Solution
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
Task 1: Optimization levers
Mr. Müller asks you to briefly explain which optimization levers are generally useful in addition to global sourcing in order to reduce procurement costs.
This task primarily serves to facilitate the introduction to the topic of purchasing in a free discussion. Here the candidate could name a variety of different purchasing levers.
Selected possible optimization levers:
- Demand: Advance planning, reduction, substitutes, bundling
- Specification: Standardization, simplification, redesign
- Procurement: Supplier portfolio (selection, development of suppliers, number, alternative services), tender frequency, framework agreements, claim management, renegotiation
- Execution: Supplier partnerships/workshops/involvement, supply chain optimization, inventory management
Task 2: Procurement costs
In order to prioritize the individual procurement areas, Mr. Müller would like to know which of the following procurement costs you could influence most effectively. To which area can the optimization lever "Global Sourcing" be applied the best?
Exhibit 1 can be shared with the interviewee.
.jpg)
a. Raw materials
Here, a candidate could mention that the global sourcing approach makes sense especially for raw materials and name, for example, countries for ore and coal that supply these raw materials.
- Ore: Australia (>50% world market share of exports), Brazil, South Africa, Canada
- Coal: Australia, Indonesia, Russia, USA, South Africa
China is the largest mining country, but exports little. However, commodities, especially ore and coal, are index-linked and therefore highly dependent on global markets. Accordingly, these costs can hardly be influenced.
b. Services
This cost block can be influenced better than raw materials (for optimization levers, see task 1). However, there are several reasons why global sourcing does not make sense here, including:
- Too high costs to use staff from abroad (transport, accommodation, etc.).
- Ad-hoc assignments that go beyond plannable needs
- Possible language barriers on working level
c. Spare parts
This cost block can be influenced along the optimization levers mentioned in task 1 and is also addressable by global sourcing. Since the board asked to look into global sourcing, the candidate should mention that spare parts are particularly relevant in this task.
d. Other
"Other" includes a large number of small items that cannot be summarized a bigger material groups. The costs of comparing offers from different individual orders would quickly offset saving effects.
Mr. Müller is satisfied with the first results of your analysis regarding possible levers in procurement optimization. However, the Executive Board would like to see figures at the next meeting that show possible savings potential. Since the cold rolling mills in particular have been struggling for years with high costs for maintenance of rollers, Mr. Müller asks you to apply the global sourcing approach to the procurement of rollers, since he expects the greatest savings potential here.
For comparison purposes, you have asked a colleague from Controlling regarding procurement costs of rollers, which amounted to € 35,843,798.12 last year.
Task 3: Cost drivers
You meet Mr. Müller in the lift. He inquires about the controlling report in your hands and asks you to briefly explain the composition of these costs before the next board meeting. Since your colleague has not given you any further information on the figure from the report, you have to explain to Mr. Müller, which are the main cost drivers of rollers.
- The majority of this sum consists of the agreed purchase price for the rollers multiplied by the quantity,
- One factor that has a direct impact on the quantity procured is the lifespan of the products. Rollers with a short service life need to be replaced more often.
- In addition, other components of the procurement costs such as logistics costs or possibly administration costs must also be taken into account.
- The candidate can also refer to other possible factors such as costs for plant downtime due to inferior quality. However, these should be explicitly delimited as they are not included in the procurement costs.
All cold rolling mills together have an annual production capacity of 12.5 million tons and an average capacity utilization of 80%. The largest cost item in the maintenance of the cold rolling mills is the roller. In order to ensure a smooth production process, the group-wide maintenance department has to replace each roll after an average of 16.7 thousand tons of rolled steel. Currently, the rolls are purchased from the German supplier "Sächsische Walzenwerke GmbH". The rollers are delivered in special containers of 7 rollers each. The transport currently costs €6,000 per container. If a plant comes to a standstill due to a defective roller, this costs about €500,000 per day. Currently, the plant is at downtime for about 1.2 days due to defective rollers. A roller from the current manufacturer has a lifespan of 8 years.
Task 4: Supplier selection
In your next appointment, an employee of the market research department was able to provide you with the following data on foreign suppliers upon request:
Exhibit 2 can be shared with the interviewee.
.jpg)
To prepare a decision template for Mr. Müller, you need to calculate which supplier offers the greatest savings compared to the current supplier.
Example calculations for the Turkish supplier:
- Quantity: 12.5 million t capacity * 80% utilization = 10 million t production volume / 16.7 thousand t per roll = ~600 (598.8)
- Product costs € 40,000 * quantity 600 = € 24 million
- Logistics costs: Number of containers 600 / 7 = 85.71 * 6,000 € * 1.3 percentage increase = 668,538 €
- Downtime costs: Downtime shifts 8 shifts / 3 per day * 500,000 € = 1,333,333.33 €
- Total costs: 26,001,871.33
- Standardization to lifetime of current rolls: Sum of costs / 90 * 96 =27,735,329.42 €
The Turkish supplier is the cheapest, taking into account the costs for downtime and the lifetime of the rollers.
Compared to the current supplier, this results in a saving of 23.9% (36,443,798.12 € - 27,735,329.42 € = 8,708,468.70 € / 36,443,798.12 € = 0.2389).
NOTE: 36,443,798.12 € includes 1.2 days downtime cost, which come on top to the pure procurement cost of € 35,843,798.12.
While you present these results to Mr. Müller in the next meeting, he is surprised about the large effects of the costs for downtimes and service life of the rollers of the different suppliers. Mr. Müller asks you if there are possibilities to commission the Asian supplier under the condition to reduce costs for downtimes and to extend the service life of their rollers.
Task 5: Quality check
Briefly explain which possibilities exist for Premiumstahl AG to influence the quality of products from certain suppliers.
- Specifications: Optimize order texts and specifications
- Supplier auditing and prequalification
- Supplier development (workshops, supplier days)
- Joint product development
