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By Gerd Hanke

Gerd Kerkhoff is an optimistic, open and direct type of person. These days, he seems particularly happy. A few weeks ago, the 51-year-old once more became a father. It's already the third daughter born by his wife Stefanie, co-partner of Kerkhoff-Consulting GmbH. Men who father only daughters have a golden hand – that's how the top consultant for purchasing and procurement summarizes his own research in this matter, with a twinkle in his eye.

In fact, Kerkhoff already often proved to have a lucky hand – especially where purchasing issues are concerned. Let's leave it open whether the additional family member will contribute to achieve new synergy objectives in private food shopping. This entrepreneur would hardly need it. But it's a foregone conclusion that buying can be a real blessing. Many successful business dealers are able to handle this discipline even blindfolded. There are numerous examples. Classical strong points of competent purchasing have recently also been illustrated by Breege O'Donoghue in a newspaper interview. She is a member of the board of the Irish textiles chain Premark which recently opened its second German market in Frankfurt. Premark is a price breaker. And Ms. O'Donoghue gives a vital reason for the success story of her own enterprise: Competitors like H&M or Zara "cannot keep up with our volume in the long run".

Of course, bundling volumes is not a new subject; yet, it's only part of the whole truth about successful purchasing which, in many cases, will not exhaust all possibilities. This applies particularly on the side of the industry which – exposed to professional buyers of the trade – itself sometimes has not yet moved all the levers to be able to get better purchasing results, in turn. The Düsseldorf-based Kerkhoff Consulting, one of the recognized consultancies in the sector of purchasing and procurement, has currently been dealing with this subject and further key issues all about industrial purchasing – in collaboration with Lebensmittel Zeitung and the University of St. Gallen, Switzerland. The result is a study entitled "Strategic Challenges for Purchasing in the Food Industry". Interviews and analysis have been provided by the renowned Institut für Demoskopie Allensbach (Institute for Public Opinion Research).

In September, more than 100 people responsible for purchasing were interviewed. They can see numerous, partly drastic developments coming up in the next ten years. Very much up front are significantly increased energy prices (see Table). This development is considered outstanding by 81 percent. Following are the items "significantly fewer suppliers; oligopolies developing with suppliers" (78 percent), "ever more individualized consumer demands in the food sector" (76 percent) and "a significantly tougher competitive battle in the purchase of raw materials due to new, emerging markets" (70 percent).

These trends have concrete effects on their own purchasing organization. Those interviewed consider the greatest challenges to be: "changed consumer demands" (28 percent), "bureaucratization, difficult legal/political framework conditions" (27 percent), "scarcity of raw materials, aggravated competitive situation" (27 percent), "concentrations in the supplier group, developing oligopolies" (18 percent), and ranked 5th "situation in retailing with concentration and great price pressure" (14 percent).

But what are the consequences derived from it? In view of the expected developments and their relevance for their own enterprise, a clear majority of those responsible sees the necessity for changes in their own purchasing department (85 percent). However, among them are 70 percent who assume that smaller adjustments will be sufficient.

This result has come somewhat as a surprise for Dr. Erik Hofmann, Vice Director of the Chair for Logistics Management at the University of St. Gallen. According to his conclusion, the companies can identify numerous challenges, see themselves even "sandwiched" by developing oligopolies on the supplier side and commerce on the other side. Yet, only small steps in adjustment are considered necessary. The reasons for it might be, on the one hand, that the interviewed protagonists are already adequately prepared for future challenges. On the other hand, it might show a certain "naiveté" or "operational blindness" with regard to the emerging needs for adjustment. According to him, the latter would be particularly volatile since a lack of problem awareness in the food industry's purchasing departments "might advance to become a danger and a risk for the entire company."

Quite apart from the classic purchasing instruments which concentrate on questions of conditions, costs, and quality, Gerd Kerkhoff also perceives a growing necessity to principally reassess the role of purchasing. This would apply, in particular, with regard to the concentrating markets of upstream suppliers. In atomized supplier markets, it would be no problem to bank on old mechanisms and optimize them, if necessary. But if the buyer were soon faced with only one or two providers, he would have to carefully consider whether to keep up the classic backdrop of demanding terms and conditions and of threatening removal from the list of suppliers (see also the interview in this respect).

Reconsideration of Purchasing Role

Especially the beverage industry is faced with their suppliers' oligopoly-like structures. For Herbert Mederer, owner of the candy manufacturer Trolli, it's also a serious subject if groups like Cargill are dominating markets or if the purchase of glucose or starch would only be possible through a few channels.

His colleague Ralf Brack, chairman of the board of VK Mühlen AG, also sees this danger – with paper, for instance. He is not worried, however, by the prospect of facing only two or three suppliers. This is due to the fact that VK Mühlen is one of the major buyers and can thus build up a considerable counterweight.

