A guide for selecting suppliers - a case study of Ericsson
on how to select suppliers in the United States
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STOCKHOLM UNIVERSITY
Ekonomlinjen, IBA
Department of Business Administration
Bachelor Thesis, 10p
Spring semester 1997
Supervisor: Ali Yakhlef
Authors:
Anne Suchocka
Veronica Wernersson
Table of Contents
Preface
Abstract
Vocabulary
1 Introduction
1.1 Background
1.2 Problem area
1.3 Problem formulation
1.4 Aim and Subaims
1.5 Delimitation
1.6 Outline of the thesis
2. Scientific perspective
2.1 Introduction to the chapter
2.2 Interpretation and reflection
2.3 Hermeneutic perspective
3. Method
3.1 Introduction to the chapter
3.2 Case study
3.3 Interview technique
3.4 Selection of interviewees
3.5 Sources of data
3.5.1 Secondary sources
3.5.2 Primary sources
4. Preunderstanding
4.1 Introduction to the chapter
4.2 Factors that influence development towards outsourcing
4.2.1 Development of markets
4.2.2 Development of products
4.2.3 Competition
4.2.4 Technology
4.2.5 Time
4.3 Should companies use outsourcing or in-house production?
4.3.1 Outsourcing and innovation
4.3.2 Advantages of in-house production
4.3.3 Advantages of outsourcing
4.4 Outsourcing
4.4.1 Focus on core competence
4.4.1.1 What is core competence and what is none-core?
4.4.2 The growing importance of the purchasing role
4.5 Selection of suppliers
4.5.1 The culture of the United States
4.5.2 Background of the selection of suppliers
4.5.3 How to select suppliers?
5. Presentation of the text
5.1 Introduction to the chapter
5.2 Presentation of Ericsson
5.2.1 A short summery changes within Ericsson
5.3 Factors that influence the development towards outsourcing
5.3.1 Development of market
5.3.2 Products
5.3.3 Competition
5.3.4 Technology
5.3.5 R & D
5.4 Outsourcing
5.4.1 Focusing on core competence
5.4.2 The growing importance of the purchasing role
5.4.2.1 The purchasing department
5.4.2.2 The role of the purchaser
5.4.3 Knowledge of Ericsson
5.4.4 The disadvantages and advantages of outsourcing
5.4.5 What is the next step of outsourcing?
5.5 Selection of suppliers in the United States
5.5.1 Culture of the United States
5.5.2 The process of selecting suppliers at Ericsson
5.5.3 The Financial Evaluation of the supplier
5.5.4 The Corporate Profile Value Evaluation
5.5.5 What factors should be studied when selecting American suppliers?
5.5.6 Information sources in the United States
5.5.7 How long can selection of suppliers take?
6 Interpretation of the text
6.1 Introduction to the chapter
6.2 Why do companies outsource?
6.3 Which part of the production should companies outsource?
6.4 Why is an increased focus on the core competence necessary?
6.5 How has the purchasing role changed?
6.6 What are the cultural differences between the United States & Sweden and how do these differences influence the selection of American suppliers?
Conclusions
The financial evaluation of suppliers
The company profile value evaluation
References
Books
Reports
Articles
Primary sources
Further information about the primary sources.
Enclosure 1
Enclosure 2
Enclosure 3
Enclosure 4
1. Outline of our interview with Arjan Kanon
2. Outline of our interview with Tove Ulmanen
3. Outline of our interview with Chuck Brush
4. Outline of our interview with Bengt Risinger and Jan Widlund
Preface
Undertaking the research for this essay on understanding the importance of selecting the best and most suitable supplier has been a very interesting and rewarding experience. To better understand the issue we have also studied other contributing factors, for instance the practice of outsourcing and the effect this has on companies.
In order to attain an empirical perspective on the subject we have had the opportunity to discuss our project with several professionals at Ericsson Business Networks AB, in Nacka Strand. These people, despite their busy schedules, took the time to share their knowledge and experiences with us. We would like to thank these very helpful Ericsson employees for their collaboration and enthusiasm during our discussions:
Chuck Brush, Arjan Kanon
Bengt Risinger, Tove Ulmanen
Jan Widlund
Source: Ericssons’ ETP-Process
Further, we would like to thank Göran Gustafsson, our tutor at Ericsson Business Networks AB, for his patience, excellent ideas and devotion throughout the whole of the work on this thesis. We would also like to thank our tutor at Stockholm University, Ali Yakhlef, for his constancy and positive engagement during the project.
For further information, or questions on this subject, please do not hesitate in contacting us.
Anne Suchocka & Veronica Wernersson
Abstract
An efficient production apparatus is required today to be competitive in the data-and telecommunications industry, as the pressure on prices in this market continues with unabated force. This implies that companies have to concentrate their resources on their core competence and assign part of their production to outside companies (outsourcing). The aim for companies who outsource is to focus the available resources on those areas in which the companies have potential to be the number one.
