Reducing Costs Remains Buyers' Central Duty

In 2012, technical purchasing trends concern, on the one hand, further reductions of procurement prices; on the other hand, the area of functions and responsibilities expands further: In the future, purchasers have to be in charge of cross-functional teams and, as project managers, help think in engineering.

Buyers are facing major challenges: Their companies must offer innovative and ever more complex products at attractive prices to be able to survive on the market and grow. "On the one hand, the buyer is required to contribute further to cost reduction by means of lower material costs; on the other hand, the supplier market is characterized by increasing uncertainties", sums up Stefan Ullerich, Senior Manager at Deloitte. But rising raw material prices are only one aspect. "Since risks due to insolvencies in the supplier chain are increasing, buyers must ensure the supply with products and services."

Gerd Kerkhoff, Managing Partner of Kerkhoff Consulting GmbH, made similar observations. "Last year, many companies were suddenly affected by serious supply failures." There were several reasons for it: Natural disasters are on the increase; commodities are becoming scarce, and the political situation in some countries is aggravated. "All that has its effects on supply chains." And it's irrelevant whether a company itself obtains products from such countries or whether it depends on suppliers which are dependent on parts from these countries. "Accordingly, companies now have to especially check their international supply chains for stability", is Kerkhoff's advice. Purchasing is not made easier by the fact that oligopolies have developed on sellers' markets in nearly all industries in particular for raw materials or commodities. "Moreover, price fluctuations are so great that precise forecasts are no longer possible", says Kerkhoff. The euro crisis also contributes to the uncertainty among all participants within an added value chain: "It increases the pressure on purchasing to run an adequate risk management", explains Ullerich.

Price increase and uncertainty can be traced back not only to raw material shortages. Kerkhoff, for example, is surprised "that many companies don't know at all what a product costs in detail and what causes price increases". This question can easily be clarified on the basis of product cost calculations. "To this end, products are broken down into their component parts and the costs for each part calculated in cost parameters for materials, production, wages, energy and overhead costs", explains Kerkhoff. It could thus be quickly determined which parts can be procured at lower costs. "There's no need to work against the supplier; instead, it can be a joint effort to eliminate cost drivers."

Corruption is another problem which purchasing departments are fighting against. "In 2011, we carried out a study with the Institut für Demoskopie [Institute for Public Opinion Research] on the subject of compliance and we found out that purchasing – even before sales – is the department most prone for violations." Buyers should prevent violations of the law in the supply chain not only for ethical reasons but out of self-interest as well: "Today, managers' liability is so rigid that decision-makers can be held liable even ten years after their leaving a company", warns Kerkhoff.

Buyers are also affected by internal changes of the companies. "We are noting a stronger positioning of technical purchasing within the company", says Ullerich from Deloitte, "increasingly, it acts as a requirements manager; it actively influences specifications and coordinates them both internally and with the market." But that means greater responsibility: "The technical buyer acts as a project manager and as a total life cycle cost manager." That means: He must come to terms with a defined target agreement and a performance control."

Overall, however, it's good for companies that purchasing gets a stronger position. Because the narrower the latitude and margins in price negotiations, the more important it will be that purchasing can influence specifications instead of simply taking over the requirements by designers and engineers. To this end, a buyer not only must have a sound technical background but must also be able to head cross-functional teams – both with engineering and production within the company, but also across the supply chain. "Increasingly more buyers completed engineering studies or at least had technical training in addition to their commercial training", says Ullerich. If there is no such previous experience, buyers can use job rotation programs to take a look behind the scenes of design, engineering and production and later even consult these departments.

Kerkhoff confirms: "A buyer does more than just process orders. He or she contributes significantly to corporate results." To be able to meet all these requirements, buyers constantly need further training. "In addition to project management, control and chairing of cross-functional teams, buyers must also be fit in risk management", says Ullerich. Moreover, they would have to master professional negotiation techniques, he says – from the initiation of suitable supplier contacts all the way to selecting the form of negotiations, such as global supplier days, parallel negotiations, or possibilities of e-sourcing.

Thus, buyers are expected to have increasingly more competence and responsibility. In reverse conclusion, they would also have to be supported very much; that means: regular further training, as well as appropriate salaries and attractive bonuses for successful transactions. But the reality is different: "In terms of further training, purchasing is still shabbily treated", criticizes Kerkhoff. According to a study which Kerkhoff Consulting carried out with the personnel consultancy Penning Consulting, these employees are granted only 2.7 days of further training per year. "But further training is urgently necessary. Markets are developing; supply chains get ever more complex, so buyers will always need the latest know-how", thus Kerkhoff. He says further that especially small and medium-sized enterprises have a lot of catching up to do – particularly, in such new areas as global sourcing, procurement controlling and risk management. "Companies must invest in purchasing personnel." But qualified recruits are missing: "Professorships or departments for purchasing and procurement are scarce", as Kerkhoff knows. "Accordingly, it takes an average of four to six months to fill vacancies and that's unusually long."