Measuring Supply Management’s Budget Effects

With this quote, the mission of this thesis has been defined. The above demand literally reflects supply management's recent situation: CFOs require more than just savings being reported; they want to see savings' financial impact on the corporate bottom line. CFOs want to be shown the money, accomplished through supply management's daily practices as an expression of the function's corporate value contribution. “The P&L impact has become more important since 2006”, as a respondent from the banking sector indicated in the conducted survey. However, a comprehensive approach, which makes supply management's bottom line impact tangible from a holistic point of view, could not be found – neither in literature nor in practice. Thus, supply management's journey starts here – in the search for an adequate approach to measure its bottom line impact precisely and comprehensively.

Supply performance measurement is a widely discussed topic with numerous concepts, frameworks, and even more important: best practices. They were created for measuring supply management's overall performance. Nevertheless, it is not clear yet if they are valid for measuring supply management's bottom line impact as well. Therefore, as a first step in approaching this fuzzy topic of measuring supply management's financial effectiveness, the measurement background is provided within this chapter. The relevance of measuring supply management's financial effectiveness is the focus in 2.1. Supply management's perception, its required scope of responsibility compared with its status, and the resulting perception gap are discussed from a principal-agent perspective due to the required change of existing systems and introduction of a new mindset. Having shown the necessity of measuring financial effectiveness, existing performance measurement approaches are analysed regarding their adequacy for this particular measurement issue in 2.2. Since obviously no established performance measurement system fits the measurement requirements of the newly defined ‘Return on Spend’, which primarily focuses on savings as an effectiveness indicator, the decision was taken to develop an innovative process for measuring supply management's financial effectiveness, with the focus on the savings refinement. The initial draft of the process design is presented in 2.3, specifying design sciences as an adequate research approach.

Management has realised supply management's contribution to profitability and shareholder value (Albright, 2003, p. 12; Anonymous, 2007, p. 74) and hence aims at measuring its value contribution under one common aspect: the measurement of those savings that were contributed by supply management directly to the corporate bottom line (Buchholz, 1999, p. 52) – supply management's budget effects. However, the question regarding the reality of the savings measurement problem remains unanswered. Thus, the status and future of savings measurement practices are explored empirically.

Finding creative problem solutions and thereby acting future-oriented as a vehicle for change, as discussed by several authors (e.g. Borja de Mozota, 2007; Lojacono & Zaccai, 2004; Michlewski, 2008; Ravasi & Lojacono, 2005; Romme, 2003), has been the reason for selecting design sciences as the research strategy for this thesis. The second draft of the savings measurement framework has already been detailed and incorporates the literature as well as practice perspective. However, it remains theoretical; or as Mintzberg (1979, p. 587) says: “It is the anecdotal data that enable us to do the building. Theory building seems to require rich description, the richness that comes from anecdote.”

Measuring supply management's budget effects has been treated as technical innovation so far, which requires a clearly defined process. However, the issue of commitment and motivation has been consistently present. Apparently, there was more to successful measurement than just a mechanical process design. “A cost management system […] is not a technical innovation […]. This distinction between administrative and technical innovation is important because the adoption, decision, and implementation success […] are determined more by particular behavioral [!] and organizational [!] variables. […] Thus, […] the key to successfully implementing ABC is effectively dealing with specific behavioral and organizational variables” (Shields, 1995, p. 149). “ABC is a socio-technical tool, and the emphasis should be on the social dimensions” (Cokins, 1998, p. 75). These quotations from literature support the statement: social and behavioural factors play a critical role in success. The literature referred to activity-based costing (ABC), which functioned as a basis for the design of the budget effects measurement process. Since this designed process is innovative and not presented and discussed in established literature, the following discussions on implementation issues will be primarily based on leading ABC- and ABB-literature.

It was the objective of this thesis to design a generally valid process, which enables supply management to measure its financial effectiveness in form of the Return on Spend. This thesis can be considered as a gate-opener for this recent field of research. The author adapted a generalist-perspective and approached the problem set from various angles, thereby gaining access to, and broadening the scope of, even more relevant topic-related issues, which generate room for future research. Therefore, the claim to present complete and final solutions was never made. However, it was intended to provide the reader – scientist and practitioner alike – with initial drafts and thoughts from a holistic point of view and to trigger further research within the diverse aspects of measuring supply management's financial effectiveness. Thus, limitations of research have to be mentioned and the most apparent potential for future research outlined. Finally, the findings of this thesis are summarised in form of allencompassing statements.