus group and could then make sure that the answers that they had given were interpreted correctly. 2.5.2.1. Interviews Interviews were conducted with personnel involved in the purchasing process. The interviews were conducted as semi-structured interviews, where the respondent was presented a topic, which then were discussed rather openly. Usually the result from the interviews were not a protocol or specific answers but more often a sketch describing their views on a certain process or activity. During interviews the respondents were also asked to present any template or examples of documents that they used during different activities or processes. These documents were then collected and used when creating the tools and templates part of the model. The roles in the company that were interviewed were: • Chief Procurement Officer (CPO). The purpose of the interviews with the CPO was to get his overall views on strategy and break them down to instructions for the creation of commodity strategies. The CPO:s input were also important to Governance and administration process and especially the target setting and follow up parts. Interviews with the CPO were also used to get approval of drafts and clearance to continue working according to specific ideas. • Procurement Support. The role of procurement support is a support function to the CPO and the person with the most detailed overall knowledge of all procurement processes. The interviews with the procurement support officer were initially used to get an overall picture of all the processes. Later the input from the procurement support officer was used to create routines and templates for reporting from the operative organization to the CPO. The role of procurement support officer was changed during this project so the leaving procurement support was interviewed on the present situation and the entering 5