Supply chains felt the economic repercussions of the coronavirus pandemic at a very early stage. The virus thus hit a very sensitive point of an industrial world that is highly intertwined at a global level – a network in which the cross-border movement of goods, just-in-time supply, and tailor-made supplier products are of vital importance. At ElringKlinger, too, the crisis had a major impact on the activities of both Purchasing and Supply Chain Management. Despite many bottlenecks, the company succeeded in maintaining its operations almost entirely without disruptions in 2020, a year that can be considered truly exceptional. As managers of the respective areas, Bernd Weckenmann and Jorin Preuß outline the challenges faced by the company during this period.
Bernd Weckenmann has been responsible for global procurement within the ElringKlinger Group since 2016. On taking up this role, he restructured the department by introducing a matrix organization. This helped to pool and manage requirements more effectively across the Group, while also achieving greater economies of scale. With an annual purchasing volume of around EUR 800 million, each and every optimization measure within his area of responsibility has a significant impact on Group performance as a whole. Embracing the fundamental principle of partnership-based supplier relations, Bernd Weckenmann is on the right track. His belief: „Ultimately, doing business has to be enjoyable for all those involved – for our suppliers as much as for us.”
Jorin Preuß has been accountable for Supply Chain Management (SCM) within the ElringKlinger Group since 2016. He thus represents the control center for material supply in global operations. SCM is responsible for ensuring the smooth flow of goods throughout the entire supply chain – from suppliers and production to customers, from raw materials and intermediate products to the end product. Among Jorin Preuß’s key challenges is the long-term strategic task of steadily optimizing net working capital within the ElringKlinger Group. The significant improvement in cash flows is visible evidence of his success. His credo:„Always six inches of water under the keel!”
What happened to supply chains in the spring of 2020 in the wake of the coronavirus pandemic is unprecedented: goods transportation was impeded by border closures within Europe, assembly lines came to a standstill, consumption stopped, entire countries were in lockdown. The manufacturing industry was forced to switch from carefully planned processes to operations management without any reliable forecasts. The repercussions of the pandemic were first seen in China, where ElringKlinger also had to close down local plants in February. From March onward, the effects were soon felt at other locations, first in Europe and subsequently in America. Almost immediately and across the board volumes requested by customers as part of their scheduling arrangements fell dramatically, in many cases by more than 50 % and at times even by as much as 80%, while the raw materials ordered for budgeted quantities were already on their way to ElringKlinger plants. “Imagine a train that suddenly stops, while additional railcars continue to pile up from the back,” says Jorin Preuß in explaining the situation. This led to a surge in inventories that reached its culmination at the end of April/beginning of May.
„Customer purchase orders saw an abrupt plunge across the board, but the raw materials ordered for projected volumes were already in transit and could not be stopped.”
„Shipping containers were filling up the yard at our plant in Buford, USA, because there was no more material flowing off to production.”
„At our American plants, we benefited from the fact that we had already established fast and flexible procurement structures due to US customs policies.”
„Our approach is based on the concept of total cost of ownership. When selecting a source we factor in not only the price of goods but also all procurement costs, including transportation, tariffs, and similar incidental costs.”
Purchasing was initially hit equally hard by the effects of the pandemic. Large purchasing volumes and long-term planning horizons as the best basis for negotiations were suddenly a thing of the past. However, there were some bright spots: in order to avoid tariffs, especially on steel and aluminum, ElringKlinger had already created more room for maneuver in the preceding year in order to be able to change suppliers. Faced with new tariffs, buyers initially focused on local sourcing. However, as supply within the US market was far too limited to cope with the sudden rise in demand, local market prices subsequently soared to such an extent that it was once again more favorable for ElringKlinger to source from abroad.
Within the area of Supply Chain Management the emergency brake was activated as soon as the rear railcars started piling up. The first task was to adapt the flow of information to the changed circumstances. “It’s disastrous when customers reduce quantities dramatically over the phone but these changes are not reflected in the automatic delivery schedules,” says Jorin Preuß in reviewing the situation. Irrespective of the legal position, it quickly became clear that immediate action was needed. The requirements were completely redefined: quantities requested from customers as part of their scheduling arrangements were adjusted downward, production orders were stopped and restarted to match the lower quantities, and orders placed with suppliers were reduced.
„The entire industry was suddenly invoking force majeure clauses, even though this was not applicable. However, rather than debating the matter it was clear that we needed immediate action in order to contain the damage as much as possible.”
„The databases have to be accurate. Given the breadth of our product range and the fact that we operate almost 40 plants around the globe, it is essential that customers from the respective regions supply us with accurate data so that our operational processes can work.”
„When volumes suddenly slump, every supplier is eager to secure orders. That changes the negotiating position.”
