Procurement market in a state of emergency: tips for medium-sized industrial procurement
published on
30.11.2023
The volatile situation on the procurement markets is particularly noticeable in the German industrial medium-sized sector. Companies are struggling with rising raw material and energy prices, which they can only pass on to customers to a limited extent due to strong competition. The economic problems in Germany, caused among other things by the late effects of the pandemic and the war in Ukraine, are not yet expected to end quickly. It is therefore essential that companies align themselves strategically to counteract fluctuations and minimize losses. Since 50% - 70% of the costs in German medium-sized companies are attributable to procurement, this is an influential sticking point. Accordingly, this is precisely where companies should start in order to sustainably arm themselves against macroeconomic crises.
In addition to strategic procurement, there are also other options that help to position procurement for the future. These are summarized in the download resource.
Problems in procurement
High raw material prices, long delivery times, unreliable procurement of goods
Macroeconomic situation
Sustained inflation: rising consumer, materials, and energy prices
Future-proof procurement
Geographical proximity, multi-sourcing, financial hedging
The German economy is currently characterized by high inflation, which not only makes everyday life more expensive for private individuals, but also presents companies with new challenges. As a result of the enormous price increases, which even rising wages cannot keep up with, a loss of prosperity and an increase in unemployment are expected.
The decline in global trade, caused by pandemic restrictions in China and delivery standstills for products from Ukraine, is also having an impact in Germany. Container ships are jammed outside German North Sea ports and exporting ships cannot leave on time.
The effects of the current situation are particularly pronounced in the medium-sized mechanical engineering sector. In this sector, sales are still expected to increase by almost 12% in 2022 compared to the previous year. This figure is due to pent-up orders from the pandemic period which still have to be processed. However, the same metric has dropped to just 6.7% in the 2023 preview due to rising procurement prices and declining order volumes.
Not only supply bottlenecks, but also the energy crisis associated with inflation are putting German companies to the test. Experts suspect that the impact could be as severe as that of the Lehman Brothers bankruptcy in 2008 (Handelsblatt 1, 2022). According to a forecast by the Leibniz Institute, economic output will fall slightly in 2023, but consumer prices will rise by almost 10%. The predicted increase in inflation to 11% in V1 2023 will also further worsen the economic situation and reduce citizens' procurement power (Spiegel, 2022).
Experts assume that the high prices will persist for another two to three years before they decrease again. Until then, it is hoped that rising wages will partially procurement power compensation (Handelsblatt 2, 2022).
Procurement is not spared from this downturn. At present, day-to-day procurement in the procurement departments of German medium-sized businesses is characterized by supply bottlenecks or even non-existent products from regular suppliers. 90% of the mechanical engineering companies questioned in a survey stated that they were struggling with bottlenecks in the supply of raw materials and intermediate products (Beschaffung aktuell, 2022).
Among other things, the war in Ukraine and worldwide problems in shipping have contributed to the shortage of raw materials and the drastic increase (up to 200%) in prices for semiconductors, steel or plastics, for example. Companies that cannot react agilely to shortages have to extend delivery times, shut down their production or even bring it to a complete standstill.
This has a major impact on the economy, as 98% of all German exports come from companies in the medium-sized industrial sector. These often face strong competition on the global market, which means that a price shift to customers is usually not possible (Handelsblatt 2, 2022).
To limit the volatility of delivery times, some companies are turning to purely European suppliers to ensure geographical proximity and thus possibly avoid long waiting times. Also, 61% of German medium-sized businesses plan to expand internal value creation and regionalize their procurement (Handelsblatt 2, 2022).
In addition, the strategy of multi-sourcing - using several suppliers for the same parts or raw materials - is helpful in crisis situations. This way, procurement is covered if a supplier cannot deliver and is in a stronger negotiating position. However, this tactic makes it more difficult to build close ties with suppliers.
However, not only supplier changes, but also good relationships and communication with suppliers are further characteristics that can enable better supply security in difficult times. Those who play their cards close to their chest can plan together with the supplier and react quickly to bottlenecks.
In order to control not only delivery times but also prices, there is the possibility of financial hedging at the bank through forwards (over-the-counter) or futures (on the futures exchange) contracts that guarantee fixed prices. For this to work, both parties to the contract agree to buy a certain amount of commodities at a predetermined price on a certain date. However, this prevents companies from taking advantage of the lower price in the event of a price reduction (Handelsblatt 2, 2022).
In the medium-sized industrial sector, the option of minimizing risk through long-term contracts is also common. These not only minimize price fluctuations, but also support supplier relationships, as their duration builds mutual trust and safeguards both sides. However, such long-term contracts often have great complexity and must be drawn up with care in order to rule out future points of dispute.
To enable companies to act cleverly in volatile times, strategic procurement, which includes price and supplier management, is essential. This allows experts to take advantage of low price phases and create clever hedges (Handelsblatt 2, 2022). According to mechanical engineering industry expert Ralf Sauter, these can consist, for example, of having a better overview of cost structures. According to a survey of 48 procurement decision-makers, 40% of mechanical and plant engineering companies are already giving this a high priority.
In order to keep a better eye on cost structures and strengthen strategic procurement, digital solutions are needed that clearly evaluate and display procurement activities and suppliers and enable agile action on the part of buyers.
Tacto is designed by medium-sized businesses for medium-sized businesses and was developed close to day-to-day operations, with buyers, to be precisely tailored to the needs of industrial medium-sized companies. For example, with the help of the procurement cockpit, it is possible to view all important key figures such as procurement volume, quantity, price developments or delivery times, related to suppliers, categories or article level, at a glance. This gives buyers a clear comparison of their suppliers and allows them to determine on the basis of data which ones they work with on the best terms.
With Tacto's Rfx module, operational activities can be simplified, leaving the buyer more time for strategic activities. With the help of this module, requests can be sent in a standardized way to suppliers, who can respond without logging in. The buyer then receives an automated price comparison - without tedious typing in Excel from various mails, Excel spreadsheets and PDF documents.
Our Supplier Portal & Management gives buyers a clear overview of all important supplier data and metrics, even in chaotic times. All documents such as NDAs and ISO certifications are stored in one place. The buyer thus knows immediately which suppliers are qualified, which qualifications and certificates are still pending and which are about to expire.
Tacto is the digital solution for medium-sized procurement, which allows buyers to keep a cool head and make strategically smart decisions, especially in times of crisis. Together for future-proof procurement.
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