When considering changes to your supplier base, you must include regulatory and supply disruption concerns, the time and resources required to complete your supplier approval process and other associated costs and risks in the decision process. Given these hurdles, a number of potential suppliers never make it past the due diligence phase.
But what do you do when an important supplier is merged with or acquired by another that isn’t approved to supply specific components, instruments or implants previously supplied by the acquired company? If the decision is forced on you, the concerns and risks remain the same but without the benefit of time or ability to decide not to proceed. With the recent M&A activity in the supplier space, all OEMs should prepare for this scenario.
An Ounce of Prevention is Worth a Pound of Cure
Legal concerns prevent suppliers from discussing potential M&A activities prior to public announcement, so any merger or acquisition will be a “surprise” when it happens. But most of your concerns should be addressed in your supply agreement, quality manual or purchase order terms and conditions, which each of your approved suppliers should have already accepted. The points specific to this scenario include:
- Design ownership of all contracted components, instruments and implants, including process and inspection technique.
- Required approval or minimal notification for all process and country of origin changes with minimum time requirement before implementing such changes. This should also include supplier-owned designs and “off-the-shelf” items.
- Access to your supplier’s facility and personnel for inspection, as it relates to obtaining or remaining as an approved supplier.
- Maximum lead time, from order placement to delivery.
- Capacity guarantee within a specific time frame, such as +/- 25% of quarterly forecast outside lead time, what is sometimes referred to as the “frozen period.”
- Expedited delivery for replacement orders if a supplier is at fault for the deviation.
- Undisrupted supply for a length of time sufficient to cover transfer and regulatory requirements for supplier changes. In some cases, this could be up to two years.
- Unit pricing for individual items, labor, campaign, batch and other applicable costs over a specified time frame with defined limitation to adjustment inside or beyond that time frame. Examples would be supplier-purchased items which increase over 10% or having any increases limited to percent or the CPI, whichever is less.
You’ll want to review your supply agreements, quality manual and boiler plate terms and conditions to assure that these points are addressed. If deficiency is found, engage your legal counsel to correct any missing language. This may require review and acceptance by your suppliers, per your approved supplier process.
Acquisition Announcement Day
Depending on the relationship you have with an individual supplier, you will most likely either a) be contacted by your supplier sales representative, b) receive a letter announcing the merger or acquisition, or c) read about it in an ORTHOFLASH update from ORTHOWORLD. In all cases, your next steps should be:
- Review the documents mentioned to ascertain your risk and establish what protections you have in regard to supply and cost.
- Check inventory and open purchase orders with the acquired supplier, and determine the length of time under which you are currently covered and the length of time you need to cover given standard supplier lead time. If the combination of inventory and current open purchase orders is not adequate to cover lead time, it is recommended that you place a new order immediately for that quantity. This is especially critical if open orders or shortfall is required to cover an upcoming launch or promotional campaign.
- If the acquiring company is unfamiliar to you, not an approved supplier or if you have concerns, use all available resources to gain an understanding of the company, including some of its current customers or purchasing team members at other companies, including competitors.
- Work with your quality and regulatory teams to identify any concerns, including individual country registration requirements and approval timeline.
- Once you have prepared yourself to meet with the acquiring company, accept the invitation or contact them. Depending on the risk assessment, this may be either a phone call or a face-to-face meeting. In either case, include other teams or individuals as required, such as quality, regulatory, engineering, etc.
Whether it’s a face-to-face meeting or phone call, the agenda and conversation with your new supplier should be the same. This meeting should not be a legal review or adversarial in tone. Your primary goal is to assure supply and compliance with all terms of agreements or open purchase orders in place prior to the merger or acquisition. As such, it is recommended that the participants be limited to those directly involved in the supply relationship, such as purchasing and quality, and the order and supply management on the supplier side. In addition:
- The face-to-face meeting or call should begin with establishment of intent (see above).
- The agenda should then include:
- Introduction of attendees, roles and responsibilities and going-forward contacts.
- Review and agreement on all open purchase orders, quantity and delivery.
- Review of critical terms of the supply and quality agreements.
- Assurance that all areas of concern will be met by the supplier.
- Identification any issues or areas that supplier attendees are not able to confirm.
- Review of any gaps you have identified in your analysis, such as past due orders or order shortfalls for which you have already placed new orders.
- It is crucial that all commitments are given in writing. This can be done in a non-adversarial way via an email that summarizes the agreements made and requires an acknowledgement of agreement. You should always keep your legal counsel fully informed in the event that assistance is needed.
- If your meeting uncovers areas of high concern regarding the commitment to meet all terms of the agreements with the acquired company, it may require involvement of your legal counsel or a meeting between both companies’ senior management.
M&A activity is disruptive to the organizations of both the acquired and acquiring companies. You should monitor performance and require updates on all open orders for assurance that delivery commitments will be met. In addition, quality and incoming inspection may want to increase sample size and scrutiny for a period of time.
You should anticipate and prepare for M&A activity among your supplier base. The best way to protect your company’s interests is to include important terms and conditions in your supply and quality agreements or purchase orders. If you have not audited your agreements for such language, it is recommended that you do so and correct any shortcomings immediately. For the best outcome of your initial meeting with the acquiring supplier, you should first understand your current state as it relates to the commitments the acquired company relationship was being governed by. All commitments made by the acquiring company should be in writing and follow-up meetings should be scheduled as needed to monitor performance and adherence to the terms of the agreement and those commitments.
In addition to being an author and speaker, David Finch is President and Founder of Insight Collaboration Partners, a consulting group that assists companies in M&A supply chain due diligence and post-acquisition integration, strategic partnering, improving collaboration & operational efficiency and lowering supply chain cost. Mr. Finch has more than 30 years of hands-on experience in global supply chain and manufacturing operations in the medical device and orthopaedic industries with Becton Dickinson, Johnson & Johnson, Wright Medical and MicroPort Orthopedics. He can be reached by email.