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Quick Profit in Lieu of Strategy: Procurement Pitfalls

18 September 2018
Quick Profit in Lieu of Strategy: Procurement Pitfalls

Identifying Domestic Products

The Decree of the Government of the Russian Federation “On Confirming the Localization of Industrial Product in the Russian Federation” effectuated in October 2015 provides the legal framework for identifying Russian and imported goods. According to the Ministry of Industry and Trade of the Russian Federation, if a final product features a certain number of locally produced components, it can be qualified as a Russian product.

Large businesses seek to adjust to established requirements, so domestic suppliers of components and equipment have been gradually replacing their foreign competition.
Still, small and medium companies often bungle in localization projects.

Planning Ahead

CLAAS LLC, an affiliate of German manufacturer of agricultural machinery CLAAS KGaA mbH, is looking for new Russian components suppliers. The enterprise is located in the Krasnodar Territory. It is currently working with more than 30 Russian organizations. According to CLAAS LLC Head of Purchasing Department Dmitry Ogarkov, companies which seek to procure contracts under import substitution projects often make the same typical mistake.


"They choose immediate gain over quality. Profit is definitely important, but competences and technological capacity are paramount. Technological resources cannot make up for the lack of quality management. As a Russian manufacturer, we definitely want to work with local suppliers, but many companies reject promising collaborative projects for the sake of quick profit. The ability to plan ahead and look to the future is an essential supplier characteristic,"

Dmitry Ogarkov stated.


CLAAS LLC performs a whole set of checks prior to placing the first pilot order with a supplier. CLAAS representative calculated that the auditing process typically lasted a week, the approval of first product samples – anywhere from one week to 2-3 months, and checking experimental series' market performance – a year. The overall process of assuring that a component is fit for an import substitution project takes 1.5 - 2 years.

Looking to the Ministry

Localization percentage remains low at the Russian Grundfos facility. The company seeks new local suppliers / Photo courtesy of Ru.grundfos.com

Grundfos, the Danish manufacturer of pumping equipment, has its own production facilities in the Greater Moscow Area – Grundfos Istra plant. The company has been working in Russia for over 10 years, but its localization percentage is still rather low, according to the statement made by Chief Technical Officer of Grundfos-Istra Anatoly Slobodinsky at INNOPROM-2018 Industrial Supply Forum.
Grundfos representatives believe that suppliers cannot secure contracts under import substitutions projects because they try to operate independently and fail to obtain relevant information from state agencies.


"It is a capital mistake to make decisions without consulting experts from the Ministry of Industry and Trade of Russia and Industrial Development Fund. The IDF was specifically created in order to provide enterprises with the necessary information on import substitution and localization and co-finance such projects,"

Igor Kinash, Deputy Director of OOO Grundfos Project Implementation Department, explained.


In the course of consultations, components manufacturers can obtain information on federal priorities and current programs.


Company Clusters

SME involvement in import substitution projects is mainly thwarted by the difference in the scope of market participants, according to Marat Nuriev, CEO, of High-Tech Park "Universitetsky."


" Large companies set global goals and are more interested in cooperating with providers who can offer comprehensive solutions in a wide range of areas. Small and medium companies offer interesting and innovative solutions which are much cheaper and often better, but they are typically applicable in only one segment of client activity. Therefore, a major client will have to perform a ton of extra work to cover all his needs when interacting with small businesses,"

Nuriev claimed.


In his opinion, small enterprises should work together, merge into clusters, and offer comprehensive solutions to large corporations. This way, SMEs will overcome existing obstacles and secure new contracts.










Manufacturing and digital projects, development of machine-tool building, additive technologies, and other core INNOPROM-2018 themes will be featured in the international industrial magazine INNOPROM. United Industrial Edition has joined forces with Business Event agency (part of Formika Group) in preparing the first issue of the magazine, which will be published in Russian, English, and Korean.
The magazine will be distributed to all INNOPROM-2018 participants, as well as heads of relevant federal agencies, major industrial holdings, manufacturer associations, chambers of commerce and industry, the Russian Union of Industrialists and Entrepreneurs, investment and financial institutions, Russian organizations providing state support of industrial exports, organizations promoting international cooperation, and business media.


Individual B2B meetings can provide an efficient foundation for the dialog between components manufacturers and large companies. This is the format that was used at INNOPROM-2018 Industrial Supply Forum. At the event, representatives of more than 14 large national and foreign companies talked about their import substitution projects and issues which should be resolved by equipment providers and commissioners.

Forum participants included DMG MORI, STAN, Lipetsk Machine-Tool Plant, RM-Terex, Volvo Components, DST-Ural, Perm Factory Metal Centers, etc. The Ministry of Industry and Trade of Russia notes that such event format allows for bringing together manufacturers of final products and companies which produce components and accessories. Participation in INNOPROM exhibitions and events is an efficient instrument for finding new partners and discovering new business solutions.

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