Operations and Supply Chain Management ESMT Case Study British Airways: A Journey in Procurement Transformation Q1 In the case what are the challenges faced by the procurement group in coming 2 years ahead? There are several challenges the procurement group faced between 2004 and 2006. First of all, keeping up with the success of the past years, especially the cost and performance improvements and also keeping investors happy (constant increase of share price since the beginning of 2003).
Secondly, the procurement group was to face challenges when rationalizing the number of suppliers, building cross business conformity to develop a uniform sourcing process, reduce spending and leveraging it. The roll out of additional tools of Ariba’s spend management solution, which was supposed to cover all spend categories was another challenge. Since it in the beginning only consisted of a small group of suppliers extended over the coming month, which might lead to difficulties when trying to increase conformity with preferred suppliers.
Those shall be decreased to 2000, which will make it easier to manage them and also to develop proper sourcing strategies. However integrating the different Ariba system tools represented another challenge, and was important to make sure that orders are based on the same agreed terms. Furthermore the procurement group planned to adjust catalogues. The challenges it faced here were to make ordering simpler, support transactions with preferred suppliers, decrease invoice mismatches, speed up approvals and advance requisition accuracy.
In addition to this another future challenge was to rollout to overseas operations and subsidiaries. This would mean another reduction in employee headcount in other divisions and could lead again to resistance to change amongst employees. Therefore change management would be an essential tool to tackle this challenge, while the technical part of the roll out should not be a problem. Q2 What were the solutions proposed and how did they address the problems faced? Solutions proposed were to adapt to a generic sourcing process.
Initially it consisted of five tollgates. Later it was reduced to three tollgates, because of heavy workload faced by the persons in charge (External Spend Group) during the review process, which would have compromised the high level of efficiency. It supported a more structured, transparent and responsible workflow, purchasing process and cost controlling. It addressed the until then very liberal management of buyers, who sometimes could authorized spending up to ? 1 million without approval by supervisors.
Adapting to a new sourcing process also meant to restructure BA’s organizational purchasing process. In order to do so, additional software for transactional purchasing of services and products was introduced. Until then this process took place through very resource intensive methods. At the time the needed software was still about to develop and it took some time to find the right one. This new software from Ariba (Ariba Buyer) was supposed to fill the gap of efficiently (time and cost) purchasing in the procurement process, which existed in this area.
It ran on an external Internet platform, which enabled BA to set up working solutions more quickly. With its ability to combine several management capabilities and to centrally manage the aspects of the procurement process the system addressed the problems originating through the earlier mentioned gap. Another problem faced by BA during the implementation of the procurement transformation program was the resistance to this new process and to use of the software in all areas.
It was a constant issue since the search for procurement process software and at the same time ongoing job cuts of the “Future Size and Shape” initiative in the year 2000. Three years later BA started to tackle the problem by showing the advantages of Ariba Buyer, offering support (e. g. call centre for buyers) and training (“Learning Programme”). A very successful tool became the “Z-card”. It was a small enough card to be carried around everywhere and explained in pictures and simple language the steps of the new process and strategy.
It also explained how this new development fit with the “Future Size and Shape” initiative. Q3 What indications are there that the changes worked? 1999-2004 In 2003, a rapid increase of strategic procurement processes showed that the implementation of the five tollgates had worked. Also the support services for buyers like the call centre turned out to be a success with over 100 calls per day. The change in procurement strategy and process had also a positive impact on the bottom-line. Procurement savings had steadily increased since the start of the change in 1999.
In 2001/2002 the new development lead to savings of about ? 50 million. Just three years later in 2004/2005 it had increased by four times to ? 200 million of savings. With such a development the cost for Ariba Buyer was returned in just five months. Another indication that the changes worked showed rapid increase of orders trough the Ariba Buyer system in the second half of 2003. Several additional benefits indicated that the changes had worked. Such as more transparent spending, which shows a rise in orders processed via Ariba Buyer.
This also reduced the amount of suppliers used until then by 63% in 2003. Another increase was recorded in contract compliance, where preferred suppliers started to become part of the daily business, not just reducing off contract spending and resulting in lower prices for goods and services purchased, but also reducing administrative efforts through fewer contracts. With better information on purchasing spend, it was possible to analyse which amount was spend for which supplier and product.
This enabled the procurement group to start leveraging purchasing power and therefore save costs in different areas like in-flight catering in the US (15%), ground fuel at the London airports (22%) and crew accommodation in the US (17%). Also internally processing costs have been decreased, with a positive affect on error rates, transaction cost (decreased by 48%) and order-processing time, with most of the orders being transacted electronically. This gives employees more time to concentrate on value-add activities, leading to higher employee productivity. Since the workflow had been optimized less workforce was needed.
Therefore BA was able to reduce headcount employed especially in procurement and safe additional costs. Q4 What could have been done differently? The procurement team should have been rigorous about the usage of Ariba Buyer right from the beginning at the implementation of the software. This could have been done by closely monitoring the usage of the software by buyers, but also by making sure that employees actually know how to use it and what the purpose of the software is. This could have been easily achieved by training workforce and supporting the software right from the beginning as ell. The time taken until reinforcing measures (like in 2003 for tighter NDI controls) was too long. During this time buyers were too greatly empowered with too much freedom about their decision-making. Also the introduction of the tollgates came very late in the process and should have been already in place when the new software was launched. The people in charge should have also been proactive with promoting the procurement transformation programme right from the beginning amongst employees, by introducing the intentions and goals something like the “Z-card” right at the beginning.
This would have decreased resistance against the change. Also one should have thought chosen a different time to introduce the “Future Size and Shape” initiative, which at the time was just another change and caused additional resistance. The start of this initiative right at the beginning of the procurement transformation programme would have been better. Or one should have waited until people have adjusted to the initial changes and then come up with this scheme.