Savings through systematic raw material procurement
The company was founded in 2007. Initially, the idea was to allow customers to create their own favourite product, choosing from a variety of different ingredients and then ordering it through an online platform. Over the next years, more and more products followed and the food producer expanded beyond the borders of Germany, adding new distribution channels through large retail chains such as REWE and Edeka.
Challenges
The procurement organisation was highly operational and demand-driven. There was no systematized demand management and no forecasts of future demand; instead, procurement was only based on current production requirements to cover rather short time spans. The procurement processes were not fully systematized and there was no cost transparency.
Another challenge is the difficult market environment and supplier market for agricultural raw materials. These raw material markets are generally very volatile and the development of raw material prices is thus difficult to predict.
External factors such as crop failures and currency crises in the producing countries can significantly influence the development of market prices and lead to supply bottlenecks.
In addition, organic certificates, regionality and the highest quality of raw materials are part of the corporate philosophy and therefore have a high priority in procurement. This reduces the eligible supplier market enormously. While demand for certified organic products is currently very high, some of the raw materials required by the company are grown in organic quality only to a limited extent.
This imbalance between supply and demand naturally weakens the negotiating position of the procurement.
Objectives
The aim was to optimize procurement and realize savings by adapting the procurement process to harvest times and price developments on the relevant commodity markets. The aim was to fix the optimal price for each agricultural raw material by concluding annual contracts at the optimal time of buying.
The most important requirement on the part of the customer is constant security of supply for the entire raw materials portfolio, so that production can always access all the ingredients on offer in the usual organic quality at all times. In order to further secure the supply of raw materials in the future, the supplier pool was also to be expanded to include high-performance producers.
In addition, product improvements were sought for some key requirements, e.g. sugar and palm oil-free crunchies.
Approach
The implementation phase began with a detailed needs analysis. For each raw material, the consumption quantity from the previous year was compared with the forecast consumption for the current year. Taking into account new product developments and discontinuations, annual plan quantities could be determined from this, which later served as the basis for the annual contracts.
In addition, a harvest calendar was created across all raw materials, consolidating information on all raw materials. This harvest calendar was compared with the relevant commodity indices and internal and external experts were consulted in order to define the optimum buying time per product from the consolidated information.
Using this data, and taking into account inventory levels and projected consumption, our consultants worked with our client’s procurement staff to establish a tender calendar with five bundled market queries.
Through an extensive supplier research process followed by an RFI, organic suppliers were pre-qualified for the upcoming RFPs. Our team used this to identify a large number of suppliers who did not yet have a relationship with our client, thereby significantly expanding the pool of organic suppliers and opening up new supplier markets in neighboring countries.
In the subsequent implementation phase, we carried out the agreed tenders, performed sampling and quality checks, and conducted price negotiations. Due to the fast pace and volatility of the commodity markets, four factors are particularly important here:
- Early tendering: In order not to miss the actual optimal time to buy, it is important to place the tender some time before the identified time. Particularly good offers can then be accepted directly through rapid sampling and testing. Meanwhile, raw materials for which the first offer is far above the accepted price can be monitored further, the optimal buying time determined more precisely, and then renegotiated at the best time.
- Close and fast coordination with the client: Due to daily market prices, it is important to be able to make decisions on particularly good offers quickly. It is therefore essential to design the structures and processes within the project team in such a way that award decisions can be made at very short notice. In some cases, this decision must be made subject to positive sampling, as this would take too much time.
- Constant exchange with pre-qualified suppliers: For some raw materials, it is not yet conclusively clear how the new crop will actually turn out due to early inquiries, so suppliers initially offer less favorable prices. In these cases, a constant exchange with the pre-qualified suppliers is important to catch the optimal moment for the procurement. It is openly communicated to the potential suppliers from the beginning that they face strong competition and that the goal of the tender should be to conclude a contract at the best possible price while meeting the qualitative criteria.
- Flexibility in awarding partial quantities: For some commodities, procurement needs to flexibly adjust the process and initially purchase partial quantities. This is always the case when best offers from suppliers are available, but only for a certain quantity that is smaller than the annual requirement. In order to take advantage of the good price, it is decided in these cases to purchase these partial quantities and to contract out the remainder of the annual requirement elsewhere. Furthermore, the allocation of partial quantities can also bridge temporary, poor supply situations for individual raw materials, and the next optimal buying time can be exploited.
Results
By concluding annual contracts with fixed prices, our customer was able to make considerable savings in the double-digit percentage range, as well as increasing planning and supply security.
Thanks to the systematic tendering and sampling process, the pool of approved suppliers was expanded and the product quality was even partially improved, which will simplify procurement in the future.
Furthermore, the relationship with existing partners was intensified and new partnerships were forged, while an optimised supplier structure was also achieved.
As a result of the new contracts, payment terms were also harmonised. All in all, as a result of the project, raw materials procurement was further professionalised and the role of procurement was strengthened within the company. The savings achieved played a major part in significantly increasing the company’s value.
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