Understanding How Distributors Can Impact Supplier Pricing

I've always enjoyed sharing office space with my wife's middle market direct materials advisory firm, Aptium Global, but this week made for particular interesting discussion and banter given some of the challenges of a particular sourcing engagement they have going on. The event in question is one for an industrial products category where suppliers would purchase much of the content from distributors. Given the overuse of reverse auctions in this market, it made more sense to deploy a collaborative sealed-bid approach with reasonable target pricing to guide suppliers to the required numbers.

For nearly a month, everything seemed on track. The right supply base was identified and qualified, and incumbent suppliers were brought on board. But when they began to receive feedback from suppliers on the component pricing for one of the higher volume items in a critical lot, things took a different turn. The feedback for this critical part was that the target price was near the suppliers component price cost! Yikes, we all collectively thought.

Not to be deterred, everyone in the cramped office -- including the ex-sourcing geek typing this blog -- put on our thinking hats and decided to reach out to the supply base for detailed feedback. What we learned is that the suppliers had called the manufacturer of the components in question who had then directed them to a specific distributor. And it turned out that this distributor had the least competitive prices!

But we only learned this after we suggested that the suppliers call three other specific distributors and to tell these distributors which OEM and tier one would be the ultimate consumer of the components further up the supply chain. Fortunately, this strategy paid off, and the suppliers were able to obtain far more aggressive component pricing by leveraging, in this case, the tier one's preferred relationships with the distributors.

The moral of the story is that when it comes to direct materials strategic sourcing where distributors are involved in providing a significant component of a bill of material to the supply base, it's actually possible to obtain better results by leveraging different distributor pricing agreements and reaching out to a group of distributors rather than the one the manufacturer recommends. And in most cases, the best answer or distributor mix will not always be the same -- potentially even across a set of parts. In some cases, it might be the OEM's relationship which yields the best component pricing. In others, it might be the tier one's relationship (as it was in this case). Above all, it's critical to try all of these options if the pricing feedback that you're getting back from your supply base is not what you expected, especially on critical volume items that could make or break a sourcing program.

- Jason Busch