9 Change Management in Purchasing—Best Practices from Germany’s No.1Airline Deutsche Lufthansa AG

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9

VOLUME

JULY 2006

Best Practices from Germany’s No.1 Airline Deutsche Lufthansa AG

— Dr. Ingo Bülow, Deutsche Lufthansa AG

— Ulrich Schott-Wüllenweber, Deutsche Lufthansa AG

— Fabian Hedderich, WHU – Otto Beisheim School of Management

Executive Summary

This Practixarticle describes how Lufthansa determined the required development path to become a value- adding purchasing organization, how new thinking was conveyed to purchasers by applying specific training formats, and what other companies can learn from this example.

New purchasing processes, new working procedures, new self-image: Lufthansa Purchasing has decided to move its organization up to the next level and has begun to change its original processes and methods. Lufthansa Purchasing has identified four fields of action to close the gap between the vision and the actual state of purchasing: (1) knowledge transfer, (2) learning by experience, (3) practical proofs, and (4) support tools for the daily work.

Background

Deutsche Lufthansa AG ranks among the world’s leading airlines. Lufthansa focuses on the core competencies of its six business areas: passenger traffic, logistics, MRO, catering, leisure travel, and IT services. Founded in 1926, Lufthansa had 92,300 employees and generated revenue of €18.1 billion in 2005. Together with United, US Airways, Air Canada, and 15 other major airlines, Lufthansa is part of the Star Alliance, the world’s largest global service network, operating nearly 15,500 daily flights and serving approximately 390 billion passengers every year.

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Recent crises arising from 9/11, the war in Iraq, and the outbreak of SARS in Asia have hit the airline industry. The resulting crisis management programs required drastic and immediate cost reductions, which could not be implemented simply by “squeezing the lemon” one more time.

Until these events, Lufthansa Purchasing had focused primarily on demanding cost reductions from its suppliers. As a response to the crises, the focus of purchasing had to change to include cost-reduction potential inside the company. This put the purchasers into a new role as critical partners with their internal customers. Making cost drivers transparent, formulating need-based specifications, and looking for more flexible and cost-efficient business models fundamentally changed the purchaser’s job in times of crisis. Figure 1 summarizes this shift of perspective.

Overcoming past crises has shown Lufthansa Purchasing how increased spending discipline can free up internal value-creation potential.

Now purchasing has to transfer such “crisis- proof ” levers and behavioral patterns into its daily routines.

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Puurrcchhaasseerrss BBeeccoommee CCrriittiiccaall PPaarrttnneerrss A synchronization of both perspectives is required: Purchasers must not limit their efforts to demanding cost reductions from suppliers, nor must they look for internal savings only in times of crisis.

Thus, purchasers need some freedom in their decisions, i.e., the purchase/supplier must not be pre-determined by specific product or supplier criteria. The purchase decisions should be derived directly from the economic problem the company wishes to solve through the

F Fiigguurree 11::

Crises bring about a shift in purchasing

perspective

Looking for a perfect solution

Avoiding risks

(“having a good feeling”

is important)

Strict aim to avoid

unnecessary cash-outflows

Increased readiness for discussion, compromise and risk-taking in the buying process

Pure price-focused negotiation

(“squeezing the lemon”)

Budget determines maximum cost

Reducing/eliminating requests

Reducing the price floor – Specification mgmt.

– Business models (Leasing, power-by- the-hour, etc.)

Design-to-cost

ROUTINE CRISIS

LEVERBEHAVIORAL PATTERN COST DISCIPLINE

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purchase. Hence, purchasing first has to identify the vital aspects of the economic problem before evaluating possible solutions. This postulation seems unspectacular at first, but it represents a considerable organizational and methodological challenge when examined closely.

Figure 2 gives an illustrative example of the fundamental difference between the problem- oriented and the traditional request-oriented purchasing pattern.

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Neeggoottiiaattiioonn DDeessiiggnneerrss

As the problem-oriented purchasing pattern questions the single elements of each request, it increases the number of possible solutions.

