This is a time of opportunity for mergers and acquisitions. It has been a record year to date for private equity acquisitions – and there is still plenty of dry powder in the market. Meanwhile, issues such as Covid-19, Brexit, energy problems in China and challenges to the shipping industry have ensured an unprecedented degree of focus on supply chains.
Paul Ross, an Associate of Eton Bridge Partners, is an accomplished and experienced manufacturing and supply chain specialist. He coordinates, manages and implements scalable end-to-end supply chain processes within a project management framework internationally and is currently poised to take his highly successful career to the next level.
In conversation with Ross Dawson, Operations, Procurement and Supply Chain Practice Lead at Eton Bridge Partners, he gives his expert opinion on the ideal planning and processes from a supply chain perspective in M&A processes.
Paul, what is your view on the current state of the business landscape in terms of mergers and acquisitions – and the role supply chain can play?
This is a time of M&A opportunity. As is often the case with economic downturns and recoveries, you’ll see many cash-rich companies looking at others struggling with cash flow and spotting the chance to snap them up at low cost, integrate them and make a lot of money.
At the same time, supply chains are now more integrated and interdependent than ever before; meaning an impact on the other side of the world can have a direct impact to your supply chain performance. For example, the recent incident in the Suez canal with a vessel getting lodged, blocking a globally critical shipping route and its related impact to global supply chains. It’s advantageous to consider this at the earliest opportunity in any new operating model design.
There’s more visibility and understanding about supply chain now than ever before. This means we have a voice, and an ability to influence business leaders to invest and make supply chains more robust. We need to leave the simple lean supply chain model behind, thinking more about maximising opportunity (Profitable Sales) having the right product in the right place at the right time to make the process efficient. There will always be operational challenges, but this is an opportunity to get better at looking forward and managing the end-to-end process.
What we, in supply chain, can do from an early stage is highlight potential areas where an agreement could cause problems for a business that impacts the profitability of that agreement. As well as to influence the short and long term operating model to maximise profitability of that agreement or acquisition.
Businesses should ensure they include that supply chain voice. Meanwhile, those of us who specialise in supply chains should be more proactive and bring that understanding of how things are going to work. Are we going to have to hold more inventory? What’s the lead time? What’s the risk? We can help businesses to understand the realities and use our expertise to look at every aspect and discern the impact on the bottom line.
On the flip side, we can also look at opportunities. Typically, people in supply chain talk about constraints. What we don’t do enough is look at the opportunities to find excess capacity, help sales and marketing, make sure an operation is agile, flexible and get a product to market quicker, faster and cheaper.
Do you see opportunities for improvements generally around supply chain’s involvement with due diligence?
One really important consideration around M&As should be understanding your operating model at an early stage in contract negotiations. If you can achieve that understanding, it can help enormously in the design of your contract. If you don’t know how you’re going to run the transition, how do you ensure that contract reflects your risks in the supply chain, or ultimately, the profitability of the acquisition?
One great example comes from the work I did recently on the private equity firm Yellow Wood’s brand acquisition of Scholl from Reckitt Benckiser. Yellow Wood decided not to carry out an audit check on the inventory; they thought it was about 90 days on average. It was actually ~140 days, which meant they had to find another ~$10-15 million of cash flow, and potentially $1-3million product write off.
If you know what your business model is going to look like, and you understand your operating team and your purchasing as part of your due diligence, you can plan for that. So often such deals are worked out by a lawyer, a commercial person and a finance person – involving someone from supply chain would add great value. Given the pressures supply chains are currently experiencing, there should be more focus on it at the boardroom table.
Tell us about your recent work supporting companies on M&A journeys from a supply chain perspective
With Yellow Wood’s brand acquisition of Scholl, there was a requirement to have a transitional agreement between the two parties to maintain operational supply during a transition period of approximately 12 months. However, this was also a great opportunity to start with a blank sheet of paper and implement what I call ‘universal best practice’.
One of the key things I designed and developed was the sales and operations planning process. What added complexity was the scale of the brands and products, and the need to have the supply chain automated from day one. We put in place a process with two demand partners and two supply partners to manage 35 different countries, and a similar number of suppliers, as well as 3,500 SKUs; all automated and with a good decision-making process in place.
