Procurement optimization in the food industry
Defense against price demands in an inflationary environment
Our client is a food manufacturer specializing in products made from potatoes (e.g. French fries, potato pockets, etc.). The family-run company was faced with high price demands on the procurement side, which the procurement department was unable to fend off.
Objective: Strengthen procurement and optimize conditions
In order to curb margin losses and find solutions to progressive inflation, the joint project was initiated. The aim was to optimize the procurement of direct demands such as meat, dairy products, spices, cardboard packaging, packaging films, etc. The project also aimed to strengthen the position of the procurement department.
The other objective was to strengthen the position of procurement. Up to now, procurement has been seen more as a purchaser and less as a process driver for supplier selection and time of purchase. Finally, procurement was to be trained to apply the new tools and methodologies in day-to-day business and to anchor them in the company in the long term.
Approach: Transparency and linking to market indices
Based on a detailed potential analysis, the project team defined various workstreams and initiatives for the individual requirements. We were supported on the customer side by a task force in which all relevant departments (quality assurance, sales, marketing, procurement) were represented. This ensured that we could react quickly to price demands and test new methods in practice with all stakeholders.
With the aim of optimizing cost structures, tenders were held to which both existing and new suppliers were invited. The current market situation made the tenders difficult for some products: Some raw materials were completely out of stock (e.g. potato flakes), which is why we received either no offers at all or extremely high prices from new suppliers. To ensure that costs do not get out of hand and to guarantee security of supply for these products in the future, we established processes for market monitoring.
Close observation of these raw material markets in conjunction with regular volume and price inquiries with suppliers helps to build up know-how and develop a feeling for the optimum times to buy. Transitionally, it also proved expedient to replenish inventories via stock suppliers in order to secure supplies.
The project team used the transparency gained thanks to market observation in the subsequent round of negotiations to agree new specifications with the suppliers on an eye-to-eye basis. As part of these talks, we agreed with the suppliers on the introduction of contractually regulated indexing to ensure that our client pays prices which are in line with the market.
Since the specifications on the part of our client were sometimes very strict, i.e. the tolerances for various quality parameters were very small, it was difficult to enforce our specifications, especially with new suppliers. However, through close communication and motivation of the suppliers, this could be solved in most cases. Based on the long approval processes and many coordination loops, regular contact was important in order to be able to pass on information quickly and effectively as well as to find pragmatic solutions.
- Transparent system for competitive pricing introduced (indexation)
- Negotiating position for the future strengthened through transparency on product composition and cost drivers
- Risk reduction and lower purchasing costs through expansion of supplier pool
- Margin improvement