Sole Source Steel Producer Plays Hardball – But at What Cost?

by on
Style:
Category:
Uncategorized

I had a very interesting meeting yesterday morning with a colleague whom we have worked with over the years. We had assisted in a sourcing effort and to protect the innocent we won’t share any product specific or industry specific information for that matter. But what we do want to share involves some of the most preposterous negotiation tactics I have ever seen on the part of a producer. Here are the facts of the case¦.

  • Material is not produced in the US few global suppliers exist capable of producing it; most of the producers are in Asia (e.g. Japan, Korea and China) it’s a highly technical value-add product
  • Incumbent supplier won’t tie price increases to an index, won’t make any long term contracts and penalizes the buying organization with higher prices for higher volumes (no, that is not a mistake or a typo more volume results in higher prices)
  • Let me explain that point in greater detail let’s say our client has a 1900/ton month buy and has historically fulfilled the entire requirement with purchases from this incumbent supplier. The deal offered by the producer looked like this: We’ll give you 1200 tons at $5.50 lb. Or, we’ll give you all 1900 tons at $6.50/lb. I should add the following caveat the option to purchase 1200 tons at $5.50 lb with the balance 700 tons at $6.50/lb was rejected outright by the producer
  • Producer submitted this latest counter offer on the morning of Good Friday and expected a reply within the business day to take advantage of the counter offer
  • The counter offer provided by the incumbent supplier was worse than the original offer

I’m trying to look at this sourcing scenario with an alternative viewpoint and unfortunately, I can’t help but think the producer both a) knows the buying organization is in a sole source situation and sees no wrong or folly in playing the adversarial winner-take-all negotiation strategy or b) the producer is testing the buying organization to gain market intelligence as to whether it (the buyer) has an alternative supplier.

Either way, the mill is stupid. Let’s look at the first case. If a mill squeezes a buyer too hard, the buyer begins pursuing alternatives (and rest assured our buyer in this case most certainly has an active strategy to not only pursue alternative material but also alternative suppliers of existing material). Second, the incumbent mill unwittingly introduces competition to a market that it previously owned with 100% market share. Gaining that share back will require the mill to lower its price in the long run and it will have forever lost its 100% market share.

Let’s look at the second case of the mill negotiating “strategically (sarcasm intended) to test its buyer as a means of snuffing out the buying organization’s sourcing strategy. Clearly one can see the goofy price structure offered as a test but how does this create a win-win strategy? The answer it doesn’t and it won’t. And the loser in this strategy will certainly be the mill.

Is this a cultural issue or SOP (standard operating procedure)? I’d venture to say a good portion of the style involves culture though we’ve seen domestic mills engage in similar tactics from time to time. We also can’t defend every buying organization. We have seen mal-intended negotiation strategies on that side of the table too. This may sound squishy but we happen to believe it true if you can’t create win-win partnerships ultimately the winner becomes the loser. Win the battle lose the war comes to mind.

–Lisa Reisman

Comments (2)

  1. Eric Welp says:

    Does the selling organization have another higher paying customer?

    Is the selling organization capacity constrained? Do they have equipment problems that they are not willing to admit?

    1. admin says:

      They may but actually this company is one of their largest buyers of this material. Yes, to some extent the selling organization is capacity constrained in that they are running at over 90% but the buying organization has been a regular client for over 20 years (known and established in the market). We don’t think there are equipment problems though there may be…

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.