Best Practices for M&A

When beer brewers SABMiller PLC and Molson Coors Brewing Co. announced plans to merge their U.S. operations in October, the companies said that they expected to achieve $500 million in annual cost savings from, among other things, streamlining production and reducing shipping distances. Achieving the projected cost savings will be key to the success of the merger as the united brewers contend with rising prices on aluminum, grains and other commodities. In addition, the cost cuts will help strengthen the new company's hand in a potential price war with Anheuser-Busch, which holds almost a 50 percent share of the U.S. market (versus the combined SABMiller-Molson Coor's roughly 29 percent).

Supply chain considerations rarely are the driving factor behind mergers and acquisitions. But as the beer brewers' linkup suggests, the supply chain function typically plays a crucial role in ensuring the success of any union of two or more companies. This article explores "best practices" for ensuring that the supply chain can rise to the challenges and meet the promise presented by a merger or acquisition.

Plan Early, Plan Realistically

A survey of 154 supply chain and other business executives at large U.S. corporations conducted last year for Accenture revealed what most supply chain executives probably already knew: in the majority of cases (77 percent in the survey), supply chain executives became involved in a merger only at or after the announcement of the deal. That's too bad, says Jay Welsh, a partner in the supply chain management practice at Accenture, because companies that bring their supply chain leadership into the merger planning process earlier are more likely to be successful in meeting their goals. "It's important to have supply chain executives involved early in the planning process, getting them involved not only during the synergy estimation and analysis, but also during the due diligence," Welsh says. "That's the number one success factor."

Bringing supply chain into the planning process early helps on a couple different fronts. First, doing a thorough, upfront analysis of the potential M&A synergies — that is, the cost savings that can be expected from combining two or more companies' operations — from a supply chain perspective can help ensure that senior management sets goals that the supply chain organization can actually meet, Welsh says. Conversely, supply chain executives may be able to identify additional synergies that the C-level group hadn't considered. Either way, establishing goals that are achievable makes it more likely that the merger will be viewed as a success once the dust settles.

Second, involving supply chain executives at an early stage can help the supply chain function understand how they're expected to meet the goals for the merger, says Marc Tanowitz, a principal with Pace Harmon, an information technology and supply chain consulting firm based in Vienna, Va. "Sometimes you'll hear a CEO say that supply chain is going to drive X among of savings, but the people in the supply chain organization don't necessarily know what that means," says Tanowitz, who estimates he has been involved in some $200 billion worth of merger activity for various companies. Does the CEO mean that the supply organization is supposed to re-source major spend categories for per-unit cost savings, or figure out how to reduce inventory to drive savings through lower working capital expenditures? Bringing supply chain into the analysis process can help the organization focus on the correct set of target metrics from the start of the merger process and begin planning that much earlier for how to accomplish those targets.

Don't Underestimate the Data Challenge

From a supply chain perspective, the potential synergies from M&A activity could come on the fulfillment and logistics, or distribution, side of the business or on the sourcing and procurement. In either case, a successful evaluation of the synergies will depend on the quality of the data available to the supply chain team, says Robert Babel, vice president of engineering at Forte Industries, a distribution supply chain consulting and engineering firm that has worked on numerous M&A projects for its clients. "You need to be able to get good data from both companies," says Babel. For companies looking to combine distribution operations, Babel continues, "hopefully, they both have good order history, good movement history for all the different SKUs they're going to be working with. You need to be able to roll all that together to see how the companies are going to work together as one." If the two companies ship similar products to common customers on similar terms, for instance, it may be relatively easy to consolidate order processing operations into a common distribution center and a shared outbound supply chain with little or no disruption to the customers. On the other hand, if the products are sufficiently dissimilar, or the customer bases sufficiently distinct, it might be best to keep the two outbound supply chains completely separate, at least in the near term. That could avert service level disruptions that could hurt the business in the long term, regardless of what cost savings could be achieved by combining two dissimilar fulfillment operations.

The challenge, of course, is being able to collect, collate and cleanse the necessary data from all the disparate systems in use at the prospective merger partners, and to do it in a way that makes a sensible analysis possible. "Just getting a normalized set of data is the first challenge," says Tanowitz. "Some companies might tell you that they have a very low cost for transportation, and that may lead you to think that one particular distribution network is more efficient than another. But then when you look at the data, you realize they're capitalizing transportation in the standard cost of their goods. They show no transportation expense, but that's really not the case." So while a company may be able to use Business Objects, Cognos, Hyperion or another query tool to collect the data, Tanowitz continues, "the hard part is trying to identify the person in the organization who understands that chart of accounts and account coding structure that will get you to the separation of the data to tell you what you want to know."

Supply chain solutions can be valuable tools for collecting these data, particularly when timelines are tight, as they typically are in M&A situations, says Andrew Kinder, director of product marketing for supply chain management at enterprise solution provider Infor. "From an IT perspective, people often focus on core back-office systems, and there's usually a three- or five-year plan to rationalize those systems," Kinder says. "But from a supply chain perspective, you can't even think about a long-term vision. You need visibility into key aspects of your supply chain — demand, supply, global inventory, transportation — and you need it quickly. This is where supply chain solutions come into their own, because they can overlie on top of multiple backend systems. An advanced planning solution can sit on top of these systems, collecting information, produce a new plan and pass it back into those systems so that the companies can carry on with their day-to-day business."

Embrace the Change

Jeff Karrenbauer, president of Manassas, Va.-based INSIGHT, Inc., a provider of supply network optimization solutions, notes that while mergers and acquisitions present many challenges for a supply chain organization, they also present opportunity. "People are more willing to make changes when there is a huge amount of transformation going on anyway," he says, "and you can make those changes under the umbrella of combining the two systems." That might mean closing facilities that previously were viewed as sacred cows, or leaving a long-time incumbent supplier. In other words, embrace the change, take ownership of it and look for opportunities to undertake fundamental transformations in how you run your supply chain or supply management strategy that otherwise wouldn't be possible.

At the same time, Michael Hilbrich, vice president of marketing with supply chain solution provider i2 Technologies, reminds that of all the challenges presented by a merger or acquisition, perhaps the cultural issues can be most significant. If one company is focused on new product development and the ability to get product to market very quickly, and they're combining with a company that has a very strong cost focus and not a speed focus, that almost assuredly will result in a clash of cultures. "A company has to develop the appropriate sensitivities to each culture and, at the same time, develop an overarching corporate culture that brings the two organizations together," Hilbrich concludes.

For additional insights on the benefits and challenges of merging supply chains, read extended conversations with Robert Babel of Forte Industries, Michael Hilbrich of i2 Technologies, Jeff Karrenbauer of INSIGHT, Andrew Kinder of Infor, Marc Tanowitz of Pace Harmon, and Jay Welsh of Accenture at www.SDCExec.com/MandA.