Consulting project: Strong global economy and rapid growth change procurement at Deutz
International growth puts procurement on a level with production and technology
About Deutz AG
“DEUTZ – the engine company”: That is how Deutz AG sees its future. The slogan shows how the company’s own view of itself has changed. Once simply a traditional German manufacturer of diesel engines with a successful 140-year history behind it, it now sees itself as an international engine maker. This shift in emphasis and the growing internationalisation of Deutz can be traced back to two key issues.
Firstly, markets and customers have changed, and Deutz had to respond. The company initiated a far-reaching turnaround and realigned its strategy, streamlining the organisation and concentrating the wide-ranging product portfolio. Deutz brought its core competencies to the fore, returning to its original strengths – the development, design, production and sale of customised compact diesel engines.
Secondly, Deutz wanted to become more international so that it could benefit from strong growth in the global economy and virtually unfettered growth in the countries of Asia-Pacific in particular. An increase of around 110 percent in sales figures at Deutz showed there was enormous demand for these versatile engines.
However, huge rowth also meant major challenges for the company and its workforce. Although virtually every area of the company was equally affected, globalisation brought a rapid increase in the demand for raw materials and products, which hit procurement particularly hard.
As a result of these changes, the function –which is crucial for an engine manufacturer but traditionally seen as less important than development and production –became a key focus of the company’s attention.
Procurement has to meet a whole range of challenges
While an increase in requirements brought about by a virtually insatiable demand for engines might have been a very welcome development, it also posed a dilemma for buyers. To keep the production lines moving, they had to make sure their suppliers had adequate capacities to keep up with demand so they in turn could keep their delivery promises to customers.
However, the procurement team was unable to restrict suppliers’ room for manoeuvre too much, since existing value added partnerships had been structured on a long-term basis. These strategic development partnerships had a significant impact on the process chain in material procurement. For example, the procurement team was involved in the development and introduction of new engines at a very early stage.
This was new ground for both sides and it took a lot of effort to win over the various parties. Another crucial factor that shaped how procurement management developed was the ever tougher exhaust emissions standards, which often meant the company was forced to use new –more technologically advanced – bought-in parts. The buyers had to expand their expertise so that they could respond to these new requirements.
Finally, the establishment of Deutz production facilities in China meant that procurement had to take on a more international remit. The buyers now have to supply the site with parts from Germany or from local suppliers.
All in all, the procurement tasks became more complex and acquired a far broader scope. In order to meet these wide-ranging challenges, procurement had to change, transforming step by step from a traditional purchasing team into a strategic procurement function. It had to operate as an interfunctional networker that could carefully coordinate all the actors in the value-added process (development, quality management, production)–and INVERTO was brought in to provide pro-active support.
Putting in place a powerful procurement organisation
The strategic realignment had set the course for Deutz and now the procurement function had to be adjusted to meet the new challenges and tasks. It was clear that procurement had to be realigned throughout every tier of the organisation. New global procurement offices were established in the relevant procurement markets to tap into the cost benefits offered by local low-cost-country sourcing and eliminate logistics costs, for example.
Project procurement was also put in place to give procurement a bridgehead to the specialist functions. A whole range of training activities were launched to boost the procurement team’s ability to act as a trategic mastermind for all procurement activities. Rolling out the specialist procurement software solution e-contor helped streamline sourcing processes and the newly created “procurement and logistics” role on the company’s management board reflected the new status of procurement both internally and externally.
Practical test – implementation in two stages
To anchor the changes to Deutz’s procurement organisation in day-to-day operations, implementation was carried out in two stages.
The first stage involved investigating all procurement-relevant data and collating the essential core information to achieve greater transparency for overall procurement volumes. Based on the information available, the procurement team then identified areas of potential for all material groups, specifying the scale of potential savings and how these were going to be achieved.
This approach uncovered numerous projects that offered potential savings amounting to tens of millions of euros. One of the key requirements for the procurement team and the consultants from INVERTO was to ensure that the newly created organisational structure and the new framework conditions would have a significant impact on the company’s results.
While planning the second stage (implementation), special emphasis was placed on delivering an effective project organisation that would gel with the new network-based approach to procurement. But optimising procurement was not to be a one-sided affair, it required cooperation from every function within the company. Project work was based around the strategic procurement process, which all the teams worked on.
As a result, the specialist functions succeeded in rolling out all the changes in their day-to-day operations, which did a great deal to ensure the changes were well received in the organisation. Clear guidelines and regular reporting improved communication between the procurement function and specialist functions.
Impressive results – costs down and the status of procurement up
The individual subprojects in procurement were extremely successful, with some exceeding their targets by a significant margin. This showed that the idea of using the strategic procurement process as a tool to anchor change at Deutz had paid off.
Procurement was seen in a whole new light, in part thanks to the cost savings that had been achieved through increased competitive pressures on suppliers and the new invitation to tender and negotiation process, for example.
The consistent inclusion of the newly created global procurement offices in the low-cost countries enabled the company to identify attractive new suppliers and procurement opportunities with the potential for further savings.
The results helped procurement at Deutz to make the transition from a traditional purchasing function catering to the needs of the technology team to a modern procurement service provider. Today, it shows great professionalism in its new role as a networker between the specialist functions and with external value added partners and, as a result, it has gained its rightful standing in the organisation.