Importance of service procurement

Fabian | 00:01.09
Welcome to another edition of Procurement Unplugged. I am particularly pleased to have Prof. Dr. Carsten Machholz as my guest today, one of the very few procurement professors in Germany, or almost in Europe. Welcome, Carsten.

Dr. Karsten | 00:19.54
Yes, thank you Fabian for the kind invitation.

Fabian | 00:23.61
Yes, it's very exciting to look at your career. And it really is, if I look at other... let's say, subject areas, marketing, management, finance, there are professors, I would say casually, like sand by the sea. You and your colleague Bode are almost unique in the German-speaking world. How is it that procurement is not, let's say, as important in academia as it is in some large companies? Perhaps you could say something about this and how you came to be one of the very few. Procurement researchers?

The importance of purchasing in science and industry

Dr. Karsten | 01:03.88
Yes, that's a really interesting question. In German-speaking countries, I would say there are perhaps two handfuls of professors who teach purchasing and procurement. In some cases, either as a separate course of study or as a bit of an appendage to business administration or engineering courses, as is the case here. And this is certainly also due to the fact that, as in many companies, purchasing has traditionally been seen more as an appendage to supply chain management or materials management.

And as an area of research, of course, it has also become extremely important over the years, over the decades, just like purchasing itself, of course, from the early days of the Kraljic Matrix in 1984, where Peter Kraljic postulated it, so to speak, where he said that we have to become more strategic, that we have to use different tools in different areas.

And I think it took a very long time for this to be recognized at the highest levels of management, in the companies, that purchasing has a very, very direct influence on costs, a very direct influence on the cost levers. Even if it's just the fact that we have an increasing share of materials, goods and products that we buy prefabricated as a result of this ever-increasing outsourcing, which also started in the 1980s and 1990s.

The proportion of material costs is increasing more and more. In-house value creation and vertical integration are tending to decrease. In some cases, large car manufacturers only really have their own value-added area of 5 to 15 percent, whether it's Smart or even a Porsche 911, their own value-added at the plant in Zuffenhausen or Weissach is only 15 percent and the rest is procured externally via Tier 1 to Tier N suppliers and we have an extremely large lever via purchasing in terms of economic value-added. So we not only have fixed and tangible assets or fixed and current assets, i.e. not only the inventories, but also, if we buy a building, a factory, a plant at a lower price, then this has a very strong impact on our income statements, on our balance sheet, for a long, long time.

And I think this gradually reached the top management level of many companies in the early 2000s at the latest. And in this respect, procurement is now largely positioned at board level. We have also had CPOs for many years and the whole thing is also being underpinned accordingly in the scientific-academic field, so that there are also one or two chairs, one or two professors who deal with this topic.

Fabian | 04:38.97
And perhaps very exciting for us listeners, what motivates you personally to go into purchasing so early and devote yourself to this topic.

Dr. Karsten | 04:48.59
JYes, I came like the famous virgin to children, both in terms of purchasing and a little bit in terms of the professorship. I'm actually a chemist by training, I did my doctorate in the field of chemistry, tumor chemistry, and back then I was trying to produce anti-cancer drugs that had fewer side effects. I then worked in the chemical industry at 3M, joined the management consultancy Capgemini Ernst & Young, moved from there to the pharmaceutical industry at Böhringer Ingelheim and from there to a small biotech start-up in Switzerland called Bio Partners.

When this company was bought out, I was there. Head of Production, Head of Procurement, Head of Supply Chain, I then moved over to what I call the dark side of the force and have now been teaching supply chain management and purchasing at the University of Applied Sciences Würzburg-Schweinfurt for eight years and can hopefully pass on not only theoretical knowledge, but also practical knowledge from 20 plus years in the industry, where you say, okay, these and these topics are relevant or have been identified as relevant in the literature. And in my actual or personal opinion, this or that is relevant and I can then tell another story about it. And in that respect, I'm a bit like the small biotech company that was bought by a larger biotech company.

