Improving Quality At Royal Philips Electronics Business Essay

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The foundations for what was to become one of the world's biggest electronics companies were laid in Eindhoven, the Netherlands, in 1891. Philips began by making carbon-filament lamps and, by the turn of the century, was one of the largest producers in Europe. The flow of exciting new products and ideas continued throughout the 1970s. Research in lighting contributed to the new PL and SL energy-saving lamps, while Philips Research made key breakthroughs in the processing, storage and transmission of images, sound and data. In a world in which technology increasingly touches every aspect of daily life, they want to bring "sense and simplicity" to consumers with advanced, easy to use products that are designed specifically to meet their needs, wherever in the world they may be.

Philips has a Vision 2010 strategic plan to further grow the company with increased profitability targets. As part of Vision 2010, the organizational structure was simplified per January 1, 2008 by forming three Sectors:

Healthcare (Former Medical Systems)

This Sector employs approximately 33.000 people worldwide and operates in the business areas of: Imaging Systems, Home Healthcare Systems, Customer Services, Healthcare Informatics and Ultrasound & Monitoring Solutions.

Consumer Lifestyle (Former Consumer Electronics and Domestic Appliances)

The Consumer Lifestyle Sector employs approximately 25,000 people in 49 countries and operates in the business areas Connected Displays, Video & Multimedia, Audio & Multimedia, Home Networks, Peripherals & Accessories, Domestic Appliances, Shaving & Beauty and Health & Wellness.


The Lighting Sector employs approximately 55,000 people worldwide and operates in the business areas: Lamps; Professional Luminaires & Systems; Home Luminaires & Systems, Lighting Electronics; Automotive, Solid State Modules, Lumileds and Special Lighting Applications

What is purchasing?

The scope of purchasing's contribution to corporate management and organization has been gradually growing over the past two to three decades. However, the perception of the contribution that the function makes remains variable and incomplete across all manufacturing and service sectors. However, if we consider that purchased goods and services can account for between 50 and 80 percent of a company's overall expenditures, purchasing does become a key contributor to the profit margin of the corporation.

For the requirement of defining the scope of purchasing, we can describe that purchasing is defined as 'obtaining from external sources all goods, services, capabilities and knowledge which are necessary for running, maintaining, and managing the company's primary and support activities at the most favorable conditions.' (van Weele, 2000, p.14). In addition, we will argue that the purchasing function should also engage, when appropriate, in activities that identify and exploit activities that directly contribute to business growth by enhancing sales revenue. This mode of purchasing action has often been carried out and labeled as 'business development', but may elevate purchasing from being perceived only as a collection of skills directed predominantly at cost saving.

Purchasing is rightly seen as being one of the most decisive departments in an organization for attaining competiveness. The increase in the rise of purchase within an organization is directly linked to the percentage of turnover directly spend on purchasing raw materials, products and services. The increase in this percentage is mainly due to an increase in outsourcing parts of production and tasks which are not considered to be part of the core business of company. Nowadays increased change in technology forces purchasers to know more about the main trend and how this changed technology could be used to improve their products and minimize total cost of production. Big companies, such as Royal Philips, outsource many activities and components of its products to other suppliers and subcontractors, but an increasing number of suppliers as well as components put new obstacles. It is becoming more and more difficult to maintain a database of components, that contains hundreds of thousands items, and to find the right one, that can be purchased from reliable suppliers, with required characteristics and at the best possible conditions. For this purpose Component Selection and Classification process is discovered within this thesis and some ways of improving this situation were offered. Component Selection and Classification processes are very important as they bring the simplicity to work of a Purchasing Department and Cross-Sector Synergy Department, decrease maintenance cost for database, decrease risks of buying components that will be phased out from the market very soon and increasing buying power of the Global Royal Philips.

Philips Purchasing Strategy:

"In recent years, Philips has transformed its activities from Purchasing to Supply Management. Today, the company looks beyond traditional purchasing boundaries to the entire value chain. And they act as One Philips, using standardized programs and tools that are aligned company-wide."

