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Early Supplier Involvement (ESI) within the Procurement and Sourcing

Management Process – An Opportunity to Achieve World Class Status in
Outsourcing

Conference Paper · December 2006

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 Early Supplier Involvement (ESI) within the Procurement and
Sourcing Management Process – An Opportunity to Achieve World
Class Status in Outsourcing
Tunçdan BALTACIOĞLU1, Frank BATES2,
Işık Özge YUMURTACI3, Z. Fırat KARAİBRAHİMOĞLU 4,
Gökçe TUNA5, Türkay YILDIZ6, Fatma Nur BİLGİN7

Abstract

As supply chains compete against one another within the globalization processes, the function of
procurement within each chain becomes a major area for examining applications for best practices and
gaining efficiencies. Those whose responsibilities lie in the formation of strategies and tactics are often
promoting the inclusion of the procurement and sourcing management departmental representative
from the earliest planning stages of a project – rather than later – thereby setting up the best
opportunities to achieve project savings. Those who support this early participative role for the
procurement function may point to the department’s knowledge of the supplier base and of which one
may be best qualified for the project. To the extent that the early presence of the supplier during the
planning period of the project when specifications are being drawn up, schedules for performance
milestones are being charted, and cost budgets are being developed may contribute to the project’s
ultimate success, there is an indication that purchasing personnel can prepare themselves for this early
involvement by spending time with suppliers to learn about products and services specifications and
descriptions to help in the procurement decision. How these contributions are best achieved is the
subject of this paper as the researchers performed primary surveys of various companies and also
reviewed industry trade and media data by which to gain an understanding and appreciation of this
role by the procurement and sourcing management organization.

Keywords: Early supplier involvement, Outsourcing, Sourcing management

1. Introduction

The increased importance of the role of suppliers and procurement

departments in the manufacturing and service companies within the
globalization process has encouraged the development of robust strategies in the
1
Izmir University of Economics, Department of Logistics Management, Turkey, +90 (232) 488 8113,
tuncdan.baltacioglu@ieu.edu.tr
2
Izmir University of Economics, Department of Logistics Management, Turkey, +90 (232) 488 8113,
frank.bates@ieu.edu.tr
3
Izmir University of Economics, Department of Logistics Management, Turkey, +90 (232) 488 8113,
isik.yumurtaci@ieu.edu.tr
4
Izmir University of Economics, Department of Logistics Management, Turkey, +90 (232) 488 8113,
z8f5k15@yahoo.com
5
Izmir University of Economics, Department of Logistics Management, Turkey, +90 (232) 488 8113,
gokcetuna@laverda.com.tr
6
Izmir University of Economics, Department of Logistics Management, Turkey, +90 (232) 488 8113,
turkay.yildiz@ieu.edu.tr
7
Izmir University of Economics, Department of Logistics Management, Turkey, +90 (232) 488 8113,
fatma.nur.bilgin@ieu.edu.tr
implementation of early supplier involvement (ESI) processes (Wynstra,
VanWeele and Weggemann. 2001; Vonderembse and Tracey, 1999; Smith and
Zsidisin, 2002; Rigby, 1996; Regatz, Handfield and Scannell, 1997). To take the
advantage of ESI at the beginning of design and manufacturing, suppliers need
to form up with their wide variety of expertise (Milligen, 1999; McIvor and
Humphreys, 2004; McGinnis and Vallopra, 1999; Laseter and Ramadas, 2002).
Planning for the initial stage for ESI should be taken as a critical factor within
the total company strategy (LaBahn, 2000; Kannan and Tan, 2002;’ Hartely,
Zirger and Kamath, 1997). The collaboration between buyers and suppliers with
an overall commitment to the total corporate strategy will ensure that ESI is a
success.
The objective of this paper is to provide a conceptual framework and to
present real-world considerations focusing on supplier and procurement
department functions through the use of regional data.

