Value Management governance & project selection at Philips Lighting A purchasing perspective Thomas Jansen 9/20/2010 1 Value Management governance and project selection at Philips Lighting A purchasing perspective Philips Lighting Eindhoven, 31-08-2010 Twente University Enschede, 20-09-2010 Author: Thomas Jansen Industrial Engineering & Management Twente University Supervisors Dhr. R.F.H.H. Reumkens (Philips Lighting) Mr. J.I.H. Buter (Twente University) Prof. Dr. H. Schiele (Twente University) 1 ACKNOWLEDGEMENTS This research is written as part of my master graduation project for the study Industrial Engineering. I would like to start with some words of thankfulness to those people who supported me during this 6 months job. I have been working at the purchasing department of Philips Lighting, writing and investigating the way of working within the company. It has been a time full of learning and new experiences. The purchasing department is in the middle of a change towards a more empowered department within Philips Lighting. I remember Albie van Buel and Rene Reumkens as two inspiring leaders who motivate people and give, together with their colleagues, structure to the organisation. I would like to thank my colleagues at Philips for their support and interest in my project. I would like to give a special word of gratefulness to Rene Reumkens and Theo Rutjes for their help on value management, the interesting discussions and our work together on the implementation of value management within the organisation. I would also like to thank both of my supervisors from Twente University: Prof. Dr. H. Schiele and Mr. J.I.H. Buter. They have been a great help writing my thesis. I admire their knowledge and insight on a broad set of topics ranging from purchasing and organisational management to product engineering. We have had some interesting discussions on value management in the future organisation and the role or purchasing in product development. Last but not least I have to thank my friends and family for their moral support. It has been a busy time for me, but all of them gave understanding and support. A special word of thanks goes to my girlfriend. I should apologize for the time I could not spend with her, even after finalising this report. I hope you enjoy reading this report and find the subject as interesting as I do. 2 MANAGEMENT SUMMERY This research has investigated the current value management practice of Philips Lighting. Value management at Philips, which is recently introduced at the sector Lighting, is a management program to increase the margin of Philips products by applying systematic tools and approaches to find solutions that increase value, reduce costs, or eliminate unnecessary value. It is expected that value management can help the organisation to perform better in terms of larger margins on its products. There is no clear structure in the value management process and its performance. This was the major reason to start this research. The first step was to identify the major problems. Three problems were identified. Firstly, there is no sector wide uniform policy for value management and there is no clear strategy to achieve the cost saving targets that are set. Only one business group has a structured value management organisation, while ownership is not taken in the business groups. Secondly, value management control takes not place. There are no clear value management targets or performance measurement. Thirdly, there is no formalised project selection. Projects for value management workshops are chosen arbitrary by one or two managers. Project selection is important in order to make optimal use of scarce value management resources. Following research question is formulated based on the identified problems: How should Philips Lighting design the governance and the project selection of its value management program in order to realise a value management organisation that is able to control and monitor performance and where project selection is structured and based on grounded criteria? The current value management practice of Philips Lighting is compared with theories on the value management, value management governance and the project selection of value management. Value management consists of four steps: project selection, the workshop preparation, the workshop execution, and the implementation of improvement opportunities. Value management governance should consist of four layers of management and performance can be controlled by input, throughput and output control. Top-management sponsorship is seen as an important tool to enhance commitment and empower the teams that are working on value management. Furthermore it is shown that horizontal coordination mechanism can help to increase integration of the program in the organization. Especially the use of cross-functional teams that have mandate is important. Finally, it is showed that the project selection should be structured using criteria that are in line with the firms’ objectives and strategy. The analysis between the current situation and the theoretical framework has identified the most important discrepancies. Six conclusions are made on the practice of value management by Philips Lighting: 1. There is no formal and consistent project selection, the workshop preparation phase is not structure and the implementation of improvements is not monitored. Theory argues that these steps should all be part of the value management process; 2. Value management practice is not integrated in the purchasing strategy development; 3. There is no formal value management structure, that should consist of four layers, in five of the six business groups; 4. Value management teams lack mandate and autonomy and value management participation is not always rewarded by management; 5. The current used value management control system of Philip Lighting is solely based on output control and margin improvement is not measured while it is the goal of the management program; 3 6. The current project selection criteria are limited to product cost and quantities, the project selection is made by one or few arbitrary selected stakeholders and there no procedure for the project selection process that considers all possible projects. Recommendations are made based on the theory, the current situation and the analysis described in this research. Recommendations are made in five fields: (1) the value management program, (2) the purchasing function, (3) organisational integration, (4) value management control, and (5) the value management project selection. Philips Lighting needs to structure and formalise its workshop preparation. The project leader should be supported by a value management coordinator that is assigned for every business group. The project leader is responsible for assigning the team, preparing all relevant information and setting a clear objective for the value management workshop on forehand. The value management coordinator is responsible for monitoring the status of the implementation of improvement opportunities that are the outcome of a workshop. This information should be communicated with the value management steering committee that consists of managers from the purchasing, marketing, development and other relevant departments of the business group. Purchasing should remain driving value management and it is recommended to consider supplier involvement for every value management workshop. Value management has important impact on the purchasing function since changes in a product design leads to a different internal demand which leads to other possibilities on the supplier market. Value management practice should therefore be