Procurement markets - The right place

Global sourcing has become a strategically vital factor for companies.

A huge choice is available on the world procurement market, which means it is all the more important for purchasers to be focused and smart with their orders.

When Jochen Schäfer travelled to China for the first time, he knew more or less what lay ahead of him. The strategic sourcing manager at Fibro, a machine tool supplier from Hassmersheim, south-west Germany, spoke to sales colleagues locally, as the company had already been selling products in China. “It’s important to do more than just exchange business cards,” says Schäfer. “You need to take your time and admire them and put them on the table, and you mustn’t put them in your coat pocket straight away.” During a meal, Schäfer knows that he must try something first because he is the guest – whether the food looks appetising or not. “You just need to get through it.” But it’s worth making the effort. Schäfer now travels twice a year to China to see his suppliers.

Procurement markets are changing all the time, along with the opportunities to gain a competitive edge in terms of sourcing. While major corporations have already been involved in global sourcing for a long time, medium-size companies in Germany are also increasingly sourcing abroad, as highlighted by a study conducted by the promotional bank KfW. It is mainly companies from China which are first-choice suppliers for many medium-size companies. “China is still a valuable sourcing market,” confirms Gerald Boess, an expert on international procurement at the consultancy firm Kerkhoff Consulting. “If you need good steel, it makes no sense buying it anywhere other than China,” says Boess. The same applies for hi-tech electronics for car manufacturing. “China is second to none in these segments.”

Fibro, which specialises in machine tools, has an office in Shanghai that also employs a sourcing engineer who visits suppliers, mainly if they have been working with the company only for a short time. “During the initial phase, we go on site at least once a quarter,” explains sourcing strategist Schäfer. Before mass production gets under way, there are several months where the purchaser inspects the quality of the components on site. Fibro is looking for long-term cooperation: “The better the supplier is integrated into the supply chain, the bigger the price benefit,” says Schäfer. “But you have to look closely at where to buy in China. Anything within a 200-kilometre radius of Shanghai is already highly industrialised and expensive.” But, this region is beneficial to anyone starting off in China. This is because the suppliers reach the “required level” there more quickly.

Those who know best what they are doing in China are above all the professionals, like the experts at Hermes-Otto International (H-OI). “We find the right supplier and factory for every product in the fashion, furniture and lifestyle sectors. We also offer retailers support with product design or compliance with social and environmental standards,” says H-OI Managing Director Michael Dumke. The experts also work very closely on this with the Hermes Hansecontrol testing institute in Dongguan, which is also part of the group. This is where textiles, shoes and toys from China are tested for their quality. After all, not all the goods produced meet European standards and contain no toxic substances. “Between 5 and 7% of all textiles are contaminated,” acknowledges Lutz Lehmann, Managing Director of Hermes Hansecontrol.

This kind of check is particularly helpful for those firms that cannot afford a local representative. For instance, Duy Tran, sourcing manager at Demmeler, a mechanical engineering company with around 200 workers, has already been sourcing from various Chinese suppliers for years.

“We’ve never been on site,” says Tran. “Since we’re a small medium-size company, I can’t be flying over there all the time.” The sourcing manager relies rather on recommendations from business partners whom he contacts in China by phone and email. Tran is sent a model of the component they want before placing an order. If this takes too long, firms like Demmeler can also have sample items inspected locally, such as in Dongguan.

However, global sourcing extends beyond just China. The Middle Kingdom is often the first step if a company is expanding its global sourcing strategy to emerging countries. Companies don’t want to be dependent on just one country. Other countries include Thailand, Turkey and Brazil, which offer a variety of advantages: flexible production, regional proximity, profitable export markets which can be opened up via sourcing. “Another important factor is finding the right business partner locally,” says Ronald Bogaschewsky, Professor of Business Management and Industrial Management at the University of Würzburg, and an expert on procurement markets.

