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11/08/2018

Procurement costs - objective and digital

Gerd Kerkhoff, Managing Director of the Kerkhoff Group, is a pioneer in terms of digitalisation and objectification of procurement costs. Now he has launched a new software-based best-price solution.


With his books on procurement and his consulting company, Gerd Kerkhoff has been shaping the image of modern procurement since 1999.

Beschaffung aktuell: Kerkhoff presents itself as a specialist in the optimisation of business processes along the entire value chain and promises needs-based solutions for cost optimisation and increased efficiency. Many say that cost reductions are out. The procurement of innovations is being promoted. Is there still potential for savings in the actual products?

Gerd Kerkhoff: We have developed a tendency to "over engineer" in the technical field, especially in Western countries, for example Germany with Made in Germany. The engineering department has developed an effective product. Over time, it improved the product and added new features, which often resulted in an overloaded and expensive product that cannot keep up with the competition. In China, for example, a product is limited to its functionality. This allows cost benefits to be generated easily.

Our task is to re-engineer this product in order to make it more competitive again. To accomplish this, we question everything. We allocate the costs to the functionalities and ask: Is this function really worth so much money? Is the customer prepared to pay that?

Beschaffung aktuell: Could you name an example?

Kerkhoff: We ascertained that a renowned agricultural machinery manufacturer was producing their steel tractor engine bonnets with a thickness of four centimetres. Background: In the past, farmers would stand on the bonnet to get an overview of their fields. This is no longer done. If you want to look at a field from the top, you can do this much better using a drone. This means that the engine bonnet can be produced thinner once more, which in turn will make tractors cheaper and more competitive compared with other tractors which have traditionally not been developed with thick engine bonnets over the decades.

This is a classic re-engineering process: Functionalities that are no longer necessary are omitted. At the end of the day, this results in cost savings and ultimately in increased competitiveness.

In the automotive industry, the tendency is furthermore from design-to-cost to re-design-thinking, in the spirit of: Can we not save more in this development process? Questioning becomes an iterative approach in a production process. What options do we have in the technical development to make the product even cheaper?

Wilms: With another customer, we ascertained that their product had an extremely high number of extra features compared to competitor's products, without the sales department explicitly drawing attention to this. The added value was not priced, and the sales department was not aware of this. You will find this over and again with German products: plenty of technology, plenty of engineering expertise, but not priced.

Current procurement: Do you really still go to companies as a procurement consultant? I would imagine that the production department would say: Oh God, what does Procurement want here? Do they want to tell us how to produce?

Kerkhoff: We have developed further on from pure procurement, with which we started twenty years ago, along with the requirements of our customers. Engineering-related components such as cost engineering were added because we want to understand what is being purchased. Here, we optimise manufacturing costs of products while at the same time taking into account current and future requirements of customers, and we concentrate on the re-engineering of the product.

That's why today, we are a consultancy company with technical and commercial expertise.

Wilms: Our projects now start in product management and sales. We want to understand what the product's sales arguments are. This way we deeply immerse ourselves into the value chain: What are the production and procurement characteristics? We analyse the entire value chain of the product.

Beschaffung aktuell: Having a look at your website, your emphatic approach stands out, i.e. understanding the customer, talking to them, and so on.

Kerkhoff: We endeavour to not only understand the customer, but also to respect what has been done in the past, and only then generate options for improvement, together with the customer.

Wilms: We want to gain a general understanding of our customers and their requirements and learn where the strain is. And only then do we create an individual solution using our tools.

Beschaffung aktuell: You mention the word digitalisation very late in your leading principles. Does this reflect on the importance of the topic in day-to-day consulting?

Kerkhoff: The mid-size sector has even more tangible approaches for optimisation than digitalisation. We don't push the topic, because we can also optimise certain areas for companies in the analogue world.

But in the world of procurement, our product Procurement 4.0 offers a completely digitalised solution, that is fact-based and allows for daily updated prices for the entire range. Here, our customers can map their product groups, create an automated price tracking for the entire range and ensure best prices for the long term.

The great challenges here are making it possible to measure procurement objectively, to be "at market", to avoid creating procurement disadvantages compared to the competition, to have availability and to ensure, by means of contracts, that the goods are also delivered.

Classic procurement projects often have the allure of "luck of the moment", if you optimise a price today, it could be that exactly these savings are added again in the next negotiation. You are never sure that you have achieved the right market price. This will be the aim over the next three to five years: Making procurement prices more objective and measurable by means of digitalisation.

Beschaffung aktuell: In your opinion, how can this problem be solved?

Kerkhoff: If you digitalise everything in the world that can be digitalised, then procurement is a field in which digitalisation fits very quickly, because here, you have everything that you need for digitalisation, namely a huge amount of data.

