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06/10/2013

Supplier's aha effect

Purchasing talk at John Deere in Mannheim

 

The so-called cost engineering is to provide purchasing with current data of a high detail quality. That's how purchasing can follow the costing of its suppliers. This often results in an aha effect with the supplier also becoming aware of how its business can be managed yet more efficiently. Daniel Zabota, Editor in Chief of Beschaffung aktuell, talked with Boris Eble, Manager Supply Management, Peter Schall, Cost Management Program Manager, John Deere GmbH & Co. KG, as well as with Lars Keller, Managing Director Kerkhoff Cost Engineering GmbH.

Beschaffung aktuell: In 2012, John Deere closed with record profits (see box). Since we all know that profits are in buying, this must have been due to the purchasing department. Right? What was the share of purchasing in that result?

PETER SCHALL: Profits are a joint performance of Quality, Sales, Marketing, Engineering, Production and Logistics. Of course, Purchasing also has its share – not least due to our close relationship with suppliers in a spirit of partnership.

Beschaffung aktuell: Your enterprise has a great diversity of products – from 400 HP tractors to lawn mowers. So how is your purchasing organized?

BORIS EBLE: Our purchasing with over 1,400 employees worldwide has a three-dimensional matrix organization. Think of it as something like Rubik's cube.
The first dimension is presented by the globally managed materials groups; e.g. for plastic or sheet metal parts. For their strategic orientation, we have seven so-called supply councils. Serving our product lines as a second dimension is the worldwide coordinated development purchasing; the third dimension is made up of the individual production locations.

The globally oriented supply council decides which suppliers may be considered for a specific product; the buyer on location selects the suppliers for series production.

Beschaffung aktuell: Are there carry over parts for tractors and lawn mowers?

SCHALL: Yes; with standard parts especially, we are pursuing joint procurement strategies.

Beschaffung aktuell: Your joint project is about product cost calculation. How did this come about? What are your intentions here?

SCHALL: We are collaborating with Kerkhoff and a number of consultants in the area of cost engineering. Background is the increase in the tractor's technical complexity which is due, among other things, to compliance with emissions regulations by the legislature and the resulting cost increases due to modified exhaust gas after-treatment systems. We cannot just simply pass on these cost increases to our customers on the basis of a customer value add so that the identification of cost savings potentials is increasing in significance – in terms of both design and purchase prices. Especially in the area of purchase prices, we provide transparency jointly with Kerkhoff and determine whether we are paying a fair price for a component.

Beschaffung aktuell: Could you give us an example? Let's take an exhaust system which costs EUR 1,000. Is it your objective to purchase it for EUR 900?

EBLE: Your question assumes that we would want to reduce costs overall by ten percent. But our approach is different: It's rather about buying the products at prices according to the costs-by cause principle – i.e. being aware of what a product actually costs. Incidentally, John Deere is collaborating with its suppliers on a long-term basis.

Beschaffung aktuell: So you are doing your calculations and arrive at EUR 900. How do you do that exactly?

EBLE: It's a highly detailed price analysis on the basis of cost of materials, manufacturing costs plus allowances. Perhaps the design is too expensive. We know what the corresponding tractor may cost on the market and we'll break that down. Perhaps we'll find that it's not possible at these costs.

Beschaffung aktuell: What is the margin you'll allow your suppliers?

EBLE: Actually, we just want to avoid paying for something that's not there at all, you know. That's why we visit our suppliers because a technically well-versed buyer knows his suppliers' production locations. One good example are the rates of machines which have long been written off. Suppliers themselves are sometimes not quite aware of it. To ensure competitive suppliers in terms of innovations and services in the long run, our cost models provide corresponding margins for the supplier.

Beschaffung aktuell: You jointly prepare for negotiations with the supplier. At that time, is the supplier's offer already available, or are EUR 900 your bid – thus a target price?

EBLE: Yes, we determine target prices which we communicate very early to our suppliers.

Beschaffung aktuell: How do suppliers generally react to that?

SCHALL: Our high quality of details provides a good basis for discussion. Of course, if we still have deviating ideas after our joint review of all cost components, we will need to further negotiate. In principle, we strive to subject all complex parts of our new development projects to a design and cost analysis. We will continuously further expand the quality of detail of such analyses.
 
Beschaffung aktuell: Would it also be possible that you calculate the exhaust system for EUR 900 but the supplier offers it to you for EUR 800?

EBLE: In this respect, we rely on long-term sustainability. The supplier must be able to live with these EUR 800 for a long period of time. We don't want him to obtain sales by making an offer which is intentionally too low. What's also right: Truth will out. If we arrive in our calculations at a higher price than the supplier, we will certainly ask whether he might have overlooked something.

Beschaffung aktuell: How do you deal with volatile prices for starting or raw materials, e.g. metals?

EBLE: We know rather precisely the prices for starting or raw materials. And we'll find an agreement with the suppliers to be considered. It's possible that an offer applies with reference to a material price basis.

Beschaffung aktuell: How does costing for a running series differ from costing for a new part to be developed?

