With M&A activity projected to remain strong into 2020, companies should look to post-merger procurement optimization to unlock value, improve EBITDA and create a measurable impact on the company’s financial results. However, the challenge is that M&A procurement is not a one-size-fits-all approach; there are various savings levers that can be pulled, depending on the M&A situation.
To capture M&A savings effectively, we recommend using five value levers: “best-price” harmonization, compliance, strategic sourcing, technical specification modification and demand management.
Best-price harmonization involves assessing the spend of both companies on overlapping goods and services and using the best price to benefit the other company. Both companies must have the exact same product specifications for this to work. This strategy will only apply to about 10% of spend, but it can usually achieve up to 2% in savings.
Compliance refers to adhering to contracts that have been put in place following a sourcing process. Compliance applies to approximately 25% of spend, and up to 5% in savings can be achieved.
Strategic sourcing involves assessing the supplier market, identifying qualified suppliers and engaging in a rigorous request for proposal effort. One company often has a more thorough approach to sourcing, so we recommend applying the same philosophy to both companies. Strategic sourcing can usually achieve between 8-10% in savings.
Technical specification modification refers to changing the specification of what one company buys—think of corrugated shipping boxes, and each company using a different thickness of container. This strategy is not used often, but in cases where it is, it can generate between 2-3% in savings.
Demand management involves optimizing internal practices to eliminate or decrease the volume of goods or services—think of the travel policies of two recently merged companies. Demand management is limited to specific “indirect” categories— purchases unrelated to manufacturing, such as travel or marketing expenses—but it can be used to achieve between 4-6% in savings.
Mergers generally fit into one of four categories: companies that offer the same or similar products or services in the same geography; companies that offer the same or similar products or services in different geographies; companies that offer different products or services in the same geography; and companies that offer different products or services in different geographies. The applicability of the five savings levers will depend on the type of M&A scenario and whether the spend category is considered “direct”—directly related to manufacturing—or indirect.
Same Product, Same Geography: For indirect spend, all five levers apply. For direct spend, all levers except for demand management apply.
Same Product, Different Geographies: For indirect spend, technical spec modification, demand management and sourcing apply. For direct spend, all levers except for demand management apply.
Different Products, Same Geography: For indirect spend, all five levers apply. For direct spend, only strategic sourcing applies.
Different Products, Different Geographies: For indirect spend, technical spec modification, demand management and sourcing apply. For direct spend, only strategic sourcing applies.
Brian Prantil is a vice president with Insight Sourcing Group and leads the firm’s M&A practice.