Global Purchasing in tough economic climate

Global purchasing´s added contribution in the likely difficult economic climate for business in 2012

Essay, 2011

15 Seiten, Note: A


Table of content

List of abbreviations

List of figures and diagrams

1. Introduction

2. Global Purchasing

3. Economic climate for business in

4. Focus on cost cutting

5. Counterparty Risk

6. Strategic Partnering
6.1. Supplier Relationship management
6.2. Supplier Collaboration

7. Conclusion

List of references

List of abbreviations

illustration not visible in this excerpt

List of figures and diagrams

Figure 1 - Major price indices of commodities

Figure 2 - Top pressures driving Procurement focus

Figure 3 - Development of numbers of suppliers of the last three years

Table 1- Key nominal price indices of commodities

1. Introduction

The worldwide economic downturn with its peaks in the years 2009 and 2010 has had a great impact on nearly every business. Also one year later, in 2011 companies are still affected of the global economic downturn. Prospects indicate that companies will continue struggling with crisis related problems in 2012 as well (The World Bank, 2011). To survive in this difficult economic climate, every department of a company needs to add their contribution.

The objective of this assignment is to answer the question “What do you think should be global purchasing´s added contribution in the likely difficult economic climate for business in 2012?” Firstly this paper will define global purchasing and will give an overview of the prospects for future economic climate in 2012. After that different approaches and possible contributions will be introduced and discussed. Finally the essay will end with a conclusion.

2. Global Purchasing

Purchasing can be described as the management of company´s external resources. These resources are managed in a way that the supply of all necessary goods, services, capability and knowledge which are necessary for running, maintaining and managing the company´s primary and support activities is secured under the most favorable conditions (Weele, 2010).

To reach the above mentioned goal, companies use global sourcing to purchase from worldwide markets to get best conditions. Global sourcing can be explained as buying goods, raw materials, as well as services from the global market (Monczka, Trent and Handfield, 2005).

3. Economic climate for business in 2012

According to the Global Economic Prospects from the World Bank (2011) significant tensions occurred due to the global recession and financial crisis end 2008 / beginning 2009 will still go ahead over the next years. Beside these tensions, recovery has started already. Especially a strong growth in many development countries affected high-income areas in a positive way. Therefore global growth will remain. In 2012 GDP is projected to rise up to 3.6 percent (The World Bank, 2011). However there are also risks. Growth in development countries as well as political tensions in oil producing countries increased oil prices to a high level. If rising oil price will continue, further slowdown of global economic recovery can be expected (The World Bank, 2011).

Another factor which can disturb economic growth for next year is the nervous financial market within the euro-zone. Depending on the solutions the situation can lead to a lack of confidence, which will have a bad effect to economical stability. But not only the euro-zone is affected. High fiscal deficits as well as rising depts of many of the OECD countries lead to concerns regarding financial sustainability. (The Worldbank, 2011)

Above mentioned situations have of course an influence on commodity markets. Due to mentioned development, commodity prices have been pushed since their lows during the financial crisis. Figure 1 shows the trend of major price indices from September 2009 till September 2011:

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Figure 1 - Major price indices of commodities (Source: The World Bank, 2011)

The figure shows clearly that commodity prices have been pushed since the peaks of the financial crisis.

Many prices of commodities are remaining high in 2011 and 2012 and will drop only lightly till 2013. This is reflecting continuous robust demand, low stocks as well as supply constraints in some cases (The Worldbank, 2011).
Table 1 shows key nominal price indices of commodities, actual and forecast:

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Table 1- Key nominal price indices of commodities (Source: The World Bank, 2011)

The table above shows that commodity prices intend to remain high in 2012.

Summing up the above mentioned facts and predictions, the market is almost bipartite for global purchasing. On the one hand the market is affected by a recovery in demand. On the other hand risks, high commodity prices and uncertainness are putting pressure on companies and their purchasing department in 2012. Especially high commodity prices are pushing material-related costs and hence profit margins are decreasing (Weele, 2010: p16).

This means that procurement is under pressure to deliver cost savings and improving working capital (Martindale, 2009). Furthermore it is purchasing task to ensure stable supplies (Assar, n.d.) as economic impacts are a potential risk of continue supplies.

