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The Forgotten Phase of M&A: Mitigating Supply Chain Risks

This is the second of three articles focused on M&A and the supply chain. Mr. Finch outlines due diligence in “The Forgotten Phase of M&A: Supply Chain Infrastructure.” His third article will focus on supply chain integration post-M&A.—Editor

The primary responsibility of the supply chain team post-M&A is the assurance of uninterrupted upstream and downstream product supply. In order to minimize disruption and eliminate risk, you must validate what was learned or assumed from the due diligence phase and develop a tactical plan to identify and map out the current, transition and future or desired state of the supply chain. That process includes analyzing people, inventory, upstream and downstream customer experience—each of which is outlined below.

First, it’s important to note that once the transaction is complete, you can expect requests to improve your balance sheet and to reduce—reduce your cost of goods sold, suppliers, headcount and more. All of these steps are important for long-term success and post M&A performance.

In order to achieve this objective, we must identify and deal with supply chain issues before they occur, putting the business at risk. Some people within the organization may see this pause for analysis as slowing down the process, but the potentially devastating impact and extensive delay that supply chain disruptions could have is why I refer to this approach as, “Going Slow to Go Fast.”

That is, you’ll get there faster by dealing with issues before they occur rather than as they occur. Typically, 60 to 90 days should be planned for a thorough assessment of the current state of the supply chain, including risk discovery and mitigation planning. It is also recommended that a single individual from both the acquiring and acquired company sides has overall responsibility for completion of this phase, with appropriate executive sponsorship and authority.

With that swiftness in mind, here we begin the essential steps to identify supply chain risk and develop a mitigation plan to minimize or eliminate that risk.

People
One critical area is the people and their tribal knowledge. Change upsets the delicate balance among departments and throughout the organization in so many little ways that may not be immediately visible, but can show their effects over time.

Generally, other than directors and higher-ups, the supply chain staff of the acquired company has not been offered an incentive to remain with the combined company. This makes them a risk from both a personal decision to leave as well as a headcount reduction opportunity for the combined company. Therefore, it is important that you identify those individuals who have extensive knowledge of systems, processes and particular nuances of supply, products and customers as soon after close as possible. This is best accomplished by first developing leading questions concerning these areas and by conducting one-on-one interviews. The interviews should include known issues with the supplier base, procured materials and services, related systems, products and customers.

Your mission is to identify key personnel who possess extensive supply chain knowledge and the related systems and processes. Once these people are identified, steps should be taken to capture and document their knowledge and, if applicable, retain these individuals.

Inventory
You will deal with excessive/imbalanced inventory and other opportunities for reduction during the transition phase. Your focus here is short-term risk for supply disruption. That can be accomplished by minimally including obsolescence, expiry and regulatory concerns.

  • Obsolescence – The concern is not that inventory has been overstated, but that inventory that has been identified as obsolete (or to become obsolete) may not have been communicated to suppliers or customers. It could be that a product line has been identified as obsolete, but inventory is being sold as long as sufficient size mix is available to make it viable or limited to a single or few customers.

    Make sure that you include instrumentation in this analysis. This would include those used only with the obsolete implants, as well as instruments that have been obsoleted but no replacement identified that are used with active implants.

    Once confirmed, make sure that the planning and supply functions have been disabled and that the customer base and customer experience associates have been informed. Identifying these implants and instruments will require the input of marketing, product line management and engineering, typically the sources or approvers of product obsolescence decisions.

  • Expiry – As with obsolescence, expired product may impact inventory value, but remember, the focus is on risk of supply disruption. This is especially true when combined with long supply lead times and customer short dating policies.

    Either one, if not identified and dealt with early, can potentially shut off supply for a period of time, especially if the product cannot be reworked or re-sterilized to extend its shelf life. Normally, expiry risk can be identified through inventory analysis, which includes expiration date with internal policies and customer agreements.

  • Regulatory Concerns – Generally, regulatory concerns for inventory fall into two categories: registration and expiring registration. Based on the regions into which the company sells or intends to sell the acquired products, you need to confirm registration and the expiration of that registration.

    This holds true for both the implant and the required surgical instruments. Issues with either one can lead to the inability to sell in a previously-approved region/market, or cause months and sometimes years in delay to introduction along with the associated expense. A comparison of regulatory registration records to short and long term product marketing plans should uncover issues in this area.

  • Other – Other areas to include are procured products and raw materials that have long lead times, new vs. reworked instruments (some markets will not accept used or reworked instruments) and ratio of surgical sets of implants and instruments to historical or projected surgeries.

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