Editor’s Note: This is the first of three articles focused on M&A and the supply chain. Mr. Finch outlines risk mitigation and integration in his follow-up articles. He will speak on this topic at OMTEC 2017. Learn more about what you’ll take away from his session.
The primary focus for the due diligence phase of many M&A projects tends to be financial review, portfolio fit and savings potential of post-close synergy opportunities, which typically means headcount reduction. What is often overlooked is the identification of risks for disruption and opportunities to leverage supply chain infrastructure to ensure that, after closing, the acquirer will be able to sustain or enhance uninterrupted and efficient upstream and downstream product supply. Here are three areas that should be included in a robust due diligence plan to avoid post-close surprises and costly supply chain failures.
People and Systems
These often fall into the “we’ll figure it out later” category and are not given the attention equivalent to the risk that they pose. One reason cited is the need to maintain confidentiality in the early stages of negotiation, especially prior to public announcement of intent. This is certainly of concern, but is not an acceptable excuse to avoid investigating areas such as:
- People – Acquiring companies will identify key managers whom they want to retain, but miss lower level contributors who possess critical knowledge and experience in systems and processes— sometimes referred to as “tribal knowledge.” Knowing why can be more important than how when it comes to understanding the legacy systems and processes in place at the target company.
These people are often system administrators or “super users,” and can be identified through inquiry, including length of employment and breadth of both horizontal and vertical experience. They are critical in that their knowledge cannot be replaced by “system experts” or integration consultants, and may be lost in headcount reduction if seen only as a duplication of similar responsibilities within the acquiring company’s organization. In addition, the impact of their loss may not be seen until months after closing, when something fails or does not work as expected.
- Systems and Processes – Review of the target company’s financials typically includes the ERP system and its compatibility with the acquiring company’s systems, but may not include the supporting supply chain systems. These elements would include forecasting, planning, warehouse management, logistics and customer service, which may or may not be integrated into the ERP. Of particular concern should be standalone systems, especially if designed, created and maintained solely by company associates. Both the systems and the maintainers of those systems need to be included in your risk plan. A disastrous example of this would be an acquiring company that does not send invoices to customers for six months, because invoicing required a manual step that was not being completed, as the person responsible for it had been lost post-close and no one else was aware that it was required. The company may never fully recover from the associated losses.
Upstream Supply Chain
Your upstream due diligence requires more than just a review of suppliers and purchased items for fit into the acquiring company’s procurement strategy. A robust due diligence plan should also include review of:
- Exclusive Supply Agreements – In addition to restrictive terms that limit post-close consolidation plans and supply cost negotiation, these agreements may include supplier IP and, in some cases, royalty payments that will increase total material cost and impact planned margins.
- Design Ownership – Do not assume that the target company owns the designs of all procured materials and products. This may require a request specifically for this information and a detailed review of select drawings. Like exclusive supply agreements, this could impede post-close consolidation, including in-house manufacturing as well as design control and regulatory submissions.
- Drawing and Specification Clarity – Due to time constraints and the nature of the due diligence process, you may not be able to complete a thorough review for incomplete drawings and vague specifications. If able, you should first focus on older legacy products, especially if they have been manufactured by the same supplier since released, as these tend to have the highest risk for this issue. Missing detail and interpretive or visual standards are two issues to look for.