More suppliers compete to become candidates for a contract, which enables the purchaser in her/his function as a negotiation designer to use market forces more effectively, i.e., to let market forces decide the optimal price-performance-ratio.

This requires strict procedure and a well- structured preparation of the bidding phase, which clarifies the evaluation criteria for alternative solutions offered by the suppliers.

The evaluation instrument is a bonus-malus system. The preliminary evaluation in the bonus-malus system needs to be based on objective monetary criteria so that price- performance-ratios are comparable.

Figure 3 shows the resulting changes in the buying process.

Problem- oriented purchasing pattern:

Customer data management (example)

Specify need

Database management and server system

Determine technical specifications

Hardware and software solution

Identify possible suppliers Supplier 1, supplier 2, supplier 3, etc.

Send out Request-for-Quotes Specified performance, prices for server capacity, etc.

Discuss & Pre-select suppliers Server capacity, security, service levels, etc.

Personal final negotiation

& award of contract

Consideration of qualitative and quantitative aspects

Understand economic problem Securing and retrieval of customer data

Deriving value drivers

& decision criteria

Costs, security, scalability, access speed, etc.

Determine problem-oriented specification

Efficient, safe and need-driven data management

Expand solution space with alternatives

Service instead of investment and operation (pay-per-customer)

Monetary evaluation of differences Bonus for service levels, scalability, etc.

Project-specific negotiation design with clear rules

Optimal use of solution space

Request-oriented purchasing pattern TODAY

Problem-oriented purchasing pattern FUTURE

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Prroocceedduurreess –– NNeeww SSeellff--iimmaaggee

The new problem-oriented pattern represents the

“ideal blueprint” for reaching the next level of the purchasing evolution. But these valuable insights alone will not change daily routines and working procedures. Experienced practitioners know how difficult it is to implement such blueprints. A sustainable change of perspective requires a comprehensive change management.

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Like a pilot who needs to analyze environmental parameters as well as technical characteristics of the aircraft to determine the optimal take-off point on the runway, purchasing management needs to analyze the status quo before planning change management measures. Purchasing’s environmental parameters are to be found in the current economic situation of the company and the status of the purchasing function within the company. These environmental parameters may open up room for action — or limit it. Figure 4 contains a checklist to aid in this analysis.

. . . Negotiation Evaluation . . .

Expand solution

space Understanding

the problem

TODAYFUTURE

Evaluation Prepare

negotiation

Final negotiation/

award of contract

The furture problem- oriented purchasing pattern changes the buying process

Checklist for the analysis of the take-off point of change management

Top management philosophy

Economic situation/pressure to act

Change readiness and tradition

Status of purchasing in the company

Company

Employees

Development level (methods, etc.)

Existing eTool landscape (experience with e-auctions, etc.)

Change management experience in purchasing

Tendency of outsourcing

Purchasing Organization

Checklist Analysis of Take-off Point (Selection)

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Determining the Adequate Path of Change

The result of the preceding analysis is important for determining a realistic path of change.

Purchasers who insist on using only conventional negotiations for price reductions will not reach the next level of purchasing as described above — at least not without taking some major detours.

In such cases, a strategy of “change in small steps” is inevitable (see Figure 5). In the beginning, this strategy of change in small steps will focus on creating common ground by establishing basic purchasing methods and processes. The Lufthansa experience shows that different ideas about common methods and processes may exist within the purchasing organization, which makes it important to develop a differentiated approach to designing the change measures. Developing practical experience in the use of new technologies in combination with intelligent negotiation designs is an important success factor in increasing the development level (see Figure 5).

While achieving a high status of purchasing within the company is one objective of the change process, it is not necessarily beneficial if purchasing’s status is high from the start. If too much emphasis is put on purchasing’s potential to contribute to company goals, the resulting top management expectations may exceed possible short term change process progress and put too much pressure on change management. Hence, the evolution of purchasing requires change on two levels: (1) throughout the company and (2) within the purchasing organization.

C

Chhaannggeess oonn CCoommppaannyy LLeevveell

Ideally, top management will request that purchasing from now on looks for alternative solutions rather than executes predefined orders. This demands integrating purchasing into the buying process earlier than before.

