POLITECNICO DI MILANO

Supplier Relationship Management Lab

Prof. Thomas E. Johnsen

A.Y. 2015/2016

Telecom Italia Group

Purchasing Maturity Analysis

Group 20

Vivek Gopalkrishnan – 838037

Fabio Parisi – 838093

Antonio Sannino – 838335

Sushant Tiwari – 840991

Danilo Torretta – 837978

Table of Contents

Executive Summary .................................................................................................................. 1

1. Introduction ......................................................................................................................... 1

2. Methodology ....................................................................................................................... 1

3. Company Overview ............................................................................................................ 2

4. Corporate Strategy .............................................................................................................. 3

5. Purchasing Dynamics .......................................................................................................... 4

5.1. Organization.................................................................................................................. 4

5.2. Purchasing Strategy ...................................................................................................... 6

5.3. Purchasing Process ....................................................................................................... 6

6. Maturity Analysis ................................................................................................................ 8

6.1. PSM strategy ................................................................................................................. 8

6.2. Global sourcing ............................................................................................................. 8

6.3. Organizational visibility and influence......................................................................... 8

6.4. Data, communication and organization ........................................................................ 8

6.5. KPIs .............................................................................................................................. 9

6.6. Skills training and development ................................................................................... 9

6.7. Basis of supplier selection and evaluation .................................................................... 9

6.8. Supplier involvement in NPD ..................................................................................... 10

6.9. Supplier development ................................................................................................. 10

6.10. Supplier relationships .............................................................................................. 10

6.11. Sustainability strategy and implementation ............................................................ 11

6.12. Sustainability reporting ........................................................................................... 11

6.13. Final evaluation ....................................................................................................... 12

6.14. Further improvement ............................................................................................... 13

7. Conclusions ....................................................................................................................... 13

1

Executive Summary

The report analyses the purchasing maturity of Telecom Italia Group, an Italian company operating in the

telecommunications sector. The organization is presented focusing on the role of the purchasing department

and a maturity model from literature is applied in order to assess the level of efficiency and organization of

the company’s procurement service. Points of strength and weakness are highlighted, but results show that

Telecom Italia Group is quite advanced in this regard, as its purchasing function actually contributes to the

firm’s strategic success. Finally, some suggestions on how to enhance the company’s purchasing

management are deduced from the model’s application.

1. Introduction

First, the methodology used in the analysis will be described. Chapters 3 and 4 will present the company,

showing relevant data and discussing corporate strategy. Chapter 5 will introduce purchasing dynamics,

focusing on organization, strategy and process. The application of the maturity model will be the object of

chapter 6: each significant aspect will be analysed in detail and a final evaluation will ensue, accompanied

with few recommendations.

2. Methodology

In order to assess the company’s purchasing maturity, we applied the model theorised by Johnsen et al.

(2014)1. We accessed all the information available on the corporate website (the specific names and

hyperlinks of documents we consulted are reported in the following pages’ footnotes). Moreover, we

arranged a face-to-face interview, held at Telecom Italia Milan offices, with two resources of the purchasing

department:

Carlo Pompei – Vice President Vendor Assessment & Processes Governance;

Fabrizio Bernocco – Operational Planning & IT Demand.

They provided us with insights about their personal experience in the department and also with undisclosed

research material. We want to thank them for their kind and valuable support.

1 Johnsen, T., Howard, M., Miemczyk, J. (2014). Purchasing and Supply Chain Management: A Sustainability Perspective. ed. Routledge

2

3. Company Overview2

Telecom Italia Group (TI) is one of the most important companies in the world, operating in the

telecommunications sector. It is one of the Fortune 500, and, in terms of turnover, it ranks seventh in Italy.

The Group operates through four brands that are clustered in two Business Units.

Fig. 1. Telecom Italia Group: Business Units and brands.

