Companies that are not achieving meaningful returns on their procurement spending could find themselves on “the wrong end” of merger and acquisition (M&A) activity, according to an industry expert.
A recent study by AT Kearney ‘Mobilising for Supply Chain Excellence’ found that less than 10% of companies can be considered to "demonstrate excellent supply chain capabilities", delivering around $13 for every $1 spent on supply chain management assets.
At the other end of the scale, more than a quarter (27%) of firms are barely covering their costs, returning $1 or less for every $1 spent on supply chain management assets.
Those companies struggling to provide return on their supply chain spend could become targets for acquisitionally-minded competitors or private equity firms, said Mike Hales, partner in A.T. Kearney's Operations Practice, and co-author of the report.
“There is a lot of private equity activity and mergers and acquisition (M&A) going on; companies that don’t improve that ratio are likely to be on the wrong end of some of those deals,” he told Supply Chain Digital.
“We see the role of procurement soaring in the M&A area because it’s a unique opportunity to combine strands of companies and take them to market in a shortened period of time.
“Part of the playbook of private equity firms is invest in strategic sourcing as soon as they’ve bought a company. It’s a really quick win for them.”
The best way for CPOs in companies with under-performing procurement operations to drive change is to attempt to prove the returns that can be achieved to their CEOs and CFOs, Hales added.
“Companies in that lower quartile are not intentionally hurting themselves, it’s just that the leadership is not prioritising procurement enough,” he said
“The path for them [CPOs] is to find a way carry out a focused strategic sourcing programme to really demonstrate that they can return more than $1 for every $1 spent. Once that is proven, they can begin to implement a real step-change.”