Now that the crisis year of 2009 is over, supplier purchasing managers are facing a variety of challenges, according to an Allensbach study.
How are purchasing departments in the supplier industry faring and what are the challenges that the sector faces?
Dusseldorf-based Kerkhoff Consulting commissioned the Allensbach Institute for Public Opinion Research to survey about 100 purchasing managers at medium-sized and large suppliers in Germany on these issues in July.
In one comparison, the majority of the purchasing managers are anticipating greater challenges for the overall sector than they do for their own company.
The suppliers in the survey employed at least 50 workers or had annual revenue of at least 10 million euros. Forty-three of the companies surveyed had revenue of more than 100 million a year, forming the largest category in the study.
There was a wide distribution in the number of subsuppliers they had. About one-third of the suppliers in the survey worked with 10 or fewer subsuppliers, the research institute on Lake Constance found. On the other hand, about 15 percent had at least 100 subsuppliers.
Last year was a very difficult year for many companies, but numerous suppliers are looking at the future optimistically. Nearly three-quarters of the purchasing managers expect the industry's prospects to improve in the next 12 months. Just 2 percent fear a contraction.
Their expectations for their own companies had a tendency to be even more optimistic.
Rising raw material prices
Purchasing managers at German suppliers expect conditions to change in many procurement areas in the next 10 years. About 87 percent of the respondents expect raw material or energy prices to rise sharply. Meanwhile, 86 percent expect increased pressure from automakers to reduce prices, and 83 percent expect an intensification of pressure to purchasing parts from emerging markets, the study found.
About three-quarters (76 percent) of the purchasing managers are convinced it will be more important to assure that their own suppliers adhere to social standards, what that means is doing things such as renouncing child labor.
About 72 percent also expect they will increasingly obtain materials from countries and regions where they don't currently have suppliers.
Mid-sized and large suppliers already source nearly two-thirds of their purchasing volume domestically. Another 11 percent is procured in Asia.
Financial issues are worrying suppliers. Nearly two-thirds (65 percent) of purchasing managers expect it will be more difficult to get credit from banks in the future, making procurement more difficult. And a similar percentage (64 percent) expects oligopolies to form among suppliers. About 62 percent expect product piracy to become a growing problem.
In addition, half of the respondents see a growing difficulty in assuring timely delivery by their own suppliers.
While 62 percent see product piracy as a growing problem for the industry, just 32 percent see it that way for their own company.
The logistics management department at St. Gallen University and the Kerkhoff Competence Center produced an academic commentary explaining the difference.
They found that the more serious perception for the industry as a whole could be attributed to “the overrated attention that the media pays to product piracy.”
But what will be the effect of the changed conditions on suppliers? When asked about the greatest strategic challenge for procurement in the industry over the next 10 years, the purchasing managers most often mentioned rising costs and prices (25 percent) and the globalization and internationalization of purchasing (24 percent).
About 16 percent gave competing in the market as the greatest challenge and 15 percent cited the new technologies, such as electric drive, that they needed to prepare for. Considerably smaller shares of respondents pointed to other strategic challenges as central issues.
The Allensbach market researchers noted that the responses were more widely distributed than in com-parable studies in other industries. According to the institute, the purchasing managers' perception of the main strategic challenges is less clear and less uniform than in the machinery industry, for example.
About 23 percent of respondents primarily cited rising costs and prices and 18 percent the globalization of purchasing as the greatest strategic challenges for their own company as well. These issues were followed by securing raw materials (16 percent), competition in sales markets (14 percent) and rising price and cost pressures from customers.
But purchasing managers' perception of special challenges depended on the size of their company. Compared with smaller companies, suppliers with revenue of more than 50 million euros cited the globalization and internationalization of purchasing more frequently as a challenge directly affecting them.
In smaller companies, the Allensbach researchers suspected that, “to a great degree, the awareness of the problem involving the issue still had not developed.” Companies with annual revenues below 50 million euros more often saw cost and price increases as future challenges rather than rising cost pressures or the need to compete in markets.
But what are companies doing to prepare their purchasing staffs for the challenges of the future? The study found that employee training, including continuing education programs for workers, has been an important element.
About 60 percent of the purchasing managers consider these measures to be “very important.”
Another 37 percent see them as “important” and just 3 percent as “less important.” In all, 88 percent of the companies offer training programs to employees.
About 80 percent of the purchasing agents at mid-sized and large suppliers can rely on a written purchasing strategy as the basis for their daily work. But that still leaves 20 percent without a procurement strategy in written form.
Furthermore, 22 percent of the suppliers had not spelled out specific purchasing goals.
The Allensbach researchers discovered that performance checks were not done at 43 percent of the responding companies. This was primarily the case at companies with less than 50 million euros in annual revenue. The situation was similar on the issue of risk management. While 47 percent of large suppliers had a systematic risk management program, the figure for mid-sized firms was just 16 percent. Nearly one in three mid-sized suppliers with sales under 50 million euros did entirely without measures to limit procurement risks.
To achieve cost goals in purchasing, about three-quarters of the companies turn to renegotiation of their existing contracts with subsuppliers.
Three-quarters of suppliers specify cost reduction goals or perform value and inventory analyses.