It is also crucial for construction equipment manufacturer Wacker Neuson to have a local presence. “I spend a third of my time travelling to see local suppliers,” says Björn Karlsson, who coordinates the company’s sourcing in Asia from Shanghai. “We have placed quality coordinators in our main suppliers who are permanently on site.” Global sourcing offers several advantages in Karlsson’s view. The company can spread the risks with sourcing and save costs. “We only go to places where we can make at least a 10% saving compared with the domestic market,” explains the sourcing expert. This is because exchange rate fluctuations alone can quickly wipe out most of the savings. Companies that source from Asia also need to change their storage arrangements. Containers still take about six weeks to go from Shanghai to Hamburg. This also applies to returns, if the quality of the goods is not up to scratch. Fibro sourcing strategist Jochen Schäfer also combines air and sea transport. He has the goods shipped from Asia to Dubai and then flies them back to Germany. “This is where progress monitoring is vital. You need to know exactly where the goods are at all times,” says Schäfer. On balance, the delivery times are around 3 weeks. “This is fine and there are always the considerable cost benefits of being around 50% cheaper than normal air freight.”

Construction equipment manufacturer Wacker Neuson also sources from Japan and Korea to retain some flexibility. If, for instance, the Chinese renminbi becomes stronger against the dollar, yen and euro, this could be a real problem for purchasers. Experts have speculated for a long time that the Chinese government could let their currency appreciate in value. On top of this, there are natural disasters to contend with, such as the flooding in Thailand which brought most of the global digital camera production to a standstill at a stroke, resulting in supply shortages worldwide. Medium-size companies are aware of this problem, too. “We want to take a look at other markets soon,” says Fibro sourcing strategist Schäfer. The aim is not to become dependent on regional suppliers. “Starting this year, we want to find a second supplier for every product, based in a different country,” says Schäfer. “This gives us an alternative if, say, prices rocket in China.” Fibro currently has Vietnam and especially India in its sights, where the company is already manufacturing and is looking specifically for suppliers.

It’s no coincidence that India is being considered as an option. The subcontintent’s economy is developing very rapidly. “Every industry has been established there for a long time,” says Kiran Mazumdar, an expert on India from the consultancy firm Inverto, which specialises in sourcing and supply chain management. The textile, pharmaceutical and hi-tech sectors are booming around Delhi, with Chennai the heartland for the car industry, and Mumbai, Bangalore and Hyderabad strong IT centres. Production costs are regarded there as reasonable. In addition, India is not dependent on raw material imports in many sectors because the country itself has many reserves. For instance, the textile industry does not need any imports because the country produces enough cotton itself. There are also benefits in terms of understanding. Although the official language is Hindi, English can be widely used in the business sector, which is less often the case in China. “The Indian legal system is also similar to the English system,” adds Mazumdar. “That makes it easier for European companies to do business there.”

The country is currently investing in its infrastructure, but at the moment, it hardly has any ports capable of handling ships on the high seas, and many roads have not been made properly accessible yet. Companies also have to constantly contend with power cuts. One other noticeable aspect is that factories are on average less automated than in China and are not quite as well organised. Mazumdar reckons that China’s productivity rate is 55% of that of the US, while India’s is only 35%. However, Kerkhoff consultant Boess is backing India big time in the medium and long term: “Both its economy and population are growing. Unlike China where the labour force is slowly dwindling, India still has a huge supply.”

How companies source items in emerging countries depends primarily on the type of product. Textiles, for example, are fairly easy to manufacture. The company looks for a manufacturer, negotiates the terms and has the products delivered. Companies like Hermes-Otto International act as mediators and help guarantee quality standards and compliance with contracts. In the case of complex parts, like in the engineering or car industries, experts reckon on a lead-time of up to a year and more before production can get under way. Apart from producing samples and pre-production batches, it is also about developing trust in your business partner. “You first need to establish reliable contacts with the supplier,” says Inverto expert Mazumdar. If companies want to develop a market for their own exports as well, he advises forming joint ventures with local companies. “They are very familiar with the distribution channels, which the German partner can also benefit from.” How this kind of cooperation works depends, however, on the rules of the game in the relevant country as well. In China, for example, experts urgently advise that samples and drawings should be supplied only if absolutely necessary. This is because copying and recreating are part and parcel of everyday business in China. “We are often asked whether we can also send drawings for whole machines,” remarks Demmeler purchaser Tran. “But we don’t do it because you really have to watch out with this. We only send drawings for the specific part that is to be manufactured.”

