This story is for CEOs and PE firms who:
- Are struggling to keep up with constant price increases from a sole supplier
- Are unable to get pricing transparency
- Feel trapped by a long-term relationship that has
grown one-sided
The Challenge
A distributor of petroleum products is a midstream and downstream provider. They depended on a single supplier to provide mission critical fuel additives, such as jet fuel deicer and gasoline detergents, that are critical to their end product. The supplier was very dependable and offered value-added services such as checking tank levels and equipment, but continually demanded significant price increases without revealing the reasons behind the increase. Negotiations were impossible.
Feeling trapped in an uneven relationship with an unresponsive supplier, the company asked SGS Maine Pointe to provide an independent market analysis to either confirm that the company had no other choice or identify a strategy that might help them in the face of substantial price increases.
Creating a real threat of switching suppliers to encourage negotiation by an incumbent
The petroleum products distribution company had several fears that had stopped them from considering alternative suppliers for the specialized chemicals they needed, including possible disruption to their supply chain, the loss of value-added services, and the cost to switch. The company also feared they lacked the scale to attract a direct-to-manufacturer relationship, providing further pressure to keep the incumbent who was a distributor.
SGS Maine Pointe had the subject market experts and structured process to challenge these fears. The SGS Maine Pointe team conducted an independent market analysis that identified six other additive suppliers, including direct manufacturers. They then analyzed and compared the different ways each supplier priced and transported additives and logistics, reducing the complexity of decision-making and establishing the pricing transparency that the incumbent had refused. They also broke down the myth that ability to deliver value-added services was unique.
The incumbent realized that there was a real possibility of losing their customer entirely unless they began to negotiate. The combination of negotiations and a second supplier resulted in a 43% savings.
SGS Maine Pointe delivered:
- A new request for proposal (RFP) and competitive negotiation process
- Network modeling and optimization that identified a new, less costly regional distribution strategy for more than 100 terminals
- A custom index-based market visibility tool for pricing fuel additives, logistics, and freight that allows the company to keep an eye on the marketplace
- A model contract for the company
- A supplier transition plan to use in the future, including identifying a 3PL supplier that could deliver further savings
- A de-risked supply chain where 32% of product was now delivered by a second supplier
- Long-term relief from a single-source relationship that was increasingly harmful to the company’s bottom line
Lessons learned for other executives
- Fear of change can keep a company from realizing significant cost savings or considering new strategies
- An independent evaluation can help break through entrenched dependency on a privileged, incumbent supplier
The Results
- 43% savings on procurement spend
- Identified additional 3% potential savings on freight
- Derisked supply chain by ending reliance on sole supplier
- Moved 32% of procurement spend to new supplier
- Used network optimization to identify more efficient distribution strategy
- Redefined service level agreements
Driving Growth with an Breaking Supplier Dependency to Drive Substantial Cost Savings (CS310)
