Sourcing Contrarian Alert — United Airline's Smart Sourcing Strategy (Repost)

Due to an administrative error outside of our control, this article was not crawled properly by a search engine earlier this morning; we are reposting in its original form for proper indexing (albeit with a shorter title that fits in our title window).

Late last week, United announced that it might place a substantial order (as much as $10 billion worth for 150 new aircraft) with Boeing or Airbus by this fall. Boeing is looking to use a winner-take-all negotiation strategy, hoping to gain overall relationship leverage -- and the best possible pricing -- from Boeing and Airbus by committing all of their spend to one supplier. For more details, check out The Wall Street Journal's write-up.

In our view, this move could go down in the annals of contrarian thinking as one of the most astute sourcing moves of the year. Why? For a number of reasons, but primarily because United is thinking ahead of the market, getting past the current bumps and bruises that have depressed aircraft orders. Which also happen to be among the very maladies that could give them outstanding pricing with Boeing and Airbus, both of which are more desperate for commercial orders than at any other point in recent years.

In addition, we believe this represents a prescient contrarian move for a number of other reasons which we'll touch on below:

- United is timing the commodity market -- commodity prices, while up, have not increased to anything close to 2008 highs and parts suppliers and OEMs will factor this into their equation in the quotation process
- Primes (and their suppliers) are looking to fill capacity to cover fixed operating costs over a longer period of time (so they can maximize margin on smaller deals)
- This will enable United to position itself for the economic recovery in 2011 and beyond ahead of its competitors, helping United to enter new global markets with newer, longer-haul planes and improving sales and marketing efforts (i.e., the youngest fleet)
- The move acts as a natural operating hedge against rising jet fuel/oil prices given the increased operating efficiency of the planes they'll be considering (operating efficiency in newer planes with winglets and other graduated enhancements is in the single digits; for new designs like the 787, it reaches into the double digits)
- United is under no obligation to pull the trigger on the contract if operating conditions deteriorate, if the total cost equation (e.g., financing costs) does not add up, if they're not happy with the prices they get back -- or just about any other reason. In other words, at the very least, this will provide exceptional pricing benchmark data even if they back-out

What do you think? In our view, this is the type of big-bet, contrarian sourcing and strategic move that has the potential to redefine the market. So who said Spend Management was boring?

Jason Busch and Lisa Reisman

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