4. Focus on cost cutting

The statement that costs saving actions are very important for purchasing can be confirmed by several studies. In the study “Purchasing Excellence”, Roland Schwieneke (2009), Partner at Roland Berger Strategy Consultants says, “The most obvious trend is that cost targets are quite clearly top priority once again in purchasing”. Also the study “Driving procurement success by leveraging the economic downturn” from Procurement-Leaders (2009) confirms that cost cutting programs are considered to be the main area of contribution of the purchasing department. In addition the below graph from the study “From Preservation to Prosperity: The CPO's Agenda for a New Decade” from the Aberdeen Group (2010) shows in figure 2 that cutting costs is the top pressure driving procurement focus.

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Figure 2 - Top pressures driving Procurement focus (Source: Aberdeen Group, 2010)

Saving costs can be done in many ways. Many companies use the difficult time to optimize their purchasing organization. (Roland Berger Strategy Consultants, 2009). According to the study “Purchasing Excellence” from Roland Berger (2009) the lead-buying approach is the most common strategy. Using this purchasing strategy, commodities can be bought in high volumes (volume bundling) giving the purchaser increased negotiating power (Schmidt and Uludag, 2007) and therefore better prices.

Several other contributions to save costs have been implemented. The RWE Group in Germany focused on reducing maverick spending (Martindale, 2009), where buying without involvement of the purchasing department can be reduced by implementing e-procurement (Madu, 2005: p11) or strict order policies (Arthur D. Little, 2010: p3). RWE also increased the use of online reverse-auctions (Martindale, 2009). It is a “tough” tool to reduce spending while putting all the pressure to suppliers, said Ulrich Piepel from RWE (cited, n.d., in Martindale, 2009: p3).

Many other firms react to recessions with extending payment terms. For example Dell, Vodafone and Unilever extended their terms between 60 and 120 days (Supply Chain Finance Insider, 2010). But not only huge brands consider this action, 63% of all British companies and 48% of German companies say that financial pressure forcing them to pay their suppliers more slowly (John, 2009). At the same time many companies admit that some of their key supplies are not be able to “survive” longer payment terms (John, 2009). By focusing only lowering costs, purchasing can make a valuable contribution (Arthur D. Little, 2010: p1) and help the company taking off financial pressure as well as drive up profits.

But cost cutting arrangements are very short-term. According to David Cann (cited, n.d. in Brass, 2008: p21), who has been at Tesco in the recession of the 1990s, concentrating only on cost-targeting is the wrong way and could damage the company in long-term. He mentioned the argument of what kind of supplier base will be left when the situation is turning?

5. Counterparty Risk

“Counterparty risk has reached the real economy” (Milne, 2008). This statement of an article in the Financial Times about supply risk describes the problem about short term cost cuts very well.

Using only cost reduction methods like re-negotiating contracts for increasing payment terms in buyers favor or “squeezing” out the suppliers by enforcing price cuts risks backfiring said Julie Metelko from PA Consulting (cited, n.d. in Milne, 2008). If suppliers are not getting money, it could have a bad effect on their working capital (Milne, 2008). This could lead to the result that they do not have money to supply and therefore creates risks for the supply chain.

The risk of getting out of stock has been enforced due to latest developments within purchasing strategies: According to the study “Purchasing Excellence” from Roland Berger (2009: p22), a common way to save money is to reduce the number of suppliers. Below graph shows the development of supplier base.

illustration not visible in this excerpt

Figure 3 - Development of numbers of suppliers of the last three years (Source: Roland Berger Strategy Consultants, 2009)

The graph shows clearly that most of the companies intend to reduce their supplier base of more than 10%. Reducing number of suppliers can have a negative influence on the supply chain, in terms of dependency on the supplier (Evans, 2007: p191). This could turn the balance between buyer and vendor and just happened to the carmaker industry in Germany. According to the head of supply chains at Capgemini Consulting, Mr. Raab (cited, 2011 in Schaefer, 2011: p21), “some supplier are currently in the position to dictate prices to the carmakers due to resurgent global demand.” Rising demand goes as far as it causes lack of supply. The car manufacturer Volkswagen shut its largest plant in Germany due to lack of engines. (Schaefer, 2011: p21)


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Global Purchasing in tough economic climate
Global purchasing´s added contribution in the likely difficult economic climate for business in 2012
Heriot-Watt University Edinburgh
ISBN (eBook)
ISBN (Buch)
456 KB
global purchasing, einkauf, purchasing, beschaffung
Arbeit zitieren
Christian Schwab (Autor:in), 2011, Global Purchasing in tough economic climate, München, GRIN Verlag,


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