I saw a headline in Crain’s Chicago that really grabbed my attention,“Financial Crisis Hits Sears While It’s Down”. Specifically, the story mentioned that Bank of America reduced one of Sears’ credit lines from $1b to $5m. No folks that is not a typo. That’s what the article said. Without a loan bailout package, I have no doubt that we could substitute the company “Sears” in that headline with thousands of firms across America. But this post is not about a bailout package. We covered that last week here. This blog post suggests an alternative strategic sourcing negotiation tactic based specifically on the financial crisis and some re-positioning by the buying organization.
The scenario goes like this…
Buying Organization: Has been sourcing key raw materials from only one supplier. Supplier has been reliable, high quality, competitive and previously honored long term contracts.
Selling Organization: Passing along price increases, will no longer hold prices, won’t sign any long term agreements (even with volume commitments)
Buying Organization: Has previously attempted to identify alternative sources of supply but given the [rising] commodity markets, has not been able to garner the attention of said alternative suppliers. Executive management has identified this rising cost sole supplier not only as negatively impacting the bottom line, but also risky (especially by not honoring long term commitments)
What can the buying organization do?
Part of the strategy involves articulating a buyer value proposition that can’t be beat. In this scenario, the buying organization has a few good things going for it. First, it has substantial purchasing volume, over 12,000 metric tons with few line items. And somebody now would only be too pleased to “lock-up” that volume for a longer term contract. Second, and this is the key, the buying organization has superb credit, little debt and can offer more attractive payment terms to the selling organization vs some of the selling organization’s current customers. Notice I didn’t say negotiate discount for better payment terms. In a problematic credit market like we have now, every company is re-evaluating its customer base and relationships.
If you consider the classic ABCD customer segmentation analysis (A’s are your most profitable customers and D’s are your least), companies in down markets most definitely dump their D’s but they may find themselves needing to dump C’s and even B’s if the business looks to risky from a payment perspective. So if you are sitting pretty with great cash flow, put on your lipstick. You might just find yourself being courted.