Instruments of procurement marketing by the example of a car manufacturer

An introduction to the concept of procurement marketing with a case example of Volkswagen


Term Paper, 2010
26 Pages, Grade: 1,7
Manrin Heckmann (Author)

Excerpt

Table of content

1 Introduction to procurement marketing

2 The procurement process

3 Aims and objects of the procurement

4 Typical problems of procurement
4.1 Lack of self-reliance
4.2 Lack of a long-term strategy
4.3 Lack of methods and honest negotiation

5 Procurement marketing as a new approach

6 The instruments of procurement marketing
6.1 Need Analysis
6.2 Supply market research
6.3 Market influencing
6.3.1 Single sourcing
6.3.2 Just in time procurement
6.3.3 Outsource products with low level of attention
6.3.4 Design performance
6.3.5 Performance and Operation flexibility
6.3.6 Corporate marketing willingness

7 VWgroupSupply as an example of applied procurement marketing

8 Conclusion and Outlook

9 Independence statement

10 List of literature

Register of illustrations

Illustration 1: Objects of the procurement

Illustration 2: Corporate procurement planning

Illustration 3: Combined XYC and ABC Analysis

Illustration 4: VWgroupSupply - Aims of communication

Illustration 5: Win/Win Situations VW - supplier

Illustration 6: Procurement Cockpit

List of abbreviations

illustration not visible in this excerpt

1 Introduction to procurement marketing

In economies of the 21st century competition among enterprises has become stronger, fiercer and is inevitable for all companies wanting to exist in the modern business world. The basic reason for the growing competition is that most manufacturing businesses rely on any kind of resources or raw materials that are limited1. The raw materials, whether crude oil used for synthetic material or iron used for car bodies, are shrinking but the number of companies demanding them is still growing. Since the exploit of domestic resources markets for raw materials have become international and purchasers do everything possible to ensure longterm supply contracts at favorable conditions.

Formerly western companies could survive very well by innovation and technological leadership within a market. During the recent two decades various competitors have risen in low wage countries, especially in East Asia and India, which benefit of a totally different cost structure. These companies can copy western products or produce very similar goods at much lower prices. Due to this fact we can see that technological achievements are not an insurance anymore to survive on markets with a global competition. Western companies with an expensive cost structure need to cut costs, too, and that is best possible with a global supply structure that helps to diminish costs for every purchase2. How important a well-working purchasing strategy is can be seen with the car manufacturer Volkswagen. According to Mertens3 more than 80 % of the total vehicle costs of a VW car are caused by supplier goods. Also in other industrial businesses the purchase already determines 60 to 75 % of the total value of a final product, without the responsible persons being aware of the growing dependency in price, quality and deliver security. And this trend of a decreasing value chain and additionally purchased products and services is still growing.

Knowing that, it is simple to confirm, that a company needs an aim-oriented process taking care of all purchasing-activities for the company. This modern process is called procurement marketing, aiming at the influence of factor markets and the sources of supply in a beneficial way for the company4. With this paper I want to provide an overview to the problem of growing purchasing activities and how procurement marketing can be used as an instrument to help diminish supplier product costs. In the first section of the paper I will explain the procurement activities of a modern company to help understand the necessity of changes in procurement. Problems of procurement will be listed as well. Finally I attempt to close the link between procurement and marketing and the specific demands of the car industry are addressed as well. In the second section this paper will explain the instruments and steps of procurement marketing and how they can also be applied to car manufacturers. In the third section you will find applied procurement marketing solutions by the example of the car manufacturer Volkswagen which has developed to a leading example in supplier goods marketing.

2 The procurement process

Procurement describes the task of ensuring a company’s supply with material, services and capital. The fulfillment of this essential task takes place in the procurement process which is to be divided into several phases. All these phases of the procurement process are marked by certain tasks, which can be subdivided into smaller tasks again to be finally executed5.

The phases of the procurement process can be structured as below.

