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5 Ways Your Private Equity Firm’s Procurement Playbook Can Benefit From Supplier Negotiation AI

June 13, 2019

Last month I attended the Industrial Exchange conference in Miami, a new gathering organized by Jon Cooper for PE firms that own mid-market industrial companies and technology providers. To date, Arkestro customer base has focused procurement in large enterprises, and I was curious to learn more about how operating partners at PE firms with mid-market assets approach savings.

PE firms generally have procurement “playbooks” that contain systematic business operating strategies that they execute on in order to make the companies they buy more valuable.

Top PE operating partners often have “procurement” or “supply chain” playbooks, and several of the IndEx talks were around pursuing value creation through procurement optimization and strategic sourcing. We reached out to Jon Cooper for a comment on this trend and he shared this insight: “As shared service offerings become more comprehensive, PE-owned companies and their operators are more likely to use procurement playbooks and related supply chain improvement strategies to reduce cost and scale benefits across newly acquired businesses.”

Unlocking that opportunity comes down to discipline around creating a world-class procurement organization. As Blackstone’s Bradley Bogess noted in his main stage talk, the core difference between high performers and average players among the field of mid market industrial companies comes down a disciplined approach to strategic sourcing, especially e-sourcing. This discipline, Bogess suggested, reflects a fundamental practice of regularly seeking better commercial terms in the marketplace.

While there were many takeaways from IndEx, below I’ve summarized five strategies that can be enabling for world-class sourcing discipline, thereby unlocking new horizons of value:

1) It’s better to get savings from unexpected  contracts than from the “usual suspects”

Truly transformative savings outcomes will not happen over and over again with the same contracts unless there are massive changes in their market, period. Thus, try running a process on neglected spend, even if it’s an unlikely category. You may be surprised by the results.

2) Groom “wildcard” suppliers to create competition from within your existing supply base

A “wildcard” supplier is a strategic supply partner that is growth-seeking. This is a supplier that wants to grow their account with you on revenue, and deliver better value with lower margins year over year. What makes this supplier a “wildcard”? They’ll continue to expand the range of categories that they can quote on. Therefore, the supplier will want to quote on more of your asset’s categories and will have the functional effect of making the rest of your suppliers more competitive. Having a “wildcard” supplier can improve more of your categories and give you leverage over other suppliers.

3) More good sourcing processes are better than fewer perfect sourcing processes

Sourcing, like sales, is to some degree a function of a law of averages. If your organization only source once or twice a year, then you probably need to get lucky in order to win big. In contrast, if you source 10-20 times a year, there is much greater likelihood of discovering transformative cost savings. When it comes to sourcing, don’t make the perfect the enemy of the good. It’s also likely that 1-2 events will account for the bulk of the value created, with a long tail of average or moderately successful processes (and a couple failures). But if you don’t start panning in the sand then you’ll probably never find the real gold.

4) Manage Suppliers, Not Categories

Operating partners and mid market executives should define the health and breadth of their sourcing challenge by their suppliers, not categories. Categories can create a layer of abstraction that prevent effective negotiation, and if a supplier is supplying multiple categories then you have leverage to ask for discounts even if those categories are managed by different departments. Category silos in mid market companies can allow a supplier to upcharge on services to make up for discounts offered on goods or commodities. But money is money, and for strategic partners it is best to analyze the relationship holistically (e.g. across categories).

“The best leverage ultimately comes from true optionality: comparing your supplier versus the market.”

5) Take The Time To Measure Success & Prep Your Negotiation Execution

It is often said that the most prepared often win. This is more true in procurement and supply negotiations than elsewhere, and having a “source of truth” around what something should cost will be a tremendous asset in asking for savings. The best leverage ultimately comes from true optionality: comparing your supplier versus the market. Technology platforms may also help automate how teams measure success and ultimately execute against a well-defined savings target.

If you are operating a mid market industrial company and want to learn more about how AI can support improved outcomes in your procurement “playbook” and supplier negotiations, please reach out to our team.

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