Be diligent

Anyone looking to buy, sell or merge a company should check out its supply chain.

Due diligence is an analysis of a companies activities and records and is a key step in the acquisition, or potential acquisition, of a business. This review is done whether the company being bought is small and privately owned or is a multi-national corporation.

What differs between the two is the number of topics and records to be investigated. Basic points often include:
- Financial
- Property and assets
- Legal
- Operations
- Marketing and sales
- Management and personnel

Each of these topics can be further broken down with more details. The purpose is to assess the company to determine if it is worth acquiring and at the price being offered.

Tom Craig

Despite the effort, due diligence does not always succeeded in its purpose. The challenge with the due diligence will intensify going forward as the cost of credit increases. Cheap credit is a factor in many mergers and acquisitions. As the global economy and credit markets rebound and evolve, easy, low-cost financing will not be as plentiful as it once was. Private equity and other capital sources will put increased emphasis on performing due diligence properly.

The general problem with acquisition analysis is using the past to predict
future results. But this is not the only issue. The traditional approach to due diligence is suitable for a general company doing all its business and operations in one country. That view is not realistic for most companies that source offshore, have factories in other countries, sell nationwide and to customers in different countries and compete against companies headquartered in China, India, Germany
and other locations across the world. Cross-border is the real world for a large number of manufacturers, wholesalers, retailers and platform companies.

What the new business reality has and what is missing in the classical view of due diligence is supply chain management. Supply chain management as a specific, vital part of due diligence has been overlooked, treated as a hidden side of operations or lightly regarded. Supply chains exist both internally and externally with companies which also makes them complex. The failure to properly examine supply chains cannot continue as the costs for acquisitions increases, and with that, the importance of performing due diligence correctly.

Supply chain management is often the largest cost operation with purchasing, inventory, transport, warehousing and technology to effectively manage the complex supply chain entity. The service impact for supply chains that extend from suppliers
factories through to customers’ warehouses or to store shelves is also considerable.

The need is to evaluate the entire supply chain, not just select areas or functions
within the supply chain. Otherwise firms will miss the forest for the trees. They will not see or will fail to understand symptoms versus problems or cause versus effect.

Supply chain management impacts market position and differentiation; company strategy success; operating costs and operating margins; use of working and general capital; lean operations and the removal of the waste of time and raw, in-process and finished goods inventories; and global responsiveness. Performing due diligence with regards to supply chain management involves more than looking at supplier invoices for ‘cheap’ prices, or at what transport carriers are used and the contracts, or how warehouses operate.

Due diligence for supply chain management should start high in a company and drill down to the details.It should include a trend analysis of these measures:
- Inventory analysis: Assess total dollars tied up, turns overall and detailed
as to ABC classification and as to customer and market segmentation. In-transit inventories should also be recognised, especially with regards to international sourcing and procurement, intra-company transfers and customer sales.
- Outsourcing: Analyse how providers perform – overall and individually.
- Cycle time: Determine the time from purchase order issued through to payment received from the customer for his purchase. This is a critical measure for profitability and for cash flow. Supply chain management is central to the time.
- Customer service: Analyse what percent of customer orders are shipped complete, accurate and delivered on time. Also look at lost sales from stockouts or having to make multiple shipments for each customer order, especially where a company has many dollars tied up in inventory and has poor inventory turns.
- Supplier performance: Determine how well suppliers perform, overall and for key vendors, as to delivering on time, accurately, completely and as to quality.
- Forecasting accuracy: Offshore sourcing adds to the lead time for replenishing inventory. Additional lead time adds to the challenge of forecasting accuracy. Longer stocking/restocking has a significant impact for products with short product life cycles and for inventory levels and customer service.
- Risks: Identifying offshore manufacturing and sourcing has potential supply and other risks. These risks should have been defined and proper mitigation steps have been taken.

What’s next
Due diligence actions can tell us what events have happened in the supply chain. The next challenge is to determine why they happened. What is controllable and can be corrected?

This work could include:
- Evaluating the supply chain process, its technology and people. Identifying
gaps, the reasons for their existence and what must be done and invested to improve the situation.
- Determine if systemic problems are driven by the management within the supply chain organisation or whether they are forced on supply chain management by top executives. This determination can have an influence on which people are retained. People who caused the problem would be suspect for being able to correct them.

Conclusion
Investigation of supply chain management has generally been overlooked with due diligence, despite its costs and impact on company operations and performance. Many times outdated standards have been used for today’s globally active and competitive companies. Increased costs of acquisition capital should drive the need for better due diligence with a hard analysis of a company’s supply chain.