A new kind of professional purchaser bent on getting rock-bottom costs threatens suppliers of basic materials. But these companies can save themselves by taking up the purchasers?weaponsThere is a killer on the loose near the start of the value chain. Suppliers of basic materials have seen tough times as their own suppliers consolidated and customers squeezed their margins. Now some of those customers are using a kind of sophisticated professional purchaser, known as a sourcer, who threatens to rub out the meager margins that remain. Armed with a detailed knowledge of the suppliers?economics, the sourcer spurns the traditional approach of building close relationships in favor of extracting the most value at the lowest possible cost. Some suppliers may not survive the assault.Indeed, this mismatch can destroy value quickly. One global producer of specialty lubricants recently acquired several service businesses in an effort to distinguish itself from competitors. The initial strategy was sound. But then sourcers demanded that the supplier bundle its new services with the lubricants at no extra charge. To preserve sales volumes, the supplier acquiesced. In the end, what had started as a sensible effort to combine a chemical business that had a 5 percent return on sales with service businesses that had a 一五 percent ROS gave the company an overall ROS of less than 5 percent.Some suppliers have suffered so much from the sourcers?attacks that countering them, rather than passively watching margins erode further, must now be a strategic priority. A first step is for suppliers to understand how sourcers have shifted the odds against them. The second is to use that understanding by fighting back through internal improvements and by taking advantage of the mentality of the sourcers to create value for both them and the suppliers. And suppliers must take a much tougher negotiating stand梚f necessary, reducing their services to customers or even abandoning customers, however long-standing, that have become too expensive to serve.SMART STUFFProfessional sourcers first appeared about ten years ago. Initially, they targeted retailers and distributors; later they moved up the value chain to include suppliers of basic materials. Instead of looking for suppliers that offer the lowest unit price for products, sourcers concentrate on reducing their companies?total cost of owning the products in question. The total cost of ownership (TCO) includes all expenses incurred in getting and using products梟ot only invoice prices, but also costs such as delivery, storage, and the disposal of packaging materials and by-products.Sourcers start by using their volume to squeeze as much value out of a supplier as possible. This approach isn抰 new, but they win additional value byshifting costs and risks to suppliers. Sourcers don抰 care about the effect this line of attack might have on relationships: the goal is to grab value.Knowledge is the second important weapon of the sourcers, who understand their own economics and the total cost of using products or services and, no less important, the economics and offerings of their key suppliers梠ften better than the suppliers do. Why? Because sourcers systematically aggregate all of the available information from their own organizations, other suppliers, trade magazines, other customers (legally, through consortiums), industry experts, and the like. Meanwhile, the information that suppliers have about themselves lies in various functions and IT systems and usually hasn抰 been pulled together. Sourcers therefore have intimate knowledge of the economic impact of their options (for example, the cost of switching suppliers), so they can generally decide on their sourcing strategies and pinpoint acceptable trade-offs before they even start discussions with suppliers.Sourcers, for example, typically shift costs such as freight, storage, and financing to sellers by having sales contracts specify delivered rather than plant-departure prices, thereby excluding the cost and risk of getting goods from the supplier抯 to the user抯 plant. Another tactic is to shift risk to the supplier by using fixed-price contracts, which force it to absorb unexpected price hikes for raw materials. Since the mid-1990s, pulp and paper manufacturers, for example, have demanded fixed prices for hydrogen peroxide on contracts with terms of up to a year. Because of this price cap, many hydrogen peroxide makers posted returns well below their cost of capital in 2001, when a sharp rise in natural-gas prices pushed up their costs. In theory, suppliers benefit from fixed-price contracts if raw-materials prices fall. In reality, when that happens, suppliers bent on preserving relationships with their customers often let sourcers, who watch upstream prices carefully for such opportunities, cut prices by renegotiating contracts prematurely.Costs in most basic-materials industries are rising because consolidation amo