If problem-oriented purchasing is really to be lived, it requires internal customers to put up for discussion their own ideas about desired solutions.

low Status of Purchasing in the Company high

lowDevelopment Levelhigh

Strategy of convincing (delivering practical proofs)

Strategy of “small steps”

(stable development)

Under operational compulsion to meet expectations quickly (danger of excessive demands) F

Fiigguurree 55::

Change management implementation strategies for purchasing

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However, purchasing usually has no direct influence when redefining its internal interfaces.

The formal introduction of purchasing’s new role depends on the individual company situation, which shall be illustrated by two examples: If the purchasing function is well- established in the company, it may be an option to simply enlarge its operating range by a formal board decision. In such a case, change management consists of designing the new role of the purchasing function in detail. On the other side, purchasing may be forced to take many small development steps in a short time in order to satisfy management expectations (see also Figure 5). Consequently, change management is not necessarily facilitated on the company level.

Purchasing management needs to pay attention to the accelerated change process and train all employees in the new problem-oriented purchasing pattern.

If there is no “political support” for a formal redirection of the purchasing function, it is advisable to implement change measures within the purchasing organization first and to exhibit the new role in selective situations, e.g., projects with high value-creation potential. The purchaser should not formally announce her/his new role as a critical partner, but live this role in the buying process, e.g., by making the real “problem”

behind the purchase request transparent, deriving solution requirements, and critically challenging evaluation and decision criteria. This represents the only possible way to convince the

organization of purchasing’s new value proposition and to create political support for an official roll-out of its new role. The challenge for change management lies in determining each purchaser’s development path without an official directive from top management. Change management must address the tension that results from living the new role internally in the purchasing function without being accepted as a critical partner companywide.

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Chhaannggeess iinn tthhee PPuurrcchhaassiinngg OOrrggaanniizzaattiioonn Lufthansa Purchasing has developed and applied specific tools for its change management effort.

Determining the take-off point was done in two ways: Purchasing discussed with top management its potential functions, operating range, and role in the company. Top management expectations were written down and served as the basis for the development of a purchasing vision, which could then serve as the guideline for required change.

Moreover, every purchasing employee filled out a questionnaire, which collected information on the status quo of everyday work procedures. By contrasting the vision and the actual development level of the purchasing organization, the required development path could be derived.

Hence, written objectives helped employees understand required changes, and their context within the company. This included developing the capability to act (1) internally as a critical, problem-oriented partner and (2) externally as a

“market forces optimizer” who maximizes company benefit.

Lufthansa Purchasing has identified four fields of action to close the gap between the vision and the actual state of purchasing:

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The field of knowledge transfer includes all measures to improve qualification through training. Lufthansa Purchasing is dedicated to going further than simply improving knowledge about the details of successful buying. That is because the purchasers should — as far as possible — act entrepreneurially to fulfill their new role. This requires that the purchasers know, understand, and adopt the new self image, the expanded methods and processes, and the value levers. Only then will they be ready to apply the problem-oriented purchasing pattern. Lufthansa used “circle training” to convey the

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comprehensive picture of problem-oriented training. Circle training helped the company avoid the trap of simply giving employees new

“tricks” or rehashing purchasing basics. At a meeting of the whole purchasing function, employees were given the opportunity to go through several “knowledge stations,” which built on each other’s content. Each station

included a short presentation on problem-oriented purchasing’s relevant concepts. Additionally, employees could discuss its core elements and how to transfer them into a working context.

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Lufthansa Purchasing had a positive experience including “learning by experience” into the knowledge transfer efforts of change

management. It knew that every purchaser had to “take in,” through his or her own actions, the necessary changes and their effects. Therefore, room for “experiments” needs to be created, allowing purchasers to simulate practical situations and work on individual learning objectives. Lufthansa developed and applied two tools in this context: In the course of a “business game,” purchasers went through the changed purchasing process and applied new methods, like the quantitative monetary evaluation of different alternative solutions. To test the

interaction with internal customers and suppliers, a special training unit called “Challenge-the- Sales” was developed in close cooperation with Lufthansa’s sales organization. “Challenge-the- Sales” is a three-day training session built around a case study. Lufthansa sales people played the role of suppliers and Lufthansa managers played the role of internal customers, which gave purchasers the opportunity to experience their new role as problem-oriented critical partners and competition maximizers. Video-based personal feedback intensified the learning experience. Interestingly, this training format was originally developed for sales, but could be expanded and used by sales and purchasing to jointly achieve learning objectives.