integrated in the purchasing commodity strategy development by including commodity team members in value management workshops and host workshops dedicated to the commodity teams Buy for resell (BFR) Ballast, BFR Luminaires, BFR Light sources, and OEM- ODM/EMS. A value management organisation that should be introduced in all business groups is suggested (see Appendix H). The value management organisation is a virtual organisation besides the current business group structure and the structure is based on three layers. A value management coach for the Philips Lighting sector at the first level, a value management steering committee and a value management coordinator at the second level and a third level where a project leader is leading a value management team. A steering committee should at least consist of managers from purchasing, marketing and development. The integration of the product development function is important to ensure value engineering practice during new product development which is argued to be beneficial due to higher pay-back rates. Literature has also shown the importance of mandate within the project team. It is therefore necessary to include at least one decision maker from all the important functions for a specific project which are trained as “level 1 value management Experts”. Furthermore it is recommended to ensure top-down sponsorship by the total value manager because this is expected to be an important tool to make sure that participation of employees in value management workshops is rewarded by direct managers. It is concluded that the current Philips Lighting purchasing performance measurement system is too much focused on the purchasing department. Superordinate goals like ‘product margin’, ‘time-to-market’, ‘achieving new product introduction schedules’, and ‘cost avoidance’ can help the organisation to increase performance of cross- functional teams. Mutual agreement and consistent measurements from all functional areas are a boundary condition. It is recommended to start with team performance measurements for value management that are supported by all functional areas that are involved. Input control and output control are two control mechanisms that can help improve value management practice at Philips Lighting. Following input control measures should be used: 4 - Percentage of value management workshops with a clear objective - Completeness of information packages - Degree of multi-disciplinarity of value management workshop teams Output control should be measured by the margin improvement of products. Cost prices should be confirmed by a cost engineer. Following output control measures should be introduced: - Availability of plans for implementation - The number of value management experts trained across the organizations. - The value outcome measured by product margin improvement: o The product price improvement o Product cost savings and cost avoidance It is recommended to introduce a structured value management project selection method. Six criteria that are derived from literature and confirmed by the Philips management are input for the project selection: ‘Product becoming non-competitive’, sales volume, the difference between cost and value (product margin), market growth, return on investment, and market share. The project selection should be done at two levels. A yearly meeting between the Philips Lighting sector management and Philips Lighting sector value management coach is used to determine strategic importance and identify large volumes to focus on certain areas (segments or business groups). A quarterly meeting of the steering committee at business group level is hosted to do the actual project selection for the business group or business unit. It is important that this group of managers has an overview over all product development and product improvement projects in order to take all possible opportunities for value management into account. More emphasis should be given to value management practice during new product development (value engineering) because higher benefits can be achieved when value management is applied in an early stage of a product’s lifecycle. The project selection should be executed by using the value opportunity potential method that incorporates cost, value, margin, volumes, market growth and competitive position. The maturity of the purchasing function is identified as a boundary condition for successful value management practice. The recommendations have taken Philips’ lower maturity score on planning, process organisation and organisation structure into account. The value management organisation should be a virtual organisation besides the currently developing purchasing structure with commodity teams. Value management can also improve the maturity level since it encourages functional integration and purchasing involvement in product development. The success of value management will increase when Philips keeps working on a world class (mature) purchasing function. The current value management practice can be improved when these recommendations are implemented by Philips Lighting. Improved value management practice can lead to improved performance of Philips Lighting in general, better implementation of the value management program, and better awareness of value in daily practice. 5 TABLE OF CONTENTS Table of Contents .......................................................................................................................................................... 6 1. Introduction: Research background and a research framework for project selection and the governance of value management at Philips Lighting ......................................................................................................................... 10 1.1. Research Context: Organising strategic purchasing in a changing market ................................................ 10 1.1.1. Organisation of Purchasing at Philips Lighting: from decentralisation to commodity teams ............... 10 1.1.2. World excellence strategic purchasing process: integrated, aligned & global ...................................... 12 1.1.3. Products and market: from product to solution and technological innovation .................................... 13 1.2. Research framework: Implement and improve value management practice at Philips Lighting .............. 13 1.2.1. Problem identification: No clear value management process, poor governance and a lack of commitment ........................................................................................................................................................ 13 1.2.2. Research definition: Improving project selection and governance of value management in order to create internal support and improved cost reductions ....................................................................................... 14 1.3. Plan of approach: Literature review and test at Philips Lighting ............................................................... 16 1.4. Methodology: Structured literature review ............................................................................................... 17 2. Literature review: Value concepts, value management governance & value management project selection ... 18 2.1. Value concepts: History, definitions and its application ............................................................................ 18 2.1.1. The history of value concepts: From tool to philosophy ....................................................................... 18 2.1.1.1. Lawrence D. Miles: The founder of value analysis and value engineering ................................... 