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Savings Measurement for Capital Equipment Purchasing CIPS - Chartered Institute of Procurement & Supply CAPEX Value, Solutions and Examples

Dr. Daniel Maucher Zürich, 04.02.2015

Agenda

06.02.2015 Seite 2 WCM bei der Schweizerischen Post - Daniel Maucher

Introduction and research overview Research methodology and key research findings Conclusion


Introduction and research overview

In order to get attuned for the investment budget planning,

please tighten your belts three holes further …

Savings measurement for capital equipment purchasing Procedures, challenges, contingencies and behavioral Aspects

Due to the features of capital equipment purchasing there arise challenges in savings measurement.

Purchasing process Players

Product

Often high financial stakes

High variability of prices and delivery times

Industry is very sensitive to business cycle Often related to services

Technical expertise required to assess

proposals

Interdependences with existing CE have to be

considered

Rate of technological obsolescence often high

Risks can be high

Payment flows are uncertain

TCO may far exceed the purchase price

Importance of international relations

Often several authority levels are involved

Required capabilities are hard to acquire, develop

and retain

Long-term business relations are important

Often low degree of standardization

Manufacturing lead time can be long

Purchasers are typically less experienced in CEP

Often not purchased frequently

Often purchasing department is not

involved

Purchasing department as coordinator and

consultant

Formation of a buying center

In many cases personal negotiations

Capital equipment purchasing

Challenges in savings

measurement

CE: capital equipment; TCO: total cost of ownership; CEP: capital equipment purchasing

Features of capital equipment purchasing (CEP) Challenges in savings measurement

The research project applies triangulation with a combination of descriptive, exploratory and experimental research.

Research phase 1

Main objective Descriptive and exploratory analysis

Main methods of data collection

Qualitative interviews, literature review

Primarily addressed RQs

RQ1 and RQ2

Research phase 2

Main objective Testing contingencies

Main method of data collection

Qualitative interviews

Primarily addressed RQ

RQ2

Research phase 3

Main objective Testing of behavior-specific aspects

Main method of data collection

Laboratory experiment

Primarily addressed RQ

RQ3

RQ: research question

RQ1: How do companies measure savings for CEP and what are the main challenges? RQ2: How do contingent factors influence savings measurement for CEP? RQ3: How does the applied savings calculation method influence behavior in CEP?

Research overview Research questions and phases


Research methodology and key research findings

In research phase 1, descriptive case studies and a literature review are applied to answer RQ1 and to form the basis for the analysis of RQ2.

Research questions

• RQ1a: How do companies measure savings for CEP and which methods are used?

• RQ1b: What are the main challenges for companies with savings measurement for CEP?

• RQ2a: Which determinants influence and what are the effects of savings measurement for CEP?

Case study (RQ1a, RQ1b, RQ2a)

• Multiple-case design with "savings measurement for CEP within a company" as the single-unit of analysis.

• Data collection method was semi-structured, face-to-face interviews. • Five interviews with three companies.

Literature review (RQ2a)

• Included research fields: procurement management accounting, procurement performance measurement, behavioral management accounting, procurement organization.

• Iterative process using Google Scholar, EBSCOhost and ProQuest.

CEP: capital equipment purchasing; RQ: research question

Research phase 1: Descriptive and exploratory analysis Research questions and research methodology RP1

Challenges in savings measurement for CEP can be categorized in procedure-specific and behavior-specific challenges.

Procedure-specific challenges

• Definition of the correct reference price. • The TCO of capital equipment are rarely

included in the calculation, • The benefit of capital equipment is

usually not considered. • The pure involvement of costs in the

savings measurement disregards critical qualitative aspects of CEP (e.g. time, quality, interdependences).

• Price changes after placing an order are often not considered for the savings measurement.

• If considerately fewer orders are placed, savings targets cannot be reached.

CEP: capital equipment purchasing; TCO: total cost of ownership

Behavior-specific challenges

• Sometimes purchasers violate savings guidelines.

• Purchasers only book savings into the system until they have reached their yearly target.

• Often only positive savings are reported.

• In some cases the superior conducts the control, even though his bonus also depends on the savings measurement.

• Savings that are reported to the management are often not trusted very much.

• Often the savings measurement process is perceived as a tedious task.

• If several performance dimensions are reported, a holistic evaluation of the purchasing performance depends on the individual judgment.