In the past, every Philips CEO had its own vision, how Philips should be organized as a company in order to be a well-performing enterprise. During Mr. Timmer governance, Philips was a completely centralized company with top-down approach.

Centralization is the process of transferring and assigning decision making authority to the top level of organizational hierarchy. The knowledge, information and ideas are concentrated at the top, and decisions are cascaded down the organization. The span of control of top managers is relatively broad, and there are relatively many tiers in the organization.

Strength of centralization:

Emphasis on: top-down control, leadership, vision, strategy.

Decision-making: strong, authoritarian, visionary, charismatic.

Organizational change: shaped by top, vision of leader.

Execution: decisive, fast, coordinated. Able to respond quickly to major issues and changes.

Uniformity. Low risk of dissent or conflicts between parts of the organization.

Decentralization is the process of transferring and assigning decision making authority to lower levels of the organizational hierarchy. In decentralized organization the decision making has been moved to lower level of the organization, such as division or branches and the span of control of top managers is relatively small.

Later on, when Mr. Boonstra became as the CEO of the company, he implemented opposite - a decentralized organizational structure, where every Product Division (nowadays Sector), was responsible for its performance and business results. That led to separation of Philips Product Divisions, which resulted in lack of cooperation, willingness for knowledge/resources sharing.

As we've mentioned above that Philips has different product division (Sectors), so each division had their own vision and also their own purchasing policy with different suppliers. Whenever, there was need for product or service each division had to supply their need separately from suppliers and they had to make different contracts individually for each single vendor, which was time consuming and at the same time expensive though.

Obviously, there was a need for change, which was recognized by the present Philips CEO Mr. Kleisterlee. He initiated the ONE Philips program, within the concept of Philips transformation from Decentralized organizational structure to Centre Led.

Centre Led means inclusion of the sites and (commodity) teams in all the key steps of the process versus the Centralized approach which often means everything is done from the centre to the exclusion of the sites and (commodity) teams.

The ONE Philips program is a company-wide program launched in 2002 to streamline Philips into a focused, agile and more cost-effective organization. The implementation of the ONE Philips program started within each department: For instance, F&A, IT, HRM, Purchasing, Marketing, and others. Now the challenge is the continuing deployment of the program between the departments. The core of the ONE Philips program is unification of Sectors, standardization and structurization of the company activities/processes. The main goal of the program is to bring savings to Philips. ONE Philips program is running, which eventually should lead to Sustainability, Synergies and Savings within Philips.

"Today's electronics industry is characterized by an accelerating pace of innovation and greatly reduced product lead-times. This is reflected in the changing nature of Philips' supply base and the relationships with their vendors.

Philips is purchasing a very high percentage of components and products, rather than manufacturing in-house. Overall, some 90 percent of company's Bill of Materials comes from outsourcing, long-term partnerships, Original Equipment Manufacturers and Original Design Manufacturers."


Based on Philips' strategic focus on growth markets, Philips has extended their outsourcing strategy in mature markets, while growing their business in emerging regions, especially Asia Pacific. They focus on 'local for local' and 'regional for regional' solutions also means they are developing the supply base in for example, Eastern Europe and countries such as Brazil, Russia, India and China.

Cross-sector synergy:

Traditionally, Philips Bill of Materials (BOM) suppliers provided them with products in the form of raw materials, components and systems. However, today they are increasingly supplying Philips with services such as assembly or even product creation.

This trend means that their relationships are also becoming increasingly complex. To handle this complexity and leverage their combined purchasing power effectively, Philips Supply Management has created Philips-wide commodity teams across the sectors.

These teams are headed by a Commodity Manager, who is authorized to negotiate on behalf of the whole Philips community.

