TKMC Case: Premiumstahl AG and the global procurement market

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

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.

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.

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 a working level

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.

"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.

• 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.

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 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:

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

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.

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 €.

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.

• Specifications: Optimize order texts and specifications
• Supplier auditing and prequalification
• Supplier development (workshops, supplier days)
• Joint product development