The best purchasers agree targets with their suppliers, according to Markus Knoche, a researcher at the Fraunhofer Institute in Germany.
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His analysis was based on a benchmarking study of successful practices at 70 companies in Germany, focused on automotive suppliers.
The 10 best purchasers in the Fraunhofer evaluation were significantly different from the average in this respect, he said.
Among the top 10, 80% agreed targets with their suppliers, compared with only 45% of the suppliers surveyed as a whole. Almost all (97%) agreed quality targets with their suppliers, 82% agreed targets for the reliability of deliveries and 64% agreed targets for price development.
Knoche said it is very important to achieve transparency with suppliers. A purchaser must “understand the supplier and his processes”, and the shape these processes with the supplier
“Because potential is not only in the product but also in the processes” he said.
Long-term co-operation with suppliers makes a complete evaluation of suppliers necessary. The problem is that hard, measurable facts like costs and quality tend to dominate the evaluation but “soft facts” like the long-term nature of the partnership, the long-term prospects for the competitiveness of the supplier location and the supplier development capabilities are becoming more important. Cost and quality are becoming more of a given.
Early involvement important
Knoche said another feature of successful purchasing is the early involvement of suppliers in development. “The biggest lever [for cost reduction] is in the development department of the supplier.”
70% of costs are fixed in the development phase and, with falling levels of vertical integration, that means 50% of total cost is influenced by the development of the supplier product.
Interestingly, he said that early purchasing works better if it is the responsibility of the purchasing department rather than research and development. Among the top 10 purchasers fully 10% involve suppliers right from the beginning of the project and a further 50% in the concept phase. None of the top 10 purchasers wait until after development process before involving their suppliers.
Knoche said that another distinctive feature of the top 10 purchasers is that they have made purchasing a high-ranking strategic function – for 30%, purchasing is a board-level function – in general that is true of less than 5% of companies.
It is only possible to overcome traditional interface problems between purchasing and development on a top-down basis.
For European companies Eastern Europe is the most important low labour cost source for purchasers, according to Knoche, and China is of growing importance for international purchasing by European suppliers – it has overtaken South America in importance and now accounts for 3% of the purchasing volume of European suppliers, compared with just 1% for South America.
But NAFTA, other parts of Asia-Pacific and Eastern Europe are all still more important sources. Knoche reported that suppliers say that legal and technological standards are the biggest obstacles to global sourcing, ahead of language and cultural problems.
Knoche said that e-procurement has so far mostly been deployed to improve efficiency through catalogue systems and to some extent e-auctions. Suppliers have found that e-procurement has substantially improved communications along the supply chain, improved the efficiency and quality of the purchasing processes, and added transparency. Contrary to initial expectations, those have been much more significant benefits than direct material cost reduction or the bundling of purchases. E-procurement has had less effect on access to innovations, he added.
The research was undertaken between November 2003 and June 2004 and about 70 firms took part in the survey. Among the participants, Volkswagen, ZF Sachs, Benteler Automotive, Degussa, KBA and Johnson Controls were identified as having successful practices. Knoche presented his insights at a conference organised by the German magazine Automobil Produktion on purchasing in Ulm in February 2005.
SupplierBusiness.com