2. Procurement and sourcing management functional activities in an effort

to manage supply chain management and its risks

From the very beginning, it is essential to develop a detailed list of

procurement and sourcing functional activities in an effort to manage supply
chain management and its risks. The two sided view of the structure of supply
chain management, including the buyers and suppliers, will demonstrate how
each part interacts.
Table 1 lists the observed activities briefly. The list of these activities is
ranging from the customers’, buyers’ perspective to the suppliers’ perspective.
Moreover, it includes some particular details in itself, such as corporate
strategies, objectives, communication, value engineering studies etc.
Table 1 – The observed activities.

Establishing customer need

Identification of project based on customer requirements

Development of target costs for supplier components

Preparation of project and milestone plans

Collaboration with operating units

Determination of commodity sub-groupings

Development of potential supplier listing

Arrival of business objective and project package

Scheduling of supplier workshops

Review of workshop expectations with supplier

Engaging in supplier workshop

Conducting value engineering studies

Evaluating suppliers’ rough order magnitude (ROM) pricing and
technical input

Arrival at supplier evaluations and score according to pre-established
selection criteria

Supplier selection recommendations

Communication with supplier bidders for bidding process

Development of working agreements and implementation of project
plans

With the aid of the activities listed in the Table 1, it is possible to gain general,
and oftentimes more specific, points of view about the suppliers’ interactions.
As a result with the advantage of ESI as a commitment to corporate strategy, it
is possible to determine the exact roles and benefits at the initial stage of ESI.
Procurement and sourcing processes are at the heart of the overall ESI
processes. When dealing with ESI, or starting its initial phase, it is helpful to
study detailed interactions concerning the deployment of ESI.

3. Procurement and sourcing processes

The basic role of the procurement/sourcing function is shown in the figure

with Early Supplier Involvement process.
 Figure 1 – The ESI involvement

The design and development phase is the initial part of the total procurement
process. The involvement of the ESI process at the initial stage is shown in the
Figure 1.

Figure 2 – Barriers to ESI

Within the design and development phases, it is essential to place the ESI at
the right phase in process flows. Figure 3 shows the basic and general point of
view for the ESI function. Step-by-step involvements of functions within the
total service process can be clearly noted. Inside the time slices there are
numerous processes to fulfill the total requirements of the service. At the
beginning the ESI process defines the whole part of the process flows. Full
success can be experienced only when all of the processes are activated to play
crucial roles.
 Figure 3 – The initial ESI role as deployed within time phases.

The initial start of the ESI process, in contrast, is not independently

determined. There are some barriers that affect its initialization. These
drawbacks associated are with implementing early supplier involvement. For
example Monczka and Trent (Monczka R, Trent R. Purchasing and sourcing,
1997 ) determined that almost 50% of the firms they studied indicated that
significant barriers exist that limit their ability to include suppliers. The
instances of these barriers at a basic level are shown in Figure 2. These barriers
can be classified into two groups; “Company Policy” and “Lack of Interface
Functions of the Procurement Department with external suppliers”. The
“Company Policy” barrier can be considered as the traditional way of doing
company operations. Thus, neither the ESI concept nor the placement of ESI
process at the initial part of the Procurement and Supplier relations is always
possible. The other barrier is the lack of function for the procurement
department. Business operations within the procurement department are pre-
defined. Therefore adding the necessary functions will take considerable time in
consideration of the learning curves of affected departments.
 Figure 4 – The share of “Common Strategy” within the whole company
strategy.

One of the most crucial parts of the ESI success solely depends on the total
commitment to the company strategy. Figure 4 shows the basic conceptual view
of how to place company strategy into the hierarchy of the supply chain. For
the success of ESI, “Common Strategy” should be shared among the functional
departments of the supply chain as well with senior management.

Figure 5 – Effective collaboration between Upper Management and Supply

Chain.
 Early Supplier Involvement achievement, at some degree, depends on the
interactions of the functional departments. Therefore, the communications of
each individual function and the development of effective collaboration are
important. Figure 5 clearly shows the 2 factors in play within this relationship –
the Upper Management Side and the Operational Side – as a collaboration
model for ESI achievement.
Another essential factor in ESI achievement is to consider the short, middle
and long term effects. Figure 6 at a basic level shows how technical capabilities
and collaboration levels increase based on the period of time duration for overall
company activities.