Philips Commodities

Philips has developed its own commodities system that is being used now. Philips Supply Management consists of Philips General Purchasing (PGP) and Bill-of-Materials Purchasing. PGP organizes the supply base for Non-Product Related goods and services (NPR), such as office equipment. Bill-of-Materials is managed by Commodity Teams. Cross-sector commodities are sourced by Cross-sector Commodity Teams, which involves purchasing specialists from three Philips Sectors. In order to manufacture its products, Philips buys a great amount of components, raw materials, machining and etc. Many components can be referred to one commodity and even sub-commodity. For instance: primary batteries or rechargeable batteries relates to Batteries Commodity.

As it was mentioned before, Philips serves its markets through three Sectors: Healthcare, Lighting and Consumer Lifestyle. Each Sector has its own type of commodities (Sector specific) it should source in order to run its product manufacturing, e.g. special type of magnet to produce medical.

Leveraged supply management

The main idea behind leverage is to reduce cost and make saving for the company. Philips leveraged its supply management through commodity buying at corporate level and focusing for operational excellence following the "Best-in-class processes." The company focus on world class management through detailed organization of the whole supply chain, selecting the best suppliers in terms of total cost ownership, including quality, reliability and timely delivery. This allows them to create a solid supply base and intensify their relationships.

Philips uses a standard general purchase agreement (GPA) and standard contracts based on processes common to all businesses. In addition, they have standardized processes for measuring and evaluating supplier performance, and for reporting the results.

Supply Markets

Since the new purchasing strategy was implemented, the management decided to work with a limited, carefully selected supply base of non product related (NPR) and bill of materials (BOM) suppliers. And outsourcing is a key part of Philips supply management strategy.

Outsourcing reduces Philips' operating and capital costs while increasing flexibility, and decreasing time to market and to volume. It allows the company to leverage the core competencies, and provides access to their suppliers' technologies and skills.

Most of Philips top 20 suppliers are Electronic Manufacturing Services (EMS), Original Design Manufacturers (ODMs) or Original Equipment Manufacturers (OEMs). They focus on suppliers that can work closely with them through early involvement in the innovation process. Philips goal is to build long-term relationships with key strategic suppliers who share in the risks and rewards of innovation.

"Philips focuses on quality, value and total cost of ownership, rather than price alone. They are working to optimize the value chain, reduce complexity and build closer relationships with their suppliers. In many cases, Philips is involving suppliers more directly in product creation process and innovation - creating an eco-system based on 'Open Innovation'."

Philips Supplier Forum:

Philips' Supplier Forum is at the heart of their strategy to create a powerful business partner network with the top suppliers. They are exploring new ways of working and taking action to become 'Partners for Growth', jointly generating value through shared goals and leveraging their mutual strengths and competencies.

The Philips' Supplier provides the framework in which they can build trust and collaborative two-way communication. It allows them to share strategic visions and roadmaps, so their partners can be meaningfully involved in their innovation and product creation process.

To facilitate this cooperation and communication Philips has created a special site where members of this group can network, share, raise issues and report on progress.

Vendor Parentage

SMART2 Vendor Parentage - a MUST for reporting total global supplier spend

Vendor Parentage is one of the backbone of SMART2 spend reporting, along with Organizational structure and Commodity tree structure. With Vendor Parentage, vendors that legally belong to the same "parent" company are grouped into so-called "Vendor Global Ultimates" (VGUs). This provides Supplier Account Managers with indispensable information about total global spend from a supplier and all of its legal subsidiaries or entities.

The supplier hierarchy has now been cleaned up thoroughly in SMART2 by the Vendor Parentage Network. So far the Vendor Parentage coverage increased from 47% to 82% of the purchasing spend of 2009.

A further clean up by Supply Market of PGP suppliers is being prepared, to be uploaded end of August. Contact Administrator for information.

From July onwards all SMART2 users can then submit parentage proposals using the "Vendor Parentage Tool". Thanks to this "Wikipedia" approach the knowledge of the whole purchasing community can be captured to ensure the proper maintenance of the supplier hierarchy in SMART2.

It is possible also to do mass uploads of parentage proposals (only for large number of proposals), to be submitted to the Administrator monthly according to a timetable and an excel format with prior agreement of the Administrator.