Profitable negotiations : A case study regarding purchase-, transport- and inventory costs at ABB

ABB is a global company with a leading position in power and automation technologies. Being active on a global market creates a high pressure to always develop the business and reduce costs in order to stay competitive. The purchasing function at ABB ́s unit Control Products is divided into a strategic- and an operative purchase department. The negotiated setups the strategic purchasers establish with the suppliers have been shown to affect the transport- and inventory costs that are charged to the operative purchase department. In order to determine whether more beneficial setups could be negotiated by including transport- and inventory costs when they are evaluated, this case study has been requested. Two master students from Linköping University have conducted the study and by investigating different setups, conclusions to answer the study ́s purpose could be drawn. The purpose is presented below. The study’s purpose is to recommend future guidelines for the strategic purchasers at ABB’s unit Control Products that can be applied when negotiating with suppliers, by evaluating purchase-, transport- and inventory costs. In order to investigate how the purchase-, transport- and inventory costs were affected by different setups, four different cases were defined. Each case included a specific article, which was chosen based on its properties and its current and alternative setups. The conducted literature reviews and interviews with employees at Control Products resulted in the two sub- criteria lead time and net price were defined as the most important ones when negotiating and evaluating suppliers. A combination of these sub-criteria was therefore used to choose suitable articles. Once the cases had been defined, the purchase-, transport- and inventory costs could be calculated for both their current situation and alternative setup scenarios. Theories from relevant researches were used to strengthen and criticised the cases’ results. Each case's result provided information regarding how the purchase-, transport- and inventory costs were affected by specific setups. By comparing the alternative scenarios with the setup currently used, the alternatives ́ profitability could be determined. The cases showed that by only studying one of the three cost posts, only a limited insight was gained. Even if the purchase cost was to increase for an alternative setup, it could still be profitable to implement due to decreased transport- and inventory costs. Furthermore, an alternative setup that showed significant potential to reduce inventory costs was proven to not be profitable because of its effect on the net price. Neglecting to take transport- and inventory costs into account when a potential supplier is evaluated can make a deal look more profitable than it is. The final recommendation is that purchase-, transport- and inventory costs all have to be taken into consideration in order to determine which setups that are economically preferable. If the strategic purchasers at Control Products includes these when they negotiate with suppliers, more profitable deals can be obtained. Examensarbetet är en förvrängd version då känslig information om ABB inte ska läcka ut.