Supply chain management: Helping merged companies connect

By Patrick M. Byrne -- Logistics Management, 8/1/2005

After several quiet years, the merger and acquisition scene is heating up. The headlines are once again brimming with M&A announcements, such as Cingular and AT&T, Procter & Gamble and Gillette, and Harrah's and Caesars.

Of course, M&A activity never really went away. But it's clear that companies were becoming more circumspect about engaging in mergers and acquisitions. One reason may have been a growing realization that attaining merger synergies can be an uphill battle. Some studies have noted that half of all mergers eventually fail to create shareholder value, and less than 30 percent create value that is noticeably higher than industry-average returns.

Although there are many reasons why deals have not lived up to expectations, one is particularly evident: Merger partners typically do not pay enough attention to supply chain issues.

By overlooking the importance of supply chain management to a merger's success, companies compromise their new entity's ability to rationalize distribution channels, jettison excess capacity, enhance customer service, and expand into new markets. In some deals, moreover, supply chain benefits constituted up to 50 percent of all acquired synergies. Effectively combining companies' supply chains, therefore, is more often than not a prerequisite for achieving merger success.

However, cost is only one area where the supply chain influences the success of mergers and acquisitions. Others include:

• Revenue. During transitions, a superior supply chain protects revenue by ensuring that customers' orders are not interrupted and by helping the merged entity launch new products and support new markets.
• Operating expense. The effectiveness of supply chain activities like order management, procurement, manufacturing, and logistics directly affect the merged entity's net income and operating margins.
• Capital expenditure. Plants, warehouses, and truck fleets represent a significant portion of the merged company's physical assets, and thus can strongly influence its cash outflow.
• Working capital. Financially speaking, companies count on supply chain mastery to quickly turn raw materials into finished goods, get them into customers' hands, and initiate the payment process.

Which practices separate successful M&A initiatives from those that are less successful? Research conducted by Accenture confirms that a primary differentiating factor often is an ability to bring together supply chain expertise and merger-integration skills during the pre-deal planning phase. This may seem intuitive, but historically, it has been more common for companies to make supply chain integration a post-merger priority.

Addressing supply chain issues early in the merger process involves taking several basic steps:

1. Identify supply chain integration leaders and team(s). Senior executives of the merged entities need to identify and appoint supply chain leaders and establish one or more supply chain integration teams with a clear charter and scope of responsibilities.

2. Realistically evaluate synergies. Estimating the value of potential synergies requires a skillful blend of "top-down" and "bottom-up" methodologies. First, the deal-execution team should use top-down, industry-comparable benchmarks to assess the overall magnitude of the merger opportunity. They can supplement this knowledge by working with expert external advisors to gain an understanding of the synergy opportunities achieved by comparable corporate mergers. From the bottom up, the team can identify specific opportunities, such as consolidating redundant manufacturing or distribution facilities, or capturing scale-based savings in procurement. By marrying bottom-up synergy summaries to top-down benchmarks, the parties will be able to determine whether synergy estimates and opportunities have been realistically portrayed.

3. Prioritize integration initiatives. The supply chain team(s) that were appointed in Step One need to ascertain Day 0/Day 1/Day 100 requirements specifically for the supply chain. "Day 0" refers to the date when the merger is expected to be approved. "Day 1" is when the two merging companies are expected to begin operating as a single, integrated enterprise.

By identifying and prioritizing supply chain initiatives according to their ease of implementation and how quickly they will produce value, supply chain integration teams can help the merged entity operate effectively immediately following a deal's closure.

4. Develop metrics. The merging companies must develop a set of metrics for measuring the success of their supply chain integration. These measurements will help the newly integrated supply chain organization stay focused on major priorities.

Merger-integration metrics may be different from those typically used in internal supply chain scorecards. For example, instead of monitoring internal, steady-state operations, integration metrics would likely include such measures as "percentage of Day 0/Day 1 requirements met on time" and "number of contracts repriced and renegotiated for cost savings."

The bottom line is that early attention to supply chain integration can increase the profitability of newly merged entities. By acting on this knowledge, M&A-minded companies have an opportunity to make their customers, shareholders, and Wall Street feel as upbeat about the new entity years after the merger as the constituent organizations' executives did on the day it was announced.