Yet, Brack's experiences with optimizations of the purchase department might encourage other companies to once again take a closer look at their own purchasing department. Conspicuous in Brack's office is a giant flat screen. The head of VK Mühlen himself personally takes care of the raw material purchase of grain. Every year, the company is buying two million tons of it worldwide. This amounts to a 20 percent domestic market share. VK Mühle supplies flour, rice or sweet corn to the market shelves; but the goods go predominantly to the industry. Of total sales, 85 percent are the B-to-B business.

When it comes to buying grain, Brack and his team are professionals. Purchasing consultants can hardly give them any new tips. But things are a bit different when it comes to the additional purchase of components which until now had not been centralized but scattered over the companies 14 branch establishments. Purchasing for oils, fats, starches or even packaging materials could be significantly optimized. Via centrally pre-negotiated contracts with a reduced but cooperatively integrated group of suppliers, components are meanwhile being purchased via an electronic procurement system accessible for all relevant areas. On the basis of a purchasing volume of 40 million euros, Consultants have been able to realize much more than the initially promised 6 percent cost savings for the company's purchasing: "Today, we must say that they really opened our eyes."

Needed Cushion Provided

Kerkhoff's message to possibly connect more closely with one's upstream suppliers is also favorably received by Brack: Through long-term cooperation agreements with his suppliers – where not the cheapest but the most reasonably-priced would get the chance – it would be more likely, for example with a view to packagings, to secure the exclusivity of some products.

Trolli boss Herbert Mederer considers it urgently necessary to professionalize purchasing further: "Many in this field need training and catching up." It is precisely before the backdrop of further increasing pressure on the part of commerce, that it would be indispensable for a supplier to permanently improve further on the procurement side. He said that, with Trolli, this had also become possible with the assistance of external consultants. Like for VK Mühlen, Mederer was able to save about 4 percent in material costs which make up over 50 percent of total costs. "The 4 percent are nearly our margin", says Mederer, making it clear that this "additional cushion" presents a "survival guarantee" in those times in which the trade takes a critical stance with regard to price increases.

Interview: "Dramatic Changes"

Gerd Kerkhoff is head of the consultancy Kerkhoff Consulting, Düsseldorf, which specializes in procurement, and he talks about the future challenges for industrial purchasing.

Mr. Kerkhoff, industrial buyers interviewed in the study see that they will be facing radical changes, but apparently, there is little willingness to principally reconsider one's own conduct and own structures. How does that fit together?

The answers show that we will have a different supplier market in many segments in the future. This is particularly evident in terms of the four major challenges: Increasing energy prices, developing oligopolies on the supplier side, more individualized consumer demands, and tougher fights about raw materials. The dramatic changes are clearly named...

But?

Some companies find it difficult to adjust their own organization, current processes and buyers' conduct or attitude to the changed realities. The conclusion is not yet drawn everywhere that one's own purchasing must change fundamentally.

Why is it necessary at all?

The classic purchasing department in today's times is usually extremely focused on prices. They permanently attempt to optimize prices with suppliers.

But that's their job. And you also earn your money with it.

That's true, but there's more to it – under strategic aspects. If I'm able to foresee that, in five years, there might possibly be only one company left to supply me, it would be advisable to change my attitude towards that company today already.

What do you mean?

To minimize the supply risk, enterprises should think about partnership relations and even consider strategic investments or participations. Unfortunately, the future hierarchy of power is not yet perceived as a threat by all involved.

Don't you exaggerate a lot – to meet trouble half way?

No. Today's seemingly optimal purchasing might be no longer competitive – already tomorrow. When you are looking at the concentration processes over a period of ten years, you'll soon see that first, there had been eight suppliers, then four, then three. In the end, two will be left; but maybe even one only. Professional purchasing should think about it in good time.

But if there will really be only one supplier or two suppliers at maximum, it will be hard to say what to do. I myself, as a buyer, would then be inevitably trapped.

That's why I'm saying that an entirely different focus is required for the future. If I have 20 suppliers who supply me, it surely can happen that I'll be invited by one or the other to a golf tournament. If I only have one supplier left, it might possibly make sense that I myself invite him to play golf.

Does the current crisis teach us something?

Yes. Smart management will simulate changes of the market. It is obvious that there are also times without any growth. Those who will only plan on growth, who do not anticipate market changes or who ignore excess capacities may be in for a rude awakening. Especially in times of crises, it's definitely unpleasant for a company to have liabilities with suppliers and at the same time have to cope with sales losses on the side of distribution.

Don't buyers have what it takes to try different approaches?

It's hardly the buyers' fault. And I also don't think that purchasing is generally lacking the necessary tools or qualifications. It's much rather that corporate management must provide the proper guidelines and objectives.

You think that the value of purchasing is not yet properly seen in perspective everywhere?

When you ask a top manager: What are your major influencing factors for your EBITA for 2010, you'll hear: Marketing, sales and production. Purchasing is frequently not mentioned although it actually contributes essentially to the contribution margin.