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11/04/2016

A software-supported consulting approach

"Procurement 4.0" is the title of a concept that intelligently combines and consistently develops tools and methods of strategic purchasing that already exist.

Matthias Hedergott, Managing Director of Purchase Analytics, a subsidiary of the Kerkhoff Group, takes the view that this software-supported consulting approach will disruptively change the strategic purchasing process.

Beschaffung aktuell: How did the development of “Procurement 4.0” come about?

Matthias Hedergott:
If you look at the trends and themes of the coming years, you will find a variety of general conditions that have a significant effect on strategic purchasing today and will continue to do so in the future:

For one thing, the individuality of customer products is growing. This leads to a fast-growing product variety and heterogeneity of the portfolio to be procured. We also note that the relationships with strategic suppliers are becoming ever closer and supply chains increasingly interlocking or integrating with one another. For this reason, it has become much more difficult and much more complicated to replace existing suppliers with alternative ones.

These points have a major effect on the issue of price optimisation. There is also a need to anticipate volatile markets and market price changes. The data masses must be used sensibly - and above all continuously.

We have asked ourselves the question: what does a company need, especially in relation to strategic purchasing, in order to be able to successfully meet these general conditions? The answer is obvious and at the same time summarises what is contained in "Procurement 4.0": companies need a clear and time-flexible but comprehensive system of categorising needs and forming a technical and price correlation by means of reference items. Clarity in terms of the cost structure is achieved by means of the product cost calculation. In terms of the optimisation of reference items, the basis is created, through adaptation to the entire product range, for achieving comprehensive optimisation. Once achieved, these improvements must be secured for the long term. "Procurement 4.0" makes this possible through price updating and controlling via indexing.

With a solution like this, companies and, in particular, their Purchasing Departments are equipped to deal with all the above-mentioned current and future influencing factors.

Beschaffung aktuell: Is "Procurement 4.0" purely a management approach?

Hedergott: "Procurement 4.0" is a combination of consulting and the corresponding software solution that we have developed ourselves and continuously optimise. We chose the term "Procurement 4.0" because this approach is supported and automated from beginning to end by software. Ultimately, it will disruptively change the purchasing process - it is already doing so, in fact.

Beschaffung aktuell:
What is special about this approach?

Hedergott: With "Procurement 4.0", strategic procurement becomes systematised. To this end, existing tools, such as spend analysis, cost calculation or indexing are combined and extended by means of new tools.

As a consequence of this, transparency for companies is substantially enhanced by insights into the cost and price structure of their own suppliers. The purchase price is not only optimised on a one-off basis, but is also secured long-term across the entire product range. Even in the case of changes in market prices, the optimal price is secured, as it is anticipated and considered on an ongoing basis.

With the automation of the strategic EC process and the reduction in expenditure and complexity, a wide range of capacitive potentials are leveraged for companies. The application is also possible internationally, of course, for worldwide procurement markets.

Beschaffung aktuell: How are the fields of activity of purchasers changing?

Hedergott: Once a product group has been systematised and calculated, price-optimised and indexed in line with "Procurement 4.0", then "it runs almost automatically". As a purchaser, I am then in a position to reduce the costs of price negotiations and/or tenders by up to 40% in the future.

As a strategic purchaser, you therefore have the possibility of looking after future procurement markets and the technological optimisation of the products. There is usually not enough time in purchasing to look around for innovations in the markets, to identify opportunities and improve the products constructively, value-analytically and functionally.

Beschaffung aktuell:
How does your solution affect collaboration with suppliers?

Hedergott:
Our system increases the degree of interaction with suppliers. A prerequisite for this is joint acceptance of the cost structure analysis, i.e. a willingness on the part of the suppliers to enter into an open-book system. Ultimately, 100% price transparency is based on a surcharge calculation. Another aspect is the two-way understanding by means of which indices can track price development. You also have to be reach agreement with the supplier on the price function for the entire range.

Experience shows that the degree of acceptance of the approach and of open book transparency varies according to the industry, but in future, based on Big Data, this will constitute the leading approach.

Beschaffung aktuell: Do you also sit at the table at the beginning of discussions with suppliers?

Hedergott: An integral part of the consulting project is the analysis and categorisation of the procurement data on the basis of the findings of the reference items, the execution of the cost calculations, the definition of the price function and the indexing and design of the contract, which then changes accordingly.

Beschaffung aktuell: How long does it take for the purchaser to master the tool or the system?

