By Jim Tompkins, CEO, Tompkins Associates
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Welcome to our 8th series on our Global Supply Chain podcast. Hi, this is Jim Tompkins, President and CEO of Tompkins Associates and Tompkins International.
I am very pleased to be with you again today to talk about one of the most important subjects impacting supply chain executives today. This is the topic of Mergers and Acquisitions.
This six part series began with an overview presentation by me followed by Steve Ganster, the CEO of our China-based company, Technomic Asia, who helped us understand more about strategy and the potential of M&A targets.
Today we move forward with Valerie Bonebrake, SVP with our Global Supply Chain Services Dimension.
Valerie, welcome.
Supply Chain Due Diligence is such an important topic. I’m always amazed at how often I hear that supply chain leaders are not brought into deals until they are done. Then they are scrambling around playing catch up, often working backwards to develop plans that will hit financial projections for supply chain improvement that have been made without their involvement. Why do you think this happens?
VALERIE:
Well Jim, while the example you provide is not ideal, at least those deal makers recognized the impact that supply chain performance can have on a deal overall, and they accounted for it. Supply chain performance can have significant impact on M&A success.
In an earlier podcast in this series, you talked about the speed with which these deals often occur. Due to the nature of the process, the deadlines that are imposed and the amount of focus given to the financial aspects of the deal, it’s no wonder that little attention is given to supply chain due diligence.
The stringent deadlines just by their nature may limit the amount of involvement that can occur. So, the advice I would offer to supply chain leaders is to stay tuned-in to what’s happening in the M&A arena in their industry, and within their own companies. They should also share relevant financial supply chain benchmarks and seek to establish relationships with their M&A team before a deal is done. Then they will be much more likely to be seen as that “go to” leader who can provide advice and assistance not just after the deal is done, but in the early stages as well.
JIM:
That’s a great point Valerie. So when is supply chain due diligence most important, and how can supply chain leaders best promote the value of the supply chain due diligence to the overall M&A team?
VALERIE:
Well it’s clearly not a “one size fits all.” As Steve Ganster discussed in the last podcast, some acquisitions are opportunistic and some are proactive. And some are with financial institutions, while others are strategic and driven by industry.
Pre-acquisition, supply chain due diligence may play a role in any of these scenarios, with varying degrees of depth, but suffice to say the level of supply chain due diligence is not likely to be as deep as we supply chain professionals would desire, which makes it all the more important to educate those involved.
Good preparation and having supply chain financial benchmarks will definitely help. These benchmarks should include supply chain costs such as a percentage of revenue, transportation and distribution cost as a percentage of revenue, financial inventory turns, days of purchases outstanding and days of receiving outstanding.
The reason supply chain due diligence is so important is that it not only affects operating costs and capital, but perhaps more importantly when doing acquisitions, supply chain performance impacts sales, customer service, and ultimately customer satisfaction, so it’s really important to get the supply chain right.
JIM:
How do you ensure that happens?
VALERIE:
To achieve supply chain excellence you really have to excel at three things: Supply Chain Design, Supply Chain Planning and Supply Chain Execution.
These are three pretty big buckets so let me break it down further. In order to evaluate the acquisition target’s supply chain, the due diligence process must begin with good preparation and clearly defined objectives.
First, you must evaluate supply chain capabilities, and to do that you must initiate an assessment. Key activities include conducting high-level interviews, confirming expectations, confirming areas of analysis, creating an assessment team and finalizing a work plan.
Next it’s important to clarify overall business strategy as this should provide the context and focus for the assessment. Performance criteria must be defined and core competencies understood. It’s really important to have visibility with top management in order to achieve alignment around supply chain issues.
This is where relationships are so important to ensure understanding of business and sales strategies, and to ensure that supply chain performance criteria is prioritized in a way to support the business. These insights then ensure understanding of the implications and priorities, and get everyone grounded on internal core capability requirements.
JIM:
I like that Valerie, very much. Now, going back to your earlier comments on supply chain financial benchmarks, that’s a great way to support the M&A team with their early evaluation, but the assessment is likely to uncover new information that can affect decisions to be made. What’s the next step?
VALERIE:
Well Jim, that’s a great segue because establishing key assessment benchmark information to be utilized as the baseline for downstream analytical tasks, and as a “stake in the ground” for quantifying improvement opportunities, is really important.
This involves modeling the current supply chain and developing a baseline. This is where getting into the details is really important. For example, in the case of a strategic acquisition, perhaps a business unit is being acquired that was previously part of a shared service network.
