FA 09: Containing risks and buying green Chosing the proper supplier is a difficult affair in economically difficult times.

The trend is towards sustainable purchasing

In face of the ups and downs of the global economy, the euro crisis, rising prices and risks associated with raw materials, purchasing experts are needed. Employing skill and strategy, they must minimise the risks for their employers, and keep an eye on slashing costs at the same time, as material costs and profit margins are not stable in the long run. This is a balancing act for the valve industry. On the one side the sector itself is a buyer of components and materials, yet at the same time it has to pay heed to the demands of increasingly critical customers and end users.

It is easy to make out the most important purchasing goals; the desired product or service is to be purchased and delivered in the amount and quality level required,  for as low a price as possible. Reality, as always, makes things complicated. Prices need to be negotiated, product development has to be coordinated with suppliers and the supply chain should be reliable for the long-term.

 

Certification and approval
The German energy company EnBW also needs to be in control of its complicated purchasing process. The corporation makes no secret of what it expects: „EnBW has high requirements for its suppliers“, states Domenico Gentile, project manager purchasing at EnBW Systeme Infrastruktur Support GmbH. In order to even come into question as a supplier, certification has to be submitted for components.

The corporation pays attention to references. Compliance with specifications and quality criteria of products and materials is seen as a matter of course. One of the major factors for an energy company is the energy efficiency of its facilities. In the case of valves, leakages and unsealed chambers are to be avoided. Societal and political developments are adding steam to this trend.

Purchasers not only have their sights set on advantageous prices, they must also consider the quality of products. Reliability and availability are required in order to ensure continuous operation in group-owned facilities. „Down times are to be kept as short as possible“, explains Gentile, EnBW.

 

Reliable, on time delivery
A buyer ought to know a great degree about his suppliers. Only then can a user know if a supplier can offer reliable and on-time delivery.

From time to time, a buyer may find himself in a fix, as he has to purchase high quality products, yet also make sure costs are reduced. In addition, buyers have to take strategic goals set by the management into account. Economically uncertain times lead to cost awareness, which in turn strengthens the buying department. “The trend is pointing strongly towards risk management,” finds a study titled „Purchasing Excellence“, carried out by the consultancy Roland Berger.

What is the proper method to assess risk? Certificates and references are one way. „Long-term cooperation, reliability and mutual trust on a personal level with our suppliers form the basis for being able to fulfill the high demands of our customers“, states Sedat Erüstün, CEO of H&G Maschinenbau GmbH, Gelsenkirchen. The company offers CNC-based manufacturing services to valve and pipework makers.

 

A tour answers questions
Erüstün knows the challenges purchasing poses for mid-sized companies. „It is difficult to create and maintain complex and multidimensional supplier management systems.“ It is rather more necessary to strategically build-up a supplier and bind him for the long-term.

H&G Maschinenbau not only considers norms, regulations and certification. Additional criteria are also as important: „What kind of an overall impression does a supplier give? Is work performed in a professional and structured manner? Can required material testing be performed by local inspecting authorities? Are all material certificates available immediately?“

Visiting and taking a tour of a supplier with the own quality manager „can answer most questions relatively quickly“, states Erüstün.

 

A single supplier?
Should everything come from a single, or from different suppliers? The answer is never easy for a buyer. „Complete solutions from a single supplier often sound very nice, but they also bear risks“, says the CEO of H&G Maschinenbau. „Out of strategic considerations, we have a pool of qualified material suppliers, allowing us to react quickly and flexibly to meet the demands of our customers, even in the short-term.“

As a supplier for numerous valve makers, H&G Maschinenbau is specialised in offering the entire production process – from processing blanks, welding special materials to final assembly, as a one stop shop. „We naturally face very stiff competition in some individual production steps, but we have convinced a lot of customers with our universal production concept and have received positive feedback,“ states Erüstün.

Apart from the product, a company buying components also expects a reasonable maintenance concept, designed to support a valve’s long life time.

 

Close cooperation
As a valve maker, Sempell is both supplier and buyer. The company uses a double sourcing strategy, i.e. having various suppliers from whom it can buy identical components, in order to ensure its ability to supply. „We prefer purchasing from a single source, although the core competencies are performed by Sempell as a matter of principle“, explains Stefan Kroeber, operations manager Sempell.

Purchasing of materials – which are often determined by project and frequently have to fulfill requirements going beyond norms – is carried out in close cooperation with the purchasing department, quality control, customer and the supplier.

VAG also examines its suppliers closely. The valve maker has its own foundry, yet because of its extensive product portfolio, it sometimes has to hand out orders to foundries. „Each new foundry which wants to work for us, is first inspected by a VAG quality expert and has to be certified prior to the first order“, states Manfred Schmidt, construction manager at VAG.

