Key factor: Purchasing

Optimizing purchasing costs is the fastest way to increase earnings or yield without jeopardizing sustainability and customer confidence. In a talk with experts from Kerkhoff Consulting, the essential point is made clear: Farsighted entrepreneurs will make this subject matter their own responsibility!

Especially mid-sized and small companies are paying too much for their purchases. Up to a turnover size of € 100 million, only very few of them are able to efficiently set up purchasing and procurement. Companies are thus foregoing opportunities particularly in the period of time just after the economic crisis. "Purchasing is the most valuable cost leverage because there is no other way of realizing savings faster", as Gerd Kerkhoff knows, the Managing Director of Kerkhoff Consulting GmbH. But if the purchasing area is efficiently structured, companies in the producing sector could save between 8 and 12 %.

Tender invitations as an effective leverage

It's true that the financial crisis strengthened the buyers' negotiating power, but only very few of them can call up that savings potential. Because many companies reduced their working hours in the procurement area or even dismissed experienced specialist personnel. Now, there are too few on board, and staff members are frequently also poorly qualified. Tenders are thus all too rarely organized; yet, they present one of the most important opportunities of reducing costs.

And even if there are tender invitations, there are hardly any new suppliers to consider. In 20% of the tender invitations, there is not a single new supplier. Additionally, processes are inadequately organized. Only very few companies will afford themselves a corporate purchasing officer; instead, they have the procurement people report to the production manager. But his focus is primarily on quality requirements. "It's better if buyers report directly to the managing director or to the commercial manager", Kerkhoff further explains.

More earnings rather fast

It takes a considerable amount of time before such measures as staff reductions will have any effect on the balance sheet. In contrast, the optimization of purchasing costs very quickly provides a plus in earnings. However, farsighted executives don't negotiate all too doggedly about prices with their suppliers. Because the subject of sustainability is also important. The executive floor will take a very close look at how environmentally and socially compatibly their suppliers are working because they don't want to jeopardize their customers' trust. Or, through long-term supplier relations, companies will try to prevent that bad quality is supplied due to excessive price pressures.

"We want to establish long-lasting partnerships with our suppliers. But that will only work if no one is getting too greedy", says Georg Sasse, head of strategic purchasing at Krone Group. Accordingly, the producer of agricultural machinery defined specific key suppliers for all product groups. These key suppliers had been asked to provide concepts and ideas of how both sides are able to collaborate more efficiently and more economically. "Quality, price and deadline faithfulness must intermesh", says Sasse. The cheapest would not necessarily be the ideal supplier. "Instead, we know precisely who supplies which products to us; we thus have better control over the entire ordering process and can largely exclude any quality problems with customers", Sasse explains. Just how vital such farsightedness will be has clearly been shown in the debacle of the Toyota recalls.

Krone moved its straight ordering activities to the logistics department so that its buyers are able to concentrate on their key functions. The company's specialists have learned negotiating tricks by having elaborated, together with Kerkhoff consultants, uniform standards for the preparation of talks. Today, buyers are significantly better prepared with data on the price development of products, raw materials, or even sales which the company has with the corresponding supplier. Buyers are thus able to negotiate at eye level with the other side. Moreover, newly introduced procurement controlling ensures one thing: The procurement people obtain all the information required for their decisions. "Prices are moving ever faster. That's why it's vital for us to become active at the right time", says Sasse. At Krone, the new price management swiftly paid off. Savings of about 10% were realized in the first year. Now that raw material prices are significantly increasing again, many mid-sized companies may be caught unawares. But Sasse from Krone is rather relaxed: He already proved that he can very successfully reduce his purchasing costs.

That's how costs in purchasing will drop
Gerd Kerkhoff sums up clearly how companies can best realize savings in purchasing:

  • Establish clear objectives for the purchasing strategy between corporate management and the purchasing area.
  • Allocate all articles to be ordered to product groups so that buyers will be able to negotiate more specifically with suppliers.
  • Clarify the necessary product properties and features with the in-house technical staff so that supplies will be as desired.
  • Regularly include new potential suppliers to obtain good quality at reasonable prices.
  • Analyze and record offers in detail. That's how logistics costs can be correctly assessed.
  • Ascertain the costs of material, production and finishing for the goods to be purchased to be able to detect any cost drivers.
  • Contractually secure terms and conditions by making delivery and payment arrangements part of the price agreement.