In the past couple of years I’ve heard several CPOs talking about the growing trend of private equity firms taking over their suppliers. Some were alarmed by this development, no doubt influenced by the image of private equity as ruthless and short-termist. But what effect do supplier buyouts really have in practice?
To try to shed some light on this, CPO Agenda decided to conduct a poll among our readers. The results, outlined by my colleague Nick Martindale in our lead feature, make for interesting reading. Contrary to what some might expect, a majority of respondents – 55 per cent – said their experiences had mainly been positive. A private equity firm taking over a supplier often brought a greater degree of professionalism, a closer working relationship and led to problems being resolved faster. At the same time, many had also had the opposite experience, with demands for price increases and attempts to renegotiate contracts topping the list of complaints.
Despite the current slowdown in M&A activity, three-quarters of respondents said they expected more of their key suppliers to be taken over by private equity firms in the next three years. And almost half said they were “concerned” by this prospect. As economic pressures begin to bite, this is certainly a trend worth keeping an eye on.
On the flipside, a growing number of CPOs now work for private equity-owned firms. Our special focus continues with a look at some of the challenges and opportunities facing those who find themselves in this situation. One such CPO is John Campi at Chrysler, the smallest of the “Big Three” US auto makers, which was taken private last year. In a candid interview, he is highly critical of the way the company treated its suppliers over the past decade, and pledges to rebuild relations.
The main focus, Campi explains, will be joint efforts to take costs out of the supply chain, with savings shared 50:50 with suppliers. He also wants a handful of critical suppliers to be involved much earlier in the design and development of new vehicles. In other words, he wants Chrysler to behave more like Toyota.
The sort of supplier development for which the Japanese firm is justly famous is discussed by McKinsey’s Nicolas Reinecke and his co-authors in this issue. They argue that the option of investing time and resources with local suppliers in a bid to improve their efficiency is often overlooked in the stampede to low-cost country sourcing. And yet, in certain circumstances, it can actually deliver greater benefits. However, they caution that this “advanced practice” requires significant expertise and should only be attempted by mature procurement organisations that have exhausted conventional category and performance management techniques.
Like private equity takeovers, I have a feeling we’ll see more of this in future.
Geraint John
geraint.john@cpoagenda.com