SCHALL: The costing itself does not differ at all. There are differences merely in the identification of the parts to be calculated. Whereas in the area of development all components of high complexity or significance run through target price costing, we will obtain, within the running series, the input from operative purchasing areas.

EBLE: Those who want to stay in business with us must continuously work on their competitiveness. Otherwise, they'll risk losing business in the long run.

Beschaffung aktuell: If you'll forgive my asking – just why does your purchasing unit not calculate product costs on its own? Or to put it differently: What's special about Kerkhoff costing?

SCHALL: In recent years, John Deere has grown very much worldwide and accordingly has a globally oriented purchasing organization and supplier structure. Thus, on all international markets, we want to precisely understand the origin of costs and, accordingly, we set high standards in terms of the quality of data. That concerns both materials and wages, as well as overhead and hourly machine rates. We cover the resulting demand with providers such as Kerkhoff. Here, we know the organizational process of data procurement and analysis. In addition to the database which is made available to us, we are also supported by costing tools which – in combination with the consultant's technical manufacturing competences – enable us to obtain a very detailed product cost calculation.

LARS KELLER: Our consultants have expertise in the most diverse production technologies. They will assess material costs, production costs and overhead. Moreover, in the preparation of costing, the hourly machine rates incurred in production are differentiated according to depreciation, imputed interest, required tools, maintenance costs, cost of business premises and energy costs.

Beschaffung aktuell: Where does Kerkhoff get the data from?

KELLER: John Deere demands from its suppliers cost breakdown sheets which we verify. We support the company with precision of detail regarding the indicated cost factors.

EBLE: Kerkhoff is only one of many possibilities. Of course, we also have internal resources for costing. It may be compared with the utilization of a business information service. Our procedure may also result in an "aha effect" with the supplier when it is realized that its business is not running cost-effectively enough.

Beschaffung aktuell: What are your savings objectives?

EBLE: That's confidential.

Beschaffung aktuell: Are they set on your own or specified by management?

EBLE: They are coordinated worldwide.

Beschaffung aktuell: How do you calculate averted purchase price increases?

EBLE: Not at all. There is no measuring parameter for it. No merit can be earned with this.

Beschaffung aktuell: Could your overall savings in the end result in a product being offered cheaper to increase sales, to gain higher market shares or to annoy the competition?

SCHALL: Primarily, we want to convince our customers with an outstanding quality.

Beschaffung aktuell: What is the role played by American and/or German suppliers?

EBLE: We see ourselves as an international enterprise with an American parent company. We are globally oriented, listed on the stock exchange, and we thus make quarterly price comparisons for comparable components. We are looking worldwide for the best suitable supplier for us. At the Mannheim works, we have well over 50 percent local sourcing. For example, you will occasionally find with imported highly automated systems in low-wage countries that costs for procurement and maintenance in Germany are possibly lower, with simultaneously higher availability.

Beschaffung aktuell: Will tractors manufactured in Germany be exported – and if so, are they perceived as an American or as a German product?

EBLE: Products from Mannheim's product line are sold worldwide. John Deere is a globally present quality product of an American parent company.

Beschaffung aktuell: Is there a low-cost product line for markets in countries which are not yet as highly developed?

SCHALL: With products offered by John Deere, we want to globally cover the demands of all customers – from small farmers to large agricultural operations.

Beschaffung aktuell: A rather general question: Where do you see the future challenges of purchasing?

SCHALL: Being on a par with technical developments and knowing the advantages and disadvantages of the different markets. The further development of cost engineering activities will also play an ever more increasing role in the company.

Beschaffung aktuell: What do you like to read the most in Beschaffung aktuell?

EBLE: What the others are doing. I mean, how comparable companies are purchasing.

SCHALL: Technical trends on the procurement market; for example, I remember an article about LED technology and the savings potentials connected with it.

Beschaffung aktuell: Mr. Eble, Mr. Schall, Mr. Keller, thank you very much for this conversation.

About John Deere

John Deere is both the name of the founder and the brand name of the American Deere & Company – according to its own information the world's largest agricultural machinery manufacturer.

Other products of the company include forestry machinery, construction machinery, irrigation systems, as well as implements for lawn care and grounds maintenance. In the first quarter of the fiscal year (January 31, 2013), profits allocated to Deere & Company reached $ 649.7 million. Worldwide, sales revenues and other proceeds increased by10 percent to $ 7.421 billion. As the largest agricultural machinery manufacturer in Germany, John Deere GmbH & Co. KG has a workforce of over 7,200 employees at six locations. In fiscal year 2012, the German John Deere business units realized sales of EUR 3.29 billion. In addition to its Mannheim works – which manufactures about 60 percent of the tractors produced in Germany – and its locations in Zweibrücken (combine harvesters, forage equipment), Bruchsal (driver's cabs, European spare parts center, sales) and Kaiserslautern (research and development), John Deere also has two locations in North-Rhine Westphalia. These factories are in Gummersbach (lawn mowers of the brands Sabo and John Deere) and in Stadtlohn (crop attachments of the Kemper brand) with a combined workforce of over 450 employees.

Managing Directors of John Deere GmbH & Co. KG are Markwart von Pentz, Christoph Wigger and Horst Graf.

(Sources: Wikipedia, company)

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