TKMC Case: Premiumstahl AG and the global procurement market

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Problem Definition

Premiumstahl AG is a steel producing group operating mainly in Europe. The core business areas are steel production and the manufacturing of flat products from quality steel, as well as the provision of services in the steel sector. In the context of the transformation of Premiumstahl AG to a green steel player, the purchasing director Mr. Müller approaches you with the request to reduce purchasing costs in order to free up funds for green investments. As some optimization projects have already been initiated, the Board of Management asks you to take a closer look at the topic of "Global Sourcing".

Short Solution

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 conceivable in addition to global sourcing in order to reduce procurement costs.

The primary purpose of this task is to facilitate the introduction to the topic of purchasing in a free discussion. Here the candidate could name a variety of different purchasing levers.

Selection of possible optimization levers:

  • Demand: forward planning, reduction, substitutes, bundling
  • Specification: Standardization, simplification, redesign
  • Procurement: Supplier portfolio (selection, development of suppliers, number, alternative services), tender frequency, framework agreements, complaint management, renegotiation
  • Execution: Supplier partnerships/workshops/integration, 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 can best influence. To which area can the optimization lever "Global Sourcing" best be applied?

Exhibit 1 can be shared with the interviewee.

a. Raw materials

Here, a candidate could mention that the global sourcing approach is particularly useful for raw materials and, for example, name 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 pool can be influenced much better than raw materials (see task 1 for optimization levers).

However, there are several reasons why global sourcing does not make sense here, including:

  • Too high costs to use personnel from abroad (transport, accommodation etc.)
  • Ad-hoc assignments that go beyond plannable requirements
  • Possible language barriers at working level

c. Spare parts

This cost block can be influenced well not only along the optimization levers mentioned in task 1, but also through global sourcing. Since the board asked to deal with global sourcing, the candidate should mention that spare parts are particularly relevant in this task.

d. Other

"Other" includes a very large number of small, non-summarizable, items. However, the costs of comparing offers from different individual orders would quickly exceed the savings effects.

Mr. Müller is satisfied with the initial results of the analysis regarding possible levers in procurement optimization. However, the Management would like to see figures at the next meeting showing possible saving potential. Since the cold rolling mills in particular have been struggling with high costs for roll maintenance for years, Mr. Müller instructs you to apply the global sourcing approach to the procurement of rolls, as he suspects that this is where the greatest savings potential is to be found.
For comparison purposes, you have asked a colleague from Controlling for the costs for the procurement of rolls from the last fiscal year. These amounted to € 35,843,798.12 last year.

Task 3: Cost drivers

You meet Mr. Müller in the elevator. He inquires about the controlling report in your hands and asks you for a brief explanation of the composition of these costs before the next board meeting. Since your colleague has not provided you with any further information on the figure from the report, you have to explain to Mr. Müller, which cost items such a procurement sum typically consists of.
  • The bulk 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 service life of the products. Rollers with a short service life have to be replaced more often.
  • In addition, other components of procurement costs such as logistics costs or, if applicable, administrative costs must also be taken into account.
  • At this point, the candidate can also refer to other possible factors such as costs for plant downtime due to inferior quality. However, these should be explicitly delineated as they are not included in the procurement costs.

Task 4: Supplier selection

Mr. Müller asks you to evaluate possible cost savings concerning the cold rolling mills. The following information on the currently used cold rolling mills has been provided by the Controlling department:

  • 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.

In order to be able to compare costs, a member of the market research department provides the following data on foreign suppliers:

Exhibit 2 can be shared with the interviewee.

Which supplier offers the greatest savings compared to the current supplier?​

Sample invoices for the Turkish supplier:

  • Quantity: 12.5 million t capacity * 80% capacity utilisation = 10 million t production volume / 16.7 thousand t per roll = ~600 (598.8)
  • Product costs 40.000 € * Quantity 600 = 24 Mio.
  • Logistics costs: Number of containers 600 / 7 = 85.71 * 6000 € * 1.3 percentage increase = 668,538 €
  • Shutdown costs: Downtime shifts 8 shifts / 3 per day * 500.000 € = 1.333.333,33 €.
  • Total costs: 26,001,871.33
  • Normalization to service life of the current rolls: Sum of costs / 90 * 96 = €27,735,329.42

The Turkish supplier is the cheapest, taking into account the cost of downtime and the life of the rolls.

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 downtime costs for 1.2 days, which were not included in the procurement costs of 35,843,798.12 €.

When you present these results to Mr. Müller in the next meeting, he is surprised about the large effects of the costs for downtime and service life of the rolls 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 lower service life.

Task 5: Quality check

Briefly explain what 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

Mr. Müller thanks you for your informative calculations and announces that he will come back to you in the next few days to initiate the planning of possibilities to improve the quality of the Chinese supplier.

Exhibits

Exhibit 1:

Exhibit 2:

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3.3k
Times solved
Intermediate
Difficulty
Do you have questions on this case? Ask our community!

Exhibits

Exhibit 1:

Exhibit 2: