"Far too many believe they are doing everything right"
Text: Jochen von Plüskow
Mr. Kerkhoff, you held a mirror up to many purchasing departments with your provocative and informative book "The Bermuda Triangle of Business Procurement".
And that was really necessary. Because quite a number of companies certainly could have prevented filing for insolvency if they had realized the potentials of a well-functioning purchasing department. A product or a service will simply be competitive only if there is a demand for it and if the market price is right. You can even influence the demand – if you have a comprehensive understanding of the procurement function. Today, industrial buyers are closely working together with their company's product development and their quality management. And not only in those sectors of the industry where this is considered a matter of course – for example, in the purchase of mass products.
You once said, "when it comes to purchasing, we all consider ourselves world champions". What did you mean by that?
It's well-known that the average German enjoys bargain hunting – whether on the internet, in the factory outlet, in classical shops or boutiques or when buying special offers at the supermarket. Sometimes, even if a detour is necessary to get the best price – and even if that means indirectly paying extra for the drive to get there and back home again. For years already, advertising spots have been confronting us to "not be stupid". And, of course, Germans aren't!
Many chief executives consider your criticism unwarranted. They believe they are doing everything right when it comes to the area of their company's purchasing. What do you tell people who are convinced that they are efficiently managing their purchasing?
Well, you might just "congratulate" such executives because they are living in a cloud cuckoo land.
But seriously: Anyone not open-minded enough to constantly scrutinize oneself and acknowledge one's own improvement potential as a matter of course won't be a business person for long. But there is also a second cardinal error: Industrial buyers today are using nowhere near enough available data and findings for their work. I'm thinking, for example, of benchmarks, purchasing cooperations or quite simply the available data material on the internet.
Surely there are efficient "tools" to get buyers on the right track.
Of course. Briefly stated, that includes the provision of framework conditions, setting up incentives and the consistent regulation of purchasing. However, our affiliated company Penning Consulting determined which qualifications industrial buyers actually have. The results have been dramatic: Only 20 to 30 percent of current applicants have the qualifications required for strategic purchasing.
It used to be that pure price cutting was the focus in purchasing. When you were able to shave off a few cents here, you were glad, proud and happy. Is that still the case?
No. Our clients proceed differently once they have come to realize that purchasing is a substantial earnings booster: Formerly, it mostly used to be a matter of realizing price improvements through the classic leverage of purchasing functions and also of training negotiation techniques; today, the task formulations are much more complex.
Moreover, for every project, it is essential to elaborate and implement demand-specific organizational projects; also, to ensure process efficiency and process security as well as to establish compliance systems. But that's far from all yet. Knowledge of product costs is also part of the central issues. The point is here to break down products, components or even production and service processes into their individual parts to then calculate them.
With all that information, buyers are optimally set up to realize good results in negotiations. With that knowledge, the relevant corporate divisions can specify competitive market prices or answer, for example, any questions arising in terms of the most economical procurement market or production location. And it's not only the procurement departments of many enterprises that still have a lot of catching up to do as far as these areas are concerned.
Moreover, we find rather frequently much more serious information deficits. This also includes the alarming fact that contribution margins of individual products and services are unknown or wrong values are used as the basis. It's clear, of course, that decisions will then end with bad results.
You once said that the earnings potentials realizable by efficient purchasing would be about ten percent. That's an impressive figure.
You are not entirely wrong about that. Of course, this is just a very rough estimate. But things look differently when we know precisely our clients' data. It is then possible to make very precise statements with regard to products or services.
The long-standing statement "profits are in purchasing" is still correct. Just no longer as far as the simplified view of the individual purchase price will go. Only someone able to play the entire piano keyboard will also be able to produce high, yet good sounding notes. And that someone then creates a harmony, which turns into a catchy tune having all the makings of an evergreen. Short-term procurement results are good and well and provide a little extra time and relief. But they are no rescue means. The orientation towards continuity and substance is decisive for the results.
In your books and lectures, you always talk about the magic formula of "procurement optimization". What does that mean?
With that statement, I just want to continuously indicate the added value function of purchasing, procurement or the entire supply chain. Many an unpopular decision might be circumvented or at least rendered significantly more moderate if there were corresponding actions.
Could you also please explain what exactly does modern procurement management mean?
Gladly. Modern procurement management permanently balances planning and current developments. It can soundly substantiate deviations and derive correct decisions. It used to be not so long ago that a project was carried out and afterwards everything remained the same. Today, it's important to establish a concurrence of project and operation and to support employees in that respect.
As you see it, what is successful purchasing?
The price still remains a major influential factor. Many businesses have learnt their lesson with regard to this area or, rather, regarding the perception of this vital and directly effective corporate function. The standard price spread on the market has become smaller – not least because of the flood of data and today's prevailing transparency. Success and failure are distinguished, on the one hand, by a much more differentiated approach and, on the other hand, by an overall consideration of the individual processes as a whole.
Due to the complexity, it takes longer today until deficits are detected. They have greater impact, and a swift elimination of such deficits requires consistent and correct procedures.