improving indirect procurement performance at suntory pepsico vietnam

IP: Indirect Procurement 3PL: Third-party logistics EDI: Electronic Data Interchange PR: Purchase request PO: Purchase Order KPI: Key performance indicator SRM: Supplier Relationship Man

MBQPM5

DO THI DIEU THUONG

IMPROVING INDIRECT PROCUREMENT

PERFORMANCE AT SUNTORY PEPSICO

PepsiCo Vietnam" is my own work and has not been published in any assessments before All materials used in this work has a clear and correct source for acknowledgement and reference

Student's confirmation

Do Thi Dieu Thuong

22 April 2016

First of all, I would like to say thank you to SOLVAY BRUSSELS SCHOOL OF ECONOMICS & MANAGEMENT and HO CHI MINH CITY OPEN UNIVERSITY for

designing and organizing this master course

I would like to show my deep appreciation for Professor Jacques Martin and all other

Professors for all their care, support and guidance throughout the course for me to

have knowledge and background to complete this report

I would like to say thank you to all facilitators of both schools to help organize and

arrange our classes during the year

I also would like to say thank you to all my classmates who are willing to share with

me many helpful experiences and information to enrich my learning

And last but not least, I deeply appreciate my family for their love, continuous

encouragement and support for me to dedicate time in the study and completing this

work

Chapter 1 - Analysis of current procurement performance 2

1.1 Customer satisfaction for Indirect (ID) Procurement service in 2015 2

1.2 SWOT analysis of Indirect (ID) Procurement performance 3

1.3 Reasons for unsatisfactory Indirect Procurement performance 6

1.4 Strategy mapping on Balanced Scorecard model 9

Chapter 2 - Design of a performance management system for procurement department 10

2.1 Employee Learning & Growth 10

2.2 Internal Process 11

2.2.1 Operation 11

2.2.2 Compliance 12

2.2.3 Innovation 12

2.3 Customer 13

2.4 Financial perspective 13

Chapter 3 - Challenges of the implementation of performance management system 14

Chapter 4 - Recommendation for improving Indirect Procurement performance 15

4.1 Capability and collaboration 16

4.2 Process 24

4.3 Technology & Innovation 25

Conclusion 28

REFERENCES 29

IP: Indirect Procurement

3PL: Third-party logistics

EDI: Electronic Data Interchange

PR: Purchase request

PO: Purchase Order

KPI: Key performance indicator

SRM: Supplier Relationship Management P&L: Profit & Loss

HR: Human Resource

OHS: Organization Health Survey

FMCG: Fast moving consumer goods IT: Information Technology

MNC: Multi-national company

BI: Business Intelligence

CSR: Corporate Social Responsibility VPO: Volume per outlet

EBIT: Earnings before interest & taxes PMS: Performance management system RFQ: Request for Quotation

CPO: Chief Procurement Officer

ERP: Enterprise Resource Planning

BPA: Blanket Purchase Agreement

E-RFI: Electronic-Request for Information

E-RFS: Electronic-Request For Solution BI: Business Intelligence

Table 1: Satisfaction with Indirect Procurement Service Quality KPIs

Table 2: Satisfaction with Indirect Procurement Buyer Service Quality KPIs Table 3: Strategy map in the balanced scorecard model

Table 4 : Procurement’s priorities from study of The Hackett Group (2015) Table 5: Market Intelligence and access

Table 6: Framework of human resource development

Introduction

Company

Suntory PepsiCo Vietnam (SPVB) is a joint venture between Suntory and PepsiCo to establish a strategic alliance in Vietnam from 2013 Before the joint venture, PepsiCo had 20 years operating business in Vietnam Our business is currently focusing on beverage basing on PepsiCo’s current portfolio and new products from Suntory brands

Vision

It is to continue strengthening and maintaining the leading position in Vietnam beverage industry while continuing to pursue sustainable development objectives, bringing benefits to our stakeholders, employees and business partners, and contributing to the communities

Mission

It is to provide consumers quality, convenient and good-for-health soft drinks And in

everything we do, we strive for honesty, fairness and integrity

 Ensure 100% products meeting PepsiCo’s global quality standard

 Simplify internal processes and increase automation level of all function’s operations to reduce processing time of all administrative works by 20% by 2017