Then I switched to an apprenticeship and it was similar for me with purchasing, when you're responsible for production and the supply chain and have to look for global sales and production networks and upstream suppliers and contract manufacturers, then you also have to deal with purchasing. That was sometimes very hands-on in the small start-up company. The nice thing is that you're responsible for everything from A to Z, but it can also be a bit exhausting because you can't delegate much, you always have to do everything yourself. But that's actually what it's like to work for a startup.

Fabian | 07:25.32
Yes, we know that best ourselves. But it's an extremely exciting career. Of course, it gives you the unique opportunity to experience different phases of purchasing, even over the years. How would you say purchasing has changed over the last two decades?

Dr. Karsten | 07:45.88
It has certainly become much, much more strategic, much, much more digital and much, much faster. And we have certainly also seen a development in purchasing, from purely operational procurement management, where the specialist department has already defined the products... or the services. Then comes the order request to the purchasing department, so to speak, along the lines of, well, sign this off or see if you can get a few percent off the price.

But then, I don't want to say that the baby has already fallen into the well, but of course the keyword here is early integration of purchasing. And there are corresponding... So there are development phases where you can say that purchasing has developed from an operational procurement function to a purchasing function, to a strategic advisor, i.e. a strategic advisor, a pilot on the deck, as you might say, which image you want to take, especially in large companies, which then also know how much added value lies in purchasing, how much volume goes through it.

And that's where you have really great tools. In some cases at Vodafone or other companies, they also have global options to monitor their supply chains, their purchasing, to see risk indicators. What impact does a corona crisis have on our security of supply or an Ever Given that blocks the Suez Canal for three or four days, where you have to act very quickly, very agile.

Part of the problem is just because we are in 2021, that doesn't mean that everyone has already arrived at this digital strategic level, but depending on the company, whether it's a large DAX, a large DAX group or a small medium-sized company, or depending on the sector, whether it's, I don't know, the banking industry, or perhaps more of a service or service sector, public or private procurement, so the whole topic of public procurement is also a very, very exciting topic.

There are different stages of development and I would say that we have the caveman who is still lying on his bearskin and has just invented the wheel and fire, where there is still a great deal to be done.

Fabian | 10:40.45
If I could interject here, this is perhaps a very exciting topic, because I think we have just heard the Vodafones of this world or there are probably other large DAX or Fortune 500 companies that have arrived in this Prokurement Mature Team, I would like to call it now. And you also have Suez Canal, Globus and Nightshades and so on. It's more about the materials and the retail chains and products. But now you've already mentioned the interface, the specialist department, and here and there the height is reported again.

How does this differ from purchasing services? If you look at it now, here in Germany or in the EU, an incredible amount has happened. I mean... Two thirds of the EU's GDP is now services. That was very different 20 years ago, when Mr. Lopez put procurement on the map. And how do you see the challenge or this topic, i.e. the procurement of services?

Challenges in the procurement of services

Dr. Karsten | 11:50.29
So that's another very specific question, of course. Special hurdles that have to be overcome. So I think the whole topic of indirect spend and also the topic of service purchasing has at least three major problem areas. Problem area number one, it's super fragmented. Problem number two is that purchasing is not always necessarily the specialist department that makes the decisions and is sometimes seen more as a fifth wheel or a pain in the neck and not necessarily as a value-adding discussion partner where you say, look, I have another supplier, another service provider that I can offer you again. So perhaps we have already concluded a framework agreement with another location or we have had good experiences.

And last but not least, it is also extremely fragmented. And if we take a look at various services, then there is also something where you can say, well, if I now have this very old classic purchasing model, I always try to reduce costs, costs and costs. then it may be that I have achieved my KPI, my goal, but that the company itself has not necessarily gotten the best benefit from it, because then perhaps the tax consultancy A has made a better offer than B, but the company would perhaps pay a total less tax with B or in marketing and sales campaigns or in research and development projects.

This means that... the expertise in the specialist departments is of course required. And that's where the challenge for the buyer lies, let's say, to adapt like a chameleon, to be able to speak different languages. In other words, when communicating with the legal department, you should of course be able to master and understand their vocabulary.

