As per our economic damnation post, sometimes it is not only the case that bigger is not better, but also that bigger takes a bigger bite out of the limited pot that you have to work with.

To point this out, we reviewed two of the big examples of anti-scale that are often mistaken for economies of scale: energy and short-term contingent labour. Since most energy plants still rely on coal, oil, and natural gas, energy costs are ultimately dependent on the unpredictable prices for these natural resources, which depend on factors that very few governments or corporations can even influence. Similarly, if the resource skill-sets that are required are scarce, in high-demand, and there are only a few providers to choose from to begin with, the last thing you want is them consolidating and holding the power to charge as much as any one client can be convinced to pay.

But if economies of anti-scale were the only thing one had to worry about when Mega-Corps entered the picture, all would be manageable, but Mega-Corps take you out of the frying pan and dump you in the lava pit when negotiation time comes and categories that were once in your favour all of a sudden shift very fast to their favour.

So, since Corporations Will Soon Rule the World thanks to the likes of politicians like the Harperman (who made Chicago politicians look good), and bring a whole new level of damnation to your Procurement world, we need to be ready. What can you do?

1. Make sure contracts have a key survivability clause.
The contract must be enforced regardless of a change in ownership structure or assignee. Make sure that your supplier can’t have it’s contracts null and voided the date it is acquired.

2. If a M or A is expected, lock in critical supply with a long term contract.
Mergers and acquisitions increase cost, increase chaos, or increase timelines — none are good for critical, time-sensitive, sourcing projects. Be sure that if an M & A is in the works, that will affect one or more key or strategic suppliers that you depend on, that you close critical sourcing projects (well) in advance of the closing date.

3. Become a customer of choice.
Supplier sales teams fight for their customers of choice. When push comes to shove and there is not enough supply to go around, you will get it. When the parent company wants to push prices up to cover the costs of the acquisition, the sales team will look elsewhere. When you need access to innovation, they will fight to give it. But, despite many contractual claims to the contrary, very few clients are actually customers of choice.

Fortunately, it’s not that hard to be one if you really want to. Start by:

• Paying on Time
  In an age when many organizations are trying to continually delay payments, paying on time sends a strong message.
• Solving Problems Constructively
  Everyone has problems, including your suppliers, and everyone screws up – but if you approach seeking a solution, versus a penalty and retribution, they will favour you over others.
• Improving Their Efficiency
  Help them help you, and do it in a way that helps them help everyone, and they will fight to keep you as you deliver value, versus just revenue.
• Helping Them Innovate
  We all want innovative suppliers, but have you ever thought about what your suppliers want? The smart ones want innovative customers who will help them innovate, and not worry about whether they own the rights or not. A supplier that sees you as a customer of choice will always give you first access.

In consumer damnation 71, we talked about governments and how government customers can not only be very demanding, but how they can be quick to pass on the blame to your company when something goes wrong even if it’s not your company’s fault. In addition, they generally mandate that you provide bill of material data, shipping manifests, country of origin determinations, quality inspections, and other information with every product that you provide the government so they can meet their accountability mandates — a paperwork nightmare, especially if all you are selling is office supplies. And if that’s not enough, if the government runs out of budget and can’t get agreement to run a deficit, there can be an indefinite spending freeze while the situation is resolved — and if you are waiting on a few million dollars for products and/or services delivered, you could be waiting quite a long time. They can be your organization’s best and worst customer.

That is, until your corporate customers are taken into account. Government customers will always give you headaches, but corporate clients will often give you nightmares. But that’s partially a story for different post. In this post, we are going to talk about specifically how they can be a nightmare for your Procurement organizations.

They can demand the SLAs be met — or penalties be applied.

If a big corporation knows that a good chunk of your organization’s revenue needs are dependent upon getting their contract, they will be very demanding in their negotiations and your sales team might end up agreeing to rather unfair SLAs that Procurement will be expected to deliver on. For example, there might be a penalty for every day a shipment is late, which could be something out of your control if a port closes, a primary transportation company’s drivers go on strike, or the supplier’s source of raw material dries up due to a mine collapse and there is no way to get a new shipment of the product produced on time to transport from the new supplier’s factory in Shanghai to the distribution facility in San Francisco, but yet Procurement will be held accountable when the shipment is late and penalties are applied to the invoice.

