Executive Summary
The aim of this paper was to analyze the strategic and operational roles of procurement at DHL. The company’s procurement function was analyzed using various procurement tools and concepts. Furthermore, secondary data was collected from a variety of sources that included the company’s website, peer reviewed journals and textbooks to complete the analysis.
The results of the analysis indicate that DHL uses a centralized procurement system to reduce costs. Its subsidiaries in overseas markets also participate in the procurement process by implementing the decisions made by the headquarters. The company has also embarked on implementing supply base optimization initiatives in order to reduce operating costs.
DHL’s Procurement System
DHL is the largest mail and logistics company in the world. The company was founded in German where its headquarters are located. Since its inception, DHL focused on rapid expansion by joining different markets in every continent. As a result, the company currently operates in over 200 countries and employs nearly four hundred thousand employees.
DHL’s vision is to “remain the postal provider for Germany and become the logistics company for the world” (DHL 2013). In order to achieve this vision, the company focuses on providing excellent services. These include “dialogue marketing, press distribution, and corporate communications solutions” (DHL 2013). Moreover, the company provides mail delivery, transport/ logistics, and supply chain management services.
Organizational Structure
As a multinational company, DHL relies heavily on the effectiveness of its procurement department to access all the supplies that it requires to meet the needs of its customers. Currently, the company is organized into four divisions that have semi-autonomous divisional headquarters (DHL 2013). However, procurement and other functions such as finance and personnel are centralized.
Procurement plays a vital role at DHL by facilitating effective and efficient sourcing of products/ services, supporting functions such as marketing and reducing operating costs. For instance, the procurement unit often assists the company’s sales team to perform activities such as reviewing response to requests for proposals (RFP) (DHL 2013).
In order to leverage the capabilities of its procurement unit, the company has embarked on innovation and use of advanced technology. Furthermore, the company is collaborating with its suppliers to help them to achieve innovation, which in turn improves efficiency in its supply chain.
Business Conduct and Operational Activities
DHL has strategically chosen to simplify its procurement system in order to achieve efficiency and effectiveness in its business and operational processes. The company’s procurement strategy focuses on the use of advanced information and communication technologies (ICT) and partnering with only a few certified suppliers. ICT is important to DHL’s procurement unit because it facilitates efficient flow of the information that is required to complete transactions such as placing orders.
DHL’s business strategy is to streamline its operations in the markets it operates in by working with selected suppliers who are able to help it to reach customers in different geographical areas (DHL 2013). The company expects to reduce its direct and indirect costs by working with a limited number of suppliers.
In particular, purchasing various supplies in large quantities from a single or a few suppliers is likely to reduce costs through discounts (Pooler, Pooler & Farney 2004, p. 47). Working with a few suppliers also helps in centralizing procurement functions (Benton 2006, p.92). DHL has centralized its procurement functions in order to avoid duplication of roles in processes such as selection of suppliers and supplier relationship management.
This leads to reduction of indirect costs associated with duplicating procurement activities (Weele 2009, p. 89). Although DHL’s global procurement decision–making processes are centralized, the company encourages the participation of its overseas subsidiaries in strategy formulation (DHL 2013). In most cases, the company’s purchase decisions are made at its headquarters.
However, the subsidiaries in various regions are responsible for implementing the decisions. For instance, the company has worldwide contracts with providers of services such as printing and labeling to enable its subsidiaries to purchase their supplies easily (DHL 2013). This strategy also reduces the costs associated with shipping materials from a centralized purchasing unit to the overseas subsidiaries (Ogden & Carter 2008, pp. 5-28).
Analysis of DHL’s Procurement Function
The effectiveness of the procurement unit is partly determined by its position in the organizational structure (Yin & Khoo 2007, pp. 7-24). The organization of the procurement unit illustrates the extent to which it is integrated into the business strategy (Yin & Khoo 2007, pp. 7-24). In addition, the organization of procurement function determines its relationship with other departments, which in turn affects its effectiveness (Ashenbaum, Maltz, & Barratt 2009, pp. 169-186).
Figure 1 shows that DHL’s procurement function is a department under the global business services unit. In this regard, the head of procurement unit has limited ability to influence procurement strategies and policies since he or she reports to the head of global business services, who in turn forwards his concerns of the CEO. Generally, DHL’s procurement function plays a facilitation role since its involvement in various business processes is moderate.
In particular, the procurement team is mainly concerned with the purchase of goods and services that facilitate the operation of other departments. (DHL 2013) These include printed materials such as envelops, as well as, maintenance, repair, and operational (MRO) services (DHL 2013).
