Mergers and acquisitions (M&A) present an incomparable number of options for the design of the new organization’s supply chain, so it’s not altogether surprising that so many of these projects fail to meet executive and shareholder expectations. Depending on which report you consult, M&A initiatives have a failure rate of anywhere between 50 and 85 percent!
Supply chain design technology enables companies to model their supply chains, evaluate alternatives, optimize the network structure and simulate multiple scenarios in order to predict the resulting operational performance of the merged organizations. There are opportunities to leverage modeling across all stages and types of M&A activity, including:
Supply chain design models include all of the potential inter-related operations and incorporate time and variability for precise strategy and operational planning. Here are few basic examples of how supply chain design can be utilized at each of these three types of M&A activity:
Pre-Merger Analysis: The pre-merger phase is uniquely challenging in that data for potential markets and acquisition/merger targets is often difficult to access. Strategy building and decision making relies heavily on assumptions rooted in available data. Companies can use supply chain network models to visualize and analyze M&A strategies and perform critical sensitivity analysis on key assumptions.
Example: What Companies are the Best M&A Targets for Entry into a New Market? By creating a model of the existing corporate supply chain, then overlaying the supply chain footprints of potential M&A targets, executives can evaluate the trade-offs including market coverage, operational redundancies and total combined cost. This information can prioritize acquisition candidates and lead to more informed negotiations with the chosen company.
Post-Merger Analysis: With two unique, complex operations often including overlapping assets, products, customers and suppliers; supply chain modeling and design is essential to help make sense of the array of possibilities. Design can:
- Identify short-term improvements with limited disruption
- Simultaneously analyze big-win but potentially more disruptive changes
- Create a more accurate projection of cost savings and operational efficiencies
Example: Developing the Combined Supply Chain Roadmap Supply chain modeling and design can help companies identify the optimal footprint (i.e., number and location of facilities, production capacity, suppliers, transportation assets, etc.) by evaluating all the potential options and required capacity over a three, five or even 10-year time horizon. This makes it possible to create a structured long-term plan for successfully combining the two companies’ supply chain operations to achieve the optimal level of efficiency.
Divestiture/Spin-off Analysis: The benefits of using detailed supply chain modeling during a divestiture or spin-off include:
- Identifying the capacity requirements and product flow volumes for the resultant business
- Obtaining data to drive the negotiation of new business terms with transportation service providers and suppliers
- Creating an implementation timeline for the transition from shared assets and resources to independent status
Example: How Will the Remaining Supply Chain Perform? The new supply chain will be responding to a different set of demand signals, with different volumes and order patterns. Supply chain designers can create a model of the new network and run the remaining orders through a simulation to help predict how that new network will perform under real-world conditions. A simulation analysis can provide detailed metrics on capacity requirements, shipment volumes, on-time deliveries and inventory levels to validate the design of the new supply chain network.
M&A Case Example: Making Data-Driven Site Selection Decisions
Challenge: One of North America’s largest packaged foods producers acquired a major frozen food manufacturer. With fuel costs on the rise, the company needed to re-evaluate its inbound and outbound distribution strategies given the expanded network. Specifically, which DCs should service which customers, what was the optimal quantity and location for DCs, and at what fuel cost would this optimal network configuration no longer be advantageous?
Solution: A network optimization model was used to establish and validate the baseline merged supply chain, determine the optimal network configuration, and conduct sensitivity analysis.
Results: The analysis showed that savings could be achieved by simply realigning which customers were sourced by which DCs, eliminating redundant shipments coming from multiple sources, and reducing expensive cross country shipments. Because of the high construction cost and costs associated with closing an existing distribution center, Memphis was not a good option to build a new distribution center. The most significant savings could be found by expanding the existing Southeast warehouse and moving the West distribution center eastward out of California.
Toby Brzoznowski is the Executive Vice President of LLamasoft, Inc. Toby has over 20 years of experience building and growing businesses, focused on process improvement and analysis technologies. His expertise has been applied to bringing new and advanced technologies into mainstream use at global Fortune 500 businesses. In the last decade, Toby has been involved in the start-up of three technology companies. He is a graduate of the University of Michigan and a frequent presenter at supply chain and strategic sourcing events.