Secondary Market Sourcing
Avoiding Pitfalls, Uncovering Pearls 

Op-Ed: Graham Leduke

No Second Guessing in the Secondary Market

Purchasing assets on the secondary market can represent a win/win scenario for both buyers and sellers of equipment, especially in these trying times of deferred projects, reduced capital spend, and staff layoffs. 

Today, everyone is looking for ways to save money, cut costs and influence decisions. The secondary market for the energy industry is increasingly becoming a viable procurement channel for companies that are traditionally highly risk adverse. However, unfamiliarity with the process, eagerness to take advantage of an attractive deal, or a simple lack of due diligence can lead to some costly pitfalls. 

As a career supply chain management professional, I have witnessed firsthand the volatility of the market. One day I was a procurement manager on a capital-intensive mega project, and the next I was tasked with leading the sales efforts for an immense asset disposition project. 

Forced to blindly navigate through the process of establishing sales channels, uncovering disposition contacts, and wading through company governance, I have come to realize the value of the secondary market. While this procurement channel has enjoyed a long life with its dedicated participants, the industry is on the threshold of welcoming an audience so vast that it will never be the same again. 

When times are good and money is flowing, energy giants and capital-intensive projects do not have the time, patience, or desire to evaluate secondary market opportunities.  Given the market conditions of today, we are witness to a culture shift.  The traditional project management approach tends toward a schedule-driven mentality, but what we are seeing now is one where we are mindful of every opportunity for competitive advantage. 

What do you mean the bridge tolerances have changed and we can’t ship our equipment?

This was the harsh lesson learned the hard way by a buyer of some large and costly assets.  After the successful negotiation of a deal to purchase some major capital equipment on the secondary market, it was found that due to a change in railroad bridge tolerances the material could not be transported as originally planned. And the results were not pretty…stranded assets, lengthy settlement negotiations, and costly project increases.  So not every bargain remains that way if there are unforeseen pitfalls.

Navigating the Changing Landscape Looking for Pearls…Knowing the Pitfalls

In tough times, cost avoidance is key. What I have learned is that everything has value to someone. The secondary market is not for everyone, but it can be extremely lucrative if you know how to distinguish the pearls from the pitfalls. 

The following provides some practical insight on some of the common pitfalls of purchasing assets in the secondary market: 

  1. Prequalification standards: Highly risk adverse companies tend to have high prequalification standards for the vendors that they choose to do business with. The secondary market is very reactive, and assets that are here today may be gone tomorrow.  Depending on the sophistication of the seller, they may not have the qualifications or the inclination to meet rigorous prequalification standards.
  2. Payment terms: Execution of the purchase from the secondary market may not fit with traditional procurement processes. Dependent on the type of seller (auction, private sale, broker), payment terms will likely be minimal, expedited, or cash in advance (almost unheard of in large companies).
  3. Commission? When an intermediary is involved you can expect to pay a buyer’s commission.  
  4. Know before you buy: Assets can be new, reconditioned, or used and may have been stored in controlled environments complete with preservation records or stored in uncontrolled, harsh conditions where they are exposed to the elements. Ensure that you know what you are getting.
  5. Generic assets: Today’s market is rife with surplus assets; your highest expectation for success is for items that have generic specifications. High-specification items will be more difficult to source. 
  6. Getting ahead of the engineering curve: The further ahead of the engineering curve the better. This affords the buyer the opportunity to find suitable items that can be engineered into their design or allows them to re-engineer the asset design to suit the application.  
  7. “Show me the data sheet!”:  Technical information may or may not be available for the asset. Ask to see data sheets, material test reports, manufacturer record books, and maintenance records before committing to the purchase. (By the way, if you are a seller of an item, you are much more likely to achieve a better price with this information than without.)
  8. Lawyer up: Know that you may be asked to sign legally binding “non-disclosure agreements” if the asset is proprietary. Have your legal department involved. 
  9. Cross-border shipping documentation: The buyer typically assumes responsibility for shipping.  When shipping across the border, ensure you are able to obtain country of origin and customs harmonized system Coding. 
  10. Do your shipping homework: Perform routing studies for any oversize loads to ensure that the shipping of the items is not cost-prohibitive. 

Buyer Beware!  

At no time has the phrase “caveat emptor” been more pertinent and yet the reward so great.  Sourcing assets from the secondary market can be the edge your company needs to aggressively compete in challenging economic conditions. While this non-traditional marketplace can feel a little bit like the wild frontier, getting informed and prepared—with a good dose of common sense—could lead you to a gold mine of value-priced assets.

Graham Leduke, SCMP,
is a supply chain management professional and asset recovery specialist concentrated in energy industry major projects. gleduke@shaw.ca 

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