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Anewkindofprofessionalpurchaserbentongettingrock-bottomcoststhreatenssuppliersofbasicmaterials.Butthesecompaniescansavethemselvesbytakingupthepurchasers?weaponsThereisakillerontheloosenearthestartofthevaluechain.Suppliersofbasicmaterials1haveseentoughtimesastheirownsuppliersconsolidatedandcustomerssqueezedtheirmargins.Nowsomeofthosecustomersareusingakindofsophisticatedprofessionalpurchaser,knownasasourcer,whothreatenstoruboutthemeagermarginsthatremain.Armedwithadetailedknowledgeofthesuppliers?economics,thesourcerspurnsthetraditionalapproachofbuildingcloserelationshipsinfavorofextractingthemostvalueatthelowestpossiblecost.Somesuppliersmaynotsurvivetheassault.Indeed,thismismatchcandestroyvaluequickly.Oneglobalproducerofspecialtylubricantsrecentlyacquiredseveralservicebusinessesinanefforttodistinguishitselffromcompetitors.Theinitialstrategywassound.Butthensourcersdemandedthatthesupplierbundleitsnewserviceswiththelubricantsatnoextracharge.Topreservesalesvolumes,thesupplieracquiesced.Intheend,whathadstartedasasensibleefforttocombineachemicalbusinessthathada5percentreturnonsaleswithservicebusinessesthathada15percentROSgavethecompanyanoverallROSoflessthan5percent.Somesuppliershavesufferedsomuchfromthesourcers?attacksthatcounteringthem,ratherthanpassivelywatchingmarginserodefurther,mustnowbeastrategicpriority.Afirststepisforsupplierstounderstandhowsourcershaveshiftedtheoddsagainstthem.Thesecondistousethatunderstandingbyfightingbackthroughinternalimprovementsandbytakingadvantageofthementalityofthesourcerstocreatevalueforboththemandthesuppliers.Andsuppliersmusttakeamuchtoughernegotiatingstand梚fnecessary,reducingtheirservicestocustomersorevenabandoningcustomers,howeverlong-standing,thathavebecometooexpensivetoserve.SMARTSTUFFProfessionalsourcersfirstappearedabouttenyearsago.Initially,theytargetedretailersanddistributors;latertheymovedupthevaluechaintoincludesuppliersofbasicmaterials.Insteadoflookingforsuppliersthatofferthelowestunitpriceforproducts,sourcersconcentrateonreducingtheircompanies?totalcostofowningtheproductsinquestion.Thetotalcostofownership(TCO)includesallexpensesincurredingettingandusingproducts梟otonlyinvoiceprices,butalsocostssuchasdelivery,storage,andthedisposalofpackagingmaterialsandby-products.Sourcersstartbyusingtheirvolumetosqueezeasmuchvalueoutofasupplieraspossible.Thisapproachisn抰new,buttheywinadditionalvaluebyshiftingcostsandriskstosuppliers.Sourcersdon抰careabouttheeffectthislineofattackmighthaveonrelationships:thegoalistograbvalue.Knowledgeisthesecondimportantweaponofthesourcers,whounderstandtheirowneconomicsandthetotalcostofusingproductsorservicesand,nolessimportant,theeconomicsandofferingsoftheirkeysuppliers梠ftenbetterthanthesuppliersdo.Why?Becausesourcerssystematicallyaggregatealloftheavailableinformationfromtheirownorganizations,othersuppliers,trademagazines,othercustomers(legally,throughconsortiums),industryexperts,andthelike.Meanwhile,theinformationthatsuppliershaveaboutthemselvesliesinvariousfunctionsandITsystemsandusuallyhasn抰beenpulledtogether.Sourcersthereforehaveintimateknowledgeoftheeconomicimpactoftheiroptions(forexample,thecostofswitchingsuppliers),sotheycangenerallydecideontheirsourcingstrategiesandpinpointacceptabletrade-offsbeforetheyevenstartdiscussionswithsuppliers.Sourcers,forexample,typicallyshiftcostssuchasfreight,storage,andfinancingtosellersbyhavingsalescontractsspecifydeliveredratherthanplant-departureprices,therebyexcludingthecostandriskofgettinggoodsfromthesupplier抯totheuser抯plant.Anothertacticistoshiftrisktothesupplierbyusingfixed-pricecontracts,2whichforceittoabsorbunexpectedpricehikesforrawmaterials.Sincethemid-1990s,pulpandpapermanufacturers,forexample,havedemandedfixedpricesforhydrogenperoxideoncontractswithtermsofuptoayear.Becauseofthispricecap,manyhydrogenperoxidemakerspostedreturnswellbelowtheircostofcapitalin2001,whenasharpriseinnatural-gaspricespusheduptheircosts.Intheory,suppliersbenefitfromfixed-pricecontractsifraw-materialspricesfall.Inreality,whenthathappens,suppliersbentonpreservingrelationshipswiththeircustomersoftenletsourcers,whowatchupstreampricescarefullyforsuchopportunities,cutpricesbyrenegotiatingcontractsprematurely.Costsinmostbasic-materialsindustriesarerisingbecauseconsolidationamongtheirownsuppliershaspushedupthepriceofrawmaterialsandbecauseadriveforhigh-tech,efficientproductionhasforcedthemtomakelargecapitalinvestments.Meanwhile,strongcompetitionandthecommoditizationofformerlydifferentiatedproductsareholdingdownthepriceofthebasicmaterialsthesecompaniessell.Thesupplier抯salesforceisaneasytargetforprofessionalsourcers,sinceinbasic-materialsindustriesmostincentiveplansforsalesrepsarebasedonvolume,whichpredisposesthemtoacceptthesourcers?demands.Whenmarginsarethin,salesrepsoftentrytobuildsalesvolumesbyofferingbuyersthelowestlistpriceandevengivingawayservices,particularlytolargecustomers.Managersencouragethisvolumementalitybypressingforgreatermarketshareatalmostanycost.Andtheseindustriesasawholeemphasizetheimportanceofretainingcustomers,therebyprom