M&A Supply Chain Strategies: Lessons from the Office Depot-OfficeMax Merger

When two companies merge, the supply chain organizations also must merge.  That means downsizing that department, making personnel choices, converging IT systems, and meeting the supply chain synergies promised to Wall Street.  Mergers can go badly wrong, or they can be a new source of competitive advantage.

Larry Hartley, the Senior Vice President of Supply Chain at Office Depot, has lived through both types of mergers.  More recently, he was the man in charge of converging the supply chain operations of OfficeMax and Office Depot when those two companies merged.  Larry spoke about that experience at the 14th Annual North American 3PL Summit & Chief Supply Chain Officer Forum in Chicago this June.

The merger was driven by competitive necessity.  Increased competition in the office supply business has resulted from the entry of online retailers like Amazon.com, as well as growing incursions into this product segment from brick and mortar retailers such as Walmart, Costco, and Target. This had led to led to declining revenues, shrinking same store sales, and not surprisingly, declining market shares.

The government approved the merger at the end of 2013, but the planning process had begun 9 months previous to the approval.  At that point, they had two distinct organizations with similar products, service promises and customer profiles, but different approaches to supply chain management.  And until the merger was finalized, both organizations were competing while dealing with open headcount, dual leaders across the organization, and assortment changes.  Further, once the merger was complete, the combined company would have revenues of about $16-17 billion, which was still smaller than the market leader Staples.

Once the companies were combined, they had “two of everything.”  Employees were asking, will I keep my job?  And if I do, where will I live?  Who will my boss be?

two of everything

Two of Everything

There was also operational uncertainty.  According to Jeff, there was the understanding that what worked in the past probably would not continue to work.  “What should we anchor on?  How should we react to new situations?”

And there were new challenges.  Wall Street had been promised 70 to 100 million dollars in supply chain synergies from the merger by the end of 2016.  It was understood that there would need to be a stock keeping unit (SKU) rationalization across their three channels.  And, they needed to design a flexible Distribution Center (DC) network that would lower costs while providing flexibility to ramp up deliveries to meet a surge in demand if new ideas for revenue growth worked.

So how did the new company to be approach this?

They used an outside consultant, the Boston Consulting Group, to provide integration and merger process support.

There was a dedicated supply chain consolidation planning team staffed by good people who were pulled off their day to day duties and worked full time on the merger.

They attempted to make data driven decisions.  This was easier to say than to do.  They had to dig into the data and understand what the true costs were.  If they were comparing safety metrics or service levels, they had to look at how OfficeMax and Office Depot had defined those metrics.  Then even when they agreed on the data, the decision that should be made on the basis of that data was not always clear.  In these cases, the team moved on to the next issue; the new supply chain leader would make that decision when appointed.

In November of 2013, Roland C. Smith, who came from outside Office Depot and OfficeMax, was appointed the new CEO.  He was experienced in mergers, and brought in his own merger playbook.  He moved quickly.  The first thing he decided was that the new headquarters would be in Boca Raton.  He interviewed the leaders from both companies, and one week later he chose his leadership team.  Part of his decision on the new leaders was based on selecting the best team possible.  But the “best” team needed to reflect the culture he was trying to introduce.  Mr. Smith wanted to establish a culture of integrity, accountability, and innovation.  He wanted the new executive team to be committed to these principles.

The leadership team, which included Larry Hartley as the Supply Chain leader, was announced two weeks before Christmas.  The team was given their holiday homework.  They were told that when they came back from the break, they needed to tell Mr. Smith who would be reporting to them.  No reserve capacity for potential moves down the road could be retained; no shadow organizations were allowed.

The new CEO told the leadership team, 60,000 people are counting on you.  “Make your (personnel) decisions for the good of the company as a whole.”  The need for speed continued all the way through the merger process.  Larry said that “not making a decision is itself a decision.  It was important to get to an 80 percent solution, and rely on your people” to fix the last 20 percent.

Throughout these weeks, Larry strove to be open and honest about the process.  People knew where the new headquarters was located.  Executives that wanted to stay on knew if they would have to relocate.  He told people when they would be told about the new decisions.

If a person was offered the job, there was a need for speedy resolutions.  They were given two days to decide.  “They could handle it.”  Because of the drawn out merger approval process, “they has already had a year to think about this.”

Further, honesty was also important in the decision making process.  It was important to be able to admit that “you don’t yet have a solution to a problem.”  The answer will probably be one of these options, but “we just don’t know yet.”  And it was also alright to say, this is just “not a top priority right now.”  Finally, the reason a decision was made needed to be explained.  “People can understand change if they understand why” the change was made.

Office Depot established a communication steering committee to make sure their messages were being understood by the rank and file.  They would ask employees from all levels of the organization, “did this message come through?  How can we make our next town meeting better?”

This was billed as a merger of equals.  This gave Larry more freedom to pick the best people. Larry said he ended up with a good mix of people from both companies. This was a very good thing in terms of creating the “To Be” process. It was important to have people that could explain both organization’s “As Is” processes and technology before a better “To Be” process could be selected.

Once people were onboard, spans of control were established such that there would be a single point of accountability.  It was important to settle who was responsible for which process and function publicly.  Once decisions were committed to, timelines for implementation were established, and the promised date had to be met.

There were still many decisions to be made and many issues the supply chain team needed to debate.  The principle that was followed was that everybody plays, no silent dissent was allowed.  Further, the term “this is the way we did it” was not allowed.  “We” is a term that should refer only to the new merged company.  Every time a team member said “we” and meant the company they use to work for, they had to pay 1 dollar to a donation kitty.  In one short statement, “a person could end up paying three dollars.”  They ended up with a nice contribution to their foundation.

Establishing core metrics as a rudder that could be used to steer the new supply chain organization was also important.  They took a Balanced Scorecard approach with top metrics that measured safety, the customer experience, and cost.  Then as they looked at their DC network and decided which DCs to keep and which to close, each of those DCs was rank ordered from top to bottom in each of those areas.  In some cases, they did have to close a DC with better ratings because of the need to have a balanced regional network.

From a systems perspective, the Office Depot ordering and delivery systems were kept.  They also selected JDA as their key Supply Chain Management platform.  Having a few core platforms kept integration simpler.

In closing, Larry said that he “learned more in the last year, than in the previous ten years;” his learnings related to leadership style were singled out as being particularly important.

Larry did not mention it, but mergers and Office Depot are back in the news.  In February of this year, Staples and Office Depot announced that the companies have entered into a definitive agreement under which Staples will acquire all of the outstanding shares of Office Depot.  The Federal Trade Commission has not yet approved this merger.

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