Figure 6 – The conceptual model for the ESI achievement term based company
goals.

4. Evidence of early supplier involvement within the process – results of

company surveys and industry trade media

To explore the evidence of ESI surveys were made of numerous regional

companies. Those surveyed ranged from small to large size enterprises, with
employment levels of less than 10 to more than 100 employees. Almost all
companies have ISO implementations in common and they are all committed to
further improvements of their service levels.
Survey forms were distributed via electronic platform and some survey forms
filled in by telephone conversations.
5. The Research and Findings

5.1. The Survey Form

The survey form includes 9 questions in total. The questions are basically
ranging from “how companies implement procurement and sourcing functions”
to “the operational implementation of the procurement functions in detail”.
In addition to commenting on past procurement and sourcing experiences
and ESI, the participants of the survey were asked the questions listed in Table 2
below.

Table 2. Table of processes being performed.

Survey Assessment Type The number of
responses
Acquisition process 60
Purchasing function 30
Decision making 90
Suppliers interaction 30
Working agreements 90
Project and milestone plans 30
Customer Requirements 30
Target costs 30
Collaboration with units 30
Potential Supplier Determination 30
Supplier Evaluation 30
Communication with suppliers 30
Table 3. Table of processes being performed – with response rates in groups.
Yes Unsure No
Responses to Survey
Questionnaire: Count % Count % Count %
s s s
Acquisition process 12 20,0% 25 41,7% 23 38,3%
Purchasing function 10 33,3% - - 20 66,7%
Decision making 78 86,7% 12 13,3% - -
Suppliers interaction 26 86,7% 4 13,3% - -
Working agreements 52 57,8% 25 27,8% 13 14,4%
Project and milestone plans 26 86,7% 4 13,3% - -
Customer Requirements 5 16,7% 25 83,3% - -
Target costs 5 16,7% 25 83,3% - -
Collaboration with units 5 16,7% 25 83,3% - -
Potential Supplier 5 16,7% 25 83,3% - -
Determination
Supplier Evaluation 5 16,7% 25 83,3% - -
Communication with 5 16,7% 25 83,3% - -
suppliers
250

Communication w ith suppliers

200 Supplier Evaluation

Potential Supplier Determination
Collaboration w ith units
150 Target costs
Customer Requirements
Project and milestone plans
100 Working agreements
Suppliers interaction
Decision making
50 Purchasing function
Acquisition process

0
Yes Unsure No

Figure 7. Responses to Survey Questionnaire about ESI

5.2 Review of results of primary research survey of respondents
In the fall of 2006 in İzmir, Turkey, a research staff engaged in a survey that
questioned the respondents that included corporate and public official
representatives from the geographical region. The participants surveyed
included company representatives from a mixed range of business operations.
All company representatives responded to the survey questions and showed
strong interest in responding to the survey.
As a general survey of attitudes and feelings amongst those surveyed, the
participants were asked to comment on ESI processes related material.
Almost all of the those surveyed responded (%89) and approximately (%48) of
the companies indicated that they had visited or otherwise were involved in any
form of ESI and only 3 out of 4 (3/4) of these had been used procurement data
as the source of management decision making.
It was noted from the survey respondents that approximately sixty-two
percent (62%) either agrees or are neutral about the acquisition process activity.
This volume of responses may reflect the lack of importance given to ESI in the
procurement process and of the need for greater efficiencies in the relationships
between the supplier and the customer.

5.3 Analytical Methodology

From the responses to the survey questionnaire as portrayed in Table 2, each

individual business response is different, with different financial goals, different
levels of risk tolerance and different personal preferences. From the point of
view of purchasing management, these characteristics are often defined as
objectives and constraints. Objectives can be the type of justification for ESI
being sought, while constraints include factors such as time horizon/window,
how conservative and strategic the procurement department’s behavior is, and
how risk is handled and managed at each company. This represents itself as a
balancing act between risk and the perception of gains received from with each
company’s procurement department having unique requirements, as well as a
unique financial and procurement outlook – essentially a constrained utility
maximization objective.