Wilms: Based on these data volumes, we can determine the exact cost components and the surcharges for any component or entire assemblies. The calculation is based on a large quantity of data such as global wages, general and material costs. Also, the cost drivers’ relevant market changes are derived from more than 42,000 indexes, thus leading to market transparency. The software is the basis for our "Procurement 4.0" procurement solution. It indexes market developments, and entire product ranges are recorded from a cost perspective. Corporate divisions such as procurement, controlling and sales thus are provided with a complete and meaningful decision-making structure.

Beschaffung aktuell: How do you see the role of procurement in the future? Do you think procurement will still be around in the future?

Kerkhoff: Procurement will take on a new role. If you automate it with Procurement 4.0, then you will actually hardly need a buyer any more for the recorded product. A large part of procurement will be mapped via systems that follow the price on the market. This is valid for as long as the production technology remains the same.

However, if the production technology changes, the system becomes invalid, as it is based on the current production methods. Procurement has the task of checking whether the production technology has changed, because then it needs to adjust the system again.

If you have an index-based procurement, and a term of one year, then you only need to check once a year whether the reference article, which you determined on the index side, still correlates with the market price. For this you will have to put out a tender, which only generates a fraction of the effort.

On the other hand, procurement might also take on other tasks, and for example be involved in product development at an earlier stage. But the classic annual meeting with the suppliers will certainly not be as common as today, at least for 70 to 80 percent of the range which can be depicted in a standardised way.

Industry 4.0 also requires that suppliers are bound to manufacturing companies over a specified long term. Suppliers can be connected electronically, they know the inventory, what quantities need to be delivered and so on. This requires a cooperative relationship.

Wilms: The buyer no longer needs to become entangled in daily price requests and negotiations, but can focus on the control of the value chain. Because the system-side securing of the optimal price is guaranteed across the entire life cycle of the product. However, not only does procurement benefit from the 4.0 solution, other departments, such as sales or controlling, also enjoy the advantages. Sales receives a transparent basis, e.g. for achieving a justified price increase, and controlling can regularly compare the current purchase price with the optimal price.

Beschaffung aktuell: Two years ago, you started with the  "Procurement 4.0" product. How far have you come now?

Wilms: Today, we can say that our system has matured for both raw materials and service provisions, and all material costs.

Kerkhoff: This is based on mathematics, software development and system analysis: meaning more the functionality of arithmetic and algorithms. We have had the data in our Cost Engineering area for five to seven years and they are constantly updated.

At the same time, last year, we developed an app with over 42,000 indices which now runs at SAP HANA. The app captures 744 regions in the word, 23 economic sectors and 10 qualification levels. We can simulate what a product with a wage component of 23 percent costs in Poland or China. This way we know the actual correct price.

For this reason, procurement has a tool with which it can check and evaluate the supplier's price at any time. At the same time, it also offers a best-price guarantee.

Gerd Kerkhoff

Gerd Kerkhoff, who graduated in business studies, has been managing partner of Kerkhoff Consulting GmbH since 1999. The strategic alignment of the business consultancy aims at positioning itself as a special consultant for procurement. Since 2015, he has been the Chairperson of the Management Board of Kerkhoff Group, which incorporates all Kerkhoff consulting companies. He coordinates the business areas of finance, PR/marketing, services and shareholdings. He is also the Managing Director of the Kerkhoff Cost Engineering consultancy company.

KERKHOFF PROCUREMENT 4.0

Product cost calculation

Kerkhoff Cost Analysis is a product cost calculation software. The software uses a differentiated overhead calculation to determine the specific cost components of any given component or complete assembly based on manufacturing costs. Numerous databases support further analysis options. With the linked Kerkhoff Costing Cloud, users can at the same time update previous calculations and create simulations. The service gathers the current market prices from more than 42,000 indices each month to correlate cost drivers in the calculation. The software is the foundation for automated procurement, the “Procurement 4.0” product, which Kerkhoff launched with SME clients and DAX companies alike. This system collects costs of entire product ranges, indexes them in terms of market development – including beyond variant families – and analyses them through regression using function terms. This means that the procurement, controlling, development and sales functions always have access to a comprehensive and up-to-date basis for decision-making.

Jochen Wilms

Jochen Wilms, who graduated in mechanical engineering, has been with Kerkhoff Cost Engineering GmbH since 2012, and the Chairperson of the Management Board there since 2016. His areas of focus lie in projects with the overall objective of holistic manufacturing cost optimisation, the implementation of digitalisation projects by building and implementing the Procurement 4.0 software/methodology, and the implementation and incorporation of "Cost Engineering" departments for a sustainable product strategy and cost-oriented product development.

"The mid-size sector has even more tangible approaches for optimisation than digitalisation. "We don't push the topic, because we can also optimise certain areas for companies in the analogue world." Gerd Kerkhoff

"[...] we can determine the exact cost components and the surcharges for any component or entire assemblies. The calculation is based on a large number of data such as global wages, general and material costs." Jochen Wilms

Sabine Schulz-Rohde, Beschaffung aktuell

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