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10/01/2011

From order recipient to active party

Interview: Christian Michalak, Managing Director Projects at Kerkhoff Consulting, on how small and medium enterprises optimize their steel purchases

Few sellers, many prospective buyers, price turbulences with commodities: Especially for SMEs, it's a challenge to successfully operate as procuring agents on the steel market. WiKu editor Daniel G. Medhin talked with Christian Michalak, Managing Director Projects at the purchasing consultancy Kerkhoff Consulting, about the right strategy and the benefits of purchasing cooperations.

WirtschaftsKurier: The professionalization of purchasing is one possibility to absorb the caprices of the steel market. To what extent has this already been adequately implemented by the SMEs?

Christian Michalak: Unfortunately, the topic of purchasing still does not rank as highly with the SMEs as it actually should. That not only applies for steel purchases but for procurement in general. We are often surprised to find that the purchasing department operates more or less as a mere order processing agent and thus is also somewhat of an order recipient of suppliers. In this respect, there are significant differences between SMEs and major corporate groups which frequently operate much more professionally and strategically.

WiKu: Is steel purchasing different from the procurement of other materials?

Michalak: No. Basically, the classical purchasing leverages here apply as well; but their weighting will certainly have to be different here and there.

WiKu: Where for example?

Michalak: Especially knowledge of the market and market transparency will here have a major effect on the quality of purchasing. For example, if I don't know the development of the upstream commodity markets, if I don't regularly check the corresponding indexes – such as the iron ore and coking coal index or even the price of scrap metal – it will be difficult to make the right decisions. It's true that comparable market influences also play a part in other areas but, in my opinion, they are even more important in this context with regard to the special structure and high volatility of the steel market.

WiKu: When purchasing steel, what must a small or medium-sized enterprise watch out for?

Michalak: An important keyword is the supplier management and the product group management. That means, I have to consider very carefully with whom I want to place my demand in the future and for whom I am at all attractive as a customer. On the one hand, there are the large manufacturers; and I as a small or medium-sized potential buyer must think about whether these suppliers are the right business partners for me or whether it would be better to satisfy my demand via dealers and service centers. Before I enter into any discussions with potential suppliers, I should carefully consider such questions as a small or medium-sized enterprise.

WiKu: All that sounds very time-consuming. Are small enterprises with their stretched staffing level even able to do it?

Michalak: Unfortunately, we frequently hear from buyers that they don't find the time to work strategically, visit and qualify suppliers because their day-to-day business is predominant. And that's how we get right to the next important subject of the purchasing department and the purchasing processes. Of course, I must take care that my purchasing department will be able to deal strategically with the markets. It's actually true for all procurement markets but the steel market especially requires a lot of attention because it is so highly volatile and concentrated; and it also requires careful consideration to decide which approach is to be used.

WiKu: After I obtained the necessary fundamental information how will things go on?

Michalak: A tender invitation for the demands will follow, as well as the preparation of a negotiation and award strategy on the basis of the tender returns. A next step will then be the negotiation talks generally over several dates.

WiKu: Even after negotiations are successfully concluded, it's not possible to just sit back and be satisfied, right?

Michalak: Yes, that's correct. It's important to check continuously whether concluded contracts and volume commitments are actually lived up to. A major keyword in this context is purchasing controlling. Finally, it's important to develop ratios so that I as the buyer can effect a proactive management of my product group. How are my demands developing, how does the supplier's performance develop in terms of e.g. due date faithfulness and quality and so on. Furthermore, market development should be constantly kept in sight so that suppliers can be proactively approached, e.g. to be able to discuss negotiations concerning changed pricing or the safeguarding of additional demands at the right point in time.

WiKu: We now have screened the purchasing process. Nonetheless, the market power of a single SME is very small as opposed to large enterprises. From your point of view, are purchasing cooperations an option to attain a better negotiating position?

Michalak: In my opinion, it's an absolutely valid instrument. A major challenge will be, however, to establish trust between the cooperating units. A cooperation will work only if all participants honestly disclose their starting position, i.e. their cost prices, and on that basis arrive at an agreement about the direction they want to take. Of course, there will always be participants profiting more than others. It's important to neutralize this field of conflict. A cooperation does not work otherwise. The participants' needs must be comparable, of course. Steel especially is available in very different grades and qualities. Thus, pertinent balancing will be required in advance. But that's a solvable problem in my opinion.

WiKu: How widespread are purchasing cooperations in practice already?

Michalak: Currently, they are rather the exception than the rule. It's simply a too emotional subject because too much information of oneself must be disclosed. But we think purchasing cooperations are an excellent way especially for smaller companies to gain a different market access and strengthen their power of demand.