Research phase 1: Descriptive and exploratory analysis Challenges RP1

In order to improve accuracy, constancy and behavioral aspects of savings measurement for CEP, the depicted measures should be implemented.

Savings measurement for

CEP

TCO, benefits and qualitative aspects should be considered in the calculation and aggregated to one single measure.

Savings should be calculated at different phases of a CEP project.

Guidelines on how to proceed in savings measurement should be established.

Audits of results should be performed by an independent party.

Realistic savings targets – as a function of realized purchasing spend

– should be formulated.

Dependency between personal performance and personal outcomes

should be increased.


Research phase 1: Descriptive and exploratory analysis Managerial implications RP1

The goal of the study is to examine how the challenges and characteristics of performance and savings measurement for CEP influence contingency-based relationships.

Research questions

• RQ2b: How do contingent factors influence performance and savings measurement for CEP?

• RQ2c: How do contingent factors differ between MCS in general compared with performance and savings measurement for CEP?

Case study

• Multiple-case design with "performance and savings measurement for CEP within a company" as the single-unit of analysis.

• Data collection method was semi-structured, face-to-face interviews. • Interviews with 18 companies and 32 respondents.

CEP: capital equipment purchasing; MCS: management control systems ; RQ: research question

• Chenhall (2003) provides a meta-analysis of contingency MCS studies and formulates 25 propositions.

• Performance and savings measurement for CEP have some special characteristics and face some special challenges.

Research phase 2: Testing contingencies Research questions and research methodology RP2

From the 22 analyzed propositions a majority was confirmed: 10 confirmed, 1 mostly confirmed, 3 partially confirmed, 2 mostly not-confirmed and 6 not-confirmed propositions.

Area Confirmed Mostly

confirmed Partially

confirmed Mostly not confirmed

Not confirmed

External environment 1 1 1

Generic concepts of technology and MCS 2 1

Advanced technologies and MCS

1 1

Organizational structure and MCS 2 1 3

Size and MCS 3 Strategy and MCS 1 3 Culture and MCS 1

The confirmation differences point to the propositions’ validity in the analyzed contingent areas.

For unconfirmed and mostly unconfirmed propositions, adapted propositions for the case of purchasing and savings measurement for CEP are presented.

CEP: capital equipment purchasing; MCS: management control systems

Research phase 2: Testing contingencies Overview of the analyzed research areas RP2



CEP

Participative budgeting is more likely to be applied in an uncertain environment. Because groups tend to make riskier decisions than individuals, one could expect that groups determine riskier (lower) budgets that are more difficult to meet.

If historical values are not available, it is often possible to split the products and services into components for which historical values exist.

Especially smaller companies should establish performance-linked payment in CEP.

In supplier partnership practices, non-financial measures and

personal interactions should be used to manage these partnerships

successfully for both parties.

The use of methods, instruments, and guidelines in performance

measurement for CEP should fit the size and the strategy of the

company.

The different company functions involved in CEP should also be involved in the

budgeting process through the application of participative budgeting.


Research phase 2: Testing contingencies Managerial implications RP2

Laboratory experimental research seems to be an appropriate method to analyze behavioral aspects of savings measurement for CEP.

Research questions

• RQ3a: How does the applied savings calculation method in CEP influence the weighting of qualitative and monetary criteria in supplier selection, the negotiation success and the final price in CEP?

• RQ3b: What are the key success factors in CEP negotiations? • RQ3c: What influence does negotiation success have in the evaluation of

CEP projects?

Experi-ments

Background • Experiments allow to observe economical decision making of human subjects

under controlled and replicable conditions.

Methodology • Two experiments: savings measurement and negotiations in CEP / evaluation

of CEP projects • In each of the two experiments, 114 students participated. • Within subjects design with two treatments.

CEP: capital equipment purchasing ; RQ: research question

Research phase 3: Testing behavioral aspects Research questions and research methodology RP3

Savings measurement for CEP

Common used methods in corporate practice:

H1a: When applying PQM-SIO in CEP, more expensive offers and higher quality offers are selected, compared to BCM.

H1b: When applying PQM-SIO in CEP, purchaser’s performance in supplier negotiations is higher compared to BCM.

Analyzes how the used savings calculation method influences the final price in CEP ?

Negotiations in CEP

H2: Making the first offer in the negotiation has a positive influence on the outcome of negotiations in CEP.

