Four Essential Levers to Realize Post-Merger Procurement Synergy

By Suchismita Dhal

September 13, 2018 at 10:41 AM

Driving synergy post M&A

The cost and revenue synergies from any M&A activities are always derived from multiple pockets. Companies do plan meticulously to achieve the savings from all departments such as operations, procurement, sales and marketing, general and administrative etc. However, among these functional areas, procurement synergies are considered to be very crucial and the quickest to generate the best value proposition. As per broker Canaccord Genuity, the global beverage giant Anheuser-Busch InBev had estimated more than $2bn in cost savings from the $107bn acquisition deal of SABMiller, around one-fifth of this total was expected from procurement function alone. Ideally, the procurement organization of the two merging companies do have capability to optimize the external spend collaboratively to increase productivity, and maximize savings. However, the question is how to achieve this procurement synergy?

Deriving synergy from Procurement – 4 Essential Levers

We can distill all the required activities in to four essential buckets which are as follows;

Figure 1: Below figure summarizes the four essential steps for driving post- merger synergy;

 post merger figure1a.png

 

 

Source: Beroe Analysis, Accenture

1.     Post-merger Activity- 1: Leverage

 post merger figure2.png

In the first stage, companies need to leverage on the existing set up of procurement. This can be initiated with spend analysis followed by price harmonization among the current set of suppliers.

a.    Price Harmonization

Key opportunities include price and contract harmonization covering the cost, delivery terms, availability etc. If both the acquiring and target companies buy similar goods from a highly overlapping supplier base, the focus should be on consolidating spend for both companies and seek for any possible volume discount. In case the suppliers do not overlap, i.e. both companies sourcing from different suppliers, a competitive bidding or price negotiation can bring better deals. Generally, raw materials spare parts, components, and packaging etc. can save between 3 to 12% of the addressable combined spend. Whereas indirect spend such as construction, logistics, maintenance, repair and operations and utilities offer savings of 1 to 5%. Other indirect spends such as marketing, HR, IT, telecoms and facilities management, offer potential savings of between 5 to 10%, as spend can be more easily leveraged across both the companies.

2.     Post-integration Activity- 2: Rationalize

 post merger figure3.png

Organizations with a well-managed contract management process are always well prepared to ensure contractual commitments are optimized. If not done earlier, M&A integration phase is the best time to reassure this.

a.    Re-Assessment and Harmonization of Contracts

In this stage, the existing contracts are consolidated and normalized, which allows the procurement organization to grasp the “low hanging fruit” in the short term. The post-merger integration (PMI) team needs to understand the core business requirements and desired functionality of the goods/services to be purchased. Based on these requirements and specification any potential synergies plan can be derived. For example, if it is discovered that both the companies have similar suppliers, however buying different goods or services, then the focus should be on harmonizing specifications. Whereas, the companies can plan for harmonizing contracts by comparing terms across its common /similar suppliers to find out best possible way to rationalize the contract.

An early analysis helps in establishing the foundation from day one of the new organization’s operation. The company can go to market as a single entity to purchases the combined scale under a single contract. This increased volume can allow for greater negotiation leverage with suppliers, resulting in better pricing, or achievement of greater rebates or better tier-based pricing. However, it is equally important that the renewed contract terms should be chosen based on a holistic consideration including quality, service level, lead time, and overall supplier performance etc. and not just based on cost/price. Selecting the best terms is usually the quickest and easiest source for synergy.

3.     Post-integration Activity 3: Rationalize

 post merger figure4.png

 a. Supplier Base Rationalization and Re-alignment

Some of the expected synergies may not be realized without supply base re-alignments. The key objective of the supply base integration process is to categorize suppliers based on business priorities, identifying strategic suppliers and stabilize the non –strategic suppliers. For example, if both the companies buy similar goods or services from different suppliers, it is advisable to check for phasing out a few of these overlapping suppliers.  In this phase, the company should look for supplier capability assessment of the existing suppliers and reevaluate them based on the synergy with the current set up. First, the company should look for negotiation at a lower price with the current supplier or phase out the supplier and shift the volume to a supplier who can provide other added value. In case of limited supplier overlap or limited overlap of goods or services procured by both the companies, it might be essential to look for transformational changes as standardize the sourced goods/services. Expected synergies in this approach are significantly higher because in such cases procurement will influence the future demand. In addition, this approach reduces the business complexity. Ultimately, the procurement organization needs to harmonize commercial conditions, compare existing and new suppliers’ performance and utilize its market position.

4.     Post-integration Activity- 4: Integration

The final phase covers the more complex exercise. Based on category strategies and supply risk considerations an appropriate consolidation strategy can be decided for the supplier base.

 post merger figure6.png

a.Supply Chain Alignment and Strategic Sourcing

Key sourcing levers to be applied for the categories in this phase would be harmonization of specifications or ‘make-vs-buy’ analysis. The following could be a few of the exercises;

−       Value Engineering: Through this overly complex specification of goods/services (mostly used for direct categories) can be simplified. It could also involve SKU standardization: e.g., using functional industry standard specifications or designs, product differentiation/ customization, and rationalization of SKUs to ensure the most cost-effective specifications.

−       Global Sourcing: It would involve exploring opportunities to combine and leverage low-cost-country sourcing, expansion of geographic coverage of supply base and explore the benefits from global supply/demand situations. It will also be a good exercise for developing new suppliers and reduce supply risk for the company.

−       Strategic Vendor Relationships: Identifying the strategic suppliers and taking collaborative approach for category sourcing,  developing  joint cost-saving initiatives e.g., share productivity gains, integrate logistics operations, exploring opportunity for  vertical integration or building supplier capability to justify make-versus-buy options etc. are few of the examples.

 

Figure 2: Below figure summarizes the sources and expected synergy realizations. post merger figure7.png

 

Source: Beroe Analysis, Accenture

Conclusion:

Post-merger procurement integration is challenging. Therefore, it is essential to address required change management sufficiently. Maintaining proper stakeholder communication and involvement of higher management etc. do play crucial role in making any M&A deal successful. Again, procurement organization must grab the opportunity and put itself in a more strategic role within the organization during the post-merger integration. A clear and transparent sourcing strategy will always help it to ensure the optimum benefit from the supply side synergies from day one.

About the Author:

Suchismita Dhal, Senior Procurement Consultant. Author specializes in sourcing and procurement consulting related to indirect spend categories, specifically capital equipment and MRO services. She has worked along with many fortune 500 organizations across globe, for multiple industries such as metal and mining, oil and gas, construction, pharmaceutical, chemical, CPG etc.

 



Tags: supplier consolidation procurement cost savings procurement merger
Category: News Article

Suchismita Dhal

Suchismita Dhal is a Senior Procurement Consultant and an author specializing in sourcing and procurement consulting related to indirect spend categories, specifically capital equipment and MRO services. She has worked along with many fortune 500 organizations across globe, for multiple industries such as metal and mining, oil and gas, construction, pharmaceutical, chemical, and CPG.


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