"Companies Take Major Risks with Any Investment"

Following a period of cost reductions, investments are again on top of the agenda at German companies. Purchasing capital goods is a complex process and considered the most prestigious discipline in purchasing. In this interview, Kerkhoff Consulting expert Jens Hornstein and Rüdiger Voß – purchasing specialist at BARD Engineering GmbH currently building the largest North Sea offshore wind park – talk about challenges in the capital goods procurement process, cost savings potentials and special contract design conditions.

Unternehmeredition: Mr. Hornstein, Mr. Voß, according to figures by the European Commission, investments once again take first place in German companies' to-do lists – after a time of cost reductions. What needs to be especially taken into account in capital goods purchasing?

Hornstein: The purchase of capital goods is a complex process and it's often called the "most prestigious discipline in purchasing". For major projects – for instance the construction of industrial plants and factories – it's not only necessary to take into account the immense procurement costs in advance but also operating and maintenance costs. Already prior to construction, such costs must also be reckoned into the cost calculation. And that's also what makes it so complicated: You have to estimate costs over a long period of time. At the same time, you have to anticipate risks – for example, construction stops or the diminishing availability of specific materials which may result in higher costs yet. Such a project cannot be realized without the purchasing department having submitted comprehensive planning.

Voß: Currently, BARD is building the largest North Sea offshore wind park – 90 kilometers northwest of the German island of Borkum. It's a 60 square kilometer area where we are setting up 80 wind turbines. Upon completion in 2013 we want to be able to supply 400,000 households with wind park power. That means 400,000 households will rely on us to properly manage this investment. That's why our purchasing and engineering departments are working hand in hand to realize this project in top quality at optimum costs and within the scheduled time.

Unternehmeredition: Capital goods procurement processes are frequently disordered; engineering and purchasing departments are working at cross-purposes. How can that be prevented?

Hornstein: Investments involve lots of money, so they are always on the agenda of corporate management. But very often, its board members will initially meet only with their technical staff. Also, managing directors frequently have degrees in engineering but not in economics. Yet, capital goods purchasing is a basket with many components. The technical staff person mostly sees only his or her partial trade and not the whole – especially not the framework conditions from a business administration's point of view. This is where purchasing experts are required.

Voß: The industrial buyer not only takes into account the technical aspects, but especially economic issues and also legal topics. My experience has been that, for major investments, it's important for buyers to be involved already in the early planning stage. This will generally stimulate competition among suppliers which has a positive effect on quality and costs.

Unternehmeredition: Most of the time, procurement costs are not even the biggest block of costs in the procurement of capital goods. How must costs be calculated in capital goods purchasing and which types of cost play a role?

Voß: Aside from procurement costs, you'll have to add, among others, life cycle costs, commissioning, maintenance, insurance, installation, startup costs, de-installation costs and service fees. All these costs must be precisely calculated in advance or estimated, respectively. Actually, what's crucial for investments is their return. And you'll get any return only from the point in time where your costs pay off.

Unternehmeredition: How exactly can a company save costs in capital goods purchasing?

Voß: We already explained to you in detail that the collaboration of engineering and purchasing is very important. At the end of the day, efficient processes and the proper communications interfaces will decide how well the departments are working together and can thus realize favorable prices on the markets. Of course, "hard" savings will then be realized with purchased components. That's principally similar to the purchasing of parts for series production.

Hornstein: I would also like to add another aspect which is not to be neglected. Companies take great risks with every investment. Aside from the qualitative description of these risks, a price formula must also be found for them. Take the following example: You are building a plant in a politically unstable country. We had a case where we accompanied the construction of a factory in Libya. Because of a dispute between Libya and Switzerland, we had suddenly been unable to travel to the country because the Gaddafi regime no longer issued any visas for Europeans. Hence, that meant: Construction stop. Buyers must also develop financial scenarios for such crises scenarios.

Unternehmeredition: Which special circumstances need to be taken into account in contract design?

Hornstein: On the legal side, it's important to comply with special liability and compliance issues. Contracts must be watertight due to today's strict manager liability – in Germany, you can be held responsible even ten years after you have left a company. Liability issues must be perfectly clarified. Management boards should also obtain releases via external parties. Otherwise, it might happen that you will also be personally held liable for wrong decisions.

Voß: Statutory warranty actually has been regulated by § 438 BGB [German Civil Code], yet a liability provision should also be individually specified in the contract. When very large investments are concerned, there is hardly any getting around external lawyers and consultants.

Unternehmeredition: Mr. Hornstein, Mr. Voß, thank you very much for talking with us!

Markus Hofelich was the interviewer.

About the persons interviewed: Jens Hornstein and Rüdiger Voß
Jens Hornstein is Partner at Kerkhoff Consulting GmbH, and Rüdiger Voß is Head of Purchasing & Procurement at BARD Engineering GmbH. Kerkhoff Consulting is a management consultancy headquartered in Düsseldorf, primarily specialized in purchasing, procurement and supply chain management. BARD Engineering GmbH from Emden specializes in planning, implementation and operation of ocean wind parks in own holding.