Hedergott: We set up "Procurement 4.0" together with our customers. This is not a software package that the customer can or should roll out alone. Once the digital framework is created, the software remains, of course, at the company. The skill required to use the software in the strategic purchasing process is learned in the joint setting-up phase of the project.

With a high level of costing skills, the Purchasing Department can master the software after about four weeks and - following optimisations carried out jointly - will also be able to set up its own.  Basically, we distribute "Procurement 4.0" (also) as a licence.

Beschaffung aktuell:
A variety of tools are already employed in companies. Does your software replace these?

Hedergott: The "Procurement 4.0" software is a supplementary software with corresponding interfaces, which in some cases may already be present in the company. In particular, software for cost calculation/analysis is already being used as standalone solutions in some companies. Because Procurement 4.0 is modular, we adapt it to the tool landscape in the company in question.

Beschaffung aktuell:
Which components are part of your solution?

Hedergott:
Our software solution includes the Cost Analysis software tool, the Kerkhoff Costing Cloud, the Big Data Analysis module, and a tender platform. These are essentially the four components that are linked to one another.

If we perform a cost calculation today, we do this in the Cost Analysis software and link this calculation immediately to the associated indices from the Costing Cloud. That is about 35,000 indices, which we update from various sources via corresponding algorithms on a daily, monthly or quarterly basis.

Beschaffung aktuell:
Does this approach lead to the formation of new departments which carry out cost calculations?

Hedergott:
Cost calculation is an essential and necessary component of “Procurement 4.0”. We help companies to establish their own function, which can vary considerably in terms of location. It can be in the Purchasing Department, elsewhere in the financial area of the company or also strategically located.

This approach enables the Purchasing Department to make a greater interdisciplinary contribution to the company - if purchasers have an open approach to the new system and accept digitalisation. Pricing models and pricing will change and this will also create room for other strategic activities to become the focus of purchasing and for it to thereby develop its role in “setting the agenda".

Beschaffung aktuell:
Thank you for the interview, Mr Hedergott.
Interview by Sabine Schulz-Rohde.

Complexity in purchasing is manageable with "Procurement 4.0" - rethink the limits of purchasing

Increased variety of products, integration of supply chains, market volatilities ... the factors influencing procurement are growing increasingly - which means the degree of complexity in purchasing is growing massively. Any improvement in this situation is prevented by the often prevailing lack of transparency of the data. An integrated software tool for purchasing offers a solution to these problems and allows the digital handling of the enormous data complexity.

Purchasing is faced with enormous challenges: it is important to take into account and optimise the price logic within a category. The best price must be realised and secured over the long term. Procurement control must be implemented and at the same time compliance guaranteed.

Datasets must be transparent so that the data can be evaluated. Finally, forecasts must also be compiled on the future development of procurement costs. These numerous requirements present Purchasing with a mammoth task. With the "Procurement 4.0" consulting approach, on the other hand, all these processes happen automatically -  clearly arranged in a software solution. For this purpose, reference items are first analysed in the Kerkhoff Cost Analysis. In the following step, mathematical methods can be used to determine the pricing of all items in the product group and identify a fixed correlation between the items in a product group. If it comes to future price changes for an item, the change in price can be derived via this correlation for all other items in the product group.

Kerkhoff Consulting optimises the reference item on the basis of the information obtained. This is performed from different aspects: material price-specific, value-analytical, function cost-related, etc. In collaboration with the supplier, cost drivers and the associated indices are then determined. By means of a daily index database, these indices are integrated into cost estimates and changes can be observed at any time. The "best price" is thereby established for the entire product group in a sustainable manner. Indexing of the reference item is verified by means of annual invitations to tender.

For the controlling process, price developments are made permanently available: the purchase price and market best price can be constantly compared. In the curve progression, corruptive influences are also immediately evident in the marginal goods in non-transparent commodity groups. Continuous evaluation of the unified data stocks will also make possible future efficiency, yield and competitive advantages.

The procurement volume is determined on the basis of past quantity changes, future development forecasts and actual prices. Market price forecasts in turn have an impact on actual prices and the model. Significant developments within the product range can therefore be readily identified and dealt with in a preventative manner. Cost drivers can be identified from historical data and then linked to forecast indices.

With "Procurement 4.0" an immediate price effect is achieved, which results on the one hand from the savings in the marginal product range and, on the other hand, from the optimisation of the core product range. The complexity of the purchasing process is also significantly reduced. With "Procurement 4.0", no purchasers evade procurement control. In this way, the integrated system not only provides optimised purchase prices, but also guarantees their sustainability and compliance conformity in purchasing.

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