The effectiveness of the facilitation model that has been adopted by DHL’s procurement unit can be evaluated based on its effect on supplier selection, supplier relationship management, and purchase decisions. An ideal “procurement organization must balance the desire to leverage purchasing power through complete ownership with the need to maintain the flexibility of individual business units” (Noor, Khalfan & Maqsood 2013, pp. 802-826).
This balance can be achieved by adopting an appropriate organizational structure that aligns procurement processes to the company’s needs (Noor, Khalfan & Maqsood 2013, pp. 802-826). Moreover, procurement roles, responsibilities, and decision rights must be distributed in a manner that prevents tensions among business units (Pushmann & Alt 2005, pp. 34-51).
The facilitation model adopted by DHL is effective since it leads to distribution of decision rights according to what is being purchased. The limited involvement of the procurement unit enables the functional units to participate actively in the purchase of complex equipment such as aircrafts (DHL 2013). In this case, the executives in the air freight division are allowed to perform duties such as product specification and most of the sourcing activities.
The rationale of this strategy is that the functional units have good knowledge of each of the complex equipment that they use (Stolle 2008, p. 67). Thus, their involvement in the purchase process helps in avoiding the mistakes that might occur due to the limited knowledge of the procurement team (Stolle 2008, p. 68).
For products or services that are “less business specific such as repair and maintenance, the facilitation model promotes cooperation between the procurement team and the business units” (Stolle 2008, p. 69). For instance, DHL’s procurement team often provides technical assistance such as evaluation of requests for proposals, whereas the business units identify the product’s specifications.
At the corporate level, DHL’s procurement team manages the entire process of purchasing standardized products and services such as office supplies. The advantage of this strategy is that it helps in reducing procurement cycle time and costs (Nicosia & Moore 2006, p. 91). However, it can lead to tensions between the procurement team and other business units since the later is hardly involved in the purchase of standardized products.
Centralization versus Decentralization
The choice between a centralized and a decentralized procurement system is often difficult to make because each system has its advantages and disadvantages (Farmer, Crocker & Jessop 2008, p. 123). DHL uses a centralized procurement system where most of the purchase decisions are made at its headquarters. The subsidiaries and each division participate in the procurement process by identifying their supply chain needs and making purchase requests to the head office (DHL 2013).
Moreover, they participate in product or service specification and make recommendations to the procurement team. The centralized approach has the following advantages. Apart from reducing procurement costs, centralization facilitates control of contracting terms and practices (Farmer, Crocker & Jessop 2008, p. 123). This helps in maintaining good relationships with the suppliers and sealing the loopholes that can lead to fraud.
In addition, centralization leads to specialization and development of skills such as negotiation among procurement staff (Zaman 2011, p. 78). This has enabled DHL to secure the best deals for its supplies throughout the world (DHL 2013). Despite its benefits, the centralized system is likely to create the following problems.
To begin with, it leads to delays when the company’s subsidiaries are making ad hoc purchases since requisitions have to be processed by the headquarters (Wincel 2004, p. 93). This can adversely affect operations if the goods are needed urgently. DHL has responded to this challenge by providing its subsidiaries with purchasing cards that allow them to spend a limited amount of money to make ad hoc purchases.
This has enabled the company to reduce its purchasing costs by 50% and to acquire its supplies in time (DHL 2013). Nonetheless, a decentralized system would enable the company to achieve faster approval of ad hoc purchases (Cherif & Maira 2011, pp. 860-877).
Involvement of the Procurement Team
According to Anderson and Katz (1998, pp. 1-13), the procurement team should be strategically involved in the purchase process at an early stage. Early and strategic involvement enables the procurement team to improve efficiency and reduce costs in processes such as planning and negotiation (Seshadri 2005, p. 98). Thus, DHL focuses on promoting cooperation and effective coordination of the activities of its procurement unit and other departments.
This includes using advanced information technologies to share transaction information between departments (DHL 2013). In addition, the company has introduced training programs to improve its procurement team’s managerial skills. The training programs are expected to improve the procurement managers’ ability to work strategically with the functional leadership teams of the company’s suppliers.
Apart from improving efficiency, early and strategic involvement creates clarity of the procurement objective that has to be achieved (Moser 2007, p. 145). Furthermore, it enables the procurement team to make accurate product or service specifications, which in turn leads to development of the best technical solutions (Sollish & Semanik 2011, p. 117).
However, pursuing strategic objectives in procurement is likely to eliminate the possibilities of cost reduction at DHL. Since the company works with a few certified suppliers, the difference between the prices quoted by the highest and the lowest bidders is likely to be very small (Sollish & Semanik 2011, p. 119). In this case, the company will not be able to save on procurement costs.
