A better Path to Purchasing Cost ReductionKen Bradley
Lytica Inc. offers our customers an M&A Synergy Savings report. For us, this is an interesting report because it allows us to observe in detail the purchasing effectiveness of two companies that have operated independently. For our customers on an acquisition path, this is a very important and informative report.
Synergy savings are the purchasing savings that result when two companies merge if the merged entity takes advantage of new purchasing opportunities. There are four main sources of savings at the direct materials level.
- Best of the Best Pricing: The most common source, Best of the Best pricing delivers savings through the purchase of common items at the better pre-merger price of the two merging companies. As these prices are already negotiated, they are readily available to the merged entity.
- Competitiveness Uplift: Usually one of the two companies involved in the merger has better overall purchase price results because of factors like purchasing practices, negotiating prowess, or volume. These factors give rise to a level of competitiveness to which the other entity can rise. Savings realised by raising the competitiveness of the poorer performing entity are referred to as competitiveness uplift.
- Economies of Scale: The combined volumes of the merged companies increase the appeal of the acquiring company to suppliers. This overall volume increase, in many cases, results in a price reduction and savings opportunity.
- Turf Protection: Closely tied to economies of scale is turf protection. Just as the newly merged companies increase the appeal of the acquiring company to suppliers, incumbent suppliers face seeing their business dissipate to competitors. This dynamic can result in these suppliers fighting fiercely to protect their turf, often more aggressively than they have in years.
In past, we were surprised by the pricing variation that occurs within companies of comparable size in the same industry; this is no longer the case. We have learned that companies with a focus on cost reduction get better results than those that don’t and the ones that combine the objectivity of benchmarking with the inevitability of statistics do the best. They understand where the opportunities lie.
When we compare companies, we are not seeing minor, near insignificant variations but large changes that most CEOs and CFOs would kill for. It surprises me how many purchasing people go into negotiations without the knowledge they need to get proper pricing focus. Tools like Freebenchmarking.com (which is free) or Component Cost Estimator ($2.00 per part) arm you for negotiations.
You would not enter hunting season without a calibrated scope for your rifle, why enter negotiating season unarmed and without the knowledge to bring focus to your cost reduction efforts?
By Ken Bradley – Lytica Inc. Founder/Chairman/CTO