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01/30/2014

Purchasing in Germany – Achieving More Together

By way of cooperations with kindred spirits, companies cannot only reduce expenditures and costs but also influence the quality of goods.

The percentage is remarkable: Edeka retailer Volker Bergmann from Lüneburg orders more than 80 percent of his goods via his group purchasing organization. This GPO with its seven regional wholesale operations takes over not only the procurement of daily fresh goods to be delivered to him; upon request, the GPO also provides free services such as price management, product range consulting and marketing. "We just wouldn't be able to handle our retail business today without having an efficient wholesaler operating in the background. As individual merchants, we would simply have procurement problems considering the great range of products customers expect today", he explains. He deliberately opted for the cooperatively organized Edeka group because every member is also an owner and has a say in matters.

With group purchasing organizations, small and medium-sized enterprises will be able to obtain, from their suppliers, terms and conditions as well as prices like those for bulk buyers. By pooling their forces, such SMEs will not only lower costs and expenditures for their purchasing area but also for the intermediary trade and logistics. On the German-language market, the portal Einkaufsgemeinschaften.eu [group purchasing organizations] counts more than 800 cooperations across all sectors of the industry. Aside from joining an existing group purchasing organization, kindred spirits from the same region are also able, for example, to establish a new GPO on their own. That makes very good sense for large order volumes and standardized products.

When planning purchasing optimizations, it will always be worthwhile to also have a look at the existing suppliers. According to estimates by experts, 80 percent of them will provide only 20 percent of the procurement volume – with the consequence that buyers get sidetracked by less significant suppliers. Instead, they should concentrate on the strategically important ones and negotiate better terms and conditions with them or enter into supplier partnerships as has been successfully practiced, for years already, by the automotive industry. Focusing on the most important suppliers will provide companies not only with savings potentials but also give them a chance to influence the quality of the goods to be supplied.

Suppliers are open-minded about cooperations. Frank Schipper, owner of the consumer electronics store Euronics XXL in Lüdinghausen near Münster in Westphalia, explains the background: "It used to be that products were mass produced and everything was sold until warehouses were empty. Today, product cycles are getting ever faster, especially when it comes to our area of consumer electronics." The result would be that goods are hardly ever kept in stock but rather produced just in time. Schipper adds: "If we want to have a certain quantity at a certain price, we must order early enough. This will provide both industry and suppliers with long-term planning security."

Dirk Schäfer, Executive Vice President of the Düsseldorf-based consultancy Kerkhoff Consulting warns against any radical cuts in the number of suppliers and says: "For non-critical products like office supplies, one supplier will be absolutely sufficient. For strategically important production materials, at least one second supplier should be set up for every group of products or goods in order to ensure the security of supply."

Josef M. Mertens, the commercial managing director of Montanhydraulik GmbH in Holzwickede, heeded that advice. The company with a workforce of 800 located in the Ruhr Valley produces hydraulic cylinders and control systems for machinery manufacturing. "During the crisis years of 2009 and 2010, we were looking for savings in purchasing and first analyzed our materials and put them together in groups. In addition, we listed the corresponding suppliers", he explained.

With support from consultants of Kerkhoff Consulting, he then classified the suppliers according to their importance for the corresponding end product. "Already the first time around, we were able to reduce the number of suppliers by 15 percent", said Mertens. For steel alone – strategically the most important product – the bundling process enabled him to reduce the number from 15 to 4 suppliers. But it really should not be much less than that. "Aside from being on the safe side if one of them fails or drops out, we also have a better starting position in price negotiations", he explained.

However, when selecting suppliers one should not only be concerned about price and quality. That's why Mertens is of the opinion: Risk assessment should be done especially for strategically vital materials. How well is the supplier set up? Would the supplier also be able to weather a crisis, if necessary? That's also an absolutely crucial point for the Edeka retailer Volker Bergmann and his group purchasing organization.