18 2.1.1.2. Value management for the construction industry ........................................................................ 19 2.1.1.3. Renewed interest from the industry: Value management to achieve best value-for-money ...... 19 2.1.2. Defining value concepts: Value, value analysis, value engineering & value management ................... 20 2.1.2.1. Value: The lowest cost of a product to achieve its primary function ........................................... 20 2.1.2.2. Value Analysis and Value Engineering: Existing vs. new products ................................................ 20 2.1.2.3. Value Management: The application of value techniques on both new and existing products ... 20 2.1.3. Value Management principles: functional definition & the job plan .................................................... 21 2.1.3.1. Phase 1 & 2: Preparation & information phase ............................................................................ 21 2.1.3.2. Phase 3: (Functional) Analysis ....................................................................................................... 21 2.1.3.3. Phase 4 &5: Creativity and evaluation .......................................................................................... 22 2.1.3.4. Phase 5, 6 & 7: Evaluation, development, recommendation and implementation ...................... 22 2.1.4. Conclusion: Value management as a three step process ...................................................................... 22 2.2. Governance of value management: Integration and control of value management in the purchasing organisation ............................................................................................................................................................. 23 2.2.1. The purchasing function and value management: Coordination, the strategic purchasing process and the effect of purchasing maturity ........................................................................................................................ 23 6 2.2.1.1. Value Management coordination from the purchasing department ........................................... 23 2.2.1.2. Value management influences the strategic purchasing process by changing the internal demand and the possibilities on the supplier market ..................................................................................... 24 2.2.1.3. The positive relation between purchasing maturity and the success of value management....... 25 2.2.2. Organisational integration: Horizontal coordination and the use of teams .......................................... 26 2.2.2.1. Horizontal coordination mechanisms to increase coordination ................................................... 26 2.2.2.2. The use of multi- functional teams: Advantages, control & composition .................................... 27 2.2.3. Value management control: Style & measurements ............................................................................. 29 2.2.3.1. Style of control: input, throughput & output control ................................................................... 29 2.2.3.2. Measurement requirements: Developing specific measurements for value management performance evaluation .................................................................................................................................. 30 2.2.3.3. Categories of measurements: Purchasing & the value management measurements .................. 30 2.2.4. Conclusion: Integrated value management and three step control ...................................................... 34 2.3. Project selection: Selection criteria & the selection process ..................................................................... 36 2.3.1. Project selection criteria: High cost value, marketing, development & purchasing criteria ................. 37 2.3.2. Project selection process: A structured way to allocate resources ....................................................... 38 2.3.2.1. Project selection by comparing cost with value standards .......................................................... 39 2.3.2.2. Project selection using analytical hierarchy process ..................................................................... 39 2.3.2.3. Project selection by comparing return on investment and impact on resources ......................... 39 2.3.2.4. Project selection based on the value opportunity potential ........................................................ 40 2.3.3. Conclusion: Multi-function selection criteria as input for different selection processes ...................... 42 2.4. Theoretical framework: Value management process, control & integration in the organisation ............. 43 3. Value management practice at Philips Lighting: the value management program, governance and project selection ...................................................................................................................................................................... 46 3.1. Value Management program: Workshops to improve product’s margin and to train employees ............ 46 3.1.1. Implementation: Cross sector value engineering program only focusing on one business group ........ 46 3.1.2. Philips’ value engineering definition: A value management approach ................................................. 47 3.1.3. Value management program: Governance, value management experts, projects & tools .................. 47 3.1.3.1. A formal development path to develop VM experts .................................................................... 47 3.1.3.2. Value management tools for basic cost reduction, functional specification & performance specification ..................................................................................................................................................... 48 3.1.4. Value management process at Philips: preparation, workshop & follow-up ........................................ 49 3.1.5. Conclusion: Value management as a three step process is just implemented at Philips Lighting ........ 50 3.2. Governance of value management at Philips Lighting: organised from the purchasing department, but little control in place ................................................................................................................................................ 51 7 3.2.1. The Philips Lighting purchasing department: Commodity team structure and its strategy .................. 51 3.2.1.1. The introduction of centralised commodity teams ...................................................................... 51 3.2.1.2. The strategic purchasing process based on MSU purchasing and supply model .......................... 52 3.2.1.3. Philips Lighting purchasing maturity: relatively low maturity in planning, organisation structure and process organisation ................................................................................................................................. 53 3.2.2. Value management organisation and integration at Philips Lighting: structural organisation, horizontal coordination and the use of teams .................................................................................................... 54 3.2.2.1. Value management organisation: One out of the six business groups has a formal, but developing, value management structure in place ......................................................................................... 54 3.2.2.2. Organisational integration by integrators ..................................................................................... 55 3.2.2.3. Value management workshops by ad-hoc teams ......................................................................... 