Project case study: How procurement boosted the company’s value
Demag Cranes AG –“Better procurement for better performance on the markets”
Demag Cranes AG is one of the world’s leading suppliers of industrial cranes, crane components, and cranes and automation technologies for use in ports. Services are also a core element of its portfolio, particularly plant maintenance and modernisation. Demag Cranes AG can trace its history back to Mechanische Werkstätten Harkort & Co., a German company that was founded in Wetter an der Ruhr in 1819. After being spun off from the Mannesmann Group in 2001, the company became part of the Siemens Group, before financial investment group Kohlberg Kravis Roberts (KKR) acquired a majority shareholding in Demag Cranes & Components in 2002 and went on to launch it successfully on the stock exchange in June 2006 as Demag Cranes AG. But before it went public, the company had to increase its value on a sustainable basis to ensure its IPO was a success. And procurement played a key strategic role in this.
The processes of optimising purchasing operations and reorganising procurement have always appealed to investors, since every penny saved is immediately reflected in results. From the very start, the new owner therefore chose to overhaul procurement systems – among a whole host of other measures.
Focus on restructuring strategic procurement
INVERTO was brought in to help design a comprehensive improvement programme for procurement that would initially focus on restructuring strategic procurement to drive up its strategic importance. Once the general thrust of the company’s strategy had been set, the procurement organisation needed to be adjusted and restructured and the procurement team given appropriate training.
Optimising the supplier structure
The entire supplier structure was also put under the microscope and optimised and low-cost-country sourcing was moved to the top of the agenda. By concentrating and pooling all procurement processes, these measures were to significantly reduce procurement costs, enhance supplier performance and achieve a sustainable increase in the company’s value for the IPO.
Lead-buyer organisation turns Demag procurement on its head
The aim of a lead-buyer organisation is to pool responsibility for individual groups of materials and use the resultant volume effects to build a better negotiating position when dealing with suppliers. The previous structure of centralised procurement was completely reorganised and what had once been a hierarchical organisation was transformed into a team-based operation with lead buyers for each materials group. Strategic and operational procurement were also separated.
Each group of materials was harmonised throughout the company and assigned to a single lead buyer. This immediately gave the buyer a great deal of responsibility and a completely new role, as well as significant influence within the company. Turning around the pre-existing procurement structures and thus improving the starting position for supplier negotiations resulted in procurement savings amounting to tens of millions
The new status of procurement as a strategic competitive factor was given an extra boost when it was decided that strategic procurement would report directly to the chief financial officer. However, procurement is not just strategic, it also includes operational aspects. Forming material group teams ensured that operational procurement was affiliated directly to the production management team. This direct integration into production processes further increased the importance of operational procurement, which became responsible for the availability of materials as part of overall supply chain management.
The last link in the chain of organisational changes concerned internationalisation, and both the managing director of Demag Cranes & Components and the financial investor had high expectations.
The aim was to continuously increase the share of low-cost-country sourcing at the company to 30 percent on a long-term basis, thereby driving down procurement costs. The first stage was to check all the supplier relationships of both procurement in Germany and procurement functions in the international companies, particularly in the low-cost countries.
The results were impressive
During the project, intensive cooperation with teams in low-cost-sourcing countries helped to triple the proportion of low-cost country sourcing to around ten percent of the total procurement volume.
Reducing sourcing costs directly and sustainably
The new procurement organisation satisfied a whole range of requirements that helped it significantly increase its contribution to the company’s value. However, as the IPO approached, both the company management team and the financial investor were naturally extremely keen to lower procurement costs so that there was an immediate effect on results.
Yet again, concentrating and pooling requirements proved successful, just as when the procurement organisation was being reorganised. To ensure that sourcing costs were optimised rapidly and in tandem with restructuring in the procurement organisation, more than 200 product groups were examined for potential savings in three waves.
Around 70 individual projects were launched in each wave based on a tight timeframe. First, requirements were analysed for each material group and then written up in a precise specification.
The procurement function then used e-contor e-sourcing software from INVERTO to analyse the relevant markets and suppliers, invite tenders and then analyse the offers that were received. Pooling requirements and looking for new suppliers had a massive impact. By the end of the project, the number of suppliers had been reduced by more than two thirds. What’s more, supply performance improved to 95 percent.
Once the methods for lowering procurement costs had been identified and the new processes and structures had been developed, the changes had to be integrated into day-to-day processes and the improvements implemented. Demag Cranes AG did an outstanding job in rolling out the changes, the management team and workforce pulled together and the successful IPO reflected their achievements.
When all the effort pays off – the markets and the company acknowledge hard work in procurement
Alongside other functions, procurement played an important part in driving up the company’s value and thereby ensuring the IPO of Demag Cranes AG was a success.
At the same time, since the successes of the procurement offensive, the procurement function has enjoyed improved status within the company’s organisation and has been held in higher regard by both the management team and technical functions.
Procurement became a key strategic competitive factor with a highly motivated international procurement team operating in efficient structures. It emerged from the shadows of development and production to be recognised as an equal partner. Its knowledge of the national and international markets and suppliers has increasingly made it a driving force for the company’s success.
But that’s not the end of the story. The aim is to continue to source goods and services from carefully selected international suppliers at market prices.