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09/10/2010

Machine manufacturers are not very mindful of their costs

Current study: Lack of strategies, few systematic quality controls and hardly any bargaining range

By Britta Biron

Good news first: Times are getting much better again for machine manufacturers. In July, incoming orders increased by 48% in real terms according to the Verband Deutscher Maschinen- und Anlagenbau (VDMA – German Engineering Federation).

But – and that's the bad news – many companies apparently relinquish part of their profits from these orders. That's at least the conclusion to be drawn from the results of a current study by Kerkhoff Consulting, by the Allensbach Institute and the Verband Deutscher Ingenieure (VDI – Association of German Engineers). Because in its purchasing policy, this sector of the industry largely operates without any clear concept and literally sends money down the drain. And that although 85 percent of the companies indicated price pressures as one of their greatest current challenges. More than one fourth of all large machine manufacturers with sales of over €100 million, as well as more than one third of the companies with sales of under €100 million have no purchasing strategy that is clearly defined and laid down in writing.

Purchasing without any plan
"Just try to explain to executive managers in sales or production that you want to place a product on the market without any clearly defined strategy", says Kerkhoff, founder and managing director of the purchasing consultancy Kerkhoff Consulting. "Chances are that afterwards you'll be out looking for a new job. But for machine manufacturers' purchasing departments that seems to be normal; yet, purchasing would be decisive for influencing costs and thus annual results.

At least machine manufacturers should have realized the urgent need for action already. Because according to their own information, 93% of those interviewed are convinced that, in the future, purchasing will need to be much more integrated into the processes of production and product development. Because that's the only way to identify optimum-cost goods already in the product development phase and to then negotiate accordingly with suppliers.

"Especially the automotive industry has demonstrated in recent years how to set up purchasing professionally and to thus improve corporate results over the long range. Especially after the liquidity crisis, machine manufacturing should finally give purchasing the attention it deserves", thus Kerkhoff. For instance by using a modern "cost breakdown tool" which renders the cost structure of all purchased goods transparent down to the smallest detail. Yet, only about one fourth of the companies is using that tool already. Kerkhoff is convinced that those who won't follow in the next few years will risk a lot:  "If you have the cost of goods 100 percent transparent on the table before you, you will be able to talk differently with your suppliers and thus clearly score in price negotiations", says Kerkhoff.