"Volatility currently overwhelms the world"

Purchasing consultant Gerd Kerkhoff about markets going crazy, the right procurement strategy, China's unpredictability, and what the German humorist, comedian, art director and writer Loriot had to do with single sourcing.

Especially smaller companies today still underestimate the risk of delivery failures. Sudden delivery bottlenecks for specific components present less of a problem for those companies not being dependent on only one source. Insecurity were rampant, says Gerd Kerkhoff in the DVZ interview. The pragmatic go-getter is considered a pioneer in purchasing and knows the sector of small and medium-sized companies inside out.

Mr. Kerkhoff, at the end of the day, the Japanese crisis had resulted in only isolated delivery bottlenecks in the German economy. Are purchasing and procurement departments better prepared for such events than many had expected?

Basically, managers will concentrate on the normality of business. But such a crisis event makes the world fall apart completely. Nobody can prepare or be prepared for natural disasters. In such an event, what's important is how fast a company will be able to switch to alternative suppliers. 

Did managers of large and mid-sized companies react adequately? 

Major corporate groups basically have the advantage of operating worldwide. They can thus find out relatively fast which supplier can alternatively manufacture a specific part. Mid-sized companies have a harder time with their partly long-established regular suppliers. Yet, the buyers' duty is to always keep alternative suppliers on hand. 

And they successfully fulfilled that duty? 

Yes, they did. And above all, they have become faster and more flexible. That's what companies have learnt from the economic crisis. 

Then why is it that some mid-sized companies still rely on single sourcing?

The advantages of this strategy are both in the benefits of scale and the bundling options. Just think about Loriot as the purchasing manager in his movie "Pappa ante Portas" . . .

. . . where he buys for the company huge amounts of typing paper just to get the maximum discount and is then sent straight to early retirement. Are there any other advantages?

When a company has one regular, standard supplier, such a well-oiled relationship of course requires much less organizational work and scheduling expenditures than when two or three companies need to be coordinated.

Is that extra expenditure a deterrent for companies to use a multi-sourcing strategy?

Because of their smaller volumes, mid-sized companies definitely have advantages when they are working with only one supplier. Because with just one, the company still has a reasonably large volume. But if that volume is divided among two or three suppliers, the company might no longer have enough quantity to provide it with any benefits of size. Thus, multi-sourcing may possibly even entail an economic drawback.

But is it advisable nonetheless?

The point is: Our world no longer is what it has once been. In the past five years alone, there have been much more frequently failures and losses due to natural disasters than ever before. Moreover, the question is: Which suppliers still have the power to survive in times of crises? That's been a painful experience for the car industry during the economic crisis with numerous vendor defaults. Another critical item is the huge problem of the Euro zone.

You are thinking of Greece?

Yes, although I don't know a single client who has Greek products in his portfolio if he is not just trading. But if the problem spreads to other countries, like Spain, Portugal and possibly Italy or even France, it will get hot. Because then, at the latest, will connections be severed in the supply of German companies.

But it also happens that sometimes only a few suppliers exist worldwide for some specific parts or components. What then? 

Of course, concentrations in the industry generally resulted in a trend towards a tight oligopoly. If you consider multi-sourcing from the point of view that a company today will have an alternative supplier available immediately, then you'll be right in saying that markets actually have become very tight with certain parts or components. But you can also look in advance for a supplier who is known to have the production resources and built him up as an alternative supplier in emergency cases.

An additional possibility of stabilizing the logistics chain would be buffers . . .

Inventories always cost money first. And that could definitely become very scarce for companies and banks in the next crisis. Because the way it is today: Companies must have a rate of utilization of at least 70, 80, 90 percent to make profits. For example, at a capacity rate of about 80 percent, a machine manufacturer will be writing a black zero. Only after that – at the peak – he'll be earning money. So if a company builds up inventories for EUR 2 or 3 millions for reasons of security, it might already have lost out in the calculation. Margins are tight! 

But assembly lines standing still will also cost money.

Sure. But, today, the managing board of a DAX company could only enforce an inventory increase with a resolution by the supervisory board because it would be speculating for a very specific market situation. The second point speaking against it: Fluctuations in the commodities markets. Volatility currently overwhelms the world. It's thus no longer a matter of having the best price at the point in time of purchasing. The question much rather is whether you are able to catch the right point in time.
Talking about commodities purchases, what do you think about cooperations which time and again are talked about in the industry?

Purchasing cooperations certainly make sense, but they are rather difficult to realize. On the one hand, there is the question of whether the different interests can fit together and be coordinated. And on the other hand, it might become problematic from an antitrust-law point of view. In the sector of small and medium-sized companies, the subject is frequently broached, but it usually ends up with the point that qualities may be extremely different. So you are actually talking about the same raw material, but bundling will not be possible. I don't believe in large purchasing cooperations; all the more so since there is a natural enemy – the corresponding purchasing departments. They don't want to lose their power.

How dangerous is the increasing dependency on Chinese suppliers?

There is always a certain dependency – at 20 to 25 percent – from specific suppliers. The risk always present with China: Its politics are unpredictable. That's why China is considered to be not exactly stable. 

Today, German industrial companies procure mainly individual parts from China. Will even more complex components be conceivable at some point in time?

The question is: To what extent should more complex developments be left to the Chinese at all and to what extent should know-how be left to drain off. The Chinese are trying to tap knowledge and know-how and then simply copy developments. It's not without good reason that white-collar crime authorities currently consider their greatest problem to be hacker attacks from China.

Can you see a slight trend of regionalization due to the crisis?

In recent months, this could be observed time and again in politics. Because  more stability is hoped for by retreating into smaller economic areas. But I think that it's precisely the other way around. We already have completely globally distributed process chains today. This development can no longer be stopped or reversed.

Mr. Kerkhoff, thank you very much for talking with us.

Claudius Semmann conducted this talk.

Personal information:

Gerd Kerkhoff
The chairman of the management board of the Düsseldorf-based purchasing consultancy Kerkhoff Consulting had studied business administration; afterwards, jointly with his friend from student times Hubert Tempelmann, Gerd Kerkhoff took over the management of the Tempelmann family's coffee roasting house. There, he capitalized on the price spread in purchasing. Kerkhoff (born in 1958) expanded the company until 1999 to become the second-largest coffee roasting house for dealer brands in Germany. Twice in a row, the trade journal "Wirtschaftswoche" awarded his consultancy – with a staff of over 200 – a prize as the best in the supply chain management category.