The Industry of Supplier Management Consolidation

 

Late last year, AECSoft, one of the three leaders in supplier diversity management, was acquired by SciQuest a ” leading provider of on-demand strategic procurement and supplier enablement solutions”.  A few weeks ago, it’s largest competitor, CVM Solutions, met a similar fate, being acquired by Kroll.  For those not familiar, Kroll is a division of Altegrity, a PE-backed holding company claiming to be the “largest commercial provider of background investigations for the U.S. government,”   With these two supplier management firms being acquired and merged into various roles, I’ve decided to take a look at what these transactions mean for the supplier diversity field.

As a whole, these transactions have no immediate impact in my eyes, however over the course of the next three years, a few changes may take place.  It was well known that AECSoft, a smaller, leaner firm offered many of its services at cheaper rates.  The organization promoted itself to the cost conscience OEM customer looking to handle a large array of spend information from various Tier 1 and Tier 2 vendors.  With the purchase of the company, like the supply management news site Spend Matters suggested, I feel that the former generous prices will be raised.  Again this is a forecast given over a 3 to 5 year period.  The later a contract renewal for the company, the more likely “new updates” will occur, along with “new fees”.  With the supplier diversity field already looking to save on costs, this may present unfortunate circumstances for some OEMs looking to grow their supplier diversity program if the fees become unbearable.  It  is my hope that they do not.

In taking a look at the CVM Solutions sale, it is my opinion that Kroll and the company will make for a better fit.  CVM Solutions was able to do a better job to grow their company’s offerings from a supplier diversity management company focus, to a broader supply chain  management  company.  This is a cue for the Kroll group and should provide an extra amount of growth opportunities that AECSoft does not have access to at this point in time.

To quote Spend Matters about the CVM Solutions transaction, “For those outside the industry, the deal might seem a bit like a synergistic stretch. But under the surface, there appears to be a significant amount of synergy (stay tuned as we investigate this further). And more broadly speaking, the likely forthcoming announcement is representative of a significant ramping of new large company interest in the supplier management market. In fact, we’ve heard from half a dozen often large and brand name organizations in recent months that are either getting into this market or are curious about it.”

The key here is the last piece about “half a dozen often large and brand name organizations….getting into this market or are curious about it.”  This could mean further acquisitions of companies like Supplier Gateway or other methods used to “test the market”.  I feel like this is an interesting piece due to the changes in spend tracking it could cause for OEMs as well as the reporting structure.  Unfortunately I feel that this is a further step away from the hope of Tier I companies that all OEMs will get on one reporting schedule.  But with more resources, perhaps a more efficient reporting system or systems are just around the corner.

Direct and Indirect OEM Spending

Direct and indirect spending are two sides of a coin that many Tier Is use to figure out where their spend lands.  Similar to tails, the coin seems to usually land on the indirect side.  With many MBEs and WBEs in the indirect spending sections, these are the usual hires (except in some cases like the Steel industry).  Indirect spend includes marketing, staffing, etc. referring to any spend not directly related to the material being built for the OEM’s spend.  Direct material from MBEs and WBEs are generally tougher to find.  Direct spend, is basically the exact opposite of indirect spend.  Any spend being used on direct materials for the OEM customer can be included on the direct side.

Pretty simple, but relevant and important for those MBEs who supply direct materials (like Electronics).  If you are an MBE or WBE looking to enter the automotive field in the direct side, you could be a millionaire within a year!  Of course, you’d have to be qualified and able to accept a large amount of business, but if you could handle the work, you’d be set for large business acquisitions.

Reporting Process

What does the Auto industry, Healthcare, Utility, Banking, Transportation, and pretty much every other industry have in common?  Well, actually alot, but for the purposes of this post, we will look more closely at the diversity spend reporting.

The diversity spend reporting process is simple yet complex.  On the one hand, Tier 1’s, when receiving contracts from OEMs must spend a portion of it with minority or women owned companies…..simple!  On the other hand, filling out different forms for different OEMs due on different days can add a bit of a twist….complex!

With these diverging facts, their are a few standards that almost all companies abide by.  One is that, when creating the diversity spend report to turn in to different OEMs, the process starts in accounting.  Once accounting sends over the information to whichever department handles the diversity spend information, that department must report the information upwards.  These reports are due monthly, quarterly, bi-annually, and annually depending on what OEM a Tier 1 works with.  If you are a MBE or WBE looking for work, it’s best to figure out which departments handle that spend, to give yourself the best leverage when looking for contracts.

2010 Supplier Working Relations Index

Congratulations to the Ford Motor Company for being the first American Auto company to break into the Top 3 of the WRI survey (survey began in 2002 if you’re wondering).  Unfortunately, this survey shows that American Auto makers still have a long way to go when it comes to positive supplier relationships. You can read more about the survey here

According to the website “The annual study tracks supplier perceptions of their working relations with the top three U.S. and top three Japanese automakers across 14 commodity purchasing areas. This year 646 sales personnel from 510 suppliers participated, providing data for nearly 2,500 buying situations.”

The results provided in the survey cover 5 key categories:

1. How the OEM is perceived in terms of its overall Supplier Relations
2. OEM Communications with the supplier
3. OEM Help given to suppliers to reduce cost and improve quality
4. OEM Hindrance to suppliers doing their best job
5. Supplier’s Profit Opportunity at the OEM.

And for those not familiar with the term, OEM stands for Original Equipment Manufacturer and refers to the six Auto makers listed in the above survey.

“Over the years, the study has shown that automakers with a higher WRI realize significantly greater benefits from their suppliers than those automakers with a lower WRI. Similar results have been found in numerous industries.”