In the world which mergers and acquisitions (M&A) are increasing at rapid speed, procurement has been a key staple to driving savings with manufacturing companies. M&A activity happened with technology, automotive, industrial, and now the most regulated sectors are starting to merge (healthcare and aerospace). One might ask how hard it is to generally drive procurement related synergies within a regulated environment; ultimately the two companies follow the same process that de-regulated firms utilize, although the results take longer. Manufacturing companies tend to focus on three main synergy (savings) options:
- Organizational Synergies – Reduce SG&A
- Operational Synergies – How can make more product lines under a smaller manufacturing footprint?
- Procurement synergies – How can a firm leverage the spend of two companies to drive savings?
In the healthcare and aerospace sectors, organizational and procurement synergies have the best chance to succeed. Operational synergies, such as closing an operation and moving it to a “best-cost country”, can take years and has various sales and regulatory implications. Focusing on procurement synergies takes less risk from the business and can drive synergies almost immediately. Now comes the question of how does a company do this.
First let’s understand how a typical sourcing, procurement, or supply chain organization is set up organizationally. Most firms today have three to four tiers of expertise:
- Commodity or Category Manager – Manage spend for a certain group of products.
- Supply Chain Management – Tactical buyers working to plan and deliver goods into the factory.
- Supplier Development / Supplier Quality Engineers: Engineers working with suppliers on cost reduction projects or increasing the competency of their own manufacturing.
- Strategic Sourcing Managers: In large multi-national companies certain firms are focused on finding value in strategic parts of the world (B.R.I.C. countries)
When two procurement organizations need to merge into one, there will obviously are synergies between personnel and the organization will have to be enhanced. In most cases the following process is followed when running procurement synergies:
- Both entities supply their spend information to a third party “clean room”.
- A third party analyzes the spend and comes up with synergy estimate (1-3% of combined companies revenue).
- Information is given back to the management team to align the organization and drive project effectiveness.
Those three basic steps are utilized in almost all synergies whether it is a firm that is de-regulated or tends to have more regulation in its field. Now to the original question, how can procurement teams save cold hard cash while in a regulated environment?
Most companies tend to go after the direct spend (spend that is used directly on its products), but in most cases the greater savings will come in indirect type procurement. Some focus areas for this indirect type are below:
- Corporate insurance
- MRO
- Health Insurance
- IS-IT
- Electricity – Natural Gas 6. Facilities Maintenance 7. Travel
- Office Supplies
Some of the spend categories above can really be driven in the first 30-60 days of an integration while others might take longer to come to fruition. The key to any team being successful with the beginning stages of integration is to have one person responsible for each project and to have a thorough category strategy for each area of spend. As I stated earlier, successful procurement integrations can save between 1-3% of the combined company’s revenue on a run rate basis. A great deal of the success lies upon the teammates experience with integration negotiations as well as the speed at which they can analyze spend and develop strategies to execute savings.
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