5.4 Findings of Survey of SMEs

With 30 out of 34 (response rate of 89%) responding to the research project

survey in İzmir, Turkey of SMEs professionals and managers from SMEs and
others interested local business persons, 48% (14 out of 30) of those responding
indicated that they are familiar with and had contemplated a form of ESI but
only 2 of these were or had been engaged in ESI within the recent 5-year period.
Most significantly, it was noted from the respondents that the 46% generally
agree while the rest are unsure or are neutral about the advantages and usage of
ESI as having a role in the corporate day-to-day activity. (This volume of
responses may reflect the perception of the need to circulate / publicize the
advantages of ESI processes and of the need for greater efficiencies in the
relationships between the SMEs and companies using ESI.)
For the SME that engages in considerations of ESI procedures, the
development of successful and productive deals can be an important factor in
the differential advantage for these companies. From the perspective of the
SME benefiting from ESI processes exchanges, there is evidence that they are
largely interested in the scope of the ESI procedures and other applications of
this concept within the corporate environment.
 To analyze how well a company’s procurement department utilizes ESI into a
particular history of acquiring goods and services, there has been designed a
structured survey questionnaire with nine but detailed questions that one of the
question has to be answered with values from 1 to 5 with 17 different sub-
questions in it. The questions range from business background to what the
respondent expects from ESI (examples of good things from the survey listing
that come from using ESI, etc.).
A fuzzy logic system has been designed for the evaluation of the answers to
the above questions. In the researchers’ work, we have used the familiar
framework of neo-classical utility theory to try and devise a structured system
for procurements classifications according to the utility preferences of individual
ESI users.
The theory of procurement buyer behavior in modern microeconomics is
entirely founded on observable utility preferences, rejecting hedonistic and
introspective aspects of utility. According to modern utility theory, utility is a
representation of a set of mutually consistent choices and not an explanation of
a choice. The basic approach is to ask an individual to reveal his or her own
company’s utility preference and not to elicit any numerical measure, see [1]
(Arkes, 2000).
However, the projections of the consequences of the options that we face and
the subsequent choices that we make are shaped by our memories of past
experiences – that “mind’s eye sees the future through the light filtered by the
past”. However, this memory often tends to be rather selective. Normative utility
contends that optimal decisions do not always reflect the best decisions, as
maximization of instant utility based on selective memory may not necessarily
imply maximization of total utility. This is true in many cases, especially in the
areas of economics and social choice theory.
5.5 The neo-classical utility maximization approach
In its simplest form, we may formally represent a procurement buyer’s utility
maximization goal as the following mathematical programming problem:
Maximize U = f (x, y)
Subject to x + y = 1,
x ≧0 and y is unrestricted in sign
Here x and y stand for the proportions of ESI-oriented procurement buys
(amount of funds involved) allocated by the procurement buyer in the ESI
process in terms of a risk-free action (here put some of the characteristics of ESI)
that could lead to savings or risk minimization due to better coordination
between buyers, manufacturers and sellers, etc).
The last constraint is to ensure that the procurement buyer can never justify
avoiding or staying out of the procurement process (ESI) to meet the traditional
purchasing responsibilities activities by his exclusion from the ESI processes, as
this is clearly unrealistic, in that the procurement actions (without ESI) will
have more exposure to risk than and will be obviously higher than the risk-free
activity that any companies aspire to.
As in classical microeconomics, we may solve the above problem using the
Lagrangian multiplier technique. The transformed Lagrangian function is as follows:
Z = f (x, y) + λ(1-x-y) (1) (Arkes)
By the first order (necessary) condition of maximization we derive the following
system of linear algebraic equations:
(i) Zx = fx - λ= 0
(ii) Zy = fy - λ= 0
(iii) Zλ= 1 - x - y = 0 (2) (Chiang)
The procurement buyer’s equilibrium is then obtained as the condition fx =
fy = λ *.
λ * may be conventionally interpreted as the marginal utility of money (i.e. the
amount of funds at the disposal of the procurement buyer) when his/her utility
with ESI is maximized, see [2] (Chiang, 1984).
As a result we can state that the motivation and activity prompting the
decision for action taken by the procurement buyer in compliance and in
observation of the ESI process procedures are done at a point when the marginal
utility of money and for value received (usefulness and derived benefit from the
ESI procedures) will be at his/her maximized utility.
From a macro perspective, the implications for the early inclusion of the
supplier into the procurement and sourcing activity within the supply chain
(value stream) may be far-reaching and powerful with high impact on the nature
of businesses operations in Turkey.

