1. Introduction
1.1 Background
Companies that compete with rapid technological innovation must be masters in rapidly deploying new tools into the company supply side, especially in the purchasing department.
The procurement process can be defined as all the activities required, getting a product or a service from the supplier to a final destination. It encompasses the purchasing function, storing, transportation and manages the relations between suppliers and internal customers.
The supply side of any company plays an important role within a general framework of its operation strategy and should be in full alignment with it. The purchasing department and the firm’s suppliers should operate according to the firm’s operation strategy and they should fully support it.
The value and importance of the purchasing function differs from industry to industry and from company to company. For a typical mining company in Greece
In the past as companies invested in programs and initiatives to build their capabilities, managers relied solely on financial accounting reports. Today, however, the financial accounting model must be expanded to incorporate the valuation of the company’s intangible and intellectual assets. These assets include valuable product and service franchises, motivated and skilled employees, distinctive internal capabilities and satisfied and loyal customers (Neely et al 1996).
Performance measurement systems should be integrated with the general performance measurement systems, and should also be aligned with the company's strategy (Kaplan and Norton 1996). Integrated measurement systems of the kind of Balanced Scorecard provide a new framework for integrating measurements derived from strategy.
1.2 Research problem
The role of a purchasing department within a company has traditionally been to supply production with the right products, for the right price, at the right quantity and quality, and at the right time from the best possible source (Dobler and Burt 2000).
A new philosophy for the role of the purchasing department within the company and the strategy that has to be followed is defined as the activities of the purchasing function, which are based on strategies that are aligned with the company’s strategic goals. The strategies should be planned, evaluated, implemented and controlled in order to achieve the long-term goals of the company (Narasimhan and Das 2001).
The procedures and operations of the purchasing department within the company, and more specifically the support and provision to the production with goods and services should be compatible with the company’s strategy.
In mining companies the purchasing and supply manager when faced with the problem of how to provide purchasing and supply management to dispersed or remote location, must first assess the location in terms of infrastructure (transportation, commercial, etc) supply facilities and capabilities.
In mining industry almost all capital and non-capital products and services are purchased to support the mining processes, like machinery maintenance with large amounts of spare parts (Cavinato and Kauffman 1999). One of the first goals though, is to ensure that the necessary energy and other critical products for the production are obtained in the right price, quality, and time.
Therefore in order for the purchasing department to be aligned with the strategy, its performance has to be measured and evaluated, so as the manager of the department knows when to intervene.
In many companies, measuring performance of a department or of the whole company is performed by financial methods only and tracking of the problems is not done until too late. If a performance measuring system kind of Balanced Scorecard is used, then the manager can easily identify when and how he or she should utilize his/her human or machine resources for obtaining the best performance in the most efficient way (Kaplan and Norton 1996).
1.3 Justification
Companies within the mining industry have a tendency to underestimate the importance of their purchasing department, mainly because the ratio “purchase value” to “turnover” is small as compared to a trading company. However, the last few years, more attention has been given to procurement from top management especially in manufacturing companies as it is now realized that “reducing costs of goods purchased by 5% is equivalent to a 29% rise in sales as far as the profit margins are concerned” (Dobler and Burt 2000). Also a new study from Profit Impact of Market Strategy (PIMS) Associates and the Chartered Institute of Purchasing and Supply (CIPS) reveals that an effective purchasing strategy can add up to 4 per cent of sales value or 30 per cent to profitability (Thompson 1996).
In the past, all companies were more concerned about profitability and with finding ways to reduce costs that are directly related to the goods purchased i.e. reducing the price of the goods, by different methods like quantity discounts or negotiations, in order to improve their financial ratios.
Today it is realized that new ways of measuring performance have to be established. Modern performance measurement systems must provide intelligence for decision makers not just compile data. These measures should produce information, balance and alignment with the operations strategy in the company.
An important factor that is both directly and indirectly related with the performance of a purchasing department is the suppliers. The suppliers of any company should be monitored, controlled and evaluated by the purchasing department in order to be as close as possible aligned with the company’s strategy (Janda and Seshadri 2001).
As mentioned above the purchasing department should be in alignment with the company’s strategy for the best possible performance to be observed. The purchasing strategy can be viewed as the pattern of decisions related to acquiring the required materials and services to support the operations activities that are consistent with the overall competitive strategy of the company (Virolainen 1998).
The most common strategic objectives for a company are: flexibility, quality, speed, dependability and cost. These are analyzed below (Krajewski and Ritzman 1998).
· Flexibility
Flexibility is the ability of a company or an organization to change form a situation to another, in order to satisfy customers needs. In other words it is the response of the system to every demand.
On the other hand an operation that moves quickly, smoothly and cheaply from doing one thing to doing another should be considered more flexible than one that can only achieve the same change at greater cost and/or organizational disruption. Both the cost and time of making a change are the “friction” elements of flexibility. They define the response of the system.
Flexibility can be divided into range flexibility and response flexibility, meaning how much the operation can be changed and how fast can be changed correspondingly (Slack and Lewis 2002).
In mining the sense flexibility applies mainly to the specifications of the products such us granulometry and quality amendments, always following the customer needs.
· Quality
Quality can in many cases be defined as the specification of a product or a service. It can also mean “appropriate specification” that is products or services, which are used for a specific need. Two concepts can be introduced at this point. One is the level of the product or service specification, the other is whether the operation achieves conformance to that specification.
Specification quality is a multidimensional issue. Any product or service needs to use several dimensions of specification to define its nature. These dimensions can be separated into “hard” and “soft” aspects of specification quality. Hard dimension are those concerned with the evident and largely objective aspects of the product or service. Soft dimensions are associated with aspects of personal interaction between customers and the product or service.
