"Global Sourcing" - more harm than good?

What has to happen now in order not to look like a loser in the competition of the global supply network.

Prof. Dr. Dirk Hecht

Prof. Dr. Dirk Hecht is the subject advisor and programme director of the Master's in "Technical Procurement Management" at the THI. (Photo:THI)

Seldom has procurement management been so prominent in the public eye as it has been in the past two years. One supply crisis follows the next. The semiconductor crisis leads, among other things, to sensitive slumps in the German automotive industry, vehicles are built on stockpile and - as far as possible - equipped with chips later or completely cancelled from the production programme. Customers wait more than a year for a new vehicle, electric vehicles are particularly affected.

In a conference call at the end of October, VW boss Herbert Diess spoke of around 600,000 cars that could not be built because of the missing semiconductors. The impact on GDP, tax revenue and employment are worshipful. "As is so often the case, no one is responsible and many are surprised," says Dirk Hecht, professor of procurement management at Technische Hochschule Ingolstadt (THI).

Is it all down to Corona?

Purchasing, or more precisely strategic procurement management, is supposed to ensure the global, demand-oriented and economic supply of goods for a company. The importance of this function becomes clear when one considers that in some corporate groups, up to 70 percent of the value of sales is the responsibility of procurement (on average, according to the BME in 2020 and 2021, about 50 percent), says Prof. Dr. Dirk Hecht.

Many companies have recognised the role of procurement and have raised the responsibility up to management level or the board of directors (for example BMW, Audi or Airbus). Studies show that about 60 percent of the value added in the global supplier network is thus shifted abroad.

Prof. Dr. Dirk Hecht explains: "Against the background of the opening of markets in Eastern Europe and the developing globalisation at the beginning of the 1990s, the importance of global sourcing increased steadily. While procurement was initially dominated exclusively by aspects of cost reduction, it can be seen over time that the establishment and expansion of global supply chains determine the orientation of companies for certain procurement markets. As a result, global sourcing is no longer understood exclusively for procurement in low-wage countries; rather, this concept is considered a strategic approach to the development of a company. The term "global sourcing" can therefore be understood as the combination of strategic orientation and an international approach. This includes, among other things, the structured analysis and evaluation of global procurement markets, the timely identification of new procurement sources, the structured development of new international suppliers, systematic cost analysis and preventive risk management."

Unfortunately, these approaches are not pursued across the board and globalisation is reduced to "the main thing is to buy cheap in China": "As early as 2009, German companies had to experience what happens when you do not control your own supply chains and a country gives us a lesson in cut-throat competition. China first used dumping offers to gain a monopoly in the extraction of rare earths overnight. The prices of the rare earths neodymium and dysprosium, which are needed for high-performance magnets, increased thirtyfold(!) between 2009 and 2011. German companies were forced to pay in advance in order to receive any supplies at all."

A highly dangerous situation

China stringently pursues core technologies with five-year plans and also implements them extremely efficiently. The semiconductor and printed circuit board market is dominated by China. The persistent shortage in the semiconductor sector since 2020 was actually foreseeable, catalysed by COVID but not necessarily exclusively caused by it, Prof. Dr. Dirk Hecht is certain.

And the next bottleneck is looming: magnesium

With an 87 percent share of production, China has an almost complete monopoly on global magnesium production. About 45 percent of all Chinese exports are destined for Europe. Germany and Europe are also particularly hard hit by supply bottlenecks because in 2001 the remaining magnesium production was abandoned as a result of dumped Chinese imports. "The result is that Chinese exports now cover 95 per cent of Europe's magnesium needs, creating an almost complete dependency," says the expert. Magnesium has been on the EU's list of critical raw materials since 2017. The European Commission stated this in its Communication on "EU Critical Raw Materials Resilience: Charting a path towards greater security and sustainability" in September 2020. However, political-strategic considerations and measures to secure the flow of supplies have so far failed to materialise. The severe shortage of magnesium is already leading to record prices, creating global distortions in the market and heralding huge disruptions in the supply chain.

At the same time, German companies need to prepare for the new Supply Chain Act from 2023 (more precisely: the Act on Corporate Due Diligence in Supply Chains). This requires procurers to take responsibility for the elements of sustainability of the well-known triple bottom line of economy, social and ecology in the supply chain. Should human rights violations occur in a supply stage, a German OEM, for example, can be held responsible, explains the THI professor. This is a Herculean task, as only a few of the initially affected companies with more than 3,000 employees can currently demonstrate comprehensive transparency of the complex supply chains. The penalties can be quite severe; values of 0.35 to 2 percent of turnover (not profit!) are being discussed. It remains to be seen whether Germany will not overshoot the mark and put German companies at a significant competitive disadvantage, despite what is certainly a well-intentioned initiative.

So what specifically needs to be done?

"We need more strategists," says Prof. Dr Günter Hofbauer, THI professor of strategic procurement, with regard to the current problems. Decision-makers must learn to think in complex scenarios and unerringly identify the optimal course of action. One-dimensional thinking and linear extrapolation have long been outdated in a VUKA world; instead, planning must be done in multidimensional decision spaces, and in this context, the ability to anticipate is the most important management competence. The new buzzword resilience describes the resilience of a supply chain to resist external disruptive factors or to be able to realign itself. "If we fail to master this resilience in the global environment and are no longer able to secure the supply of raw materials and intermediate products, procurement organisations run the risk of stalling the EU's economic engine," says Dr Bernd Martens, long-standing Chief Procurement Officer at Audi AG.

New technologies such as RPA, blockchain or digital twins can provide relief, but before digitalisation, the strategy and process must be adapted.

The function of the procurer is highly professionalised. Analogous to the requirements for development and production departments, stringent training for the buyers of the future is imperative. Universities such as the TH Ingolstadt are leading the way with dedicated Master's and Bachelor's programmes in southern Germany.

"Sourcing on global markets must be reoriented and expanded to include essential decision-making criteria," says Dr. Bernd Martens. The current criteria, which are mainly based on costs, are no longer sufficient. The ESG criteria, as laid down for example in the sustainability requirements in the automotive supply chain and in the VDA audit programme, must be met in full. The CO2 emissions in the supply chain must be taken into account and included in the total cost of ownership with a CO2 price per tonne. This is the only way to systematically reduce the CO2 footprint. New processes for more environmentally friendly production of raw materials must also be promoted and implemented.

Every company must carry out a screening with regard to the risk of supply disruption for the materials and assemblies they require and also name the risks. Especially in the case of risks from monopolies, or from dependence on certain regions, the creation of additional sources is essential, even if this leads to short-term increases in purchase prices. "The current example of supply bottlenecks and record prices for magnesium or also a few years ago for rare earths show how the previous approach leads to a dead end", Dr. Bernd Martens explains. Strategic procurement is taking on a new significance; it is becoming the visionary for future, sustainable and robust supply chains.

The neglect of German and European industrial policy to invest in the production of necessary raw materials and core technologies such as batteries, semiconductors and telecommunication has also created a worrying dependence on others, the experts are sure. Together with the industrial associations, the companies and the ministers of economy of the European countries under coordination of the European Commission, an executive plan has to be developed that ensures the renewed availability of Critical Raw Materials (CRM) (see also: Study on the EU's list of Critical Raw Materials 2020) and directs investments to the necessary core technologies.

Dr. Bernd Martens, Prof. Dr. Dirk Hecht

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