Suppliers with more than 50 million euros in revenue increasingly rely on the specification of cost reduction goals as well as value and inventory analyses. On the other hand, purchasing managers in smaller companies more often renegotiate existing contracts.
The majority of suppliers work with preferred vendors, the Allensbach researchers say. In dealing with their contractors, about 85 percent of the companies rely on standardized evaluations, 70 percent on systematic checks, and 63 percent on strategic partnerships.
But so far just 38 percent have implemented a direct connection between these firms and their own data processing systems.
Nearly one supplier in two (44 percent) has a software program known as a “cost breakdown tool” that it can use to calculate the costs of a supplier part based on its components. In this way, it can check prices offered by suppliers. A full 61 percent of large companies use the tool.
Suppliers are more likely to buy than lease their capital equipment. That's the rule for three-quarters of the companies. But leasing capital goods is definitely an option for most of them. About 21 percent of suppliers regularly lease instead of buy. Another 46 percent occasion-ally lease the production equipment they need, even though they usually buy these capital goods.
Before they acquire this equipment, about two-thirds of the companies (70 percent) undertake “total cost of ownership” or “life cycle cost” analyses.
They take transaction and user costs, along with the costs of acquisition, into consideration. In this way, companies are supposed to make decisions based on a comprehensive, overall picture of the costs associated with an investment. Large auto suppliers are considerably more likely to use these tools (79 percent) than mid-sized companies (57 procent).
Cooperation with other firms on purchasing is not widespread among auto suppliers. Just 18 percent of companies work “closely” or “very closely” with other firms in this area, forming joint purchasing ventures, for instance.
When it comes to the transport and logistics area, the share of companies that collaborate is even smaller. Only about one company in 9 works “closely” or “very closely” with other firms in this field.
Overall, the majority of suppliers (58 percent) are convinced that collaboration in purchasing will become more relevant in the future. About 15 percent of them even expect a sharp growth in its importance. This conviction prevails mostly among purchasing managers at large suppliers.
Gerd Kerkhoff, founder and CEO of the consulting firm Kerkhoff Consulting, also expects “cooperation in the supplier industry to grow because logic dictates it.” Industry cost pressures are playing their part as well, he said.
Purchasing managers predominantly see their purchasing departments as having “great significance” (52 percent) or “very great significance” within the company.
However, about half (49 percent) of the purchasing departments are “not well” or even “hardly or not at all” tied to product development in the company. In the future, the significance of their department will grow, a large majority of the purchasing managers indicated. Only 1 percent fears a loss of importance.
The academic commentary accompanying the study sees purchasing's minimal integration into automakers' development processes on one hand and the great importance that purchasing managers impute to their department on the other hand as an overestimation of their own importance within the company.
Need to do more
To arm themselves for future challenges, a clear majority of purchasing departments in mid-sized and large suppliers have either already taken measures (30 percent) or plan concrete steps (22 percent) or even both (28 percent).
A total of 38 percent of purchasing managers consider the arrangements they have made to be insufficient. But only 19 percent see the need for fundamental change in their department. A total of 74 percent assume that fairly small changes will suffice.
As a rule, 30 percent of suppliers are spending a “small” share of their purchasing department budget to adjust to new challenges. About 40 percent of suppliers said they were spending a “not very large” share of their budget for this purpose. But about half the purchasing managers expect this share of the budget will grow in the future.
Overall, the difference between the mid-sized and large suppliers suggests that there is widespread unease among purchasing managers at mid-sized suppliers. They feel that they are not yet equipped for their future work.
But a clear, strategic view of the challenges that transcend the operational issues of “prices and cost pressures” is less pronounced for them than for purchasing managers at larger companies. So is the insight into the consequences that are certain to await them.
At the same time, only a minority of purchasing managers have the time they need to deal appropriately with future challenges.
Here are some of the key recommendations for purchasing managers from the authors of the academic commentary:
• The challenges facing the supplier sector should not only be seen as a problem for “others.” They should be recognized as an opportunity for one's own company. It is during in times of great challenges that companies can achieve com-petitive advantages with forward-looking actions.
• To develop additional savings, inter-company supply chain management measures should be strengthened. These could include joint purchasing or inter-company cooperation in areas such as transport and logistics.
• In many companies, the integration of purchasing into development and production should be intensified. Here the use of so-called “cost breakdown tools“ can change material structures on a lasting, positive basis.
• To manage future challenges, sufficient time and money should be made available to purchasing managers. Purchasing must be accorded the importance to which it is in fact entitled due to its leveraging effect.
In any case, Kerkhoff is sure that the relationship between suppliers and automakers has changed as a result of the economic crisis. “Vehicle manufacturers have noticed that, with their excessive terms, they endangered the survival of suppliers, which they in fact need for their own production processes.” But he is skeptical that the industry's new thinking will actually last.
It's completely possible that some procurement managers will rediscover their purchasing power when it's a matter of “squeezing out” an advantage for their firm.
But he noted that many suppliers are more aware of their strength vis-à-vis automakers than they were before the crisis and thus are heading into price negotiations on a stronger basis. In line with this principle: As a supplier, I cannot survive without orders from the automaker. But without a healthy contribution to margin for the supplier, the manufacturer has a problem as well.