Anyone who is already more familiar with the procurement markets in Asia may focus their attention on Thailand as well. “This country already offers a high level of technological expertise,” says Maximilian Butek from the German-Thai Chamber of Commerce. “Lots of Thai companies are export-orientated and know what quality and delivery reliability Western companies expect.” But that doesn’t mean that German firms should abandon ongoing quality checks. The car, chemicals, food and IT sectors are strongly represented in Thailand. Important economic centres include the area around the capital Bangkok with roughly 12 million inhabitants, and the Eastern Seaboard coastal region, to the east of Bangkok. According to Butek, other regions, with just a few exceptions, are still not developed enough.

In Kerkhoff consultant Gerald Boess’s view, the benefit of having additional regions for procurement offers another quite crucial advantage: “Companies can have access to new sales markets via sourcing.” They get to know the market in the process and also have the right partners locally if they want to start production there too one day. Brazil is an example of this.

At first glance, purchasers are interested in the biggest country in South America mainly for raw materials and food products. Iron ore and crude oil account for roughly a quarter of exports, with meat and sugar at more than 6% each. At the same time, there is a labour shortage, which means that car production, as an example, is three times as expensive as in Germany. It’s not a great place then for purchasers from industrial companies seeking suppliers. On the other hand, the economy is growing strongly, living standards are steadily rising for the 195 million Brazilians, and GDP rose by 7.5% in 2010. “Brazil is a huge export market,” says Boess. “If companies want to gain access to this market, it might be sensible strategically also to look for suppliers there.” For example, to reduce transport costs and keep exchange rate risks to a minimum. In addition, Brazil has stipulated occasionally in the past that importers must also manufacture locally.

If you don’t want to stray too far afield, Turkey is a good recommendation. There are several reasons that make the country on the Bosporus appealing. First of all, there’s its geographical proximity to Europe, making just-in-time deliveries easier to coordinate than with Asian suppliers. Not to mention that transport costs are lower, even though they are often only of minor importance, accounting for roughly 5% of the purchase volume. What is more important is the short distance to the supplier. “If there are quality issues, I can quickly get there,” says Kerkhoff consultant Boess. Several flights depart every day from German airports for Istanbul, with a flight time of roughly 3 hours from Düsseldorf. And if there’s any snag with the transport, the manager can dispatch, if need be, one of their own lorries to go and fetch the actual goods. Experts view Turkey, therefore, as a good alternative to Eastern Europe. The country is not much further away than the EU countries in the east, but cheaper. “There’s also the fact that the Turks are much more strongly influenced by the West in the way they do business than, say, the Ukrainians, who are much more strongly aligned to Russia,” says Boess.

That’s something that is also appreciated by entrepreneur Helmut Krauß, who visits Turkey once a month. The manager of the Krauß vineyard in the Zellertal area, in western Germany, opened a winery in Turkey in the mid 1990s. He initially produced 50,000 litres of wine a year. Now the volume is a million litres. Krauß sources locally from farmers and agents. He originally made the contacts when he was on holiday. “If you really get behind the Turkish mentality and negotiate with business partners, this is a very good place for sourcing,” says Krauß. There are a number of benefits from doing business here. Many Turkish businessmen speak German, with English also widely spoken. The main export goods from Turkey, apart from food, are clothing. Istanbul and the city of Bursa, located to the south of the Sea of Marmara, are still among the main textile centres in the world, even though suppliers from Asia are now doing a large part of the business. But Turkey can offer a lot more than this. Car parts suppliers and commercial vehicle manufacturers have already been established locally for many years. The electronics industry is also growing in importance, along with more recent economic sectors such as medical, aeronautical and space technology. “A lot of companies in the metal and plastic processing industry have also moved to Turkey,” says Nikolaus Bemberg, Managing Director of the consultancy AHP Bavaria and an expert on Turkey. According to the German-Turkish Chamber of Foreign Trade, Turkey is the largest producer of buses in Europe, as well as of cement and refrigerators. Many brand manufacturers also have their TVs made in Turkey. Bemberg mentions another benefit: “Companies are flexible and can, in most cases, easily handle smaller batch sizes as well.”

Even Fibro sourcing strategist Jochen Schäfer has already put out some feelers towards Turkey, but was not happy with the supplier’s quality. He is more focused on Asia. “The biggest potential savings are offered there.” Apart from the large markets of China and India, Schäfer also has the smaller countries in his sights. He is already sourcing from Thailand and has Vietnam as the next procurement market on his list.

André Schmidt-Carré, David Selbach, Celestine Hassenfratz