They can not only insist on extreme corporate responsibility requirements and demand not only end-to-end supply chain transparency, but that every supply chain participant be one that has been vetted by an accepted third party audit in the past two years.

This can make complying with the documentary requirements that the local government will insist on a walk in the park. As a good corporate citizen, you would have mapped your supply chain and vetted all of your tier 1 and critical tier 2 and tier 3 suppliers, but considering there could be over ten thousand suppliers in your corporate supply chains when you consider every purchase from the 50M you spend on your primary electronics retail products to the 50K you spend on miscellaneous office suppliers, its an almost insurmountable task to identify every organization in the chain and map them against a list of audited suppliers. If your choices are do your best to comply or lose a third of your revenue (because you are CPG and they are the biggest of your big box retailer clients), it might be the case that you really don’t have a choice.

They can be a real pain in the backside.

If they are a big customer, in addition to the huge discounts they negotiated during the sales process, they might expect free service, warranty support beyond the warranty period, and the ability to make additional purchases at a moment’s notice. And who has to arrange that free service, deal with the manufacturer to try and negotiate additional warranty support, convince the supplier to add a second shift, or find an additional source of supply at 7 pm on a Friday night? That’s right, Procurement.

Corporate customers don’t just make hell for Sales, they often make hell for Procurement too. And when they decide to spread the damnation, Procurement is the organization that really feels the burn.

While the general consensus from a sourcing perspective is bigger is better as it allows for volume discounts from economies of scale, this is not always the case, as recently pointed out in our post on Economies of Anti-Scale. Sometimes it is not only the case that bigger is not better, but also that bigger takes a bigger bite out of the limited butt that you have to work with.

Let’s start by going back to two of the big examples of anti-scale in our post from a couple of weeks back: Energy and Short-Term Contingent Labour.

With respect to energy, as per our post, most energy platens still rely on coal, oil, and natural gas, and, as a result, energy costs are dependent on the somewhat unpredictable prices for these limited natural resources. And since the energy companies can always extract the maximum prices for their energy produced from these limited resources from consumers and small businesses with no negotiation power, they are not overly interested in negotiating with you unless they are not close to their maximum production potential and you will guarantee enough annual usage that it’s worth their time to even talk to you. And even then, unless you have a couple of other energy companies that are also willing to talk, they aren’t going to give you great deals. In any given area, there aren’t that many energy companies, so if a merger or acquisition happens and your options drop to 2, or 1, you are, as they say, up the creek without a paddle and your prices will go from bad to worse.

The situation is similar in contingent labour. If the resources you need are scarce, in demand, and their are only a few providers, the last thing you want is a merger or acquisition. This gives the provider all the power, and your cost is as much as any competitor is willing to pay. Don’t even bother to negotiate. Just sign the offer, thank them endlessly for even thinking of you, kiss the ring, and go on your way. The best you’re going to get is a bit of spit on the pitchfork.

If economies of anti-scale were the only thing one had to worry about when Mega-Corps entered the picture, all would be manageable, but Mega-Corps take you out of the frying pan and dump you in the lava pit when negotiation time comes and categories that were once in your favour all of a sudden shift very fast to their favour.

Buyer power depends on a number of things, but always depends on two critical market conditions being in the buyer’s favour:

1. Supply exceeding demand.
2. Multiple vendors competing for the business.

When a Mega-Corp swoops in and buys up one or more suppliers in a category which only had a few suppliers to start with, or multiple supplies merge into a Mega-Corp, the number of vendors competing for your business decreases, and with the smaller guys only being able to support a smaller customer base, more and more companies are forced to go the big guys, like it or not, and these big guys can essentially dictate the prices across the critical goods and services you need for your supply chain. Previously low cost electronics, CPG, MRO, and services categories in some regions can jump double digit percentages overnight and there’s nothing you can do.

But this isn’t the worth. Let’s say two suppliers merge, and one had an exclusive mega deal with your direct competitor which became null and void if that company serviced you. Guess what? Your contract is getting dropped faster than a hot potato covered in scalding oil. And your primary supply source goes up in smoke.

Besides the fact that these Corporations Will Soon Rule the World thanks to the likes of politicians like the Harperman (who makes Chicago politicians look good!), which will bring with it a new level of damnation to the entire world, they are a damnation unto themselves and generally hurt our supply chains at least as much as they help.