Both BUs, “Domestic” and “Brazil”, operate in the TLC sector, but in different geographical areas. In

particular:

TIM and TIM Brazil offer voice and data services to business and consumer costumers;

Sparkle offers a range of IP, Data, Cloud, Data Center, Mobile and Voice solutions to Carriers, Service

Providers, and Mobile Operators;

Olivetti is a manufacturer of typewriters, computers, tablets, smartphones, printers and other such

business products as calculators and fax machines.

Fig. 2. Financial and general data (2015).

2 “Telecom Italia: Preliminary Results at 31 December 2015 approved”

(http://www.telecomitalia.com/tit/en/archivio/media/comunicati-stampa/telecom-italia/corporate/economico-finanziario/2016/preliminary-

results-at-31-december-2015-approved.html)

“Relazione Finanziaria annuale 2015”

(http://www.telecomitalia.com/content/dam/telecomitalia/it /archivio/documenti/Investitori/Bilanci_di_esercizio/2015/Relazione-finanziaria-

annuale2015.pdf)

3

4. Corporate Strategy3

Telecom Italia has recently presented to the Financial Community a strategic plan to be realized in the next

two years (2016-2018). The operating and financial outlook of the plan includes:

stabilization and growth of domestic EBITDA;

increase in market share and EBITDA in Brazil;

reduction of Net Debt through a strong financial discipline.

The company’s orientation to efficiency actually reveals the intention to raise investments aimed at

innovating the network infrastructure, enhancing the quality of service and offering premium contents.

Moreover, TI has defined a new strategy based on creating economic and social value, leading Corporate

Social Responsibility towards the wider concept of Corporate Shared Value. The main purpose is to link

financial results with social progress, which is created by responding to the needs expressed by the realities

where the Group operates. It surely is an innovative transformation, designed to address the company's

strategic decisions, match financial and non-financial performance and meet the stakeholder’s legitimate

demands at the same time.

Fig. 3. The concept of Corporate Shared Value in Telecom Italia.

3 “Strategy”

(http://www.telecomitalia.com/tit/en/investors/outlook.html)

4

5. Purchasing Dynamics

Within TI, the procurement process is aimed at the acquisition of products and services under the best

market conditions, assuring, at the same time, requirements concerning quality, safety and social and

environmental compliance. The procurement process is based on a competitive comparison of the

technical/economic offerings of suppliers previously selected on the basis of company procedures aiming at

preserving ethics in negotiations. The Group is committed to guaranteeing the quality of its procurement

processes and their continual improvement, including their sustainability.

5.1. Organization The Purchasing Department (PD), a function centralized since 2000 and counting 135 buyers, is included

in the Business Support Office and directly controls nearly 100% of the Group’s spending. Only specific

items are procured under the responsibility of other functions, e.g. when prices are determined by a State

Regulatory Authority (interconnection costs, mobile licenses, etc.), but the company reports no cases of out

of coverage for items under the PD’s responsibility. The CPO, Eduardo Perone, reports to the Business

Support Officer, who reports to the company’s CEO. Within the PD, The Purchasing Support group deals

with processes’ governance, vendor control, mastering technology and business evolution trends, whereas

the International Purchasing group coordinates international purchasing activities. The department

organization is adapted to the 8 supply markets, which are grouped into three macro-areas (Market,

Factories, Behind the core business). Indeed, every market is scrutinized through a dedicated marketing

analysis and supervised by a category manager in charge of negotiations and contracting with vendors.

Fig. 4. Organization of the Purchasing Department.

5

Fig. 5. Purchase items divided by the three macro-areas.

In 2014, consolidated purchases (for Italy and Brazil) amounted to € 9,430 million.

Fig. 6. Classification of consolidated purchases by BU.

Fig. 7. ABC analysis: contribution of suppliers to consolidated purchases.

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Fig. 8. Classification of 2014 spending by market cluster.

In 2015, purchases furtherly decreased to € 8,533 million, proving that the department actually strives for

efficiency.