If you are communicating with the CFO or with the marketing and sales or R&D department, then of course you also need to understand exactly what they need and how you can help them to support them. Because if I'm just the one crying in the wilderness or the bad buyer who always raises his finger and says, "But it's too expensive. But you have to take this one, it's cheaper. I don't really, really deliver value, but I really have to say, okay, what do you need, what offers do we have, because the purchasing department naturally has an overview of the market and there are also appropriate tools to analyze markets, to analyze suppliers.

We have the network, we are like a spider in a web and we also know who in our company works with whom, where and how, where framework agreements already exist. We have supplier evaluations. We already know how these services have gone in the past, whether they were good, whether they were outstanding or whether they were simply quite good at first glance. But then, if you really dig a little deeper or work with this company, you say, well, it wasn't that great. Next time we'll go back to our... old supplier.

Fabian | 15:50.25
In the summary, to reflect on this again, you basically say that indirect purchasing is generally extremely fragmented, therefore highly complex and difficult. But on the other hand, this recurring interaction, specialist department, central purchasing, where of course then goes into the various topics.

I work together properly, that I use each other's expertise and I collaborate properly during the sourcing process on the keyword comparability, transparency and performance management of the suppliers. I think you can summarize it like that, can't you?

Fragmentation and complexity in indirect purchasing

Dr. Karsten | 16:32.75
You can summarize it like this. I would like to add one more point, and that is ultimately the incentives. So I think it's also important that the savings that are generated also benefit the department or the company in some way. Because otherwise, if I as a specialist department am penalized for simply having less budget available next year, then cooperation with the purchasing department will be more difficult, where people say, well, okay, you've just reduced our budget now, you get the credit because you met your KPIs, we don't get it. We have to see how we can perhaps push more volume through the pipeline next year with an even smaller budget.

So here too, of course, it's clearly about collaboration, about a common optimum and not just saying, okay, how can I just look at my tube in a system of communicating tubes and push the water level down, then it goes up somewhere else and then I've only met my KPI. For the company itself, that doesn't help, because we have a right pocket, left pocket problem.

So here too, transparency and collaboration are ultimately the key to success.

Fabian | 17:54.09
I think that's actually a very good approach to the issue, which is always a major challenge, that the interests of the specialist department and purchasing are not on an equal footing with those of the other departments.

Do you perhaps have a few solutions ready, perhaps also directly from research, Brandt means, on the topic of how can I make these services comparable and how can I bring transparency into it, because I mean, if I look at purchasing, then of course I have a clear taxonomy in the direct area of materials and products, my product categories, I use the UNSPC or Nike Sport and have a clear structure there.

Of course, this is not so tangible for services. Are there different approaches or methods where you say, okay, you can bring in comparability and transparency, or is that still more of an unsolved problem?

Dr. Karsten | 18:53.08
That's difficult. I mean, at the end of the day, I have to somehow try to attach a measurable KPI to various things like collaboration, innovation, cooperation, in other words all these soft factors, and perhaps attach a price tag to them and then use a kind of bonus-malus system to break the whole thing down into the dimension of costs. But that just turns out to be difficult. Many companies simply do this with different selection criteria, where of course price and quality, time... Reliability, trust, innovation cooperation, collaboration, technology leadership. These are the classic areas that are used. The problem you always have to look at a little bit.

Of course, you always try to measure as much as possible at the beginning in order to get as comprehensive a picture as possible. The problem is that the more I measure, the lower the individual value contribution. In other words, if I divide 100 percent into 20 categories, then each needle only goes up or down plus or minus 5 percent or plus or minus two and a half percent, i.e. 5 percent in general. And the more I measure, the lower the sharpness of the trend really becomes afterwards. So I then have to consolidate this a little at the end of the day. Of course, this is also always done in joint teams, where you say, okay, what are our criteria? How highly do we rate them? And then of course you have to do that again together with the specialist department.

And that will then also look very different, whether you say, okay, is this now a service partner, a service partner who... a MeToo service that is interchangeable, that perhaps still has old technologies, old services, or is this also someone with whom we can go into the future together, i.e. also in the direction of strategic suppliers, are we repositioned with them, better positioned, more digitally positioned in order to also address a new clientele of millennials, are we on the move on other social channels? Where do we need to position ourselves? And I think these are many exciting areas where not only is the entire company undergoing a digital upheaval, but Purchasing also has to support this accordingly and act as a competent strategic advisor to the specialist departments.

