5. Procurement

In 2011, procurement markets were in a strong growth phase following the unexpectedly quick recovery from the economic crisis in 2010.

The high demand for our products made supplying our plants with purchased parts challenging, particularly during the first half of the year. We were able to avoid a significant adverse impact of this market situation on both supply and prices by utilizing our global procurement sources in the form of existing and new suppliers, particularly in the strong growth markets of Asia, India, the U.S., and Brazil. Schaeffler’s consistent crisis management and close cooperation between the corporate and the Asian procurement organization enabled it to avert the threat to certain parts of our production from the natural disaster in Japan. Substantial efforts and the high level of flexibility of our suppliers enabled us to eliminate sporadic supply bottlenecks in time, preventing them from affecting our supply to customers. Overall, we were able to fully [--break--]  satisfy the procurement needs of our 70 plants around the world throughout the year without any disruptions in supply.

Due to the further rise in commodities prices, price increases for some purchased parts could not be avoided entirely.

In the area of production materials, our renewed focus was on the supply and price trend of steel products, which are of particular significance to Schaeffler.

Most steel producers had re-established their full plant capacities after the ramp-up in 2010; as a result, supply was largely smooth. Schaeffler used the calmer situation to come to agreements on fundamental principles regarding logistics processes with those suppliers in order to be able to counter future fluctuations in supply with improved planning processes.

In 2011, prices for coking coal, iron ore and scrap metal remained at a historic high until the fall, keeping price pressures high, particularly for flat steel products. In addition, manufacturers’ sometimes very short-term pricing policies increased uncertainty, which did not help the much needed stabilization of prices in the steel market.

In addition to ongoing cost reductions, procurement of components for production during the year was primarily focused on securing supply, which was successfully achieved by reserving capacity early on and entering into agreements on new logistics and supply concepts. Schaeffler cooperated closely with its business units in establishing global supply strategies and seeking out new local suppliers, particularly in the growth region Asia/Pacific.

Schaeffler has again made considerable progress regarding the quality of purchased parts. The number of complaints declined by 20 % from the prior year. Measures specifically initiated to reduce the cost of inadequate deliveries have also begun to produce results. We further improved the investigation of the reasons for expenses incurred.

Although the trend towards increasing prices also characterized the market situation in general purchasing, Schaeffler was able to more than offset its impact with the help of economies of scale and cost saving projects with suppliers. Electricity, gas and products based on oil and tungsten were the only areas where an increase in cost was unavoidable.

There were a few insolvencies among our suppliers during the year. Thanks to Schaeffler’s risk management system, combined with close communication with the suppliers concerned, these insolvencies did not lead to disruptions in supply.

Schaeffler continued to optimize its payment conditions with its suppliers during the year. [--break--]  Systematically avoiding early payments and applying standardized payment conditions contributed significantly to the management of working capital.

Since the closing of an agreement on a purchasing cooperation with Continental AG in March 2009, the purchasing functions of both companies have been working together successfully for the third year. This applies to both production materials as well as indirect materials.

The joint activities enabled both companies to achieve sustainable cost reductions. Teams successfully worked together on systematically developing uniform standards and to coordinate requests for proposals of both companies to ensure a joint market presence and market success. Both companies cooperated closely on the strategic direction and in operations not only within each individual purchasing sector, but also globally in all significant markets in Western and Eastern Europe as well as in Asia and North and South America.

Schaeffler intends to continue its successful cooperation with Continental AG in the coming years.