Interview with Merck CPO Joachim Christ

CHRIST The coronavirus pandemic, the Suez Canal blockage, rising raw material prices, the Shanghai lockdown, the war in Ukraine and now the energy crisis – the challenges for procurement teams merge into one another. The past three years were largely characterized by operational crisis management and the search for short-term solutions. In general, robust supply chains have become even more important.

CHRIST I still believe in the future of global markets, global production networks, and global supply chains, which must also work together. Our business model at Merck is based on this; we are a globally positioned company. However, we are increasingly moving our sourcing activities closer to our production sites – to where our internal added value is created – with the goal of ensuring short logistics paths. So we're taking more of a "region for region" approach.

CHRIST Logistics has become much more expensive and vulnerable in all industries. We want to reduce the risks in this area through regional optimizations. Just-in-time and single sourcing to achieve maximum cost savings are a thing of the past – security of supply has become the top priority. To minimize risks arising from dependencies, we now rely on diversification, multi sourcing, flexibility, and resilience in our supply chains.

CHRIST For example, we're taking a much more active approach to supplier management beyond our normal relationships. For our large key suppliers, we're developing business continuity plans to better manage potential supply difficulties. There will always be certain dependencies. The goal is to make them transparent and minimize the associated risks.

CHRIST You could say so, yes. The focus is primarily on risks relating to supply reliability. Currently, reliable procurement sources are more important than achieving cost savings through maximum bundling. This fact has also elevated the status of procurement within the company; its "value contribution" is now far more evident. Procurement has become more visible again and now works on joint solutions in close collaboration with the operational business. We are now able to coordinate different scenarios with regard to costs, availabilities, and supply and demand fluctuations with the core business, and make the best possible decisions. Also, there is now a much greater willingness to approve alternative products and suppliers to mitigate specific dependencies.

CHRIST The Chinese share of our global procurement activities is very moderate and significantly disproportionate to our sales. No, we're not looking for alternative suppliers across the board, but we are reducing dependencies and risks, and continuing to focus on China as one of our central sourcing markets. In principle, we're open to alternative suppliers if they have the necessary qualifications. Internally, we're ready to accept new partners. However, we're not focusing on specific countries. There will be no general shift of supplier markets to Europe or Germany.

CHRIST This was and indeed remains a challenge, especially given Merck's extremely broad product portfolio. However, we have made further progress in this area in recent years. For example, we don't base our risk assessments solely on the spend volume of our suppliers, but rather on the likely impact on the corresponding sales. If supply bottlenecks arise in a particular area, our goal is to identify the impact on our commercial activities ahead of time. Another focus area within our risk management is the issue of sustainability, which is becoming increasingly important.

CHRIST There may be conflicting priorities in the short term. In the medium and long term, however, sustainability will once again become far more important and will even contribute to supply security through greater localization. Strategically, the two topics will go hand in hand, which will also generate competitive advantages. In this context, we will also make more conscious make-or-buy decisions in the future, which we are already doing. For example, in-house green energy production is an area in which we are becoming much more active, e.g., by investing in the construction of wind farms. In general, every procurement function must pay greater attention to the issue of sustainability and transparency in the supply chain. In the future, we will require CO2-based product calculations on the supplier side, the current focus of the German Supply Chain Act is compliance with human rights, and so on. At Merck, we work closely on these topics with more than 50 companies from the pharmaceutical and chemical industries through our industry-wide initiative "TfS – Together for Sustainability", which also aims to establish an industry standard.

CHRIST The situation remains challenging at present, and there is still no sign of relief at many points in the supply chains. However, I'm convinced that we are now even more resilient. In this context we're also working on optimizing our planning systems to identify requirements as accurately as possible and, for example, to increase our own inventories in the event of foreseeable critical problems. And we also want to become even better at predicting the effects of price increases: How and to what extent do material price increases affect our suppliers – buzzword: "P&L transparency". Our goal is to provide more accurate rolling forecasts to better manage the challenges of the next few months. We have all learned a lot in recent years and, above all, we have seen that crises can be overcome by working together – via trust-based, effective collaborations with our internal and external partners.