test
12/22/2010

Savings in purchasing

The importance of purchasing for a company's overall performance has long been underestimated. Specialized consultants now provide for a professionalization of procurement in business enterprises.

Even on dark wintry days, one thing is clear as daylight for Gerd Kerkhoff: "This will be the decade of purchasing!" The German consultant's concept of time is oriented on economic boom years which different corporate areas had experienced in the past. Thus, the 70's were considered the decade of production, the 80's the decade of marketing and the more recent past the era of sales and star sellers. And Kerkhoff now postulates the primacy of purchasing for "the Tens", i.e. the second decade of the 21st century. "In ten years, every head of purchasing will also quite automatically be on the corporate management board", forecasts the founder of the purchasing and procurement consultancy Kerkhoff Consulting.

The logic behind his forecast: Due to the increasing market transparency, sales prices are less frequently freely calculated and ever more increasingly preset by the competition. Accordingly, profit contribution can practically be increased only via more economic purchasing. But that's not the only reason why buyers are rising to pivotal positions within their companies. "In times of increasing raw material prices and limited resources, it's up to the purchasing department to lastingly ensure supply security of scarce goods at acceptable prices", says Kerkhoff. Thus, the buyer of the future need not be yet a better price cutter but a manager who strategically secures and optimizes the supply with basic products. In the concrete individual case, it might also mean that the buyer must carefully weigh whether it's more advantageous to squeeze even lower prices from his supplier or whether there is already the prevailing risk of driving his supplier into insolvency and thus severing his own supply source. "All these considerations are not within the temperament or disposition of the classic operative buyer", as Gundula Jäger knows, head of the Kerkhoff office in Vienna.

Upswing during the crisis. Like Kerkhoff and his consultants, Willy Aigelsreiter, partner and managing director of Kloepfel Consulting in Austria, has also taken up the cause of optimization and cost reductions in procurement. Kloepfel, also based in Düsseldorf, started in November 2008 in Austria and, according to Aigelsreiter, has 14 employees here today. The Austria start right in the middle of the virulent economic crisis was not a disadvantage for him – on the contrary. Because the prospective savings promise precisely what companies needed most urgently at that time and what they don't want to miss today either: more liquidity and the optimization of working capital. Aigelsreiter calculates for us the effect on the basis of a case study of a medium-sized company with an annual turnover of € 40 million (see box and table above). As a rule of thumb, consultants assume – Kerkhoff as well as Kloepfel – that professionals are able to realize improvements for about 60 to 70 percent of the entire purchase volume. Their potential is 5 to 15 percent – depending on the sector of the industry and the individual situation.

In Aigelsreiter's case study, the medium-sized company realizes profits of nearly one million Euro within half a year; another € 700,000 in the following year. To achieve the same economic result – with an assumed yield of 5 percent – the company would have to expand sales by no less than 60 percent. "Optimization of purchasing is one of the most efficient ways of improving liquidity", Aigelsreiter sums up. "That results in genuine leaps in yield", as the Kerkhoff expert Jäger also emphasizes. Such leaps not only apply for their clients but also for the consultancies themselves. "In 2008 and 2009, we experienced a growth by 20 percent. Because under the pressure of the economic crisis, companies decided much faster to carry through purchasing projects", Gerd Kerkhoff confirms that the crisis was sort of a booster for the professionalization of purchasing. On the consultancy side, there are no longer only the specialists like Kerkhoff and Kloepfel dealing with the subject: A team of authors around Christian Schuh, partner in the classical strategy consultancy A. T. Kearney, recently presented the book "Der agile Einkauf – Erfolgsgarant in unsicheren Zeiten" (Agile purchasing – Guarantor for success in uncertain times); the consultancy thus also positioned itself in this growth segment.

Closeness to clients and contingency fees. In the project phase, consultants are staying directly with clients and work jointly with their purchasing staff on the implementation – thus, for instance, they negotiate with suppliers and implement the necessary processes. "We are not the soccer manager, we are the players", Kerkhoff explains the implementation-oriented approach. For instance, his consultants supported Agrana in setting up a global purchasing organization for frozen fruits. "The amount of implemented savings surpassed our expectations", states Kapsch CEO Franz Semernegg with regard to the effect of a project implemented with Kloepfel Consulting. At Kloepfel, the consultancy fee is 100 percent dependent on their success. "We credit an advance of € 500 per consultant's day and receive 50 percent of the savings realized in the first year", Aigelsreiter explains the remuneration model. In contrast, Kerkhoff rejects the entirely success-oriented remuneration of consultancy services. He uses a fixed daily rate plus a percentage share in the result for targets set beforehand.