5.2. Purchasing Strategy In a global and competitive scenario, the supply chain should not only pursue the objective of saving on

purchasing costs, but also play an integrated role within the organization and be capable of improving trends

and performance in order to contribute to the creation of business value. Since 2002, TI’s procurement

function has been undergoing a process of transformation, abandoning the traditional “cost cutting”

approach and adopting a multi-lever integrated strategy based on:

5.3. Purchasing Process The phases of the purchasing process are seven.

1. Purchase plan definition

a. Purchasing requirements planning

b. Purchase market plan and budget

c. Definition of specifications and technical/economic requirements

PRICE• The spending target takes into account possible savings on average price levels

RE-ENGINEERING

• Addressing the evolution of the vendors’ ecosystem towards a win-win strategy

DEMAND• Demand optimization with beneficial effects and economies of scale on total spending

VALUE FOR MONEY (V4M)

• Total cost control, lead time and service level optimization

7

2. Scouting

The purchasing department periodically scans the supply markets (once a year), in order to assess their

current status and eventually identify potential vendors, which are qualified after undergoing a rigorous

process. Qualification, which is a necessary step in order to start any kind of supply relationship, is

market-specific and a company cannot be approved as a vendor for more than one purchase category. In

order to become a TI’s qualified supplier, a company has to:

a. fill in a technical questionnaire, designed in collaboration with internal customers (e.g. when the IT

department wishes to buy a software, it defines the specifications and prepares the questionnaire with

the purchasing function);

b. pass an economic verification, aimed at assessing the company’s solvency (among other things);

c. meet specific requirements in terms of risk exposure, proportion of Telecom Italia’s business with

them (dependence), sustainability, etc.

3. Negotiation and selection

Telecom Italia may either issue an invitation to tender among qualified suppliers or directly purchase

what it needs. There are two kinds of frame agreement: a “contract” with the supplier is a commitment to

buy a specified number of items across an indefinite period of time (internal customers, i.e. other

functional groups, will issue single orders until the contractual amount is fully purchased), an “order” is

a stand-alone purchase running out in just one transaction. Agreements are specific for each purchase

category.

4. Contract management

5. Delivery of the supply

TI checks (i.e. tests through on-site audits) the effective and compliant execution of deliveries/services,

monitoring the actual situation with respect to agreed conditions (incoming quality control).

6. Delivery acceptance, invoicing and payment

Suppliers of the riskiest purchase categories are assessed by means of structured vendor rating

procedures.

7. Analytics and feedback

In order to collect business intelligence, a set of procurement KPIs is measured using a “Tableau de

Bord” framework.

Fig. 9. Supplier assessment in Telecom Italia.

8

6. Maturity Analysis

6.1. PSM strategy Within TI, the 75% of costs affecting EBIT are actually purchases and, fittingly so, there is a full integration

between purchasing and corporate strategy. In order to increase profitability, most of the effort weighs on

the purchasing function, which is in charge of almost all the company’s spending (as proven by the very

high level of spend coverage). We can say that containment and reduction of operating costs is pretty much

of the purchasing function’s business.

Moreover, the alignment between purchasing and corporate strategy can be seen also in terms of

effectiveness (purchasing contributes to improving the level of service and the quality of goods/services) and

sustainability.

Our evaluation: Strategic Contributor.

6.2. Global sourcing The company relies on several vendors located abroad, e.g. devices are bought in China and Korea.

When the purchasing department qualifies TI’s suppliers, it always adopts a global perspective on the supply

markets and selection follows the same standard procedure. Therefore, whether internal customers (i.e. the

other functional groups) are located in Italy or Brazil (depending on who starts the request for purchase), the

application of TI’s specific purchasing strategy is always ensured.

Our evaluation: Strategic Contributor.

6.3. Organizational visibility and influence The purchasing function is supervised by a CPO. This figure has a significant influence at senior level

mainly due to the high impact that purchases have on EBIT. Therefore, the department is a key decision

maker in the strategic planning process, suggesting different ways to enhance the firm’s strategic success.

