“Procurement’s main priorities for the year include ensuring supply continuity, combatting inflationary pressures and reducing spend cost.”

Who could argue with the importance of cost savings?

Just because cost savings are vital, however, doesn’t mean that they should be the sole factor driving the purchasing decision: what and from whom to buy, and what price to pay. Where is it written that cost is the paramount factor?

The only reason to justify purchasing on price alone (or price predominantly) is if there is no differentiation between the goods or services being offered in competitive proposals.

Imagine that you are in charge of buying a commodity, such as one thousand pounds of a specific grade of copper.  Each bidder is offering exactly the same type and amount of what you want. So, of course, price in this case is the sole determining factor.  The buyer should do everything they can to make the process appear as competitive as possible to keep the suppliers on their toes when it comes to price. (For all the lip service to cost savings, how many people when purchasing commodities manage to do even that much?)

How often is the modern B2B buyer purchasing a commodity? How often do they get to make the decision by themselves instead of having to develop a consensus across a committee of relevant stakeholders?

The truth is that companies engaged in strategic sourcing need to review multiple proposals characterized by significant differentiation. It’s more like apples-to-electric cars than it is an apples-to-apples comparison.

An academic approach to the problem might be to perform a discounted cash flow analysis accounting for not only the present value cash outflow of the consideration for the thing being purchased, but also the cash inflows of the margin improvement over the life of the project from adopting the solution in question.

Overweighting cost (or, worse, making cost the sole driver of the decision) means ignoring these subsequent positive cash flows.

Even if we assume that the buyer is evaluating the true cost, it may still be the wrong thing to do because doing so ignores the purchase’s impact on margin.

Consider two solutions: A and B. A was a piece of industrial machinery that cost $100k upfront. B sold a different piece of industrial machinery that cost $120k upfront.

This seems like a simple decision for many. Obviously A.

What if I told you that A created a $5k monthly improvement in margins for a 3-year life and B led to a $12k monthly improvement for a 5-year life? We would say that B has a better problem-solution fit than A.

That’s a different calculation, isn’t it?

When we talk about opportunity costs of picking A over B, we refer to the incremental $7k per month in margin benefit that the buyer foregoes.

Then, we should layer on the dimension of supplier risk. What if company A is a less risky company? Say, it’s been around for decades and has a fortress-like balance sheet while B is a venture-backed growth company that has not generated positive free cash flow in any quarter of its existence?

Shouldn’t we discount B’s margin improvement more heavily?

We should. But how many do?

How many buyers understand the correct, multi-dimensional balance between upfront acquisition cost, lifetime opportunity cost, and supplier risk? A buyer who was focused on multi-dimensional risk in this way would want to ensure (at least) two things. First, they would want to see as many competitive proposals as possible. Second, they would want to make it as easy as possible to understand supplier risk, as quickly as possible.

What’s more likely to lead to discovery of the best problem-solution fit, a reverse auction with three proposals or one with ten proposals? Clearly, the more proposals the buyer can see, the better.

What’s more likely to lead to a reverse auction with ten proposals, one in which the buyer invites only suppliers with which they have a pre-existing relationship or one open to any vendor with a relevant solution? Is it one with a difficult supplier user experience or one with a simple supplier user experience? Logically, inviting multiple suppliers to respond, regardless of their onboarding status with the buyer, is more likely to surfacing the best option.

This is what we have built at EdgeworthBox. Buyers can execute reverse auctions in a simple user interface, casting a wide net with suppliers, confident that you can use our rapid vetting tools to get comfortable enough with new supplier risk to proceed with an initial contract while engaged in the longer, more formal onboarding. Give us a shout. We’d love to talk to you.

This estimate, and the appraisal of the attendant risk to its realized accuracy, drives transactions.

When two companies combine, proponents argue that they can create value together in ways that they could not individually.

Sometimes, management will say that they can cross-sell products, exploiting distribution channels more efficiently. Investors tend to be skeptical of these claims. Think of banks trying to sell insurance through their retail stores.

The more tangible, and therefore credible, assertions relate to cost-cutting, specifically when it comes to duplicative administrative overhead. Sometimes, it involves rationalization of productive capacity, for example in industries bedeviled by excess supply, like airlines. But, often, the biggest drivers are the simple, easily quantified activities. This usually includes some blanket, hand-waving reference to procurement savings.

