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08/27/2010

One of the Important Trends in Coming Years: Cost-Breakdown Software

Two thirds of the industrial buyers of major machine manufacturing companies in Germany expect that there will be an upward trend for this industry sector in coming months. But not all of them are prepared for the challenges they'll be facing.

A total of 106 purchasing managers were interviewed, and 43 % of them think that actions taken to meet future challenges are not sufficient. This view is shared by even 51% of those in companies with annual sales of under € 100 million. And 29 % of those responsible for purchasing see fundamental needs for change in their departments; another 67 % assume that smaller changes are necessary.

Those are the results of the study "Strategic Challenges for Purchasing Departments in the German Machine Manufacturing Industry". On behalf of the Düsseldorf-based management consultancy Kerkhoff Consulting, the Institut für Demoskopie Allensbach (Institute for Public Opinion Research) and the University of St. Gallen had jointly interviewed, in June of this year, 106 purchasing managers in machine manufacturing companies with at least 250 employees or more than € 50 million annual sales. "It was only in the economic crisis that many companies really became aware of their purchasing department's relevance. At that time, every penny suddenly had to be counted", says Gerd Kerkhoff, founder and managing director of Kerkhoff Consulting. "In the past, purchasing departments had often been shabbily treated; that's why there is a lack of well-trained staff to strategically manage purchasing. That's why companies are actually able to make an analysis of their challenges but cannot react adequately."

The heads of purchasing departments in major companies state that globalization and internationalization of purchasing present special challenges. In companies with annual sales of under € 100 million, their managers especially interpret as most important future challenges the necessity of maintaining their position on the markets – whether on the procurement markets or on the sales markets.

About every fourth company has no procurement strategy laid down in writing (27 %). Regarding smaller-sized companies with annual sales of under € 100 million, this is lacking even for about every third company (35 %). Kerkhoff: "Every product launch has its marketing strategy. Why do people think that procurement is less complex?"

To ensure quality in purchasing, major machine manufacturing companies especially rely on supplier visits or inspections and audits of suppliers – in addition to the usual brief visual inspection at the incoming goods department. Altogether 42 % of those responsible for purchasing made spontaneous statements to that effect. One fourth of the purchasers indicates additional quality controls; another 14 % indicate specific, production-associated controls. Every tenth company is using supplier certificates. "Purchasing itself cannot specify the quality criteria, that must be done in the special technical departments", says Kerkhoff. "But purchasing must always review these criteria, especially if it purchases on such markets as Asia or South America."

To realize their cost objectives in purchasing, very large companies with annual sales of € 100 million and more will rely on value and inventory analyses and specifying cost reduction objectives to their suppliers. In contrast, purchasing managers in companies with annual sales of under € 100 million more frequently renegotiate existing contracts. , Only every fifth purchasing department (20 %) has a cost breakdown tool available – a software product which calculates the costs of a supplied part on the basis of its individual parts, and it can thus examine the prices asked by suppliers. Gerd Kerkhoff: "The few companies having such a tool are able to conduct much more efficient negotiations with their suppliers and thus gain a decisive advantage versus their competitors. From our point of view, the introduction of a professional cost breakdown software is one of the most important trends in coming years."

Cooperations with other companies in procurement do not seem widespread in the machine manufacturing industry. Only 14 % of the major companies collaborate "closely" or "very closely" in the purchasing area with other companies – e.g. by forming buyers' cooperatives. Where transport and logistics are specifically concerned, the rate of cooperating companies is even lower. In this respect, only every tenth company collaborates "closely" or "very closely" with others, 72 % "hardly or not at all".