Procurement

We will continue optimizing our procurement management in 2011: prices, terms, and especially quality are key factors for securing further earnings growth.

Global demand for raw materials is growing. Fresenius Medical Care is responding to this development by intensifying its supplier management process both regionally and supra-regionally. The aim is to secure supplies of high-quality raw materials and intermediate goods on favorable terms and generally to increase the profitability of the production chain. We want to profit from the know-how of key suppliers already when products and production processes are developed. We involve partners at this stage who then develop and supply complete product modules or assemblies for Fresenius Medical Care. After the regions harmonized their procurement strategies especially for production materials in 2010, we now want to realize synergies in the area of indirect supplies, which includes all goods and services not directly related to the manufacturing process, such as information technology, energy, freight, and consulting services.

The procurement activities at Fresenius Kabi will be influenced by the following main factors in 2011: firstly, by the considerable volatility of the prices of underlying raw materials and the exchange rates of major trading currencies, secondly, by the effects of the continued financial crisis in some European countries, and, thirdly, by financial and economic policy measures in leading economies which are difficult to predict. These factors make it hard to forecast the trend in the prices of the underlying raw materials relevant for Fresenius Kabi and the products derived from them. In 2010, the prices of a number of underlying raw materials were already close to their 2008 peak levels. It remains to be seen whether this trend will continue. For products whose prices are linked to those underlying raw materials, the prices will be newly fixed at already scheduled dates in 2011.

In the case of active pharmaceutical ingredients for IV drugs, important supply agreements have already been concluded for 2011.

The energy markets are extremely volatile and speculation-driven. We had already concluded supply contracts for electricity for 2011 at the bottom of the economic crisis, thus assuring a positive development of our cost situation versus last year. However, this will be virtually neutralized as the renewable energy premium will increase by 72% in 2011 and tax reliefs will fall away as well. We also expect increases in gas prices.

Our 3-year project Global Sourcing Initiative will continue to be a focus of our procurement activities in 2011. The measures defined within the framework of this project relate not only to price but also to the consumption of input materials and consumables and their substitution.

At our HELIOS clinics, the central materials management unit plans to complete the project for a common consumption data platform in 2011. After a validation phase, the system will be available to all clinics within the HELIOS network. In other strategic projects we are focusing on medical devices. As a first step, product strategies are being formulated together with users within the clinic network, with the focus on medical use as well as quality criteria. In a second step, the bundling of purchasing volumes is planned in order to leverage cost-cutting potentials.

We had already contracted our electricity supplies for 2011 in the first quarter of 2009. We were able to reduce the electricity price for 2011 by 15% compared to 2010. This saving partially offsets the higher renewable energy premium. We also covered our natural gas requirements early on. The natural gas price for the 2011 supply year (October 31, 2010 to October 31, 2011) was reduced by about 15% compared to the 2010 supply year.

HELIOS plans to switch all clinics to partially renewable energy-based heat generation over the long term. Three clinics already produce energy from a biomass boiler (wood pellets). This is also to be examined and prepared for at other clinics in 2011.

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