 Develop next generations of management from local source to take more than 90% of management positions in the company by 2018

Chapter 1 -Analysis of current procurement performance

1.1 Customer satisfaction for Indirect (ID) Procurement service in 2015

In December 2015, IP took a survey to get internal customer's feedback relating to IP service quality in 2015 This is the first time IP processed to get customer's feedback and the result of this survey is summarized in two below tables

Table 1: Satisfaction with Indirect Procurement Service Quality KPIs

The overall customer satisfaction level for procurement service in 2015 is quite low The highest result is just at 42% for the cost criteria, while the lowest result is at 25% for the lead time criteria of the whole sourcing and procurement process.It shows the big dissatisfaction from stakeholder for supply lead time Even for the traditional criteria - cost, the satisfaction level is also not high

Table 2: Satisfaction with Indirect Procurement Buyer Service Quality KPIs

The satisfaction for buyer service is even lower when the highest score is just at 38% It shows clearly that there is a problem in IP's buyer capability to fully understand products/ services being purchased and the market to provide helpful advice for end-users The effectiveness of communication and buyer’s response time

is also a hot spot to be improved more

1.2 SWOT analysis of Indirect (ID) Procurementperformance

Strengths

IP is a big team divided in both function and location IP has centralized all

indirect activities since October 2014 to handle a big business scale with high

complexity and in urgency environment With the annual business growth at 20% and management of an annual spending at 300 million USD with approximate 500

suppliers, it requires a lot of buyers' effort to execute and maintain the business

operation smoothly

Majority of IP team members are young, active and have eager attitude to take challenge and learn new knowledge IP has a potential talent pool to bring energy to this challenging team and IP members are expected to develop capability further not only to achieve saving targets but also improve service level Many of IP team

members have technical background which is a great advantage to work along well with technical team at 5 plants nationwide

IP has aggressive approach and spent great effort to achieve a saving at least from 4% and productivity at 2.5 million USD in 2015 IP has supported business to develop 3PL partners successfully since 2014 which delivered both cost saving

criteria and a professional logistics management The achievement of logistics

procurement is a bright spot when IP has actually created value for the business by developing successfully two 3PL partners and in progress of implementing EDI system to integrate SPVB's warehouse with 2 vendors' warehouse systems to

enhance the technological application and business efficiency

Weaknesses

One of the hot spots is the low stakeholder's satisfaction due to the long

processing lead time from PR-PO (Purchase request to purchase order) This

weakness has been existing for a long time, and IP is still on the way to improve the service level

Buyer's market intelligence is limited In Direct Procurement, there is a support from global procurement with internal specialists in charge for each key categories with high spending and high frequency, like can, sugar, PET bottle/ preform These specialists have intensive market intelligence to support for procurement decision making and utilize their capability of market knowledge to support for business units

of each country However, it's more difficult to obtain market intelligence for Indirect Procurement with a large number of categories Therefore, Indirect Procurement of SPVB currently receives limited support from regional and global level, which partly impacts to the information access of supply market, key suppliers and best practice

of cost model and other commercial terms One of the consideration is lacking frequent vendor's on-site visits for buyers to understand market and vendor's capability

2015 was the year with the highest turn-over rate so far (21%) which shows the employee's heavy workload and lack of employee's motivation

Management is too focused on daily operation rather than people development From my observation, Procurement department in SPVB does not have a practice to rotate staff within department or across functions Short assignments are also not applied popularly in Procurement This way is limiting the possibilities for employees to expand their experience in other categories, limiting talent development and also limiting the possibilities for organization to build future successors

Policy and process is currently out of date and complicated, which sometimes becomes a roadblock for procurement to meet stakeholder's requirements Process

is one of three backbones of an organization Therefore, if process is not simplified and more appropriate, it will prevent the company from its growth trend

Another issue relating to people perspective is that there was no clear KPI and performance measurement for IP staff in previous years When both process and KPI was not clear, it created confusion for IP staff to identify the right direction for development

