Savings Measurement for Capital Equipment Purchasing. CAPEX Value, Solutions and Examples

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1 Savings Measurement for Capital Equipment Purchasing CIPS Sie - Chartered Institute Procurement Wenn diesen Text lesen können,of müssen Sie die Folie & im Supply Post-Menü mit der Funktion «Folie einfügen» erneut einfügen. Sonst kann kein Bild hinter die Fläche gelegt werden! CAPEX Value, Solutions and Examples Dr. Daniel Maucher Zürich,

2 Agenda Introduction and research overview Research methodology and key research findings Conclusion WCM bei der Schweizerischen Post - Daniel Maucher Seite 2

3 Introduction and research overview Wenn Sie diesen Text lesen können, müssen Sie die Folie im Post-Menü mit der Funktion «Folie einfügen» erneut einfügen. Sonst kann kein Bild hinter die Fläche gelegt werden!

4 Savings measurement for capital equipment purchasing Procedures, challenges, contingencies and behavioral Aspects In order to get attuned for the investment budget planning, please tighten your belts three holes further

5 Features of capital equipment purchasing (CEP) Challenges in savings measurement Formation of a buying center Purchasing department as coordinator and consultant Players Often purchasing department is not involved Often several authority levels are involved Often not purchased frequently Purchasers are typically less experienced in CEP Purchasing process Manufacturing lead time can be long Often low degree of standardization Importance of international relations In many cases personal negotiations Capital equipment purchasing Required capabilities are hard to acquire, develop and retain Long-term business relations are important High variability of prices and delivery times Interdependences with existing CE have to be considered Often related to services TCO may far exceed the purchase price Payment flows are uncertain Industry is very sensitive to business cycle Challenges in savings measurement Often high financial stakes Rate of technological obsolescence often high Product Risks can be high Technical expertise required to assess proposals Due to the features of capital equipment purchasing there arise challenges in savings measurement. CE: capital equipment; TCO: total cost of ownership; CEP: capital equipment purchasing

6 Research overview Research questions and phases 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? Main objective Main methods of data collection Primarily addressed RQs Research phase 1 Descriptive and exploratory analysis Qualitative interviews, literature review RQ1 and RQ2 Main objective Main method of data collection Primarily addressed RQ Main objective Main method of data collection Primarily addressed RQ Research phase 2 Testing contingencies Qualitative interviews RQ2 Research phase 3 Testing of behaviorspecific aspects Laboratory experiment RQ3 The research project applies triangulation with a combination of descriptive, exploratory and experimental research. RQ: research question

7 Research methodology and key research findings Wenn Sie diesen Text lesen können, müssen Sie die Folie im Post-Menü mit der Funktion «Folie einfügen» erneut einfügen. Sonst kann kein Bild hinter die Fläche gelegt werden!

8 Research phase 1: Descriptive and exploratory analysis Research questions and research methodology RP1 Research questions Case study (RQ1a, RQ1b, RQ2a) Literature review (RQ2a) 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? 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. Included research fields: procurement management accounting, procurement performance measurement, behavioral management accounting, procurement organization. Iterative process using Google Scholar, EBSCOhost and ProQuest. 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. CEP: capital equipment purchasing; RQ: research question

9 Research phase 1: Descriptive and exploratory analysis Challenges RP1 Procedure-specific challenges Behavior-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. 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. Challenges in savings measurement for CEP can be categorized in procedurespecific and behavior-specific challenges. CEP: capital equipment purchasing; TCO: total cost of ownership

10 Research phase 1: Descriptive and exploratory analysis Managerial implications RP1 TCO, benefits and qualitative aspects should be considered in the calculation and aggregated to one single measure. Audits of results should be performed by an independent party. Savings should be calculated at different phases of a CEP project. Savings measurement for CEP Realistic savings targets as a function of realized purchasing spend should be formulated. Guidelines on how to proceed in savings measurement should be established. Dependency between personal performance and personal outcomes should be increased. In order to improve accuracy, constancy and behavioral aspects of savings measurement for CEP, the depicted measures should be implemented. CEP: capital equipment purchasing; TCO: total cost of ownership

11 Research phase 2: Testing contingencies Research questions and research methodology RP2 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 questions Case study 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? 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. The goal of the study is to examine how the challenges and characteristics of performance and savings measurement for CEP influence contingency-based relationships. CEP: capital equipment purchasing; MCS: management control systems ; RQ: research question

12 Research phase 2: Testing contingencies Overview of the analyzed research areas RP2 Area External environment Generic concepts of technology and MCS Advanced technologies and MCS Organizational structure and MCS Confirmed Mostly confirmed Partially confirmed Mostly not confirmed Not confirmed 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. From the 22 analyzed propositions a majority was confirmed: 10 confirmed, 1 mostly confirmed, 3 partially confirmed, 2 mostly not-confirmed and 6 notconfirmed propositions. CEP: capital equipment purchasing; MCS: management control systems

13 Research phase 2: Testing contingencies Managerial implications RP2 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. In supplier partnership practices, non-financial measures and personal interactions should be used to manage these partnerships successfully for both parties. If historical values are not available, it is often possible to split the products and services into components for which historical values exist. Savings measurement for CEP The use of methods, instruments, and guidelines in performance measurement for CEP should fit the size and the strategy of the company. Especially smaller companies should establish performance-linked payment in CEP. The different company functions involved in CEP should also be involved in the budgeting process through the application of participative budgeting. In order to improve accuracy, constancy and behavioral aspects of savings measurement for CEP, the depicted measures should be implemented. CEP: capital equipment purchasing; TCO: total cost of ownership