Evaluation of CEP projects

H3: When CEP projects with the same user value and same final price are being evaluated, the projects with a higher negotiation success are more positively evaluated.

Initial offer of the

selected supplier

Final price

Savings

Price quotation method – single initial offer (PQM-SIO)

Budget Final price

Savings

Budget comparison method (BCM)

CEP: capital equipment purchasing

In addition to savings measurement for CEP the hypotheses also concern the related areas of CEP negotiations and evaluation of CEP projects.

Research phase 3: Testing behavioral aspects Hypotheses RP3

1. Classification of the participants in 3 groups: purchasers, technicians, suppliers

2. Explanation of the task and the payment scheme for each group :

– Purchasers: Buying a good excavator for the cheapest possible price

– Technicians: Buying the best excavator within the given budget

– Suppliers: Bargaining the highest possible sales price for the excavator 3. Two treatments

– "Price quotation method – single initial offer" for purchasers (3 rounds) – "Budget comparison method" (3 rounds)

4. Common selection of one from ten offers through purchaser and technician (3 minutes time limit). Pattern of the offers:

5. Final negotiation between purchaser and selected supplier (3 minutes time limit).

* User value: compound of product performance, product quality, service quality, delivery time

Offer 1 2 3 4 5 6 7 8 9 10

Price [800,000-1,200,000 €]

€ 800,000 € 845,000 € 887,500 € 932,500 € 982,500 € 967,500 € 1,067,500 € 1,107,500 € 1,155,000 € 1,200,000

User Value [60-100%] *

60.0% 64.4% 68.9% 73.3% 77.8% 82.2% 86.7% 91.1% 95.6% 100.0%

The purchaser and the technician have to select an offer which is then negotiated between the purchaser and the supplier.

Research phase 3: Testing behavioral aspects Experiment 1 (H1a, H1b, H2) – Procedure RP3

Procedure: The task is to make a holistic evaluation of 8 different capital equipment purchasing projects, based on the given data.

Project number

User value [1-5]* Final price Percentage of

negotiation success Your evaluation

[%] 1 2.5 1,236,253 € 3% 2 3.5 1,068,019 € 7% 3 1.5 872,193 € 3% 4 5.0 1,175,227 € 0% 5 3.5 1,068,019 € 3% 6 1.0 1,050,257 € 7% 7 2.0 1,162,924 € 3% 8 3.0 915,445 € 3%

The experiment is used to depict how user value, negotiation success and final price are evaluated in CEP.

50% 0% 100%

Average Very good Good Poor Very poor

* compound of product performance, product quality, service quality, delivery time5 = best possible user value; 1 = worst possible user value

Research phase 3: Testing behavioral aspects Experiment 2 (H3) – Procedure RP3

The results support the formulated hypotheses except of hypotheses H1b.

Savings measurement for CEP

PQM-SIO BCM Sig. (2- tailed) Hypotheses

Selected offer 7.42 6.47 .000 H1a – supported

Initial offer price € 1,085,232.14 € 1,043,209.82 .000 H1a – supported

User value 88.5% 84.3% .000 H1a – supported

Discount 3.38% 3.18% .348 H1b – rejected

Final price € 1,053,347.02 € 1,012,846.93 .000 No hypotheses

Negotiations in CEP

Above average

Below average Sig. (2- tailed) Hypotheses

Number of first offers

3.49 2.89 .097 H2 – supported

Evaluation of CEP projects

Project 2 Project 5 Sig. (2- tailed) Hypotheses

Evaluation 78.8% 67.0% .000 H3 – supported

CEP: capital equipment purchasing; PQM-SIO: price quotation method – single initial offer, BCM: budget comparison method

Research phase 3: Testing behavioral aspects Savings measurement for CEP – Results – Hypotheses RP3

Purchasers’ negotiation success is much lower than that of suppliers and technicians.