The low level of automation has been the barrier for efficiency improvement and that's why IP resource more focused on tackling works than strategic categories which are opportunities for procurement to add value and bring benefits for the organization

Knowledge transferring and supplier relationship management is not focused and it lacks a system to store data of supplier, transactions, performance, and communication in each category Therefore, in 2015 IP suffered a lot when employees left the company and there were a lot of challenges for new members to catch up with the current work

Opportunities

There is a high potential to improve IP's performance in terms of lead time, cost saving and supplier quality by centralizing purchases with key spending to manage

The company's annual growth is 20%, and SPVB's solid brand power in the market have been creating huge saving opportunities and increasing the our business attractiveness with suppliers

The dramatic advance of technology provides tools to increase the control level and work efficiency while reduce risks and paperwork SRM, business intelligence, ERP system, e-sourcing are all IT solutions procurement can take advantage of to enhancing its value to the business

SRM system was launched at SPVB since January 2016, but the utilization of this system at this time is just at tracking email communication and issues during order’s execution Uploading documents, data is also a requirement but it’s currently not complied 100% as expectation Many other benefits of SRM haven’t been realized yet to utilize this system for leveraging supplier capabilities, improving security of supply, enhancing supplier relationship, forecasting on volatile commodity prices

Threats

One of the most difficulties for buyers is lacking stakeholder's cooperation in developing new suppliers to explore opportunities of cost saving and building back-

up sources to well prepare for the expanding business scale

The current forecast accuracy is not high, which influence the supplier's price commitment or delivery time

The company has grew so fast that system, people, process do not catch up with and create gaps between the current resources and business expectations

IP focuses more on sourcing, negotiations to deliver cost saving in P&L report, but the contract and supplier performance management step is often neglected or reluctantly processed Therefore, it is also a gap in risk management and may hold the company back in its journey to achieve the sustainable growth

1.3 Reasons for unsatisfactory Indirect Procurement performance

2015 is a very challenging for IP with high turn-over rate In addition, despite the huge effort and hard work of IP team, the stakeholder's satisfaction is not as management's expectation It made a red flag for HR and management team to have

an analysis to simply understand what was going on in IP team, what were the obstacles and what was employees’ expectation to do better The analysis was conducted through the interview with each employee The result mostly fell into the main reason which is the heavy workload in IP It comes from too many ad-hoc requests, complicated process and long lead time for approval, ineffective collaboration with stakeholders, and unsupportive system

These above reasons can be summarized in three main pillars:

Cross-function collaboration:

End-users would like to make decision in the supplier selection as previous Therefore, they are unwilling to share their knowledge and information for buyers and requirements for services sometimes are vague It will take more time for buyers to verify back and forth with end users

Unlike with Direct procurement, Indirect procurement always has to face with internal conflicts The key point is how to make internal customers buy in with Procurement's initiative, help them understand that Procurement is supporting and adding value to business rather than doing admin works

In a big corporate like SPVB, it will create more difficulties for buyers to work effectively in a cross function environment with many complex relations

Learning and development:

Learning is very important because no one can have knowledge in all categories, and it is totally correct for IP IP was established in 2011, but Procurement at that time just took charge of some main categories in plants, about 10% - 15% of total indirect spending IP has step by step been in charge more categories in indirect spending, like Sales & Marketing, Logistics In Oct/ 2014, we officially announced the centralization of all purchasing activities in all categories, but for Marketing, we mainly take care of spending of below the line activities For above the line activities, the involvement of Procurement is still limited due to the nature of work and other influences from global or regional instructions Being a young team, however, IP's scope of works has spread to all activities of business operation Yet, one of the shortcomings is the lacking a thorough induction for new hires to understand Procurement policy, procedures, technical instructions to operate in system (Oracle PR-PO function) There is no official functional induction for Procurement new employees, and no instruction for which information need to be transferred The current practice is old employees in the team will brief some basic information relating to Procurement policy, procedure, provide mandatory templates, instruct manipulations in Oracle The lack of procedure for a systematic knowledge transfer from old employees to new employees is really a problem when

no one can control whether information transferred is enough or correct for new employees to process their work effectively