55 3.2.3. Value management coordination from the purchasing department: output control and purchasing performance measurements ............................................................................................................................... 56 3.2.3.1. Value management control: Output focused ............................................................................... 56 3.2.3.2. Formal reporting: Value management control at the top-level based on savings and the number of value management experts ......................................................................................................................... 56 3.2.3.3. Purchasing performance measurements by a balanced score card ............................................. 57 3.2.4. Conclusion: Value management organisation embedded in the purchasing department with only value management output control ...................................................................................................................... 58 3.3. Project selection at Philips Lighting: Few criteria and no structured process ........................................... 63 3.3.1. Selection criteria at Philips Lighting: product cost price and sales volume ........................................... 63 3.3.2. The current project selection process at Philips Lighting ...................................................................... 63 3.3.3. Conclusion: Further research is necessary to derive the importance of new selection criteria ............ 63 3.4. Conclusion: Unstructured value management practice with few control mechanisms ............................ 64 4. Interviews to test the relevance and importance of improvement opportunities .............................................. 69 4.1. Interview set up: Questionnaire and interviewee ..................................................................................... 69 4.1.1. Interviewees: Value management, purchasing and technology stakeholders ...................................... 69 4.1.2. Development of the standardised questionnaire covering four subjects of interest ............................ 69 4.1.2.1. Interview questions about the value management program covered by the project selection and the value management process....................................................................................................................... 70 4.1.2.2. Interview questions about the governance of value management: the purchasing function, organisational integration and value management control ............................................................................ 70 4.1.2.3. Interview questions about value management project selection covering selection criteria and the selection method ....................................................................................................................................... 73 4.2. Interview results: Integration of value management and market based selection criteria ....................... 73 4.2.1. Results on value management governance: the purchasing function, organisational integration and value management control.................................................................................................................................. 73 8 4.2.1.1. Purchasing function: ‘value management should be part of the commodity team strategy development’ ................................................................................................................................................... 74 4.2.1.2. Organisational integration: creating a formal value management organisation .......................... 74 4.2.1.3. Value management control: the introduction of value management performance indicators ... 75 4.2.2. Project selection based on market oriented criteria ............................................................................. 75 5. Conclusion and recommendations: creating a value management organisation ............................................... 77 5.1. Conclusions on the value management program, value management governance and the project selection .................................................................................................................................................................. 77 5.1.1. Value management program: No project selection and unstructured preparation ............................. 77 5.1.2. Governance of value management: Increased organisational integration by the use of teams, purchasing strategy development and value management control .................................................................... 77 5.1.3. Value management project selection: Need for market based criteria and a structured method ....... 78 5.2. Recommendations: Towards improved value management practice ....................................................... 78 5.2.1. Value management program: structure and formalisation ................................................................... 78 5.2.2. Governance of value management: focus on integration and control .................................................. 79 5.2.2.1. Purchasing function: drive and integrate value management ...................................................... 79 5.2.2.2. Organisational integration: Create a formal value management structure with empowered teams in all business groups ............................................................................................................................ 80 5.2.2.3. Value management control: by input and output measurements ............................................... 82 5.2.3. Structuring value management project selection ................................................................................. 83 5.2.3.1. Market based criteria for the project selection ............................................................................ 83 5.2.3.2. project selection by value opportunity potential method ............................................................ 83 5.3. Discussion: reflection and value management in a changing organisation ............................................... 84 Works Cited ................................................................................................................................................................. 85 Appendix A: Job plans derived from literature ............................................................................................................ 89 Appendix B: Required project information .................................................................................................................. 90 Appendix C: Purchasing measurements ...................................................................................................................... 91 Appendix D: Purchasing organisation .......................................................................................................................... 92 Appendix E: Purchasing assessment scores ................................................................................................................. 93 Appendix F: Current Value Management organisation ............................................................................................... 94 Appendix G: Interview questions................................................................................................................................. 95 Appendix H: Recommended value management organisation structure ................................................................... 97 Appendix I: Table of figures ......................................................................................................................................... 98 9