Outside suppliers have unique solutions and areas of competence that can be utilized by other companies. These suppliers are focusing on their core competence and they have the ability to remain in the forefronts of their markets with the latest technology. Companies of today must increasingly focus on their core competence due to a shortage of time and lack of resources. In order to be successful, companies must adjust their products to the needs of their customers, which is important for the company to have in consideration when core competence is selected. More of companies’ production will therefore be laid on suppliers. This implies that the use of outside suppliers will be increasing. Expanded contact with suppliers is the result of companies using outsourcing as part of a strategy to achieve their competitive goals.
The selection of suppliers becomes crucial and more pressure is placed on the operational and strategic purchasing departments. To be able to adapt to the requirements of the market, the purchasers must reorganize their work and focus more on the selection of suppliers. The department of strategic purchasing is buying more products from other companies today than ever before and money can be saved through an effective negotiation of good contracts with these suppliers. The strategic purchasers are, therefore, required to become more competent, knowledgeable, and increasingly flexible. It is also important that the purchasers have an excellent understanding of cultural differences, knowledge of the complex technology and products, and a sufficient financial background, to be able to perform a thorough evaluation of suppliers.
Company's annual report does not, deeply, cover all the information necessary for the purchaser to be able to thoroughly evaluate the firm as a potential supplier. Our aim in this thesis is to develop a guide of important factors to be aware of when evaluating suppliers on the American market and our findings regarding this can be found in the conclusion of this paper. The guide is divided into two parts, one financial and one commercial. The financial section is based on the information given in the annual report and the commercial portion will recommend important factors to investigate thoroughly when searching for potential suppliers.
Vocabulary
Outsourcinga company is in need of a product or service but for different reasons decides to place the production externally.
In-house productionthe goods that a company produces within the company itself.
Vertical integrationa company itself stands for the production in several chains.
Virtual integration a company specializes in a few core competencies and places the non-core competencies externally.
Core competencethe skills and the technologies of a firm that provide the customers with a particular benefit.
R & DResearch and Development.
The ETP-processExternal Technology Provision-process. A checklist used by Ericsson in the selection process of suppliers.
Strategic purchasingpurchasing department that handles the selection of potential suppliers until the contract is signed.
Operating purchasingpurchasing department that handles the daily contact with the selected suppliers.
Procurementall activities to purchase products from external suppliers.
1 Introduction
1.1 Background
Today, the life cycle of a product has been substantially reduced - as soon as a new product has entered the market, new and better ones will be on their way. Companies strive to develop new techniques and processes as quickly as possible in order to keep up with the competition. Increased competition, accelerated technique developments and a shortage of time are some of the reasons why companies today have been forced to focus on their core competencies. In order to achieve this, companies are obliged to place part, or the whole, of their production process on suppliers. This is referred to as outsourcing. The core competence of companies will not be placed to suppliers but will remain in-house. This means that both the suppliers and the companies will focus primarily on the areas where they have a competitive edge. Outsourcing does not decrease the size of a business, the resources will only be redistributed, and more money and energy will be used for R&D investments in areas in which the company is most suited. The intense competition has also forced companies to improve cost control, improve their flexibility, and react faster to be able to meet demands of the ever changing market.
Companies that have selected outsourcing as a strategy to be more competitive will be more dependent on their suppliers. Selection of suppliers has therefore become more important than before.
The technical performance and price offered by potential suppliers are not, as they often were before, the only determining aspects. Financial, commercial and qualitative perspectives are other important factors that also influence the final decision in the choice of a supplier today. Suppliers of today are spread all over the world, cultural differences is a factor of great significance when selecting the companies that will ultimately get the contracts. Today the strategic purchasing department actively participates in the selection of these suppliers. The purchasers’ assignments, in this process, are to accurately evaluate these suppliers, both financially and commercially.
1.2 Problem area
In order to understand why the selection of suppliers is as significant as it is today, it is important to understand outsourcing. Outsourcing is the reason behind the increased importance of selecting suppliers. Why do companies today choose to outsource? Which part of the production should the company outsource and which part should stay in-house?
The decision whether to have the production in-house or to outsource depends on whether the best solution can be offered by outside suppliers or by the company itself. In order for the company to be able to answer this question it must first know what its core competence is. As a result, competitive companies are focusing more on their core competence. Why is this increased focus on core competence necessary? When companies outsource, the significance of suppliers increases. This indicates that the selection process becomes more important than ever before. To better understand the selection of suppliers, it is interesting to investigate how the purchasing role has changed.
