Buyers gaining respect

For decades, industrial buyers lived in the shadows as procurement people. Due to increasing complexities, internationalization and strategic tasks, buyers can move up the career ladder all the way to the management board in some cases.

Order books are full; warehouses empty. That's a handicap for production, almost as much as the reverse case. To secure supplies nonetheless, purchasing departments must go new ways and readjust strategically. "Buyers must deal with ever more volatile commodities and procurement markets and take a view of the economy as a whole", advises Dirk Schäfer, Managing Director Projects at Kerkhoff Consulting. That means more responsibility for the individual. Those buyers who had been satisfied until now to place orders and acknowledge incoming goods will have a hard time in their new role because it includes the cooperation with other departments.

"But it's not absolutely required to completely change the entire company", says Schäfer, "sometimes, it's enough to change two or three departments." But if manufacturing depths are to be reviewed – i.e. when it is to be decided which products will be manufactured by the company itself and which are to be purchased externally – that's a task concerning the entire company. "Every tenth company considers reorganization as an overall task; 90 percent carry it out with the design and purchasing departments in a separate project", estimates Schäfer. Currently, some companies are setting up – as pilot projects – departments for cost analysis like those already existing in the car industry. Their staff will provide the technical input and will be more difficult to find on the labor market than good buyers. "In two to three years, cost analysis teams will be very important", says Schäfer. Those times are over when a single call would get you a three percent discount on everything. "Today, it's all about strategic supplier relationships."

Within the company, however, the purchasing department frequently lived in the shadows and was only considered as a procurement place, as a connecting link between construction and production on the one side and suppliers on the other. When prices went up, buyers were held responsible who apparently had no adequate negotiating skills. Yet, it's certainly possible that products become more expensive, but handling and service improve so much that it will pay off in hard cash within the company. Good buyers make sure that their success will become known in the right places. Such communication bears fruit. Schäfer: "Today, purchasing departments work at eye level as an equal partner of other departments and can even push their own strategic projects."

Dr. Holger Hildebrandt – Senior Managing Director of the Bundesverband Materialwirtschaft, Einkauf und Logistik e.V. (BME – Federal Association of Materials Management, Purchasing and Logistics, registered) – has a similar view: "A company which understands the procurement manager only as an executing ordering organ for upstream company areas does not only act uneconomically but is also threatening its own existence." He says that purchasing departments have a high standing within their companies especially in those sectors of the industry which are characterized by little manufacturing depth and where the quality of the upstream suppliers and their products and raw materials plays an important part. Exemplary in this respect are the automobile industry, the pharmaceuticals industry as well as plant engineering and mechanical engineering. "The reputation of purchasing is also increasing in financial and services areas", the head of BME observes. His advice is that especially global players should lastingly promote procurement within the company. "In the future, purchasing must be presented on the management boards of major companies much more than now. There is still a potential."

In terms of respect, things have changed somewhat in recent years: "It used to be that the head of purchasing reported to the head of production", Schäfer explains, "today, he'll report directly to the management board or is even a board member because it's now well known how much the purchasing department can contribute to the success of a company", Schäfer cites an example from his consulting experience. Even if such a position is not planned, numerous companies will have at least a head of supply chain. "A good purchasing department is almost always critical with regard to competition", says Schäfer. If the supply chain is functioning, sales may be even higher. Untrained buyers still make a number of avoidable errors: "Once the harvest is over, you won't sell anymore bale rolling presses", says Schäfer. One company could sell e.g. only 4,000 machines instead of 6,000. "That was due to the fact that they had a bad purchasing strategy and as a result very long delivery periods and availability problems and were unable to sell the quantities which the market actually demanded."

Buyers must think about everything that could influence their procurement. "One of the biggest mistakes is not to react in good time to new challenges", says Hildebrandt, "that has been impressively proven by the volcanic ash rain over Iceland, the crisis in Japan and the railroad strike in Germany." According to him, only those people in procurement are successful who will permanently review and adjust their risk management. That includes not to make one's own supply chain depend on only one supplier. "If that supplier fails, alternative vendors must fill in fast so that the supply chain does not break." In view of the growing influence of investment banks and fund companies on pricing in commodity markets, buyers are also increasingly challenged in terms of technical financial know-how. "That task is frequently underestimated."

Rare on the labor market are good buyers who understand something about strategies, finances and processes and are also highly skilled in internal communications and external negotiations. For example, if the design department develops a part with a lower steel percentage as a reaction to increased raw material prices, that does not mean the price benefits go down well with the purchasing department. "Many companies are unable to achieve an effect with suppliers due to a change in specification", says Schäfer. Tough negotiations are required so that the supplier will not simply offer thinner sheet metal at the same price and thus enjoy a higher margin.

Buyers must also be well-versed with regard to electronic procurement solutions for the optimization of business flows. "Thanks to the robust economy, German companies are again investing more in e-procurement", says Hildebrandt. With good reason: Companies lower their cost of funds on average by five percent when catalog systems or tenders are used. "For auction solutions, it's even twelve percent", says Hildebrandt. Additionally, there is the reduction of process costs of 25 percent on average for catalog systems, ten percent for tender solutions and five percent for auctions, as well as a number of not directly quantifiable successes such as the increase in compliance. Small and mid-sized companies here profit to a similar extent; with some solutions, they profit even more than major companies and large corporate groups. "However, e-procurement solutions cannot be introduced on the side", Hildebrandt emphasizes, "they must be continuously updated and developed further."

Those who feel they can't cope with the wealth and diversity of their new tasks should not be afraid to use professional help: "Before the backdrop of complex international flows of goods and services, procurement deciders are increasingly accepting strategic tasks and coordinate the global purchasing process", explains Hildebrandt. To do justice to the requirements of new organizational structures, it would be important for global players and for small and mid-sized businesses to increasingly tie in external service providers into the procurement process. "Service providers support purchasing departments in the conception of projects and take over strategic as well as operative purchasing responsibility." The highest priority would be that external consultants provide standardized tender invitations for services; do quality assurance or control, and prepare framework agreements. "To optimally evaluate the performance portfolio of procurement service providers, intensive exchanges are absolutely necessary with purchasing colleagues from the own company as well as from other companies", emphasizes Hildebrandt, "because expensive marketing activities don't really tell anything about their actual capabilities." BME supports members looking for suitable suppliers and deals with the subject of procurement service providers in its own section.

■ Kirsten Seegmüller
Free journalist in Leinfelden