In addition, failure to achieve high savings is likely to have negative effects on the motivation of the procurement team since their effort is often measured in terms of cost performance. The procurement team will not be rewarded if they are not able to realize meaningful savings. Thus, they will have little or no incentive to participate in strategy formulation at the corporate level.
Supply Base Optimization
Supply base optimization refers to the process “of determining the right mix and number of suppliers to maintain” (Ogden & Cater 2008, pp. 2-28). The objective of supply base optimization is to identify the ideal number of suppliers who are able to deliver the required goods in a timely and cost-effective manner (Ogden & Cater 2008, pp. 2-28).
DHL’s approach to supply base optimization involves switching suppliers and reducing the number of tier one suppliers (DHL 2013). In order to select the right mix of suppliers, DHL incorporates supplier development functions in its supply base optimization process. The process begins with identification of the company’s strategic supply chain needs.
Once the needs are identified, the company recruits competitive suppliers and sets performance metrics to assess their achievements. The company uses a problem-solving approach to develop its suppliers. This approach involves cultivating open relationships with suppliers through feedback and sharing of information (DHL 2013).
Supply base optimization initiatives can only be effective if they are supported by an appropriate supplier evaluation system (Chang, Tsai & Hsu 2013, pp. 34-51). In addition, the company must be able to reward its suppliers by awarding them long-term contracts. This is likely to be a challenge to DHL since it lacks a clear guideline for rewarding its suppliers.
In addition, DHL is likely to lose its competitive advantage by entering into long-term contracts with suppliers of commodities such as oil whose prices keep fluctuating (Vagstad 2000, pp. 949-963). For instance, the company might not be able to benefit from price reductions in the market after entering a contract for the supply of a particular commodity at a specific price.
Recommendations
DHL should consider the following recommendations to enhance the effectiveness of its procurement unit. To begin with, the procurement unit should be allowed to play a strategic role in the organization (Ukalkar 2000, p.78). The company should reorganize the procurement function by allowing it to operate as an independent unit that reports directly to the CEO.
This will improve the process of making strategic decisions by enabling the head of procurement unit to participate in strategy formulation at the corporate level. The company should also rethink its supply base optimization objectives because reducing the number of suppliers does not necessarily lead to a reduction in costs. Specifically, the company should have an optimal number of suppliers in order to reduce costs (Weber & Ellram 1993, pp. 3-14).
The gist of this perspective is that the competition between suppliers will be minimal if their number is very small. Consequently, the possibility of reducing costs through low bids will be diminished. On the other hand, having a large number of suppliers will increase the cost of supplier relationship management. Apart from identifying the right number of suppliers, DHL should establish a better reward system for its procurement team.
Cost performance should be used in conjunction with other metrics to evaluate the achievements of the procurement team (Benton 2006, p. 137). This will motivate them to participate in strategy formulation in order to improve the company’s efficiency. DHL should also improve its supplier development approach by adopting advanced technologies such as e-learning.
Currently, the suppliers are supported through periodic training programs and incentives to innovate. However, better performance can be achieved if advanced information technologies are used to enable supplier to access the company’s knowledge base to improve their performance (Doherty, McConnell & Chadwick 2013, pp. 495-515).
In addition, the company should establish a proper supplier reward system that recognizes performance and innovation. This will enable the company to benefit from its supply base optimization initiatives.
Implementation Plan
The company should begin its restructuring process by identifying its procurement needs and setting appropriate objectives. Once the procurement objectives are clearly specified, the company should redefine its organizational structure by establishing the procurement function as an independent unit that reports directly to the CEO. The Unit should be allowed to shape policy and to set guidelines for procurement functions such as purchasing and evaluating suppliers.
Adopting advanced information technologies to support the suppliers should be considered as a strategic spend and a long-term corporate objective (Murray, Rentall & Geere 2008, pp. 540-555). The company should focus on incremental improvement of its supplier development model through systematic acquisition and implementation of user-friendly information systems. The incremental approach will help in alleviating the resistance that is likely to be experienced if the improvements are implemented as a revolutionary change.
Conclusion
The procurement function is central to the success of DHL since it enables it to access key supplies that determine the quality of its services. However, the procurement function has not been given adequate recognition by being allowed to operate independently.
The company has adopted a centralized procurement system to reduce its operating costs. Similarly, it has embarked on supply base optimization to reduce the costs associated with managing suppliers. However, these initiatives might not lead to cost reduction if they are not implemented effectively.
For instance, a significant reduction in the number of suppliers will eliminate the opportunities for cost reduction through competitive bidding. Thus, the company should rethink its supply base optimization objectives and improve its supplier development model in order to achieve a competitive advantage in procurement.
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