The future of indirect purchasing: trends and visions

Fabian | 21:35.05
Yes, I can see that the demands on buyers are changing significantly. So the buyer is becoming more and more, especially in service purchasing, the strategist knows, also the, I say, sparring partner for the specialist department, so there are also new requirements for various digital interfaces, i.e. software solutions. And historically, I mean that purchasing is very focused on materials.

Dr. Karsten | 22:04.41
was focused,

Fabian | 22:05.73
Does this software already exist, where you are now saying that all these solutions are being played out in terms of collaboration, in terms of working together and so on? Or is the reason, as you mentioned before, that people still have to take themselves seriously like cavemen, i.e. Ex and Outlook, that there is also a reason that the digital work interface has not yet been made available to them in the sense of a... services can be purchased easily and digitally.

Dr. Karsten | 22:39.85
Yes, I think there are probably three aspects. Firstly, of course, it's a question of what the market or the start-up scene, the software landscape, is currently offering in this area. And I think this is still really, as we would probably have said back then in consulting, tall grass or a lot of uncultivated land. And Mercanis certainly has a very good product at the start, which also has a pioneering role.

There are certainly also one or two niche solutions. Difficulty number two is of course ultimately the specificity of a service. But we know that ourselves. In the private sector, you can also say, well, why should I pay 10,000 euros for a Fiat Punto and 100,000 euros for a Mercedes S-Class, they're both cars, I can actually get from A to B. And then you have to say, well, why should I pay 10,000 euros for a Fiat Punto and 100,000 euros for a Mercedes S-Class? And then you have to say, okay, what about life cycle costs, what about quality, what about maintenance, that's of course difficult, and with service it's of course even more difficult to verify higher prices, different prices.

But we've already dealt with this issue by working with the specialist department and I think last but not least, and I think this is also a very big factor, is simply the human factor, which of course also says, I've been working with company XY or with the service provider for years. And they know us, they know our processes, they know our machines, they know our interfaces, they know where they come in and out of the plant. Of course, it's much, much easier to rely on trusted partners than to say, should I use the new service company Carsten Machholz or XY, whoever? I don't know him, I don't know how he behaves here. He doesn't know us yet, he doesn't know what makes us tick, what our processes are like.

So, of course, sometimes for good reasons, sometimes out of comfort zones, you often stick with suppliers or service providers that you've had for years. If they are good, that is of course not a problem. It only becomes a problem if they don't perform. Then of course you have to part with them. And of course, there are also things where suppliers are actively sidelined. So if there really are accidents at work, massive violations or other things, that's a completely different issue. And certainly not by or then, of course, software can also help or the corona crisis. All of a sudden, supply chains that have been established worldwide for decades and that we have trimmed very, very one-dimensionally in terms of costs and efficiency. Suddenly all the dominoes are falling.

China has a shutdown that comes from Wuhan and other supply chains collapse. And then, of course, I have to look very quickly in the direct area, but also in the service area, who can offer me this service? Perhaps more regionally, perhaps more diversified, so that I am more resilient, more resistant and can react in an agile way. And of course... up-to-date software can always help me to combine my own know-how, my own experience, my own Excel list or my own list, which I might even have had in my desk drawer in the past, with it and say, oh, look, there are these and these suppliers that I can also include in my portfolio and then integrate accordingly in the tender, in the pitch or whatever.

The role of people in future procurement: strategic consulting vs. operational tasks

Fabian | 27:05.88
Very exciting to hear. I think it's in line with what we're seeing everywhere at the moment, that there isn't really any software yet that's able to tackle the topic of indirect and services on a global level in the way that the top dogs in the direct program are doing. And of course there are also many human challenges that need to be incorporated somewhere in the area of collaboration and, above all, cooperation.

Collaboration and that can take place in this whole area of tension between service provider, specialist department and purchasing. So it's definitely something that probably won't be solved today or tomorrow. Nevertheless, I and our listeners would still be very interested to know what your visions for the future are for indirect purchasing? I think you not only have your finger on the pulse of the times with your consulting mandates and your commitment, but I also think you can always take a good look into the future with your research.

