There is a killer on the loose near the start of the value chain. Suppliers of basic materials1 have seen tough times as their own suppliers consolidated and customers squeezed their margins. Now some of those customers are using a kind of sophisticated professional purchaser, known as a "sourcer," who threatens to rub out the meager margins that remain. Armed with a detailed knowledge of the suppliers’ economics, the sourcer spurns the traditional approach of building close relationships in favor of extracting the most value at the lowest possible cost. Some suppliers may not survive the assault.
Indeed, this mismatch can destroy value quickly. One global producer of specialty lubricants recently acquired several service businesses in an effort to distinguish itself from competitors. The initial strategy was sound. But then sourcers demanded that the supplier bundle its new services with the lubricants at no extra charge. To preserve sales volumes, the supplier acquiesced. In the end, what had started as a sensible effort to combine a chemical business that had a 5 percent return on sales with service businesses that had a 15 percent ROS gave the company an overall ROS of less than 5 percent.
Some suppliers...