• Further success factors in CEP negotiations:

o Number of semesters (p < 0.01)

o Ambition (p < 0.05)

o Need for power (p < 0.05)

• Evaluation difference between project 2 and 5 (p < 0.05):

o Technicians 6.6%

o Purchasers 13.0%

o Suppliers 15.8%

• Correlations between the participants’ evaluation and user value:

o Technicians 0.526

o Purchaser 0.329 (p = 0.003)

o Suppliers 0.380 (p = 0.024)

Negotiation success of purchasers, technicians and suppliers

Purchasers Suppliers Technicians Sig. (2- tailed)

Negotiation success

33.9% 65.0% 66.3% .000

CEP: capital equipment purchasing; PQM-SIO: price quotation method – single initial offer, BCM: budget comparison method

Research phase 3: Testing behavioral aspects Evaluation of CEP projects – Results – Supplemental analyses

RP3



CEP

The applied savings calculation method has an influence on the offer selection and on the final price in CEP.

Procurement attention should be placed primarily on the specification of requirements and on offer selection in CEP.

Making the first offer in a CEP negotiation has a positive influence on

the outcome of the negotiation.

Purchasers should be aware of anchors in CEP negotiations.

Purchasers should take their time and should prepare every CEP negotiation thoroughly.


Research phase 3: Testing behavioral aspects Managerial Implications RP3


Conclusion

• There exist many different procedures and calculation methods for savings measurement for CEP.

• Savings measurement for CEP is associated with procedure- and behavior-specific challenges.

• Preliminary conceptual model concerning savings measurement for CEP:

o Savings measurement for CEP is influenced by company-internal and company-external contextual factors

o Savings measurement for CEP affects behavior-specific aspects in savings measurement for CEP (e.g., manipulation, trust and judgment) as well as performance of CEP.

• Findings emphasize the importance of MCS contingent factors concerning performance and savings measurement for CEP but also indicate special characteristics of the topic.

• Findings point to the validity of the general proposition for the different contingent areas.

Research phase 1

Research phase 2

CEP: capital equipment purchasing; MCS: management control systems; PQM-SIO: price quotation method – single initial offer; BCM: budget comparison method

Conclusion Theoretical implications (research phases 1 and 2)

• Company-internal performance measurement has an influence on inter- and intra-organizational negotiations.

• Purchasers are willing to invest more effort in a negotiation although this does not necessarily lead to a higher personal benefit.

• Incentivizing of purchasers in CEP with multiple goals has only minimal impact on the negotiation success.

• CEP projects with the same benefit and the same price are evaluated differently depending on the negotiation success, although theoretically negotiation success should not be taken into account.

• Evaluators of CEP projects put more emphasis on those criteria that are important in their own work.

Treatment 1 (PQM-SIO) Treatment 2 (BCM) Theoretical

equilibriums Experimental

results Theoretical

equilibriums Experimental

results Step 1: offer selection

= (8.5+10) / 2 = 9.25 7,4 = (1+10) / 2

= 5.5 6.5

Step 2: price negotiation

approx. 5% discount 3.4% approx. 5%

discount 3.2% Research phase 3

CEP: capital equipment purchasing; MCS: management control systems; PQM-SIO: price quotation method – single initial offer; BCM: budget comparison method

Conclusion Theoretical implications (research phase 3)


Thank you very much for your attention!

WCM performance excellence study Content of the study

Aim of the study: • Determine sector-specific, but also more general WCM benchmarks. • Gain an understanding of excellence in WCM and formulate potential influencing factors, such as

the sector and size of the company. • The study identifies the strategies pursued by good practice companies in working capital

management, thus providing reference points for efficient WCM within companies.

Your benefit of participating : • Company-specific benchmark report • On-site presentation of the benchmarking study • Report on WCM in Switzerland • Possibility to apply for the Swiss WCM award

Further information: • Study 2014: https://www.postfinance.ch/wcm • Study 2015: http://www.scf-lab.logistik.unisg.ch/de/projekte/wcm-studie

WCM performance excellence study Aim and benefit

https://www.postfinance.ch/wcm

http://www.scf-lab.logistik.unisg.ch/de/projekte/wcm-studie

Dr. Daniel Maucher Project Manager Working Capital Management

PostFinance AG Mingerstrasse 20 3030 Bern

Telephone: +41 795 468 707 Fax: +41 31 667 62 00 Working Capital Management by Swiss Post: Website | YouTube

Contact

https://www.post.ch/wcm

http://youtu.be/nwmrDK8Mbds?list=UUFkmI5Xc9d7x2OA2ZeMezGg

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Savings Measurement for Capital Equipment Purchasing Speaker...Wenn Sie diesen Text lesen können, müssen Sie die Folie im Post-Menü mit der Funktion «Folie einfügen» erneut einfügen