After inspection, the quality team hands out a test order to the foundry. “If the test order is fulfilled in the desired quality, the foundry receives approval as a VAG supplier.“

 

Standard or complex products?
Quality is also essential for Sempell. „We have high demands for our suppliers in terms of quality, reliability and flexibility. Our products are created for challenging applications and demanding costumers.“ Sempell demands small production batches from its suppliers, alongside high requirements for material properties and quality.

End users choose product ranges based on the degree of complexity. „Packets consisting of standard products are often obtained from a single source“, says Jürgen Pick, sales manager at Sempell and director of product management nuclear valves at Tyco Global Power. However, certain valves have to fulfill high technical requirements and are thus categorized as „engineered products“.

„These valves are conceptualised and constructed for individual customers.“ Such special valves are often purchased by end users, or the technical specifications are handed out evaluated.

Sempell repeatedly witnesses that buyers place value on cost-effective solutions. Cast iron encasements are a lot cheaper, „and are therefore often preferred, which is unsatisfactory in regard to quality“, states Pick.

 

Saving the environment and costs
Buyers are also increasingly making sure that products and facilities function in an environmentally-friendly fashion, and that valves are manufactured in such a manner; this heightens broad societal acceptance. A company’s public image can profit considerably, which in turn makes itself paid.

Sustainable products and facilities save energy. „Cooperating with eco-friendly suppliers and the consequent optimisation of our supply chain management in respect to CO2 is a major level for a company to save costs“, declares consultancy A.T. Kearney. Kearney consults globally operating corporations, leading mid-sized companies, as well as public institutions.

 

Green supply chain management
86 percent of companies  participating in the „Carbon Disclosure Project“ (CDP) see far-reaching competitive advantages through cooperating with eco-friendly suppliers, claims the „Supply Chain Report 2011“, penned by Kearney and the CDP. In 2009, only 46 percent of companies saw such advantages. „This fast-paced rise confirms that managing supply chains and purchasing in respect to sustainability not only helps the environment – as more than half of a company‘s CO2 emissions can be found here –  but also saves costs“, explains Daniel Mahler, a partner with A.T. Kearney.

According to the supply chain report, more than 79 percent of companies participating in the CDP have a comprehensive sustainability strategy. One year before, it was only 63 percent of companies. „The importance of sustainability in the field of supply chain management is accordingly high.“

 

Sustainability as a strategy
The growing strategic importance of sustainability is triggering „a domino effect within the supply chains of global corporations“, states Kearney. At the moment, 41 percent of companies offer training courses for employees if they hand in proposals on how to reduce CO2 in the supply chain. „These are even especially honoured in 25 percent of companies.“

Suppliers need to react: „Suppliers need to urgently reconsider their position, as 17 percent of corporations already choose suppliers according to CO2 criteria“, adds Kearney partner Mahler. „And the proportion is increasing – we estimate around 30 percent in five years time.“

After numerous corporations have firmly embedded sensible climate policies in their business strategy, the focus now is „on the concrete operative implementation – across the entire supply chain“, claims Frances Way, program director of the CDP. What is particularly pleasing is that both corporations and suppliers profit to an equal degree from cooperating; in economic, social and ecological regards.

 

Regional buying and global sourcing
Environmental concerns are also important to Sempell. The maker of control, safety and shut-off valves puts an emphasis on regional purchasing with short distances for toll manufacturing. As for procurement of materials, the company depends on global sourcing and cooperates here with suppliers, that are „up to date with the latest technology“, claims Stefan Kroeber, an operations manager with Sempell.

What about small businesses? „One should differentiate between environmental protection management based on standards, and environmentalism in practice“, explains Sedat Erüstün, CEO of H&G Maschinenbau. „We can observe, that environmental standards often aren’t in line with the reality of small businesses,“ and are therefore only put in place hesistantly, and cause high costs.

„However, if I for instance intuitively act eco-friendly by producing in an energy efficient and modern manner, use materials efficiently, avoid waste and sewage, then my company automatically becomes more competitive. We at H&G clearly see that our customers honour such behaviour.“

 

Makers and end users on the winning side
Especially valves need to be as eco-friendly as they can. „The most important function of a valve is its leak-tightness, in order to prevent harm against people and the environment,“ emphasises  Stefan Kroeber, Sempell.

Thus, all those are winners, who think ecologically – regardless if they are suppliers or buyers. „Cooperation with green companies makes itself paid,“ consultancy A.T. Kearney sums up rightly.