Our evaluation: Strategic Contributor.

6.4. Data, communication and organization Thanks to a well structured purchasing process supervised by a centralized department, TI can access to its

full spend information, which is stored in the repository of the ERP system (powered by SAP). Here, digital

contracts, orders and invoices are hosted: 2,000 contracts are signed and 15,000 orders are issued every year;

moreover, contracts are often subject to changes and the IT system allows to make up to 7000 modifications,

without the necessity to stipulate new ones.

As a matter of fact, the purchasing activities are ICT-enabled and supported by a variety of electronic tools

integrated with SAP. Among all, the “RevolAuction” e-sourcing portal is used to issue on-line tenders and

negotiate with vendors, whereas vendors can access to a reserved area with visibility on relevant data and

events in connection with TI through a portal called “Vendors Hub”, which applies the logic of social

networking to a business context.

Fig. 10. Electronic tools supporting the purchasing process .

9

With regard to organizational aspects, the purchasing department is centralized, meaning it is the only

function in charge of purchasing for the whole Group, but it follows the model of a center-led procurement

unit, where strategic decisions are coordinated centrally and transactional activities are decentralized across

the organization. In fact, when a contract with a vendor is signed, the department takes into account all the

internal customers’ needs, who may issue single orders at contractual conditions whenever they need.

Our evaluation: Strategic Contributor.

6.5. KPIs The function adopts a structured model composed by a set of KPIs assessing both efficiency and

effectiveness of purchasing. Behavioral factors are not taken into account.

Fig. 11. The Procurement KPIs Controlling Model .

Our evaluation: Supportive.

6.6. Skills training and development Training in the company is actually constrained by the recent budget cuts. Whenever a new resource or a

new system is introduced into the purchasing function (the latter case is more likely as hiring is not so usual

lately), a training program is activated. There are two approaches to training, usually implemented together

to enhance the effectiveness of these programs:

frontal lectures given by experts (e.g. IT professionals who explain and show how the new system

works);

e-learning platforms on which training courses are uploaded.

Our evaluation: Supportive.

6.7. Basis of supplier selection and evaluation Both tenders and negotiations are managed through the “RevolAuction” e-sourcing tool, which is also a

source of business intelligence thanks to its documents repository and thus of informational power.

10

Eventually, supplier selection is based on a competitive comparison of technical and economic weighted

criteria. After issuing requests for information, proposal and quotation, a price analysis is performed and is

assigned a weight of about 30%; then, the company assesses technical aspects and other kinds of

compliances (e.g. capability of a construction company to cover the highest length of fiber optics)

accounting for the 70% of the total evaluation.

Our evaluation: Supportive.

6.8. Supplier involvement in NPD Considering the most important (strategic) purchase categories, there are examples of supplier involvement

in TI. For example, in 2014 the company signed a three-year cooperation agreement with Huawei, which

provides TI with network technologies, to create a Business Innovation Centre in Italy with the aim of

developing innovative technologies and high quality services4. Moreover, Huawei is also in charge of the

design of Telecom Italia’s central offices, the buildings that house the equipment for telephone exchanges.

Our evaluation: Supportive.

6.9. Supplier development TI’s periodic scouting and qualification of vendors already ensures a high level of professionalism, an

ethical stamp in setting industrial relations and rigid compliance with the local legislation amongst its supply

base. In addition to that, Telecom recommends adopting adequate initiatives for the development of human

resources, but does not implement any specific development action.

Our evaluation: Clerical.

6.10. Supplier relationships We can say that the company can rely on a varied portfolio of appropriate relationships: there are few cases

of partnerships with key suppliers (e.g. Huawei, which is often involved in NPD processes) and, in general,

TI tries to collaborate with vendors in an integrated fashion. Referring to Cousins portfolio model, we

believe that collaboration with suppliers may be classified as either “Strategic” or “Tactical” (we assume a

high level of confidence as the supply base is under the constant scrutiny of the purchasing department and

supplier qualification is updated every year).