The selection of suppliers can be done in such a way as to receive a very general picture of the potential business partner, or much more thoroughly. In both cases the strategic purchaser must evaluate the suppliers both financially and commercially and when the evaluation requires a deeper analysis, an interview with the suppliers is necessary. It is not an easy job for the purchasers to know how to perform the selection of a supplier. It is even more difficult to perform evaluations of foreign suppliers, since the cultural differences must be considered. It is, therefore, important to be aware of the various cultural differences between the countries and how exactly those cultural differences influence the selection of suppliers. It is necessary to know what other factors the purchaser should be aware of when selecting suppliers of other nationalities. We have, for the purpose of this study, selected to perform a guide for selecting American suppliers in the United States in the data-and telecommunication industry.
1.3 Problem formulation
Outsourcing was a rather new phenomenon for Ericsson, when this investigation took place (spring 1997). This strategy had recently been implemented at this time within the organization and it implied organizational changes but also practical changes as for instance to develop a guide for selecting suppliers. A guide for selecting suppliers already existed within the company. The purpose with the guide was to use it as a checklist. The information in the guide gives each purchasing department a helpful tool to develop a guide specifically designed to its needs.
The strategic purchasing department, at Nacka Strand, was in need of a guide for selecting American suppliers in the United States; where most of their suppliers are located. We believed that this matter would be very interesting to investigate.
In order to understand the importance of selecting suppliers we soon became aware of the fact that other information was important to understand before the main investigation could take place. The result of this was that we decided to explain other issues in order to make the study comprehensive for the reader such as; outsourcing and how this new strategic development changes the purchasers’ role, what does outsourcing imply and why companies decide to outsource. How this effects the role of the purchasers? It is also necessary to investigate how cultural differences, in our case the American culture versus the Swedish and how these differences influence the selection of suppliers.
We decided to focus our study mainly on the selection of suppliers. The reason for this was because the purchasing department in Nacka Stand was in need of a guide and because Ericssons's new strategy, outsourcing, is based upon using suppliers. It is, therefore, very important that the Company has a good guide to select the best and most suitable suppliers. We thought it was surprising that no investigation with this focus had been conducted yet, considering the subject’s importance.
1.4 Aim and Subaims
The main purpose of our study is to investigate:
How to select American suppliers in the market of the United States, in the tele-and data communication business, from both an American and Swedish perspective.
Our purpose is not to identify a recognized method of selecting suppliers, but rather to give the strategic purchasing at Ericsson Business Networks AB at Nacka Strand guidelines to follow when selecting American suppliers in the United States.
It has become necessary for companies that use outsourcing to be able to select the best and most suitable suppliers. In order for the discussion of the selection for suppliers to be best comprehended, it is important to understand outsourcing and its consequences. This is the purpose of the following sub-aims:
- Why do companies outsource?
- Which part of the production must companies outsource?
- Why isan increased focus on the core competence necessary?
- How has the purchasing role changed?
Selecting the best possible suppliers is not an easy task for the strategic purchaser. A recognized method does not yet exist for these purchasers to follow especially when cultural differences between the United States and Sweden are one of the significant factors. We would therefore also like to include the following question as our sub-aims:
- What should the purchaser be aware of when selecting American suppliers in the United States?
- What are the cultural differences between the United States and Sweden? How do these differences influence the selection of American suppliers?
1.5 Delimitation
We have limited our study to one industry, the tele-and data communication business; one company, Ericsson, and just one of the company’s business areas, infocom systems, formerly Ericsson Business Networks AB, EBC[1].
The purchasing department at Ericsson is divided into two parts; strategic and operative. We will, for this thesis, only study the strategic purchasing.
We have limited our study to look only at the impact of American culture, and exclude the effect other cultures have on the selection of American suppliers.
The guidelines for selecting suppliers in the United States is specifically adapted to the needs of the strategic purchasing department in Nacka Strand. We have therefore excluded the needs of other alternative companies or areas of business within Ericsson.
The job of the strategic purchaser begins with the selection of potential suppliers and lasts until the contract is signed with one or more of the chosen companies. We will limit our study to the investigation of the selection of suppliers; from the selection of potential suppliers to the final decision of the choice of the supplier(s).
1.6 Outline of the thesis
Chapter 2 describes our chosen scientific perspective, which will influence the whole study.
We present our choice of method in Chapter 3. From the scientific perspective we have chosen an appropriate mode to collect our data. As mentioned earlier, we choose to approach our problem by using a case study of the strategic purchasing department at Ericsson Business Networks AB at Nacka Strand.
In Chapter 4, we present our theoretical perspective of selecting suppliers. The material in this chapter is based on secondary sources. This chapter also describes factors that contribute to the development of outsourcing, and why companies outsource at all. We divided the chapter into fourparts, the order of these parts is important since it is this succession (see figure below) that have influenced companies towards decisions to outsource. Companies that outsource are dependent upon their suppliers. The selection of selection of suppliers is, therefore, of vital importance and a discussion of this is also included as a section of the chapter.