6. Conclusions

Within the corporate organization, there has been a push to manage the
efficiencies in their processes. It is estimated that various industries have
hundreds of millions of dollars tied up in their procurement processes, but few
businesses handle these business operations and processes neither with ESI
deployment nor in the most optimal way. The need for and identification of
ways to ensure efficiencies in the procurement process are evolving and ESI
appears to address a variety of issues and challenges. This research work has
highlighted many of these issues and presented the contemporary challenges in
achieving TQM and optimization of efficiencies within procurement
operations.
In conclusion, early supplier involvement into the processes can be a useful
and beneficial way to demonstrate how both a supplier and their customer can
acquire needed vision and attendant goals and objectives while gaining
important progress in its own operational competitive advantage (Dowlatshahi,
1998; Birou and Fawcett, 1994). Companies that need to gain new opportunities
for successful sourcing activities, have the option to achieve them through an
early supplier involvement program within the procurement and sourcing
process (Hartley, Meredith, McCutcheon and Kamath, 1997). Procurement
acquisition programs are growing in frequency and size, yet research shows that
many firms have not yet tried to use the ESI as an innovative ingredient to their
projects – particularly as a role player in the supply chain. Involvement of the
early supplier involvement activity offers a number of advantages, as reflected
above. Specifically, it may be a useful process in the business operations, while
not a panacea to every specific difficulty that exists between the firms approach
to its operations, the results of this approach suggests that there are specific
advantages to be gained by the involvement of acquisition as a contributor to a
world class procurement and sourcing program – particularly in light of supply
chain management (Bidault, Despres and Butler, 1998). Procurement and
sourcing management planners who have not examined this supplier tie-in
involvement may be overlooking an opportunity to engage in more effective
and rewarding projects acquisition phases in their operations.

References
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Development: A Comparison of US and European Development: A
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Appendix 1: ESI Survey Form

1. Evaluate the importance of the steps in acquisition process. According to you,

which are the two most important steps in acquisition process to affect the value
of the product:

1. Need recognition
2. Description
3. Potential suppliers
4. Selection
5. Receipt
6. Payment

2. Referring to the question above please indicate the practise in your company.
From which step on you include the purchasing function to the acquisition
process. (Please select only one step which means from that step on you include
purchasing.)
1. Need recognition
2. Description
3. Potential suppliers
4. Selection
5. Receipt
6. Payment

3. Do you consider the Procurement department as a source of data and

information to support management decision-making? Yes No
Please explain

4. Use a scale of from 1 to 5 to evaluate each activity with a (1) indicating you
strongly agree to a (5) indicating you strongly disagree.
Our procurement/purchasing department personnel can be effective in:
1 2 3 4 5
Establishing customer need
Identification of project based on customer requirements
Development of target costs for supplier components
Preparation of project and milestone plans
Collaboration with operating units
Determination of commodity sub-groupings
Development of potential supplier listing
Arrival of business objective and project package
Scheduling of supplier workshops
 Review of workshop expectations with supplier
Engaging in supplier workshop
Conducting value engineering studies
Evaluating suppliers’ rough order magnitude (ROM) pricing
and technical input
Arrival at supplier evaluations and score according to pre-
established selection criteria
Supplier selection recommendations
Communication with supplier bidders for bidding process
Development of working agreements and implementation of
project plans
Assist management to make decisions and to control risks

5. What experiences have you had with your procurement personnel?

Good Bad Please explain.

6. Do you consider the Procurement department as a source of data and

information to support management decision-making? Yes No
Please explain

7. What interests you most about these sessions with the procurement
personnel?

8. What would you do if your were the head manager/director of

procurement/purchasing at your company?
Please explain

9. Have you worked for another company and how did they use the
procurement/purchasing personnel?

Yes No Please explain.

Your Name Company Name

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