Fig. 12. Cousins Portfolio Model.

4 “Telecom Italia and Huawei: agreement to create a Business Innovation Centre Signed”

(http://www.telecomitalia.com/tit/en/archivio/media/comunicati-stampa/telecom-italia/mercato/business/2014/telecom-italia-huawei-

agreement.html)

11

Supplier assessment includes some elements of relationship assessment (e.g. dependence is taken into

consideration during qualification and kept low for non-strategic items), as a proof that the company is well-

committed to managing interactions with vendors.

Our evaluation: Strategic Contributor.

6.11. Sustainability strategy and implementation5 TI works on the implementation of processes aimed at improving the Corporate Social Responsibility (CSR)

of the supply chain through a more detailed systematization of sustainability criteria across supplier

qualification, incoming quality control and vendor rating.

In particular, suppliers are ranked on the basis of potential risks associated to their sustainability

performance and this system contemplates rewards and penalties. Aspects under scrutiny, especially during

qualification, include child labour, hard labour, discrimination, health and safety, working hours, salaries,

etc.6. Riskiest suppliers are subjected to CSR audits, carried out by company personnel or specialized

external parties. TI also participates in a joint initiative with other telephone operators called “Joint Audit

Cooperation (JAC)” to carry out sustainable audits to the factories of suppliers located in geographic areas

with a significant level of socio-environmental risk7. Thanks to auditing, TI can define and implement

corrective actions and continuous improvement programs, establishing with vendors a lasting relationship

with mutual benefits in terms of efficiency, productivity and risk reduction.

TI continues the implementation of the “green procurement policy”, which provides guidelines for

establishing environmental requirements of purchases. The policy considers all the product life-cycle stages:

design, manufacture, use and end of life.

Electronic exchange of documents with suppliers reduces the environmental impacts connected to paper

consumption, transport and storage of documents.

The Telecom Italian Group has endorsed numerous environmental and social organizations, at national and

international level, to spread universally recognized values such as respect for human rights and labor, and

environmental protection. A few examples of the main associations with which TI collaborates are “Global

Compact”, “GSM Association” and “GeSI (the Global e-Sustainability Initiative)”.

Our evaluation: Strategic Contributor.

6.12. Sustainability reporting8 TI follows the guidelines provided by the “GRI” for the preparation of the sustainability report, which is

available on the corporate website. Moreover, in 2014 the company was confirmed for the eleventh year in a

row in both rankings of Dow Jones Sustainability Index (World and Europe) with a score of 90 out of 100.

The latter sustainability assessment is carried out by crossing the company’s self-evaluation with business

intelligence collected from different sources.

Our evaluation: Strategic Contributor.

5 “Bilancio di sostenibilità 2014”

(http://www.telecomitalia.com/content/dam/telecomitalia/it/archivio/documenti/Sostenibilita/Report_di_sostenibilita/2014/Bilancio-

Sostenibilita%CC%80-2014-ITA.pdf) 6 “Relazione con i fornitori”

(http://www.telecomitalia.com/content/dam/telecomitalia/documents/Sostenibilita/it/Politiche/Relazioni%20con%20i%20fornitori_it_22.12.09.p

df) 7 “Sustainability audits on suppliers operating in developing countries”

(http://www.telecomitalia.com/tit/en/sustainability/our-approach/case-studies/progetto-jac.html) 8 “Bilancio di sostenibilità 2014”

