Lumber Liquidators: Acquiring a Supplier or Trading Company to Reduce Supply Risk

On the surface, it might seem like there is nothing overly remarkable about a small recent M&A deal in which Lumber Liquidators -- incidentally, whose very attractively priced cork flooring we recently put down in one of our rooms at home -- acquired one of its suppliers. But there are in fact some excellent lessons we can learn from Lumber Liquidators' acquisition of Sequoia Floorings. According to the news, the flooring retailer is acquiring "certain assets of Sequoia Floorings in order to strengthen its mill-direct relationships and shore up its long-term sourcing strategies...Sequoia, a trading company, had provided product quality and development services on approximately 40% of Lumber Liquidators' 2010 merchandise purchases, primarily those in Asia."

The entire deal, valued at less than $10 million, is tiny in the global landscape of M&A -- not to mention the landscape of procurement organizations buying suppliers in order to shore up a source of supply. But in many ways, this transaction is more interesting in terms of what it represents. Increasingly, more and more companies have realized the true costs of sourcing globally often involves looking at far more than just unit cost, even factoring into account currency fluctuation, labor cost increases and related areas. In addition, the cost of quality and supplier performance is mattering more than ever when it comes to looking at the true costs of doing business with suppliers where your next container may be 3-4 weeks in transit away, a delay which creates the need to hold even additional inventory if you want to play things extra safe.

Even more important, as companies who have dealt with trading companies in Asia know, is the value of going directly to suppliers not just to get a better deal -- this is only secondary in most cases -- but rather to have direct relationships with producers in order to ensure continuous standards of quality are met. This can involve frequent supplier development activities, virtual and physical auditing and frequent interactions to jointly set expectations and to review a set of metrics to manage the relationship by. No doubt, procurement-enabled acquisitions that not only can impact the bottom line, but can help drive the top line as well -- and reduce working capital requirements because of the greater visibility and comfort that comes from getting closer to your supply chain partners -- will become more strategic to an increasing number of organizations that are managing global supply chains.

Jason Busch

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