In my approach I try to demonstrate the phases by the example of VW6:

- Procurement preparation

- Determine the procurement demand
- Figure out specifications of the procurement demand e. g. VW demands 6.000 gear clutches with specific sizes for the model Passat.

- Initiate the procurement

- Seeking for potential suppliers
- Inviting offers
- Analyzing the offers
- Choosing a provider

e. g. VW searches for a variety of manufacturers producing automotive parts. They will only send requests to providers of who they think they are able to meet the requirements in quantity, quality and time.

- Procurement conclusion

- Contract negotiations
- Contract completion

both parties, VW as the purchaser and the supplier will negotiate about the exact details of the contract like price, date of delivery, etc.

- Procurement realization

- Control fulfillment of contract
- Receiving goods
- Storage

e. g. the logistics department of VW will receive the clutches and control them according to the conditions agreed to in the contract.

3 Aims and objects of the procurement

Aims of procurement: The supply of all goods and services which are necessary for the manufacturing process of a company within the required time, quantity and quality.

These requirements have to be fulfilled in best sense of the company to increase cost-effectiveness, profitability and to minimize time and effort7. With the following image I want to provide an overview which objects belong to procurement and can be influenced by procurement marketing.

illustration not visible in this excerpt

Illustration 1: Objects of the procurement8

4 Typical problems of procurement

In typical procurement departments in which employees work with deprecated methods and lack new approaches like procurement marketing a variety of problems are likely to occur. I do not want to describe all but concentrate on the major problems which can also occur at car manufacturing companies.

4.1 Lack of self-reliance

Procurement departments constitute the link between internal customers and external suppliers9. The function is challenging because several independent departments within the company have to be satisfied according to their individual requirements. At the same time the conditions and terms of delivery of various suppliers have to be taken into account.

The task of satisfying every department and every external supplier becomes even more difficult when the company is so big, that production is divided further on into various departments. At VW in Wolfsburg we have for instance a weld shop, an axle gear, galvanic, clutch and punching department, just to name a few of them. The departments are of course not separated from each other, they are due to efficiency reasons placed in an assembly line but formerly worked as departments of their own.

Often procurement departments in large companies follow strictly the orders of the demanding department itself or of controllers. For example the galvanic department reports a demand of chemicals to the procurement department with exact instructions which supplier to choose and which product. In this working method purchasers have a very limited amount of possibilities to shape the purchasing activities efficiently.

In the example mentioned above the purchaser is not able to compare various suppliers and homogenous products. The only possibility left for him is to negotiate a beneficial supply contract. “You will find that staff who have so far only been allowed to follow instructions need time to learn how to actively influence demands with a view to achieving previously defined targets“10.

4.2 Lack of a long-term strategy

In order to efficiently satisfy the supply demands of all departments a long-term approach is necessary. Long-term planning in procurement is necessary to make use of bigger quantity discounts, to identify emerging suppliers early, to build up relations to potential suppliers on time, to have more time for the negotiating process and to observe price and currency development long before the purchase. As you can see, a long term planning approach for a procurement department which has a corporate function for the entire company can save a lot of capital. Nevertheless the majority of companies are lacking a long-term planning strategy as the survey below indicates:

illustration not visible in this excerpt

Illustration 2: Corporate procurement planning11

It might be questionable whether this illustration, representing the general procurement planning approach of German companies in 1995, still supports the strategic approach procurement marketing from a today’s perspective. But procurement marketing is not a strategy with its origin in the 21st century. The necessity for cost shrinking has already evolved much earlier. During 1970 and 1990 companies and umbrella associations started to ask for strategic managerial approaches to diminish costs and shape business processes more efficient12. For instance the German association for materials management, purchasing and logistics (BME) actively supported development in higher levels of proficiency in the field of materials management13. Deriving from that time of observation the illustration underlines the necessity of long term planning and a strategic materials management concept.

4.3 Lack of methods and honest negotiation

In the same survey the companies were also asked about their methods in successful and efficient procurement14.

The survey reveals that 40 % of the companies in Germany use the ABC-Analysis and 26 % base their procurement on supplier assessment.

