[Editor’s Note: Over the next few weeks on CPO Rising, we’re publishing some “best of” 2020 articles as we reflect on the year and prepare for the new year ahead.]
“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” ~ Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
“The Wealth of Procurement”
Adam Smith wrote the “The Wealth of Nations” on the eve of the Industrial Revolution in 1776. According to Wikipedia, “the book offers one of the world’s first collected descriptions of what builds nations’ wealth, and is today a fundamental work in classical economics.” Smith’s quote and the idea behind later came to be known as “Comparative Advantage” (coined by David Ricardo) above came to be known as the idea of Comparative Advantage and is the economic principle behind international trade. Essentially, it posits that countries should focus on what they can produce best and source everything else from those who can produce the other goods and services at a lower opportunity cost. Almost 250 years after Adam Smith, global trade is at an all time high and with it global sourcing.
It is also the economic principle behind strategic sourcing and why companies source goods and services externally. Sourcing professionals employ this concept every time a Make or Buy decision is made. Almost 250 years after Adam Smith, specialization and a focus on core competencies is at an all-time high. Among many benefits, the aggressive move away from vertical integration over the last twenty years has driven innovation and in general, been a huge boon to business.
At the same time, many of the most successful and innovative companies in the world like Apple, Amazon, Google, Costco, CVS, and AT&T are becoming more vertically-integrated. To date, vertical integration strategies have mostly been pursued by industry giants. But, there are multiple economic scenarios that could open vertically-focused M&A activity over the next few years to a much larger group of companies.
Why CPOs May Drive the Next Round of M&A Activity – Part 1
Now, procurement has been invaluable in supporting/driving M&A deals from a synergy standpoint (volume discounts, supplier rationalization, best-price contracts, demand management, etc.). That goes without saying. But they are also the company’s experts in the supply chain and the supply markets that support it.
At the core of most of the scenarios that will drive huge growth in vertically focused M&A is the premise that “business as usual” (meaning the main business trends since 2010) does not return quickly, or perhaps ever. In these scenarios, markets do not recover quickly and the economic downturn is longer than the capital markets currently expect. In these scenarios, access to credit will tighten significantly.
When a slow sales market meets tight credit, many companies, particularly small and mid-market companies will begin to face greater uncertainty and increasing financial pressure. Even as companies aggressively cut costs costs to maintain operations, many will struggle to survive. The companies with strategic suppliers that are dealing with severe financial distress may need to act to forestall supplier bankruptcies and ensure supply. Enter the CPO and the procurement team. While synergies may still be a major driver in the acquisition of a strategic supplier, the CPO can also bring knowledge and expertise of the supplier, its products and services, it competitors, and the market in general.
Simply put, there are many financial/economic scenarios that will drive an increase in vertically-focused M&A deals over the next few years. If/when that happens the CPO and procurement will be a huge resource.
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