Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

What the GE Oil & Gas and Baker Hughes Merger Means for Supply Chain Teams

November 23, 2016 at 10:04 AM / by PowerAdvocate

Earlier this week, news broke of the planned merger of GE’s Oil & Gas business with Baker Hughes. By combining GE’s machinery and equipment focus with Baker Hughes’s services focus, the merger will create one of the largest “fullstream” providers in the energy industry and will likely increase the competitive stance of Baker Hughes against the likes of OFS giants Schlumberger and Halliburton.

So what does a supplier merger really mean for Oil & Gas supply chain teams?

By merging assets, GE and Baker Hughes position themselves to weather the price drought and enter the market upturn in a strong competitive position. In general, supplier mergers could mean that Supply Chain teams will likely experience pricing changes and greater difficulty in negotiating with a supplier with greater market share.

In order to prepare, we recommend that Supply Chain teams:

  • Review their existing contracts with both suppliers, compare unit prices, and gather historical data to answer questions like:
    • Is one supplier charging more than the other, which would allow us to negotiate for the lower price?
    • How much of a volume increase discount should we be getting with the new firm?
    • If we can get a better rate with the merged entity, how much spend should we move from other suppliers?
  • Proactively communicate with suppliers on their perspective on why pricing should remain lower, and where they are willing to bring the supplier more business in exchange for preferred terms.
  • Probe to find value-added services as a result of the merger for benefits such as:
    • Shorter lead times
    • Package deals on services and equipment
    • Decreased administrative costs and overhead for transactions
    • Extended discounts for loyal customers of one supplier to both suppliers
  • Develop counter-arguments to combat the effect of increased market power: for example, merger synergies should mean greater cost savings from economies of scale, which are savings that should be passed along to the buyer.
  • Consider alternative suppliers in categories where price is escalating because of increased market power.

Check out our other posts if you’re interested in learning how to build a savings plan or how other E&P firms have successfully held prices down in supplier negotiations. If you’re interested in learning more, contact us here.

 

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