Buyers are spoiled for choice

In selecting their suppliers, enterprises should also take into account such factors as the qualification of personnel, logistics, flexibility and sustainability.

International procurement follows the new rules of the game. Frequently, very wage-intensive products are bought from low-wage countries like China or India. However, wages are meanwhile also increasing above average in these countries; in China, for example, wages for highly qualified workers are getting close to western levels. The scarcity of raw materials is another reason why companies are frequently looking abroad for suitable suppliers. But the raw material demand increases disproportionately. Thus, the security of supply is not exactly ensured there; and procurement is no longer really low cost. In the course of changing procurement markets, detailed market research is accordingly essential. Every company can thus develop its individual purchasing strategy and select its suppliers on that basis. In this respect, a company should be as flexible as possible to reduce its dependence on vendors and ensure its security of supplies. It is here important to find the right balance between risks and benefits.

Eastern Europe as an alternative
In the future, global sourcing will have to consider much more carefully whether the costs of goods procured worldwide are still lower than when these goods are purchased from regional suppliers. The qualification of personnel in global sourcing countries is also an important factor in the selection of vendors. So that products will meet German quality standards, a manufacturer must frequently first invest in the qualification of the workforce abroad. Potential savings may thus be low – at least in the first year. When in doubt, it might thus be sensible to first of all further develop already existing vendors. Or to invest in new markets like Bangladesh or Brazil – always in view of the risk of perhaps not getting the familiar quality especially in the beginning.

A good alternative is provided by Germany's neighboring countries which currently offer good conditions. Wage costs in Eastern Europe, for example, are still significantly lower than here. At the same time, the degree of qualification and professionalization has increased significantly. An additional factor is the logistic proximity and thus greater flexibility in supply. Yet, small and medium-sized businesses are still hesitant when it comes to near sourcing. Because so far, these procurement markets had not been in their focus due to their strong orientation towards Asia.

Sustainability lowers costs
Moreover, requirements on a vendor are increasing due to the changes in demand. One trend: Customers increasingly demand ecological products. Moreover, stricter regulations by state institutions demand that manufacturers have to deal much more with sustainable products. Companies accordingly are urged to orient their supply chains no longer only on the three criteria of price, quality and service but also add the factor of sustainability.

A last year study by the Kerkhoff Competence Center of Supply Chain Management showed: More and more companies assume that sustainability in the supply chain results in a competitive advantage. Many of them still fear, however, much higher costs due to increasing procurement prices. Yet, it is cheaper, for example, to transport, store, use, and dispose of a low-pollutant product than its noxious counterpart. Moreover, fewer formal permits and safety requirements are necessary. Additional cost reductions can be realized in the area of cutting back energy consumption, reducing materials used, or savings in raw materials. For example, companies changing to eco-friendly packaging materials can significantly reduce both costs and their volume of waste.

Logistics – a critical factor
A very decisive factor for a sustainable supply chain is logistics because about 20 percent of all CO2 output worldwide is due to the transport of goods. Thus, logistics companies are no longer selected exclusively because of their price, but also because of their strategies in terms of eco-friendliness. Already more and more service providers voluntarily indicate their CO2 footprint. CO2 designations provide transparency and allow comparisons to be made by the potential customer. It's thus an incentive to lower CO2 emissions.

Especially for many small and medium-sized companies, green procurement is just a trendy term so far. They don't have as yet any overview of the new standards and a concrete concept of ecological procurement.

Aspects of logistics are frequently neglected in the selection of vendors – yet, these aspects may represent a decisive competitive advantage. The important question is: Can the vendor implement the logistics concepts desired by the company to ensure the availability of materials and goods at the right place and at the right time? Because not every vendor is able to implement a canban system, if necessary, and thus deliver according to the just-in-time principle. Central items are the vendor's adaptability to potential fluctuations in ordering volumes and thus flexible concepts of delivery.

Clarifying the transport issue
Other aspects to be considered are packaging and transport handling. Many companies are unaware that packaging and the resulting handling costs present quite a considerable part of the logistics costs. By determining packaging and container requirements in a logistics guideline, a standard can be established which may contribute to fewer errors, shorter throughput times and reduced costs. Transport handling must clarify in advance who will take over the forwarding costs. If the supplier takes over the logistics, the customer can enjoy this convenience, on the one hand, but will lose cost transparency, on the other hand. If the company takes care of commissioning a forwarder, costs will certainly be transparent. In contrast, however, expenditures will be higher since IT interfaces must be provided, for example, or personnel temporarily transferred.

Overall, logistics services may be considered as the vendor's service which has an effect on customer satisfaction. But it will always require to consider carefully the objectives of cost and services. At first glance, a high service level may result in high logistic costs. However, a detailed consideration of all supply chain processes might show that costs are overall lower.

How companies can avoid supply bottlenecks
Purchasing and ordering activities currently show positive developments, but they may result in problems concerning the security of supplies. One reason: Production capacities and inventories were very much reduced during the crisis. Even such crises as the current one in Japan may result in supply bottlenecks – especially for companies without risk management. Here a few tips on the security of supplies:

  • Scenario planning: The buying department must identify the most important product groups and vendors for the company's production department to be able to detect risks and bottlenecks early on. Developing scenarios for potential market developments as well as the corresponding emergency plans will allow the buying department to react more swiftly and flexibly to any crises.
  • Strategic partnerships: Closely connected partners know each other's strengths and weaknesses and are able to better counteract critical situations. The necessary strategic benefits for the vendor will prevent that, in times of delivery bottlenecks, the possibly objectively more worthwhile order from another company is given preference.
  • Alternative suppliers: To avoid supply bottlenecks, but also to protect against vendor insolvencies or oligopolies, companies should make the change from a single sourcing strategy to multiple sourcing supply. If an important supplier fails, a company can thus obtain its goods from another source.
  • Changeover to operative work: If supply bottlenecks exist already, short-term remedy may be provided, for example, by regular talks with suppliers on the phone, as well as an adjustment of supply schedules, the search for alternatives, and price negotiations with vendors.

Imprint & Privacy Policy – Kerkhoff Risk & Compliance GmbH – +49 211 6218061-0 – Elisabethstr. 5 – 40217 Düsseldorf