In addition, Lufthansa Purchasing has conducted internal training and workshops for sales colleagues that simulate auctions and implement rules to cope with “new age purchasers.” Initiatives like these are pivotal factors in changing the entire company’s mindset towards value-added purchasing. They spread the news about what purchasing can achieve in its new role!

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Successful convincing — of the organization as well as of each individual employee — is based to a large extent on making change visible and tangible. Therefore, coaching for specific real- life cases was carried out. Selected purchasers were turned into internal promoters and multipliers of the new purchasing role.

Prominent pilot projects were identified. This allowed purchasers to apply new purchasing methods under professional supervision, experience internal tensions, and optimize their own potential. Through this approach, the necessary practical proofs were generated which validated purchasing’s new role.

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Noo.. 44 ““SSuuppppoorrtt TToooollss ffoorr tthhee DDaaiillyy WWoorrkk”” The necessary changes described above are relatively abstract and thus are difficult to “just”

implement in daily work — despite extensive training. Hence, it is important to lead purchasers through the new process — but not by predefining her/his actions in detail in a mechanistic way.

In fact, it is essential to provide some room for maneuvering, within which purchasers may act in an entrepreneurial way. Lufthansa Purchasing has developed a process that reflects practical reality and eliminates traditional narrowly formulated process descriptions. Freedom is granted to purchasers so that entrepreneurship becomes possible. In the daily work, e-tools guides the purchaser through the process and supports the new purchasing pattern. Lufthansa Purchasing is using fairpartners.com, an internet platform for conducting market research and

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managing electronic RFQs and auctions. Today, fairpartners is operated by a third-party service provider, but originally it was invented and developed mainly by Lufthansa Purchasing.

By offering a wide array of functions for market research and for evaluating alternative offers via an integrated bonus system,

fairpartners supports Lufthansa purchasers in the new purchasing pattern.

Another major milestone is a workflow management tool that (1) guides purchasers though a continuous purchasing-project-planning process, (2) facilitates communication between purchasing-team-members and managers, (3) clarifies the status of documents, and (4) uses an email-based approval process for next steps within a project.

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Baarrrriieerrss ttoo CChhaannggee aanndd LLeessssoonnss LLeeaarrnneedd The promoters of change encountered “typical”

phenomena of resistance within purchasing.

Some employees were not willing to embrace purchasing’s new role, others simply lacked the required capabilities. Yet, the change management effort at Lufthansa Purchasing was a very special one. On one hand, it was a self-induced change process. Purchasing itself realized its need to change and improve its value proposition. On the other hand, Lufthansa Purchasing needed to “sell” the idea of a new purchasing pattern to top management. It was limited in executing this new role and depended on internal partners. It also lacked a formal directive to do so.

Furthermore, those meant to live this new role were reluctant to do so. Two major arguments may be used to promote change: “Your new role is more fun, as it includes tasks far more challenging than administrating orders” and

“This new role — and only this new role — will secure a purchasing function as you know it.”

These are valid points, but may be insufficient to effect fundamental change without a top management directive.

After two years the change process at Lufthansa Purchasing is not finished. Considering the scope of desired change, which addresses procedures as well as mindsets, this is not surprising. The reactions to change outside of purchasing need to be monitored closely to protect the change process from external influences.

Only the permanent re-evaluation of purchasing’s position enables flexible change management.

The key to success lies in this flexibility and in the motivation and capability of creative employees, who want to become catalysts for bringing the new vision to life.

Send written comments to —

Debbie Maciejewski, Center Manager or Phillip L. Carter, Executive Director at the address listed.