14 Research phase 3: Testing behavioral aspects Research questions and research methodology RP3 Research questions Experiments 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? 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. Laboratory experimental research seems to be an appropriate method to analyze behavioral aspects of savings measurement for CEP. CEP: capital equipment purchasing ; RQ: research question

15 Research phase 3: Testing behavioral aspects Hypotheses RP3 Savings measurement for CEP Common used methods in corporate practice: Initial offer of the selected supplier Savings Final price Budget Savings Final price Price quotation method single initial offer (PQM-SIO) Budget comparison method (BCM) 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. In addition to savings measurement for CEP the hypotheses also concern the related areas of CEP negotiations and evaluation of CEP projects. CEP: capital equipment purchasing

16 Research phase 3: Testing behavioral aspects Experiment 1 (H1a, H1b, H2) Procedure 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: Offer Price 800, , , , , ,500 1,067,500 1,107,500 1,155,000 1,200,000 [800,000-1,200,000 ] User Value [60-100%] * 60.0% 64.4% 68.9% 73.3% 77.8% 82.2% 86.7% 91.1% 95.6% 100.0% 5. Final negotiation between purchaser and selected supplier (3 minutes time limit). The purchaser and the technician have to select an offer which is then negotiated between the purchaser and the supplier. * User value: compound of product performance, product quality, service quality, delivery time

17 Research phase 3: Testing behavioral aspects Experiment 2 (H3) 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 ,236,253 3% ,068,019 7% ,193 3% ,175,227 0% ,068,019 3% ,050,257 7% ,162,924 3% ,445 3% Your evaluation [%] 0% 50% 100% Very poor Poor Average Good Very good The experiment is used to depict how user value, negotiation success and final price are evaluated in CEP. * compound of product performance, product quality, service quality, delivery time5 = best possible user value; 1 = worst possible user value

18 Research phase 3: Testing behavioral aspects Savings measurement for CEP Results Hypotheses RP3 Savings measurement for CEP PQM-SIO BCM Sig. (2- tailed) Hypotheses Selected offer H1a supported Initial offer price 1,085, ,043, H1a supported User value 88.5% 84.3%.000 H1a supported Discount 3.38% 3.18%.348 H1b rejected Final price 1,053, ,012, No hypotheses Negotiations in CEP Number of first offers Above average Below average Sig. (2- tailed) Hypotheses H2 supported Evaluation of CEP projects Project 2 Project 5 Sig. (2- tailed) Hypotheses Evaluation 78.8% 67.0%.000 H3 supported The results support the formulated hypotheses except of hypotheses H1b. CEP: capital equipment purchasing; PQM-SIO: price quotation method single initial offer, BCM: budget comparison method

19 Research phase 3: Testing behavioral aspects Evaluation of CEP projects Results Supplemental analyses RP3 Negotiation success of purchasers, technicians and suppliers Purchasers Suppliers Technicians Sig. (2- tailed) Negotiation success 33.9% 65.0% 66.3%.000 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 o Purchaser (p = 0.003) o Suppliers (p = 0.024) Purchasers negotiation success is much lower than that of suppliers and technicians. CEP: capital equipment purchasing; PQM-SIO: price quotation method single initial offer, BCM: budget comparison method

20 Research phase 3: Testing behavioral aspects Managerial Implications RP3 The applied savings calculation method has an influence on the offer selection and on the final price in CEP. Purchasers should be aware of anchors in CEP negotiations. Procurement attention should be placed primarily on the specification of requirements and on offer selection in CEP. Savings measurement for CEP Purchasers should take their time and should prepare every CEP negotiation thoroughly. Making the first offer in a CEP negotiation has a positive influence on the outcome of the negotiation. In order to improve accuracy, constancy and behavioral aspects of savings measurement for CEP, the depicted measures should be implemented. CEP: capital equipment purchasing; TCO: total cost of ownership

21 Conclusion Wenn Sie diesen Text lesen können, müssen Sie die Folie im Post-Menü mit der Funktion «Folie einfügen» erneut einfügen. Sonst kann kein Bild hinter die Fläche gelegt werden!

22 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) Research phase 1 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 o Savings measurement for CEP is influenced by company-internal and companyexternal contextual factors 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. Research phase 2 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.

23 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) Company-internal performance measurement has an influence on inter- and intraorganizational negotiations. Purchasers are willing to invest more effort in a negotiation although this does not necessarily lead to a higher personal benefit. Research phase 3 Step 1: offer selection Step 2: price negotiation Treatment 1 (PQM-SIO) Theoretical Experimental equilibriums results = (8.5+10) / 2 = ,4 approx. 5% discount 3.4% Treatment 2 (BCM) Theoretical Experimental equilibriums results = (1+10) / 2 = approx. 5% discount 3.2% 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.

24 Thank you very much for your attention! Wenn Sie diesen Text lesen können, müssen Sie die Folie im Post-Menü mit der Funktion «Folie einfügen» erneut einfügen. Sonst kann kein Bild hinter die Fläche gelegt werden!

25 WCM performance excellence study Content of the study

26 WCM performance excellence study Aim and benefit 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: Study 2015:

27 Contact Dr. Daniel Maucher Project Manager Working Capital Management PostFinance AG Mingerstrasse Bern Telephone: Fax: Working Capital Management by Swiss Post: Website YouTube