Recently, Fiat-Chrysler and Renault were in serious talks to merge their operations. While a big driver was the consolidation of research for small cars and electric cars due to the unremitting tightening of fuel efficiency requirements in their target markets, procurement was also a key factor, made even more important by management’s rejection of plant closures in an apparent nod to what turned out to be insurmountable political complications.

“FCA and Renault have raised the stakes for themselves by ruling out plant closures. That increases the pressure to achieve more than $5 billion in promised annual savings from pooling procurement and research investments.”

Indeed, procurement synergies underpin the existing Renault-Nissan alliance, as explained in a document called the “Renault-Nissan Purchasing Way.” It explains the integrated approach to procurement from the quasi-merger of the two companies established with their cross-holdings and mutual governance.

“This guide applies in principle to all purchasing activities made by Renault and Nissan including RENAULT-NISSAN Purchasing Organization (RNPO) worldwide. The principles and processes extend to all Renault and Nissan departments involved in the supplier relationship.”

Of course, the additional complexity of this complex governance structure which includes political interdependencies and concomitant unintended consequences was what ultimately killed the Fiat-Chrysler deal for Renault.

“Nissan’s role in particular was an important sticking point for the [French] government … France wanted Nissan firmly behind the deal, fearing that any opposition — or even just lukewarm support — would risk alienating a cherished industrial partner over time. But as the Renault board prepared to meet on June 4 at the headquarters, Nissan’s position became increasingly precarious. CEO Hiroto Saikawa said the Japanese company needed to review the future of the alliance, including contractual relationships, culminating in Nissan’s decision to abstain from a vote.”

Corporate Jenga is difficult.

Of course, some people make it work. But it requires outstanding management and deep cultural sensitivity.

“When Peugeot chief Carlos Tavares unveiled his plan for the German car maker at Opel’s headquarters in 2017, union representatives praised his decision to let it produce for export again, something GM had limited. The move galvanized the workforce, and within 18 months Opel was returning profits and exceeding its synergy targets.”

Even when the deals get closed, merger integration is exceedingly complicated and prone to unexpected problems.

“The investigation, launched after Kraft Heinz received a subpoena from the SEC, found evidence of misconduct in its procurement operations, the company said last month. The company had improperly accounted for arrangements with suppliers, which it described as ‘complex’. In particular, there were problems in how it had recognized costs and rebates.”

What’s even worse is that the antitrust pendulum may be swinging away from its multi-decade tendency to diminished enforcement and towards a more skeptically activist orientation that could make deals less likely.

“But some in the industry are nonetheless reconsidering how they do business in this new era of antitrust fears, even if the political rhetoric doesn’t end up translating into stricter regulatory enforcement. Tech companies are said to be thinking twice about pursuing splashy acquisitions, according to interviews in recent months with venture capitalists, former tech M&A execs and public policy officials.”

Integration is a key problem for conglomerates, such as large industrial-sector roll-ups. The central office often runs the portfolio of smaller industrial companies with a light touch. Each one of them has a separate sourcing system. When it comes to RFPs and procurement, generally, there is little coordination. There may be resistance to such joint activity, as the thin edge of the centralization wedge.

What is a synergy-loving manager to do in this new world?

What if she could have some, if not all, of the procurement synergies from a single deal without the risk of merger transaction? What if she could replicate these synergies multiple times, instead of just with one putative merger partner?

EdgeworthBox is a platform for making RFPs simpler, fairer, and faster. Our combination of three sets of tools with a marketplace engine, layered on top of the buying organization’s incumbent sourcing system, facilitates this kind of collaborative sourcing. By simplifying the administration suppliers face, we make it easier to get them to engage and respond to bid solicitations. Our database of public sourcing activity makes it straightforward to get market intelligence from the public sphere, while the private, organization-specific repository of RFP activity makes finding answers from prior statements of work or precedent proposals fast and accurate. Our social networking, including profile pages and contemporary messaging, makes collaboration within and outside of the organization smooth.

Put EdgeworthBox all together and an organization has everything they need to synthetically create the procurement synergies of a merger without the complications of integration. We call it network-based sourcing™. Let’s talk about making the RFP process better.

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