Economy Drive

Procurement. All too often, buying is also part of a secretary's job. Yet, farsighted managers and company owners consider purchasing their responsibility and top priority. Because this is where big savings can be realized.

By Eli Hamacher

"You don't get rich by what you earn but by what you don't spend." When Markus Frank presents the WMF Group's new purchasing strategy to colleagues, he likes to quote Henry Ford. It's been one year now that he as the Director Corporate Purchasing has been keeping a close watch on when and from whom the manufacturer of cutlery and kitchen utensils orders and at which terms and conditions. Pressured by the financial investor and majority shareholder Capvis, the long-established WMF company located in Baden-Württemberg had called in the experts from Brain Net, a consultancy based in Bonn, the former capital of West Germany situated on the Rhine river. Three consultants scrutinized the entire purchasing department for six weeks. Results were alarming. The experts found considerable improvement potentials in the department's organization and processes, its systems and its staff qualifications. And that with annual purchasing volumes of € 400 million.

In that respect, WMF is in good company. Especially small and medium-sized companies pay too much for their purchases. "Up to sales figures of € 100 million,  very few companies are able to  set up this area efficiently ", says Thorsten Makowski, member of the management board of the Berlin-based purchasing consultancy Valueneer. Especially in a crisis, companies will thus give away their chances.

"Purchasing is the most valuable cost leverage because there is no other way to realize savings faster", Gerd Kerkhoff says, managing director of Kerkhoff Consulting GmbH. But if the purchasing department were efficiently structured, manufacturing companies could save between 8 and 12 percent. For service providers, savings might even go up to 20 percent.

The financial crisis certainly strengthened the industrial buyer's negotiating power, but only very few of them are able to realize their savings potential. Because many companies reduced working hours in the purchasing area or even dismissed experienced purchasing clerks. Now, there are too few of them still on board; frequently, the staff is also inadequately qualified. Invitations to tender are thus only rarely organized – yet, it's one of the most important possibilities for lowering costs. And if invitations to tender are actually made, the number of new suppliers entering the game will be far too low. "In 20 percent of the invitations to tender, there is not a single new supplier", complains Makowski. Additionally, purchasing processes are inefficiently organized. Only very few companies feel they can afford a chief purchasing officer; instead, their production manager is also responsible for purchasing. However, production managers have their sight set primarily on quality requirements.

"It's better to have the purchasing department report directly to the managing director or the commercial manager", says Makowski. WMF learnt fast from its mistakes and decided on a general overhaul. "It used to be that every company of the WMF Group did its own purchasing, frequently from the same supplier but at different prices. As if that were not enough, their purchasing staff lost a lot of time due to manually controlled processes. There were hardly ever any invitations to tender at all", that's how Markus Frank sums up the biggest potentials for the company. To provide for a central organization of the group-wide purchasing business, WMF introduced the position of Director Corporate Purchasing who reports directly to the CFO, the Corporate Financial Officer. Now, as opposed to the past, product group managers bundle their purchases and pursue one uniform negotiation strategy. This is to prevent, for instance, that one and the same supplier is being courted by one subsidiary while another subsidiary rejects it.

Not only the organization was put to the test, but the systems as well. Today, a new purchasing information system has on file all of the data about quantities, prices, articles and suppliers which are relevant for the purchasing staff and can be retrieved quickly. Today, invitations to tender are processed electronically. Moreover, a computer-assisted system simplifies and accelerates all of the ordering processes. "Our objective is to save annually 3 to 5 percent in purchasing cost", says Frank. And according to him, they already successfully reached that objective in their first year after restructuring.

More Earnings Quite Fast
Measures such as job reductions only become effective for the balance sheet with a considerable delay. Instead, purchase cost optimizations provide a plus in earnings very fast. But farsighted company managers will not haggle too persistently about prices with their suppliers. Because the topic of sustainability is also important. Company managers do not want to risk their customers' trust and thus watch very closely that their suppliers' work is environmentally and socially compatible. Also, companies will look for long-term supplier relations and then try to prevent that bad quality is delivered because of any excessive price pressure. "We want to build up long-lasting partnerships with our suppliers. But that's only possible if none of us becomes too greedy", says Georg Sasse, head of strategic purchasing at the Krone Group. The producer of agricultural machinery thus defined special key suppliers for all product groups who were then requested to provide concepts and ideas of how both sides can collaborate more efficiently and more economically. "Quality, price and supplier loyalty must intermesh", says Sasse. The cheapest supplier would not necessarily be the ideal one. "Instead, we'll know exactly who supplies what to us; we thus have better control over the entire ordering process and can largely exclude any quality problems at our customers", Sasse explains. And just how important such farsightedness really is has recently become evident on the occasion of Toyota's disastrous recall actions.

Krone shifted its straightforward ordering activities to its logistics department so that the purchasing staff is able to concentrate on its core functions. The company's specialists learnt negotiation tricks by elaborating jointly with Kerkhoff consultants uniform standards for the preparation of talks. Today, Krone's purchasing staff is clearly better equipped and able to negotiate at eye level because they have at their fingertips not only data on the price development of products, raw materials, but also data about the company's business volume with the pertinent supplier.
A newly introduced system of procurement controlling moreover ensures one thing: The company's procurement staff obtains all the information it needs to make decisions. "Prices change ever faster. So it's vital for us to act at the right time", says Sasse. The new price management quickly paid for itself not only at WMF, but at Krone as well. According to them, about 10 percent have been saved in the first year.

If raw material prices will now go up again, a lot of medium-sized businesses might be caught unawares. Yet, the expert Frank from WMF is unruffled: He proved already that he has been very successful in reducing purchasing costs.

How to cut costs in purchasing
Gerd Kerkhoff, Managing Director of Kerkhoff Consulting GmbH, knows how companies save best in purchasing:
  • Establish clear objectives for the purchasing strategy between general management and the procurement department.
  • Classify all articles to be ordered into product groups to become more specific in negotiations with suppliers.
  • Clarify the required product properties with the company's own technicians so that suppliers will deliver accordingly.
  • Regularly involve new potential suppliers to obtain good quality at a reasonable price.
  • Record and analyze offers in detail. This is how logistics costs can be correctly evaluated.
  • Determine the cost of materials, production and finishing for the goods to be purchased so that any cost drivers will be detected.
  • Contractually secure terms and conditions by making any delivery and payment arrangements a component part of the company's price agreement.