„There are specific parameters for each material. Due to the supply chains involved, commodities tend to be negotiated on a long-term basis, but here too fluctuations in market prices are taken into account.”
„There are many ways to streamline costs. This may also include an adjustment to processes, for example, allowing suppliers to manufacture in a more cost-effective manner.”
Purchasing was quick to see the crisis as an opportunity. When suppliers are suddenly faced with a complete slump in volumes the negotiating position tends to change. “Essentially, we stepped up what we are already doing, which is to continuously check across all areas how we can make the best possible purchases,” says Bernd Weckenmann. He used various instruments to achieve his goals. For example, contract durations were a key issue in those cases in which market price fluctuations were expected. However, certainty of supply and lead times also had to be taken into account – two aspects that were of great importance, particularly in the year of covid-19. Bernd Weckenmann still sees a lot of potential at present in the area of process improvements, which are implemented together with suppliers. “Collaboration often leads to solutions from which both parties benefit,” the expert says.
Thanks to the rapid response measures by Supply Chain Management, the material backlog initially seen in factory yards was cleared by early summer. In fact, ElringKlinger actually reported a significant quarter-on-quarter reduction in inventory levels at the end of the first half. This favorable trend was also the result of a longer-term program: Jorin Preuß and his team are working continuously to reduce inventories throughout the global Group. This requires SCM employees to conduct an in-depth assessment of the various processes in order to be able to identify possible improvements relating to operational material flow. The aim is to be able to keep stock levels lower while theoretically maintaining the same output. ElringKlinger’s recently shown ability to improve cash flow from operating activities is to some extent evidence of the company’s success in this area.
„Reducing inventories without jeopardizing operational output requires in-depth knowledge of processes.”
„In a tough exceptional case like this, supplier, producer, and customer have to pull together to avert the danger of escalation level 3, i.e., production line stoppage at the OEM. Risk management can minimize threats, but not eliminate them.”
„The supply chain is long when it comes to raw materials in particular. Once we have placed an order, our supplier in turn orders the production of the input materials from his upstream supplier.”
In the third quarter, the pandemic-plagued year changed tack again – in a more favorable direction. Customer demand surged to such an extent in September that the supply of raw materials, which had previously been heavily reduced, could not be increased again as quickly as required. While so far ElringKlinger had been able to navigate through the pandemic without disruptions to the supply chain, late fall saw the emergence of bottlenecks that again posed a challenge for Purchasing. “We have always placed great importance on risk management, which also means scaling back dependencies. This too, however, has its limits,” emphasizes Bernd Weckenmann, citing an example of several serial production orders within the area of Lightweighting. A supplier of plastic granules had not been able to offer the quantities needed. The search for alternative suppliers at short notice was compounded by another problem: the material used for the mass-produced parts has to be validated by the customer, i.e., approved in line with strict and time-consuming procedures. In this specific case, escalation was avoided only in collaboration with the customer. By involving the Sales team and maintaining a close dialogue with the customer, ElringKlinger managed to source replacement materials in time for production.
The SCM team headed by Jorin Preuß mastered a steep learning curve in the period up to the end of 2020. In pre-crisis times, the planning horizon in the systems was between six and twelve weeks. This system collapsed during the first lockdown of 2020. In response, the situation had to be reassessed very quickly. The ERP system deployed by ElringKlinger at the majority of the manufacturing plants around the globe proved instrumental in this context. “It allowed us to react very quickly and, ultimately, coordinate activities as part of weekly reviews,” says Jorin Preuß in summary. Another crucial success factor was his team’s close dialogue with customers on a daily basis.
„An important foundation was provided by our well-organized ERP information system, which is used worldwide. With it, we were able to make updates at short notice and were very flexible.”
Purchasing and Supply Chain Management can look back on an unusually challenging year, requiring tremendous efforts. Ultimately, however, ElringKlinger fared well. As with any challenge that has been overcome, the same holds true: it makes you stronger for the future. "We seized opportunities during the crisis and exploited them. Renegotiations helped us to improve our performance and raise our overall level of flexibility,” summarizes Bernd Weckenmann. Jorin Preuß adds, “The crisis ruthlessly exposed specific dependencies, but at the same time it was precisely the aspects of close networking and intensive cooperation both internally and with customers and suppliers that proved instrumental in overcoming it.”
„2020 was a year with a below-average enjoyment factor – but our commitment to partnership within the supply chain proved particularly valuable.”
Vice President Purchasing, ElringKlinger AG
„In retrospect, we applied the brakes extremely hard at the beginning of the crisis. What counted in the end, were out agility and good interfaces with contractual partners. Despite low water levels, navigability was maintained and ElringKlinger remained on course in 2020.”
Vice President Supply Chain Management, ElringKlinger AG