The other concept is whether the operation achieves conformance to that specification. Conformance quality is a concern of the operation itself. It refers to the ability to produce goods and services to their defined specifications reliably and consistently. Rather the issue is often a matter of how the operation can reach the product or service specification subsequently (Slack and Lewis 2002).
The priority that mining companies must give more attention is the consistent quality. Customers want products that consistently meet the specifications they contracted (right concision, etc) (Kennedy 1990).
· Speed
Speed indicates the time between the beginning of an operations process and its end. It includes the time when the customer requests a product to the time the customer receives it.
It may also include the time to clarify a customer’s exact needs, the “queuing” time before operations resources become available, and after the core processing, the time to deliver, transport and installation of the product or service (Krajeweski and Ritzman 1998).
The punctuality in delivery time for purchased products in the mining industry is quite important. This is because the products produced by a mining company are usually used as a raw material in manufacturing and industrial companies. Therefore delays are not accepted here and speed is the first priority (Kennedy 1990).
· Dependability
The term dependability here has the meaning of keeping delivery promises, honoring the delivery time given to the customer. It is the other half of total delivery performance along with delivery speed.
The difference between the expected delivery time and the time quoted to the customer is being used as an insurance against lack of dependability within the operation. However, companies that try to absorb poor dependability inside long lead times can finish up being poor at both (Slack and Lewis 2002).
For the mining industry the same applies as in objective ‘speed’. That is, the products produced by mining companies and more specifically by those producing industrial minerals, should have an increased degree of dependability without delays, mistakes or long delivery times (Runge 1995).
· Cost
Cost is treated last not because it is the least important but because is the most important. To companies that compete directly on price, cost will be clearly their major performance objectives. The lower the cost of producing their products and services the lower can be the price to their customer (Slack and Lewis 2002).
Low prices can increase demand of products but it also reduces profit margins, if the product cannot be produced in lower cost. So operation managers must address labor, materials, scrap, overhead, and other costs to have a system that lower costs per unit of the product (Krajewski and Ritzman 1998).
Cost is any financial input to the operation that enables it to produce its products and can be divide into three categories:
· Operating expenditure
· Capital expenditure
· Working capital
In the mining industry low operating cost is always a desirable objective. If a given company for the same mine output, selling at the same market price, the company with the lower operating costs, will have larger cash flows. This gives the company greater protection against variability in market price and it means that the company can continue in production at prices that its competitors cannot match (Runge 1995).
For the success of the above priorities all departments within a company should operate with common objectives. Especially the purchasing department, since its main function is to spend money.
Finally, it is noted that the main objective of the research was the development of an integrated performance measurement system for a purchasing department in a mining company according to the strategy that each time the company wants to follow.
An integrated performance measurement system was developed through questionnaires data collection. The information gathered was processed using the Balanced Scorecard (BSC) methodology, in order to observe whether the purchasing department operates according to the company’s strategy. In addition, weaknesses were identified so that corrections could be made to align the departmental and company strategies.
The primary objective of the research was to measure and examine the performance of the purchasing department in relation to the company strategy, by taking into account the strategic objectives.
The primary objective can be divided into the following subsidiary aims:
· Following the performance measurement the problems in the purchasing department operation and its suppliers were identified. In other words, the strategic objectives that are malfunctioning were identified.
· The next aim was to locate the causes of the problems, so that the purchasing manager could take the necessary actions to provide the required solutions at the right time.
1.4 Methodology
As mentioned in the previous section, the primary objective was to develop an integrated performance measurement system for a purchasing department in a mining company. The persons involved were called to give information through specially designed questionnaires.
The basic steps of the report were the following:
· Preparation of questionnaires
· Data collection (from the completed questionnaires)
· Input data into the integrated performance measurement system (BSC)
· Identify problems
· Conclusions
The methodology that was followed to address the research problem was as follows:
· In summary, the general plan of the research was to determine a system for measuring the performance of a purchasing department in the mining industry.
· Identify the primary subject of the investigation, which is the finding and application of a modern performance measurement system for a purchasing department.
· Identify the effect of the research based on the results of the performance.
· Identify the context of the research which is the purchasing department in a mining industry.
· The type of investigation is a case study (Hughes 2001).
1.5 Outline of the dissertation
Purchasing departments are important in every sort of business, whether it is a manufacturing company or a mining one. In a typical mining company the purchasing department supplies the Strategic Business Units (SBUs) with products, and the methods usually employed to measure performance include financial or general indicators without taking into consideration the company’s strategy.
Therefore a performance measurement system should be developed that would be able to give a broad picture of the purchasing department’s progress, while at the same time identifying the problems in order to solve them.
In order to measure the performance of the purchasing department, questionnaires were used based on the five strategic objectives and the selected indicators. The questionnaires were designed for different target groups. In this way care has been taken in isolating the findings. The answers to the questionnaires were processed based on the BSC methodology, aiming to the findings that would assist to improve the function of the purchasing department and its alignment with the company strategy.
1.6 Summary
Every company that wants to be competitive in the market must find ways to measure its performance in order to rank itself within the market. More specifically, a purchasing department should identify the tools for measuring its performance so as to be aligned with the overall company’s strategy.
Performance measurement systems should take into consideration all factors involved in the processes of a company or a department. An integrated performance measurement system that was applied for the purposes of this report should be able to identify the problems in order for the manager to take corrective actions.
The five main strategic objectives that were examined are the following:
· Flexibility
· Quality
· Speed
· Dependability
· Cost
The performance measurement system of the purchasing department was based on the Balanced Scorecard, always in accordance to the five strategic objectives. Data were collected by the use of questionnaires. The information gathered was processed according to the Balanced Scorecard methodology in order to identify problems in the purchasing department’s procedures. Finally the possible causes of the problems were examined.
