Thinking Through M&A and Supply Risk

Over on Line 56, Jim Lawton penned a guest article that highlights some reasons why companies should add supply risk to their due diligence work. For any organization with an acquisitive personality, the piece should be required reading. And in my view, just as more and more organizations are incorporating spend visibility and analysis work into their due diligence -- or immediate post-close -- process to gain a better handle on procurement synergies and cost savings opportunities, they should also incorporate supply risk factors into their analysis.

In their supply risk due diligence analysis, Jim suggests that companies should consider the following types of questions:

What fraction of this company's supply base includes suppliers that are financially unstable?

What's the likelihood of suppliers delivering sub-quality, off-schedule parts?

How many active parts are in the supply chain? From how many vendors? What's the amount of spend with each?

How are suppliers performing relative to others providing similar commodities, whether organized by SIC, NAICS, UNSPSC classifications?

Obviously, this list is just a start. To it, I might consider adding questions such as: "Is there an overt concentration of suppliers of in a particular region (especially a potentially volatile -- from a commodity, economic, and political perspective -- one). And "what risk assessments have already been conducted that might examine particular category exposure to the core business (e.g., help desk outsourcing)".

By beginning to unearth the risk to the business that an acquisition might pose because of its purchasing and operational activity, acquirers can begin to model the complete upside (and downside) associated with a particular deal. Without question, the right internal skill set is critical to make this a reality. Personally, I highly doubt that the majority of Big 5 or strategy consulting practice teams have the experience to pull this off in an advisory capacity given a lack of domain expertise, despite what they might position in their pitch decks. In my view, this type of internal team should pull from cross functional areas including sourcing, supplier development, design engineering (to understand part standardization and alternatives), and operations.

Technology is another component that can provide critical insight into the potential risk a potential acquisition target's supply base might bring. In addition to considering predictive modeling solutions that will help you think through the likely hood of supplier financial or operational failure (such as D&B's Open Rating), it is also essential to look at other risk management technologies that look at supplier compliance (e.g., Vendormate, Browz), and supplier quality and performance (e.g., Apexon, Ariba, Procuri, Emptoris, SAS). Trust me on this one -- Excel and Access will only get you so far in your supply risk management due diligence analysis efforts.

- Jason Busch

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