PETROS PARANIKAS Negotiating with Powerful Suppliers

Transcription

1 ! PETROS PARANIKAS Negotiating with Powerful Suppliers #BLC2015! 0

2 Negotiating with powerful suppliers September 2015

3 Cast rail wheels are a commodity... 2

4 ... or not: What a difference a century makes Number of American Association of Railroads accredited suppliers

5 Cast rail wheels are the tip of the iceberg... 4

6 ... as top suppliers keep gaining share across the board Median market share of S&P 1500 companies across industries in (%) 100 Overall increase ( ) % 39.9% 42.7% 47.3% 48.8% 49.2% Top 5% +12.7% % 16.3% 16.8% 44.0% 43.8% 40.5% % 16.1% 15.2% 36.1% 35.1% 35.6% Next 5% Lower 90% (-4.3%) (-8.4%) 1. Refers to market share within S&P 1500 companies only, or top 1500 traded companies in the US according to market cap before 1995; includes manufacturers, service providers and distributors in the following industries: Consumer Goods, Energy, Health Care, Industrial Goods, Real-estate, TMT 2. Firms were divided into industries based on GICS and SIC codes Source: S&P 1500 database, historical trade data, BCG analysis 5

7 Regardless of the sector, companies are being challenged every day "They had a 70% market share in cash services and demanded at 40% price increase..." Head of procurement, Financial Institution "Their technology was patented so I had no alternate source of supply- and they asked for a 25% price increase..." Head of procurement, Mining Equipment OEM "We integrated their cameras into our security system and then they asked for a 30% price increase" Head of procurement, Security Integrator "They came to us when the agreement expired and asked for an 8x increase..." Procurement manager, Professional Services Firm "Their refinery was connected to us with a pipeline and once we were spun off, they asked for a 10% price increase" Head of procurement, Chemical Company "I asked for better rates and they told me to pound sand not much room to negotiate with a regulated utility" Procurement manager, Paper Company 6

8 Four strategies help tilt the balance of power Going through the framework systematically maximizes impact while minimizing risk First priority Address challenge by strengthening our relationship while tilting the balance of power 3 levers deployed successfully Develop a win/win solution Rebalance relationship Use a catalyst event Can entail significant short and long-term risk Critical to weigh all alternative scenarios, considering carefully advantages and disadvantages Requires a well-thought communication strategy 4 Play hardball 1 Bring new value to your supplier 3 Create a new supplier 2 Change how you buy Challenging but demand is under our control Involves less risk than altering supply or playing hardball 4 levers deployed successfully Reduce demand Eliminate demand Redefine bundle Create buying consortium Need to impact the competitive landscape 2 levers deployed successfully Develop new supplier Vertical integration Pros and cons should be considered carefully (risk, styles of competition, synergies and dissynergies) 7

9 Alter your demand profile and challenge the incumbent firm Shift spend to communicate competitive tension The problem Actions taken Impact Client spent $10 million per year for legal services with 65% with one, preferred but high priced firm Spend was split between corporate and field locations with no coordination Preferred firm had deep, long standing relationship with parent company and CEO Tough business conditions necessitated a reduction in all professional services including legal Legal team nervous about "upsetting" preferred legal firm Segmented spend by matter type to highlight premium with incumbent firm Worked with General Counsel to review analysis and savings opportunity Offered incumbent opportunity to reduce rates and offer volume discounts...they refused to move Shared analysis and response with General Counsel and CEO Elected to compete all legal services and restricted incumbent to a narrow range of business Introduced a formal preferred legal panel and delivered 19% savings across all spend Introduced a new process to channel corporate and field spend to the preferred legal firm by matter type Eliminated field use of original incumbent firm and limited corporate spend to specific legal matters based on specific expertise 8

10 Change how you buy Decrease purchase volume - move 75% of your spend to a free solution The problem Actions taken Impact A retailer with 20K+ employees wanted to reduce the costs of Office productivity software All users had been using the full suite of Microsoft Office Company analyzed the needs of its users and determined that 5K users were creating content and needed access to the full suite of Microsoft Office 15K users were consuming content and needed an office productivity solution that enabled them to read documents Company assessed number of alternative options and determined that free, online offering was adequate for users that needed readonly access Company eliminated Office productivity software costs for 75% of its user base 9

11 Bring in a supplier from an adjacent market Enter a multi-year arrangement to break a duopoly The problem Actions taken Impact The airline catering market in the US was dominated by two companies Airline company wanted to improve quality and reduce cost Incumbent supplier was unwilling to move Procurement team identified international supplier that had track record of success & innovative assembly technology that would improve quality Procurement team worked with management team to align on new strategy Procurement team established multiyear contract with new supplier to support operations in major US hub International supplier drove cost down by locating off-premise, while being able to simultaneously improve quality Airline realized 20% unit cost reduction across its catering spend Incumbent supplier replaced sales team and refocused on establishing a collaborative relationship 10

12 Each strategy needs to be supported by seven key enablers Understanding 1 2 Unambiguous understanding of the opportunity A good enough fact base coupled with outstanding analytical capabilities 3 A commitment to resolve the problem across the C-suite: this is not a procurement problem, it's a company problem Commitment Accountability A commitment to solve the problem through the creation of insight-based negotiating strategies A clear communication strategy that makes a compelling case for change across the organization: taking compliance for granted is a recipe for failure Dedicated cross-functional teams that are accountable for solving the problem in an ambitious time frame to resolve the issue A set of KPIs by which the success of the effort will be measured 11

13 Thank you bcg.com bcgperspectives.com