Purchasers fret when suppliers merge. As well they should. Continuity of supplies is critical to success in the procurement world and nothing threatens this more than mergers and acquisition activities. An acquisition can result in the elimination of product lines, derailing carefully laid out procurement plans.
A spate of recent acquisitions in the semiconductor market highlight this problem: Altera is being acquired by Intel Corp.; Avago wants Broadcom; Infineon Technologies has grabbed International Rectifier and; NXP Semiconductors and Freescale Semiconductor are getting hitched. Meanwhile, NXP is selling its RF Power business for $1.8 billion and in March it purchased Athena SCS. These transactions may turn out to be good news for shareholders of the businesses involved but often they represent a nightmare for purchasing professionals.
The acquisition of a supplier should trigger an urgent review of purchasing’s exposure to that company. While purchasers don’t like to change vendors it may be forced upon them following an acquisition. The factors that go into deciding when to swap a vendor for another are numerous and failing to pay attention to any of them can jeopardize a manufacturer’s operation. It can cost a purchaser his or her job, too.
In addition to guaranteed and timely deliveries, purchasers like vendors that report few defects. They like responsive suppliers who also update technical specs promptly and provide detailed notice about product roadmaps and any potential snafus that could derail the prompt delivery of supplies. Procurement, at its core, is about risk management. It’s not just about acquiring products at the cheapest possible price.
Good, fair or competitive pricing is important but in the electronics world today, it is considered a foundational factor; No procurement expert will entertain a supplier who doesn’t offer competitive pricing. However, as Mark Tayles of Lytica Inc. says many companies erroneously believe they are getting the best pricing whereas this is often not the case. This applies to even the biggest OEMs and electronics manufacturing services (EMS) providers. Just because a supplier says ‘you are one of our biggest customers and you’re getting our best price’ doesn’t make it true. Trust and verify, says Tayles. He calls it price benchmarking. Lytica’s Component Cost Estimator is one of the tools available in the market for companies interested in price benchmarking.
Beyond pricing, though, purchasers want to be sure that components designed into a product today would still be in production or available if needed years later. This is even more important for single-source or sole-source parts.
That’s why smart procurement experts pay close attention to the financial health of their suppliers. They scrutinize financial disclosures of publicly-traded enterprises that they are engaged with for information about a company’s liquidity, inventory turnover, account payables and account receivables (useful for determining whether a company is having problems paying suppliers or collecting money from customers), partnerships, legal challenges and other hurdles that could trip up the business and jeopardize its ability to fund operations.
Purchasers may also be able to find out whether a company is up for sale or planning to dispose any of its business units. Of course, the procurement expert isn’t expected to be a financial wizard but red flags can be followed up to reduce exposure to risky enterprises.
But not even the best financial analysts may be able to accurately predict if and when an enterprise might conduct an acquisition or be bought by a rival. And, it’s almost impossible to determine the real fallouts from such a transaction. Take the planned merger of Freescale and NXP. The two companies compete in certain areas and see opportunities for product streamlining (translation: reduction) to improve margins. But nobody really knows which products will be affected. NXP, the dominant partner or buyer, in this case, “anticipates achieving cost savings of $200 million in the first full year after closing the transaction, with a clear path to $500 million of annual cost synergies.” The expected savings will probably come partly from workforce reduction and partly from the elimination of some product lines.
Typically, vendors provide enough notice to assure some level of continuity but the process will still pinch the purchasers’ time and may even impact engineering resources due to the possibility of a redesign.
Procurement can insulate itself to an extent against these challenges by prequalifying multiple sources for critical components. A good relationship with electronics component distributors is also recommended. Distributors can in a pinch suggest viable alternatives to products going end-of-life and even help with redesign. Many of them stock excess components that can be reserved for continuity of production and some also produce hard-to-find components under license from the original supplier.
So, here’s my advice to purchasing: no matter how tempting, don’t ignore distribution.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.