Not only for new hire's induction, current Procurement staff also sent feedback that there is a limit of chance for them to learn both of technical knowledge and functional skills although there are still some training courses provided by HR The employee's expectation is to have more practical courses to be relevant and applicable to improve the service quality

Recognition and Reward:

People aspects are complicated and obviously the work quality will be negatively impacted if people perspectives are not respected I'm mentioning about recognition

and reward This element should have contributed to the high turn-over rate of IP in

2015 From OHS (Organization Health Survey) report, recognition and reward is also one of points Procurement needs to improve more to enhance team spirit Recognition should be from internal team, and also from external functions which appreciate Procurement as a supportive function to add value in delivering business results

There is a lack of opportunity for internal employees to reach to higher leveland no clear career road map can be a reason for not getting a long term commitment from employees

As the second pillar, Process plays a crucial role in setting the guideline for employees to follow and being the base for all controlling activities.Process determines the speed of work flow executed inside the company As one of the leading companies in FMCG, the work flow requires faster to be able to react promptly to the market change or competitor's actions However, the current process is too bulky to support business operation to achieve the vision and strategic objectives In Procurement part, one of the highlights is the out of date status of Procurement policy The latest version was from 2010 while till now, there have been a lot of changes in both organization structure and scope of works but policy has not been updated yet

One of the reasons stakeholders complain Indirect Procurement is the processing lead time With a complicated process and long approval lead time, it is obviously pulling down the efficiency of IP and create more pressure on employees to ensure the compliance and meeting stakeholder's timeline

In the third pillar, System nowadays contributes as a key factor to improve efficiency

of business operation However, comparing with other companies in similar business scale in FMCG, SPVB has lower automation in business operation It is due to the limit of IT investment in previous years Manual process is limiting the control ability when our business scale has expanded too quickly in recent years It also limit the efficiency of business operation when until May/ 2015, SPVB hadn't had a online PR-PO for indirect materials In addition, there is currently no system for equipment maintenance planning which leads to inaccuracy in spare part forecast and reduces the equipment operation efficiency For Procurement, it's uneasy to access historical data of Indirect spending for analysis and strategy design Buyers also have difficulties in supplier performance tracking and evaluation due to lack of relevant tracking reports from system Popular tools for e-sourcing haven't been applied yet; so it takes time consuming for buyers in transactional purchases and can't focus in strategic categories to add more value for business That's why more and more companies have been investing in system to create

competitive advantages in a market which is changing so quickly SPVB is fully aware of this importance, but the question is how far SPVB can do to replace the manual process by system

1.4 Strategy mapping on Balanced Scorecard model

As mentioned in this illustration, Balanced Scorecard model is used to map the linkage and interdependence of 4 main pillars in business operation to achieve the main financial objective In this model, people in Learning & Growth perspective is the base to connect all activities within the organization and realize internal processes to maintain three pillars – operation, innovation and compliance The outcome is showed through value-added products delivered to internal and external customers Customers’ acceptance and cost efficiency is the key for achieving the strategic objectives

Table 3: Strategy map in balanced scorecard model

Source: Modify from Exhibit 1.4 Strategy Map – Page 19 - BALANCED SCORECARD STEP-BY-STEP (Paul R Niven)

Chapter 2 - Design of a performance management system for procurement department

2.1 Employee Learning & Growth

authority

Enhance effective communication internally &

externally

Evaluate & apply best-in-class procurement practices

Create initiatives for productivity &

sustainable development

Follow government's laws

& regulations

Ensure effective internal control procedures to be in place

Deliver products with lower cycle time

Provide value solutions for internal & external customers

added-Ensure to deliver products with committed quality

Increase profit &

shareholder's value

Increase revenue Reduce cost

Attract, retain, develop talents

Leverage technology for success

Develop culture for learning &

development

Objective Measurement KPI

Attract suitable talents Quantity of candidates

having interest in setting

up a career at SPVB

Quantity of suitable candidates/ total of applicants

Quality of training courses per year

% of Procurement processing lead time reduced

% of OHS result increased

vs last year

Develop an open culture

for learning and

% of IT projects rolled out, implemented and go live successfully / year