Only 5 % is using SAP software, which enables purchasers to combine several relevant procurement factors at the same time. None of the questioned companies in 1995 mentioned to be familiar with corporate procurement strategies like procurement marketing or global sourcing which are essential strategies of procurement marketing.

Another problem in procurement is the lack of honest negotiation although purchaser-supplier relations based on trust are naturally better working.

Negotiating individual contracts with suppliers which contain agreements mainly about price, quantity, quality and returning issues is a repeating task of procurement departments. Purchasers are often in a better position because there are various suppliers who are waiting for request. Therefore it is understandable that buyers want to design the contract to their own favor. But many purchasers abuse their beneficial position by pressing prices at inacceptable conditions and exploiting their suppliers. “Trying to pull your supplier over the table while secretly hoping that he will somehow manage to do the same to your competitors is a more common practice than you might think”15.

5 Procurement marketing as a new approach

Procurement marketing is an entirely new approach to master a company’s supply demand with the aim to avoid the typical mistakes in procurement I mentioned in the previous chapter. The method follows the same aims as other procurement strategies. It is optimizing the delivery costs, preparation costs, delivery administration costs and ensuring appropriate material quality to keep the own products competitive. But procurement marketing uses different instruments to realize these objectives. The main thought is that marketing strategies and instruments which are used in classical sales marketing can be adopted by the procurement function. According to Koppelmann sales and purchasing are strictly related disciplines. Therefore they share the same problems and it is logical that the marketing approach can be implemented to supply market activities16. A key task of sales marketing is to identify the customers’ needs and to solve these problems with suitable products or service solutions. That identifying process is done to finally achieve the company’s own goal: To produce a demanded product which can obtain profits on the market. And the more efforts are put into the research of customers’ problems, the easier it becomes to understand market objectives and to work by regarding the customers’ problems17.

And that is exactly what procurement marketing does. It tries to anticipate and to identify the customers’ demand in order to work more efficiently. But one main difference to sales marketing is that we have to satisfy two parties in procurement.

[...]


1 cp. Haines, S. a. o. (2005, p. 17)

2 cp. Giunipero, L. a. o. (2004)

3 cp. Mertens, B. (2006)

4 cp. Witherton, G. P. (2010)

5 cp. Piontek, J. (1993; cited from Fried 1990, p. 64)

6 cp. Piontek, J. (1993; cited from Seggewiß 1985, p. 27)

7 cp. Piontek, J. (1993, p. 2)

8 cp. Piontek, J. (1993, p. 2)

9 cp. Koppelmann, U. (1998, p. 4)

10 Koppelmann, U. (1998, p. 5)

11 Koppelmann, U. (1998, p. 6, ct. n. u., Industrieller Einkauf heute, Beschaffung aktuell, No. 12, 1995, p. 25)

12 cp. Koppelmann, U. (1998, preamble)

13 cp. Koppelmann, U. (1998, preamble)

14 cp. Koppelmann, U. (1998, p. 7)

15 Koppelmann, U. (1998, p. 7)

16 cp. Koppelmann, U. (1998, p. 24)

17 cp. Koppelmann, U. (1998, p. 24)

Excerpt out of 26 pages

Details

Title
Instruments of procurement marketing by the example of a car manufacturer
Subtitle
An introduction to the concept of procurement marketing with a case example of Volkswagen
College
University of Applied Sciences Wernigerode
Course
Ausgewählte BWL-Probleme Internationaler Unternehmungen
Grade
1,7
Author
Year
2010
Pages
26
Catalog Number
V204131
ISBN (eBook)
9783656308928
ISBN (Book)
9783656309345
File size
1098 KB
Language
English
Tags
Procurement Marketing, Einkaufsmarketing, Logistik, Volkswagen, Single Sourcing, Just-in-time, VWgroupSupply
Quote paper
Manrin Heckmann (Author), 2010, Instruments of procurement marketing by the example of a car manufacturer, Munich, GRIN Verlag, https://www.grin.com/document/204131

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