It becomes important then to understand the implications – operationally and financially – of the separation. Will synergies exist? Will the new business unit be integrated into the core or will it stand alone? Will the selling company need to continue to provide services ongoing, and if so, at what cost? There are a host of issues to address, and this is where it’s important to get to the business unit and the location level, looking at how the various sales channels are serviced, the organizational model and team, and details such as where manufacturing and distribution are located.
With this information in hand, then you can really begin to look at key supply chain issues and drivers. Going back to the three areas of focus – supply chain design, planning and execution – the team can begin to identify strengths and weaknesses and begin to quantify them. There are a host of areas on which to focus. As Steve mentioned in the last podcast, many companies use M&A strategy to expand globally so it’s important not to overlook the global supply chain. This includes things like trade agreements, duties and customs, and compliance.
It’s also important to look at the global network including things like the number and locations of manufacturing and distribution operations, inventory levels and policies, and transportation costs. A real estate evaluation is also important. Armed with all that information and an economic baseline, the team will be prepared to quantify efficiencies and synergies when they get to the initiative development and prioritization stage of the process.
JIM:
OK, so now what about systems? There are some great examples of global companies who have had the discipline to implement a global ERP system and put rigor into standardizing across core functions. If the M&A function is one of buy and integrate, this is a key factor, but what if that’s not the case?
VALERIE:
An evaluation of supply chain systems is really important and can be a big challenge whether you’re looking at a business unit that utilized shared systems or you’re looking at a company that perhaps serves different channels, and has a completely different platform and approach to technology, than that of the acquirer.
Whatever the situation, it’s important to utilize due diligence to assess high-priority supply chain components. And because of the number of applications that touch supply chain, you really need to break the plan into key areas of analysis.
For example, you might look at process and integration, system tools and functionality and internal and external information flows. It’s not until you have a full view into the system support for each of these categories that you can begin to conduct a meaningful analysis in order to assess options and make recommendations.
It is especially important when doing a system assessment that the opportunities be broken down into short–term and long-term, as it is likely that long term-systems investments will ultimately compete for capital. So, the business case for integration, replacement or stand-alone systems requires a thorough understanding of the role of a system in supporting the activities, whether they are for planning, execution or information management.
This is another area where benchmarking can really help to provide objectivity in terms of performance, expected benefits and the importance of the various functions to the users.
JIM:
OK Valerie, so once the assessment is complete, what comes next?
VALERIE:
The next step is the development of supply chain initiatives. Ideally this is done in a very collaborative fashion. This is not a time when you want a lot of surprises, so it is important to have buy-in from users and stakeholders. I can’t over-emphasize the importance of communication throughout the process.
When all is said and done, most likely some, if not all of those involved, will be dealing with some level of change. If the supply chain due diligence team has done its job, they’ve captured not only the supply chain functions but also the dependencies upstream and down. If information is shared and due diligence is done in a systematic unbiased fashion, the desired collaboration is much more likely to occur. The objective is to clarify supply chain performance improvement opportunities, assess the impact and determine relative priorities.
JIM:
Once priorities are established how does the implementation occur?
VALERIE:
That’s a great question Jim. We’ve all read about the low success rate that M&A transactions experience. Just as is true with running the business day-to-day, implementation is all about having a plan and executing it.
First, in an acquisition of any size, it’s important to identify implementation resources, to engage them and to dedicate these resources to the team. This goes all the way back to assessment planning. It is important to have a complete picture of the supply chain in order to achieve high priority improvement initiatives.
Once the team has completed the assessment of supply chain capabilities they must document the initiatives, assess the financial implications and develop the due diligence action plan. This process should ensure that red flags issues are identified and tactics are in place to address any major supply chain gaps.
The last thing you want to happen is to have supply chain disruption occur. Customers must have the assurance and peace of mind during times of transition. Service levels must be maintained and customer expectations must be met. Finally strategic opportunities are evaluated, each supported with a business case, as most likely supply chain initiatives will compete within the company for prioritization and capital.
JIM:
Valerie, thanks for sharing your thoughts with us today. You’ve given us a lot to think about. I have no doubt as to the importance of supply chain due diligence and the importance of doing it right. I look forward to being with you all again in the 2 weeks when we are back with Kent Kedl on getting the deal done and the lessons learned in making a deal successful. I look forward to the podcast and speaking to you real soon.
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