One of my mantras in professional life is to keep things simple. I find it essential to maintain your focus on the objective at hand and not to try to do additional things that aren’t needed at that point.
It wasn’t the right time to change product names, or look at customer and supplier segmentation. The key was to transition suppliers and deliver products to customer locations without the customers seeing any difference – either from an administrative or logistical point of view.
My previous work was at MundiPharma, working very much in a due diligence capacity to understand where supply chain could add value to its pipeline, process and operating model. I ensured that key risks were highlighted, commercial forecast scenarios were challenged and the financial evaluation accurately included impacts to supply chain operating model.
How important is data within the transformation journey?
It’s absolutely crucial. With Scholl, we were creating data from day one on a blank sheet of paper as we worked on brand new systems and processes. You need the right numbers aligned to products as well as inventory tracking, routes, locations and customers – and if you put bad information in, you get bad data out.
When considering an acquisition, it’s important not to make the assumption that the seller’s data will be accurate and robust. Get some key data samples and pressure test it. It is very likely that additional resource/product/sales understanding will be required before or during the transition to understand the data that is being shared, and to help cleanse and correct before using as historical sales or master data for a new system.
We all recognise that data is critical, but I still don’t see enough ownership of it within businesses. This was something we talked about in depth at MundiPharma, which had significant data issues, and in the set-up of the ERP system for the Scholl business.
It’s essential to know who is going to own the data and be responsible for it. Because it’s one thing to set up a new ERP, but you then have to maintain it and ensure the accuracy of the data, otherwise you will encounter delivery issues.
If you don’t remove unnecessary data, or don’t add new customers and suppliers accurately, you will require a lot of manual intervention – and your system is no longer automated.
If the processes or data accuracy cannot enable automation of specific customer/ supplier interactions, this will certainly lead to off-system solutions, which bring their own challenges.
The final point on data would be that is important not to drown your organisation in it! Keep data simple where possible as this will be more sustainable, and lead to more efficient operations. For example, a demand led supply chain can be managed with 2 pieces of information – actual sales and actual inventory.
What will be the key pain points for supply chain in the coming months?
From a UK perspective, we’ve lived in a world of supply chain disruption for more than five years. There has been Brexit, pre-Brexit, Brexit negotiations, post-Brexit, then trade wars, global shortages of capacity and logistics, and then the pandemic. That’s all had a huge impact on demand globally.
But this is the real world. What we’ve seen over the last few years is the consequence of a lack of investment into supply chain, however, the business world should stop using the turbulent world as an excuse not to invest and make some difficult decisions.
I’d like to say it’s going to settle down, but I don’t see that happening any time soon. So as a supply chain function we need to be a more proactive and better at creating business cases.
What does every business need to ensure it’s successful from a supply chain perspective?
The most important element to put in place is a culture of collaboration, internally and externally. Businesses need to move away from the silo mentality where departments sit in isolation, with consequences that are reflected in technical solutions. You’ll find ERP systems that, for instance, do finance and invoicing well, but do less well with planning, regulation and contract management.
There have been good collaborative tools available for decades that will help people to work together if the silos are broken down, and KPIs can be used to enhance collaboration. So instead of putting pressure on the sales team to meet forecasts, we should be asking supply chain professionals what we can do to help them forecast more accurately.
Supply chain needs to be more assertive with our colleagues and stakeholders – but also within supply chain teams to benefit a business as a whole.
“This is a certainly a time of opportunity for businesses. As is often the case with economic downturns and recoveries, after many organisations have been furiously fighting fires and treading water for months, it is now time for them to take stock and properly consider their business in this altered world. This may lead to an acquisition of a competitor that has done less well, a sale to a prospective investor, a divestment of a non-core business unit or product range, the opportunity to refresh the Target Operating Model or to review and refresh systems and processes.
As supply chain is key to the success of many businesses, our clients’ recognise that it simply has to be considered within the transformation and that now is the time to do it.” Ross reflects.
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