12

6.13. Final evaluation

Clerical Developing Supportive Strategic

Contributor Score

PSM strategy None Emerging, informal

Formal strategy

supportive of corporate

strategy

PSM integral part of

corporate strategy 4

Global sourcing None or ad hoc

international sourcing,

only as needed

International (incl. LCC)

sourcing developing

Global sourcing

strategies integrated

across worldwide

locations

Global sourcing strategy

integrated across

worldwide locations and

functional groups

4

Organizational

visibility and

influence

Low, viewed as a cost

saving service function

Gaining (indirect)

visibility

Direct visibility at senior

level, but still limited real

influence

Direct influence at senior

strategic (board) level,

CPO position 4

Data,

communication &

organization

Low level of spend

information, basic ICT,

decentralized

organization

Improving information,

change towards ICT,

centralized organization

Cross-functional & ICT-

enabled, hybrid

organization

Full spend information,

ICT- enabled, centre-led

organization

4

KPIs Price savings

Small set of easy-to-

measure KPIs

A range of KPIs aligned

with PSM strategy

A range of KPIs aligned

with PSM strategy, incl.

soft behavioural factors 3

Skills training

and development Minimal, low level

tactical

Current popular best

practice Cross-functional

Cross-functional,

leadership, change

management

3

Basis of supplier

selection &

evaluation

Price & availability Change towards TCO,

but ultimately cost driven

Multiple weighted

criteria

Multiple weighted criteria

aligned with PSM strategy

3

Supplier

involvement in

NPD

None, suppliers approached during

prototyping

Attempts at early involvement i.e. during

early design and

development planning

Close early involvement of key suppliers, some

even during concept

development

Close early involvement of key suppliers, including

between NPD projects 3

Supplier

development None

External accreditation,

reactive problem-solving

Systematic vertical supplier development

e.g. supplier assistance,

training, one-way

approach

Systematic development

extending beyond direct suppliers, horizontal

supplier collaboration,

two- way mutual

improvement approach

1

Supplier

relationships Mostly adversarial Emerging partnerships

High proportion of partnerships, SRM

A portfolio of appropriate varied relationships, SRM

4

Sustainability

strategy No consideration Partial and emerging

Integrated sustainability

and PSM strategy

Integrated sustainability

and PSM strategy

4

Sustainability

implementation None or limited

Some initiatives to avoid

negative exposure

Ethical supply chain

evaluation e.g. CO2

supply chain

measurement, company audits. Mostly direct

suppliers focused.

Ethical supply chain

evaluation e.g. CO2

measurement & audits but

also supplier development. NGO

involvement. Extends to

indirect suppliers

4

Sustainability

reporting None

Ad hoc mention of e.g.

sustainability policy or

code of conduct

Some disclosure

including online reports.

Still elements of ‘green

washing’

Fully transparent

reporting incl. online

reports and video clips

from supplier factories.

Honest self- assessment

4

Fig. 13. Johnsen et al. (2014)’s maturity model.

Given the final score (3.5, computed as the arithmetic mean of all scores), TI’s purchasing department is

mid-way between a “Supportive” and a “Strategic Contributor” function in terms of purchasing

maturity.

13

6.14. Further improvement Supplier relationships management is an activity to which the company is surely devoted and contributes to

defining appropriate sourcing strategies, but there are still margins for improvement. When we interviewed

two resources working in TI’s purchasing department, they confirmed that soft, behavioral factors (e.g.

mutuality and trust) are not taken into consideration during supplier assessment.

An area where the company could focus its attention is Supplier development, but, in reality, TI

compensates the low commitment in this regard by implementing a rigorous qualification process and

approving only compliant, best-in-class suppliers.

7. Conclusions

Results show that Telecom Italia Group is really well developed in different areas of purchasing maturity,

which led us to focus on its key success factors. Indeed, we can stress that the purchasing department relies

on a well-structured ICT system, allowing an efficient implementation of procedures, sustainability is

carefully regarded and the company’s mind-set leads them to spend efforts in managing supplier

relationships. TI’s supply base is selected in a way that ensures vendors are compliant with the company’s

culture and policies. Considering the analysis carried out, we may suggest some actions to introduce supplier

development in the company’s practice, but TI appears to prefer implementing a very selective qualification

process. In conclusion, the Group demonstrates to be well ahead in its path towards full purchasing maturity

thanks to its 50-year experience and a strong orientation to efficiency.