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10/11/2018

A question of cost pressure

Today, businesses have to compete on a global level. This increasingly puts pressure on the purchasing departments, who have to perform a balancing act between supply reliability and cost pressure. We spoke to Dirk Schäfer, Managing Director of the Kerkhoff Group, and Ralf Altpeter, Managing Director of Kerkhoff Cost Engineering GmbH, about levers in the optimisation process.

Mr Schäfer, you have been working in purchasing consultancy for 14 years. What do buyers currently focus on?

Dirk Schäfer: The focus is still on the core task of purchasing: Managing the tension between availability and costs. Currently, the difficulty lies more in the availability of the products, in the reliability of supply for production. We can't watch every cent when it comes to the price.

What is the greatest challenge?

Dirk Schäfer: I would say the cross-functional cooperation in the departments. Today, it's no longer enough to simply find an additional supplier to quickly secure the supply for production. Instead, it starts right at the beginning, in the design. This is where the first decisions are made, which then result in the costs and availabilities in the entire supply chain. Apart from that, the budget figures from production and sales must be correct, otherwise you have a supply risk, which purchasing will struggle to cope with despite good suppliers and good contacts.

Have the current positive economic circumstances made it more difficult to secure good suppliers?

Dirk Schäfer: Yes, definitely. For example, we spoke with a large construction equipment manufacturer, where we could still achieve savings on the supplier side. His reply was: He has 300 cranes in his yard which cannot be delivered because of missing parts. He doesn't need to further pressure his suppliers. Due to full order books, it just happens to be a seller's market at the moment. And they know this. There has been a complete turnaround, and no one can say exactly how long it will stay like this.

How important is it to keep an eye on the costs during development, especially right now?

Ralf Altpeter: For me, this is actually a topic that has been around for a relatively long time. In design theory it is taught that the cost impact is significantly greater at the start of product development than at the end. That is why it is so important to take these aspects into consideration, especially at the beginning. In addition to the costs, you now of course have the topic of supplier availability. And here, the integration of the suppliers is important, as they no longer only supply parts, but increasingly transform themselves into system suppliers and are anchored in the product development.

What does this mean exactly? What are the causes of this?

Ralf Altpeter: It means that entire value chains are shifted. It is necessary to specify right at the beginning of the product development: What technologies, what production processes are we talking about. And this is a much more pleasant situation for us; achieving cost savings of around 40 percent.

Dirk Schäfer: Basically, it's about one point: If I want a real effect – and that is at around 30 percent for most rather than five percent - then I have to achieve this cross-functionally. Purchasing alone is simply not enough. Companies are under such pressure that even five percent is no longer sufficient.

Where does this increased pressure on companies come from? Is it the comparability in the global markets?

Dirk Schäfer: Companies need to be much more flexible than they have been over the last years and decades. Annual savings of two percent are no longer sufficient. For products to keep up with the global competition, manufacturing costs need to be reduced by 15 to 30 percent. This is a complete change in the initial situation. A German medium-sized enterprise would have to do some serious cost-cutting calculations.

This would also mean moving away from German over-engineering, wouldn't it?

Dirk Schäfer: Yes, and we are currently experiencing this dramatically. German medium-sized enterprises still have extreme difficulties in really taking these rather large changes that are happening on the customer side and market side seriously. But they have to. The market pressure is simply becoming too big.

When you approach these kinds of projects, where do you start?

Dirk Schäfer: Contrary to previous classic purchasing projects, today we have to face the entire board. It's almost like a restructuring. And it has to be this way, as all processes in the company need to be changed. This covers everything from product development processes, planning processes to material flows, manufacturing depth and anything else that is part of the product costs. In principle, the entire company has to be considered when we talk about a manufacturing cost project.

Where exactly do you begin?

Dirk Schäfer: The most important thing that we do is to get a neutral overview of the companies. We have to create a basis in order to derive measures from facts, which then benefit the company. The first step is to create cost transparency and to understand which values have what function for the customer and how these are weighted. Then we can develop an optimisation lever and, together with the customer, think about how we can change and optimise the organisation in order to create sustainability. But in the first step is really about the product, how it is structured, how valuable it is to the customer, and what costs are entailed.

Can this also be applied to other products?

Dirk Schäfer: With our software, a direct transfer is possible. Our customer can apply the sample calculation to its other products. The intent and purpose is that the customer can optimise and improve the company as a whole.

Where are the most savings potentials?

Ralf Altpeter: That varies from customer to customer. But it's around a third each between design, manufacturing and purchasing. Raising the effects is basically only possible through the interaction of all three. You need to have an eye on manufacturing, on the supplier market and on what suppliers can actually provide. Otherwise, you are designing something that seems to be much cheaper, but if you don't have the right supplier, nothing will come of it. That's why it will only work in interaction.

How does the software work when checking the manufacturing costs?

Ralf Altpeter: What's special about our software is indeed the costing cloud behind it. It contains more than 40,000 indexes, starting from material costs to salaries, social data or energy prices. Using the software, it can easily be checked where the costs are, what levers are still available and in which regions parts can be procured cheaper, but also how prices are developing over time. In addition, there is our enormous supplier database which can be used immediately to see whether there are any adequate partners in relevant countries.

Dirk Schäfer: The software offers us a central control element. If we purchase a supply part here in Germany, then we calculate this in relation to the region. And then the software can compare: The same manufacturing technology - what does the part cost in India, what does it cost in Eastern Europe. We then give this calculated price to the regional purchasing teams in order to push-start a target price control. In principle, I can transfer the target price to all regions in the world and centrally check that this price is not exceeded.

Author: Kathrin Irmer

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