Phil Reuben on why logistics operations must be a due diligence priority

28 May 2024 7 min. read

A majority of firms in the UK view as the best way to keep up with the changing landscape, but it is increasingly important that companies explore the security of the supply chains of firms they acquire to meet those goals.

Phil Reuben, executive director at global supply chain and logistics advisory firm SCALA spoke to about how firms can best prepare themselves for deals in the coming months.

Phil Reuben on why logistics operations must be a due diligence priority

You’ve been with SCALA for eight years, how has the supply chain risk landscape shifted in that time?

The last eight years have seen a succession of major global events impact businesses’ supply chain and logistics operations significantly. From major elections to war, Brexit, and the pandemic, businesses have been forced to navigate constantly evolving operational landscapes - which has made providing consultancy in this space professionally challenging, but also a diverse and rewarding job.

Risk has certainly increased during this time, with businesses forced to prepare for the unpredictable and make difficult decisions that could affect their bottom line. Turbulent geopolitical and socioeconomic circumstances affect everything from the cost of raw materials to the availability of transport routes, meaning that having a foolproof end-to-end strategy with adequate contingency planning in place is a non-negotiable for today’s supply chain leaders.

What are the leading risks firms expose themselves to in the M&A process now?

As with any major business move, undertaking a merger or acquisition can pose significant opportunity – but also expose potential risks. Supply chain and logistics operations are particularly complex, comprising many moving parts which can be vulnerable to changing circumstances. For example, supplier dependencies, compliance issues, and geopolitical and socioeconomic circumstances can all present a risk to the success of a merger or acquisition.

Businesses are increasingly switched on to the risks following years of disruption – hence supply chain resilience is a hot topic right now. However, identifying supply chain and logistics risks that could emerge because of M&A does not necessarily mean that a deal is a no-go. Doing the due diligence beforehand can provide the foresight to put a risk mitigation strategy in place and avoid anticipated problems later down the line. However, in more complex cases, it can certainly uncover the evidence that informs investors not to proceed with a deal.

The global deals market dropped off in a major way over the last two years. How have these risks contributed to that?

This situation is not unique to M&A; we have seen business confidence waver in recent years, which is hardly surprising given the volatile circumstances within which they are operating and shifting consumer behaviours which they are required to accommodate.

Savvy leaders have been measuring the risks and understandably, some have put the brakes on big plans to merge or acquire in recent years. But businesses continue to note the potential benefits of undertaking a deal, with research indicating that 56% of firms in the UK view transactions in the form of M&A, divestments, joint ventures, or minority stakes as the best way to keep up with the changing landscape and secure long-term viability.

We know that doing the research and taking the leap with a merger or acquisition can provide a step-change in capabilities and infrastructure and facilitate business growth. Those who choose to embark on M&A in the coming years may be able to differentiate themselves by opening up to new markets, driving efficiencies, and cultivating best practice through reciprocal learning.

What might the key trends be in the sector for the coming year? Will they inhibit or encourage growth in M&A looking forward?

Supply chain resilience will continue to be a differentiator between the businesses that sink and swim in the coming years. Learning from the vulnerabilities exposed in recent years, innovating, and continuously adapting to changing markets and macroeconomic conditions will be key to success. For example, issues like the Red Sea crisis, which has affected transportation routes for many global traders, have pushed thoughts of nearshoring operations up the agenda to increase resilience and future-proof.

Businesses may well look to M&A as an effective way to futureproof, opening them up to new markets and enabling them to offer new services as demand evolves. We’ve seen consolidation become a growing trend in the logistics industry itself in recent years, with major moves such as GXO acquiring Clipper Logistics plc, and, more recently, Wincanton, demonstrating a clear appetite to merge and reap the rewards.

How can firms best insulate themselves from these risks?

Businesses should take a holistic look at their end-to-end operations and consider how future circumstances could impact each link in the chain. Do the existing distribution methodologies make sense? Are current suppliers providing the most time- and cost-efficient options – and will they continue to deliver if circumstances change? Digital modelling can be an effective way to scope different scenarios, providing the intel to create a robust strategy that supports business resilience.

Ultimately, there will always be an element of risk – for example, we could never have predicted circumstances like the pandemic and its global business implications being around the corner. The key is to embed flexibility from end to end, considering a ‘plan B’ should the preferred option be rendered obsolete. From a personnel perspective, it’s also critical that supply chain professionals are equipped with the skills, agility, and power to make quick, informed decisions based on evidence, enabling them to mitigate the impact as situations begin to arise.

In what ways does SCALA help its clients to navigate the supply chain challenges and opportunities of the pre-M&A process?

SCALA provides objective, specialised third-party expertise, drawing on the team’s experience of the complexities of supply chain and logistics operations across different sectors.

While most investors will seek financial and legal counsel before proceeding with a deal, often supply chain and logistics are overlooked during the due diligence process. However, we know from experience that supply chain and logistics operations can be extremely time- and cost-intensive, meaning that they can impact - or even determine – the profitability of an entire business operation. Therefore, ensuring you get these factors right from the outset makes good commercial sense when it comes to considering M&A.

SCALA helps prospective acquirers in two ways. First, we troubleshoot potential issues that could arise because of M&A, helping them to understand whether a deal is a ‘good idea’ from a supply chain and logistics risk perspective. We also advise clients on how they could maximise the opportunity of M&A and reap the commercial benefits, putting in place new systems and ways of working to heighten success and add profitability.

Are there any recent cases SCALA has helped with that you are particularly proud of?

We worked with a private equity (PE) group, who were acquiring a major supplier of consumer products. The group saw the potential for the business to benefit from reduced logistics costs, increased supply chain resilience and local market growth, but the value of the benefits needed to be evaluated to justify what would be significant changes.

SCALA evaluated a spectrum of factors that could influence the outcome of a deal, including the manufacturing, logistics, and warehousing costs, import duties and lead times, before analysing and identifying markets to be serviced from different manufacturing facilities and ascertaining optimum supply routes. We also provided a detailed financial forecast; a plan for facilities rationalisation and improvement; and a change management plan.

Following on from our work, the PE group decided to proceed with the acquisition, and we subsequently led the change management and wider company development to deliver the benefits that SCALA, at the due diligence stage, advised could be achieved. The business is already reaping the benefits of reduced supply costs for several major markets, increased capacity enabling global growth, and improved supply chain resilience.

SCALA was founded in 2001 and has earned a solid industry reputation for providing high-quality supply chain and logistics expertise. The company has an executive board of directors, all of whom have senior level business experience.