Michael's M&A Playbook: Synergies in Purchasing
One of the main ideas in post-merger integration is to use synergies between the companies. The procurement function is a good example of what the combined power of two or more companies can achieve compared to separated entities before. The benefits include better supplier selection and relationship management, increased process efficiency and reduced administrative purchasing costs, synergies in scale for the investments into purchasing software, and many other advantages to achieve - in the end - better terms and higher cost savings. Here are a few tips that I found helpful in this area.
How to Find Synergies and Make the Procurement Function Stronger
Use The Power of Higher Volumes: By combining the purchasing volumes, organizations can negotiate better prices from suppliers, as suppliers are often willing to offer discounts for larger orders. It may sound simple, but it is one of the main drivers of better terms and prices, and I have seen companies that do not use this opportunity.
Improve supplier selection: Finding the right supplier can be difficult. It starts with analyzing the existing suppliers and needs to include market research into other suppliers. Standardize the scope and requirements and kick off an RFP (request for proposals) process. My tip: Define a $-value threshold and send RFPs for all purchases above that threshold. After selecting a supplier, monitor their performance over time and share results and expectations with them. Be clear in your communication.
Find the best negotiators and train teams: Even if you follow all of the tips in this article, you still need to find the best talent in the organization to negotiate lower purchasing prices and better terms. From my experience, there are always talented negotiators in companies, but also develop your team and invest in negotiation training.
Make price only one element of the negotiation: Everybody focuses on the price and wants to achieve direct cost savings. However, many other indirect key metrics are also important for a company. Think about the total cost of ownership (TOC), which includes payment terms, delivery reliability, who holds the inventory, consistency in product quality, or ease (or complexity) of the administrative procurement process.
Build strong supplier relationships: One of my main rules in business is that long-term business success is built on active stakeholder management, which includes suppliers. Develop a process of regular check-ins, which you can also use to brainstorm with the suppliers about new ideas. Make it a partnership.
It can work centralized and decentralized: Some tips may sound like you need a centralized purchasing function, but you can also make a decentralized organization work. Develop a category-based approach with experts in different locations or entities, define clear processes, train decentralized people and teams, foster collaboration and communication, and leverage technology. Especially in a decentralized organization, the right software tools can be crucial.
Focus on Quick Wins and Celebrate Success: Like with any other project, focus on the quick wins and celebrate every time your team achieves milestones. Have you successfully negotiated better prices or terms for a critical supplier? Let the company know and celebrate the success.
Make it Work, and Don't Accept No
At the beginning of post-merger integrations, I often heard that additional savings or better terms were impossible. From my experience, the average savings a company achieves with such a procurement improvement project is about 5% of the annual spending. If the company already has a well-developed procurement approach, the savings are slightly lower, between 3% - 5%. But I have also seen savings of 10% and more when there is more room for improvement.
