Upstream Supplier Rationalization and Consolidation
Post-close supplier rationalization projects often fall into one of two outcomes:
- A seemingly wholesale replacement and transfer of the acquired company’s suppliers to the acquiring company’s suppliers based on perception that a widget is a widget, or
- Nothing with an expansion of the supplier base with its associated redundancy, higher management cost and most likely higher acquisition cost.
Neither of these approaches will optimize supplier performance or cost. The BONEZONE articles referenced below included detailed considerations and methods considered best practices for supplier selection, and are just as applicable to post-M&A supplier rationalization and consolidation.
- 4 Questions to Answer Before Outsourcing
- Outsource Innovation by Tapping into Supplier Expertise
- OEMs Achieve Sustainable Manufacturing Cost Through Supplier Relationships
It is recommended that you reference these and other related sources prior to your combined company supplier selection process. A quick summary of these resources:
- Establish common single-supplier performance definitions and metrics before comparing individual company suppliers.
- Include all stakeholders in the selection process, including quality, engineering, sales and marketing, in addition to supply chain and procurement.
- Make sure that drawings, specifications and functional acceptance criteria of both companies are complete, accurate and accepted internally before sharing them with external service providers and contract manufacturers.
- The expectation and goal should be that the suppliers to the combined company should deliver equal or better service and cost than experienced by the individual companies. Taking the time to evaluate and vet them properly will dramatically reduce the risk of failure in both of these areas.
My previous articles on the forgotten phase of M&A detailed ways to approach areas of concern regarding inventory, special handling, regulatory restrictions and the customer-facing system. In addition to these important considerations, you will need to include review of the distribution systems of the two companies for redundancy, cost savings and scalability.
The first step to this is mapping the physical movement of product from the source to the customer, including independent distributors. These maps should be reviewed and validated by all stakeholders in order to properly and fairly compare performance overlap, as well as physical movement or location overlap. This process, combined with your standardized performance metrics, allows you to identify redundancy and best fit for the customer experience and cost. An area that could deliver immediate savings is transportation services, which are typically volume driven. In cases where the individual companies use the same carrier or carriers which can be consolidated without service decline, revised contracts should be negotiated as soon as feasible after close.
Through these three articles, we have stressed the importance of including the supply chain in M&A and the steps that can be taken to reduce risk and enhance value from due diligence to consolidation and integration into a single company.