Mergers and Acquisitions; is your supply chain your Achilles Heel?

PRESS ARTICLE April 2011 Mergers and Acquisitions; is your supply chain your Achilles Heel? Corporate dealmakers in the US and Europe are predicting a flurry of deals in 2011, as the number of potential mergers and acquisitions continues to grow. According to The FT, the US mergers and acquisition (M&A) market saw record levels of activity in January, with 77% of banks reporting an increase in loan demand. While this is good news for the financial sector, businesses themselves need to think carefully about the impact that growth by acquisition can have on an organisation’s hidden asset; its supply chain, says Peter Roan of independent supply chain consultancy, Total Logistics. Roan and his team have been involved in a number of post-merger supply chain projects, in sectors such as food, retail and chemicals – all industries that are predicted to see a rise in M&A activity in the next year. He said: “In some instances integration of businesses is seen as the potential silver bullet that will create a single, optimised organisation that will dominate its market. The actual needs of a business, and more importantly its customers are rarely addressed by an integration strategy that is too simplistic or overly optimistic. “While the broad strategic fit of the two merging businesses might make sense on paper, it’s often the practical details that get overlooked, leading to problems in the post merger period. Some of the key questions that need to be asked from a supply chain perspective prior to a deal include; can the products of each company be stored together? Can customers change their ordering patterns to buy products from the two businesses together? Is range rationalisation possible, or do apparently similar products serve different customer needs?” In short, Roan believes that a detailed study of supply chain activities needs to be undertaken before financial due diligence is undertaken to understand the benefits that can be achieved. “According to research (Marks and Mirvis), three out of four mergers fail to achieve their financial or strategic targets, which suggests that management teams and their advisors focus on the easy measures such as income, P/E ratios and stock levels, without looking at the softer side of the deal, which includes cultures, systems and of course supply chain,” comments Roan. In his experience on both sides of the fence, as both corporate executive involved in a merger and as an external consultant, Roan believes there are five key areas where M&A teams can mitigate against risk of supply chain issues undermining a successful deal. 5a Market Place, Wokingham, UK, RG40 1AL Noordhoven 19b, 6042 NW Roermond, Netherlands T: +44 (0)118 977 3027 | F: +44 (0)118 989 0081 T: +31 (0)475 322 306 E: info@total-logistics.eu.com E: infonl@total-logistics.eu.com Risk In order to avert risk, at least for an initial period after the merger, Roan recommends that respective supply chains remain separate, to reduce the risk of service disruption. “During the months following a merger, it’s vital to maintain service levels to customers as supply chain failures at this critical point can cause significant problems for a newly-merged business. Often, it is more sensible to let the two businesses operate as normal after the deal, while detailed planning of joint supply chain activities is done. Guard your profits Many management teams acquiring a business assume, wrongly, that the reported levels of turnover and profitability in the target company will be sustained. Roan recommends that acquirers undertake a competitive review of the company’s supply chain. “Savvy acquiring businesses understand how their target is adding value to its customers and also how competitors could match this offer. We strongly advise those about to complete a merger to look closely at the contract terms with key customers and suppliers from a logistics perspective. This point particularly applies to a business’s relationship with its 3PL, which can have a huge bearing on the competitive position of the organisation, in terms of cost of warehousing, storage, product availability or flexibility. Dig deeper Typically, incoming management do not have a granular understanding of the business’s supply chain, putting more emphasis on the financial evaluation of the company, without understanding the underlying operations and potential for improvement. “Instead of taking the ‘easy option’ of doing a desktop review of the company, we always advise the takeover team to talk to the operations team, preferably before the deal is completed, but certainly early in the post merger period,” advises Peter Roan. “Only by getting your fingers dirty and really understanding some of the practical logistics challenges can you hope to achieve the efficiencies that were identified at the beginning of the acquisition process.” Stay focussed During the hectic period after a merger, the day to day job of serving customers can sometimes take a back seat, according to Total Logistics. “This loss of service focus is typical in the weeks that follow a merger as systems cope with demand and the business deals with manpower rationalisation. “To mitigate against this, we recommend that key customers are identified and prioritised during this period of transition. This should involve detailed planning to identify demand and ways of increasing stock cover during this time. Buffer stocks should be considered as a failsafe method of keeping up with customer demand.” 5a Market Place, Wokingham, UK, RG40 1AL Noordhoven 19b, 6042 NW Roermond, Netherlands T: +44 (0)118 977 3027 | F: +44 (0)118 989 0081 T: +31 (0)475 322 306 E: info@total-logistics.eu.com E: infonl@total-logistics.eu.com Harness people skills It is often a mistake to assume that the dominant partner in the merger has a monopoly of management competence. Often, we see relatively inexperienced, incoming supply chain teams grappling with logistics operations that were built and operated by the team that have been ‘let go’ during the merger. It is usually far better for the business to think about ‘one team’ and spend time with managers to understand the value that they can add. Harnessing all the experience and knowledge of the business’s logistics talent pool makes far more sense than jettisoning logistics expertise just when the newly forming company most needs it. Conducting a successful merger or acquisition is generally cited by senior directors as one of the most stressful challenges of their careers. It is easy to be drawn into the detail of the accounts and performance figures during the due diligence period. However, taking the time to identify and protect the key drivers of the business – such as the supply chain – during the process can significantly improve the chances of success. Getting it right - adidas One business that got the supply chain element of a merger right is adidas, which took over rivals Reebok and Rockport back in 2006. Instead of simply closing down its inherited distribution net- work, the business continued to operate four con- ventional warehouses to service customers in the UK, Ireland and Benelux. Total Logistics was engaged by adidas to under- take a fresh analysis of the business’s supply chain needs, ultimately recommending a single, automat- ed site in Trafford, Manchester. The 30,000 m2 site cost approximately £20m and was fully operational in 2008. The new Distribution Centre allows adidas to balance work over several peaks and troughs between its re- spective brands. adidas customers experience better flexibility, along with fewer, consolidated deliveries and improved responsiveness. The automated warehouse was exceeding the original performance targets within just six months of going live. 5a Market Place, Wokingham, UK, RG40 1AL Noordhoven 19b, 6042 NW Roermond, Netherlands T: +44 (0)118 977 3027 | F: +44 (0)118 989 0081 T: +31 (0)475 322 306 E: info@total-logistics.eu.com E: infonl@total-logistics.eu.com