What would be your top 3 visions? How will indirect procurement develop in terms of importance? And there's a lot of talk about self-service procurement and autonomous procurement at the moment. It would be interesting to have another opinion on this.

Dr. Karsten | 28:22.83
I think procurement in general, in the future, will definitely become much more agile, much more resilient and much more sustainable. This applies to both direct and indirect purchasing, because at the end of the day we only have one planet and then the issue of sustainability, CO2 footprint, compliance with human rights in the supply chain, i.e. the German Supply Chain Act, EU Green Deal. is extremely important and even if you say, well, we're just one company with 3,000 employees, so at the latest if you're somewhere in the supply chain of a mercedes-benz, a porsche, ikea or other larger companies, then ultimately the suppliers, whether direct or indirect, will be chosen who can then also show transparency, that the origin and further processing of products or the origin of services can be traced and can also be audited, i.e. for an audit trail, this can be done in areas such as banking, insurance, finance, of course. Pharma, biotech, this is a very important point in the area of public procurement and, of course, also for simple ISO certification. Here, too, I have to document the relevant processes and procedures.

That is certainly very, very important and fundamental. And, of course, we are all on the path to digitalization. And that means, even if we take Industry 4.0 or IoT a little further, as we saw at trade fairs many years ago, that one machine communicates with another machine and then of course also with direct materials. I need a metal part, which I now mill, turn, drill, whatever. Or beware, I need maintenance, a service, a service. This will also become more and more machine-to-machine communication. And everything that can be automated will be automated because it's simply much faster, more efficient and cheaper, so like every coin, there are two sides to it.

Of course, the workload in indirect purchasing will be reduced, but this will give you much more time to focus on the strategic issues that create value. And that, I think, is the great opportunity for procurement to position itself as a strategic advisor to management and to look ahead, identify cliffs and icebergs that lie ahead on our path, offer solutions and steer the ship through the stormy seas. This very operational purchasing will certainly be increasingly automated in the future through RPA and bots. And especially in the area of service purchasing, I think there is still a massive need for a human component, including an emotional, empathetic and rational component, where I can perhaps weigh up different offers and bring out the best solutions for the company or for the specialist department.

And the software, whether it's artificial intelligence or RPA, will not replace us, I'm quite sure, but will support us. In other words, the redundant, mindless tasks will be transferred from one Excel sheet to the next SAP system, from there to the next Excel sheet or to the next requisition. This will certainly become much more automated in the future. And at the end of the day, there may be another buyer who approves things again if there are discrepancies, or says again, no, but I would rather have the second version and not the first version or option and approve it.

So the human factor will still be very important. And I think we will simply have a lot more time in the future... time to deal with the strategically important issues. And that's where software like that from Mercanis or other providers in the direct or indirect area can provide us with massive support, so that we simply don't spend so much time searching and evaluating, but rather invest in strategic decision-making.

Fabian | 33:38.38
Yes, an extremely exciting vision of the future, so if I may say so again, you see sustainability and compliance, CSA I would call it, as a clear vision of the future as a bottom layer for direct and indirect, and then perhaps even more on the indirect side as a layer above that, the topics of digitization, automation, keywords, AI, RPA, big data. So that, if you look at it like a pyramid, at the top of the pyramid you have the opportunity to finally participate in value creation as indirect purchasing from the human component, from the transactional component. And if we say it so casually, that indirect purchasing can also emancipate itself and then actually become this trusted advisor, as you have called it, for services, that this can finally be with the specialist department.

Carsten, thank you very much. It was an extremely exciting conversation. So I think our listeners will really appreciate having insights into the course of time, but also for the future, what visions can look like. So thank you once again. Otherwise, I can already announce the next episode. We have more exciting guests, including Marcel Vollmer with an eventful CV, formerly Chief Procurement Officer at SAP, then CEO at Arriva, the world's largest procurement software company, and now a global consultant at BCG. So, dear listeners, you can continue to look forward to exciting purchasing experts with us. And the cash register will find him there.