The four keys to faster logistics synergy savings

1. Redesign the network early

Two aspects of network design—site selection for distribution centers (DCs) and stores, along with asset rationalization decisions—can save or cost a merged company tens or hundreds of millions of dollars. Yet it is common for CPG companies to leave both their network and the one from the acquired company as-is upon integration, resulting in extensive redundancies that are expensive, time-consuming, and temporary, since the resulting network will likely prove inadequate and need a redesign anyway.

Instead, revisit the networks as early as possible and build an updated one that supports the new organization’s long-term needs. The company can determine the best way to merge networks after initial optimization of the individual supply chains.

Key considerations:

Design and plan for the future. Align on network design parameters and future growth requirements. Focus on a long time-horizon that includes long-term strategy, developing industry trends, and the desired capabilities of the combined organization in the years to come.
Build in flexibility. Develop a platform that easily adapts to evolving markets, consumer trends, technology, expansions, policies, and requirements.
Reach the best compromise on cost, complexity, and service for each customer channel. Focus on how to best serve those channels at the lowest possible cost from the combined entity.
Accommodate various product and activity types. Coordinate with sales and marketing to determine which products will be retained or emphasized in the future and require network support. Work with manufacturing to clarify where products will be produced and how that will affect the network, including accommodation of different product types and activities supported at various factories.
Be realistic and avoid excessive risk. Evaluate the plan’s feasibility and ambitions. For instance, think twice about building multiple DCs all at once. Instead, use pilot programs to test recommendations before rolling them out to the rest of the network.

A recent merger involving a global confectionery company illustrates much of the above. To optimize end-to-end costs as it integrated logistics networks, the company decided to close eight DCs, expand two DCs, and build two more. To test the waters, it used its most capable DC as a pilot, integrating its systems and processes into the new network first. Then it phased in the integration to the rest of the network based on each DC’s complexity.

2. Rapidly adapt organizational structure to the new post-merger situation

Smart acquirers seize the day by using a merger as an opportunity to integrate and improve upon existing business processes. They move fast to adapt a new organizational structure that meets the post-merger situation because they know that delays will exacerbate differences and slow down buy-in.

This is particularly applicable to the world of CPG, where companies intentionally align their supply chain and manufacturing organizations to serve a specific business model. Different models may not align in an integration, leading to disrupted operations and activities on the buyer’s and seller’s side as top management spends chunks of time on the complex process of creating common procedures and reporting relationships. This is when buy-in becomes a major challenge, morale dips, and employee turnover soars. Hence comes the largely held assumption that little of permanence can be accomplished following a deal until organizational structure has been set.

Consequently, insightful companies design the desired end-state of the combined organizations as early in the deal process as possible. They also directly address differences in the current structures to reduce opposition and speed up buy-in.

Key considerations:

Involve leadership teams from both organizations. Organizational decisions are more efficient when the buyer and seller closely collaborate. Establish a cross-functional, cross-organizational leadership team to improve buy-in and morale on both sides.
Establish value drivers from the start. Set parameters and the targeted end state for organizational design according to the economic value the deal presents. Clearly communicate and reiterate this value so that it permeates the entire integration effort. A global CPG company delayed announcement of a new shared-services organization recently, which affected its activation, potentially diluting expected savings. To counteract this, Kearney helped the company define the organization’s role and redesigned processes including those involving third-party logistics providers (3PLs) and systems required to activate the new entity.
Be transparent. Set up a dedicated communications office and channels to inform employees of upcoming changes.
Start from scratch. Avoid one of the biggest pitfalls organizations make in a merger integration: Do not assume that the acquiring company’s structure is optimal and the other company’s should be force-fit into that structure. Rather, take the best elements from both organizations to create a new one that best serves new needs. This is also an opportunity to incorporate general best practices and improvements from industry learnings. Resist the temptation to begin the process where it should end—by attaching names to specific roles.
Define the core operating model. This step informs the roles and responsibilities needed in the future organization and reveals gaps to be filled. Begin with required processes and then determine who should own or lead them. This measure is especially important if there are significant differences between the two organizations.
Identify transitional versus stable-state needs. More resources may be required during the transition period than in the stable state. When designing the future-state organization, plan for the incremental resources required to support the integration. Include some clearly defined redundancy at the beginning of the integration (in leadership roles of both organizations, for example) to capture good practices and standard operating procedures of these functions. Finally, establish a clear timeline for realizing the stable-state organization versus intermediary phases. Based on integration work with our clients, we have seen the stable state take one to two years from closing to achieve. Transitional phases take less time. In one example, we helped a global food manufacturer support a new command center (which managed incident resolution, functional resolution, and support teams), local deployment teams, and full allocation of PMI leadership during 12–16-week periods as these operations went live.
Account for the different organizational structures (matrix, centralized, or decentralized) of the merging entities. If they are the same, it is much easier to merge, of course. When one is centralized and the other decentralized, there are more challenges. When one of our clients, a global beauty manufacturer, faced integrating a decentralized supply chain into its centralized structure, it had to make significant changes to staffing and roles in planning, ordering, purchasing, vendor management, warehousing, and transportation. Structures aligned by business units instead of functional areas add even more complexity.
Incorporate best practices from both organizations. As we mentioned earlier, do not assume that the acquiring company is superior in all aspects. In fact, the company being acquired may have better processes in some areas. Conscientious organizations choose the best from each company when defining the future state.
Use a holistic approach to rollout. Take a comprehensive view when determining the priority and rollout schedule of any changes. Prioritize based on criticality and be wary of the business risk inherent in implementing too much change simultaneously. Follow immediate priorities with those that can occur after the transition period has concluded. This approach served a top beauty-product manufacturer well recently, when it merged global operations after an acquisition. With guidance from Kearney, it created an international team that defined and began executing toward a future-state operating model for the combined entity. The team adopted best practices from both organizations, performing detailed fit-gap workshops, and considered needs across the company’s expanded network and geographies.
Assess the degree of outsourcing in either organization. Have any functions been outsourced for one of the companies but not the other? Often the pre-merger entities operated with an optimal number of outsourced processes because they could not scale internal resources and expertise to perform efficiently. Outsourced functions and processes may no longer be the best solution for the newly merged and expanded organization. In the post-merger period of a global beef, chicken, and pork processor, Kearney advised insourcing all transportation planning and dispatch operations while maintaining a mix of owned fleet and external carriers for the most economical operations cost and strongest service model.

3. Define system integration strategy and a future technology landscape early in the game

It can be tempting to make decisions quickly about retaining, combining, or replacing major solutions, such as enterprise resource planning (ERP) or a warehouse management system (WMS). But hastily chosen projects can easily become expensive, counter-productive, and overwhelming—especially if the company expects the newly combined system to simultaneously accommodate the different business processes of the merging entities. Avoid wasting resources by defining what technology should truly look like for the consolidated company before taking the leap.

Key considerations:

Begin with processes. To determine which systems will best support the merged organization, first understand how the supply chain will run going forward. Otherwise, the decision of which systems to keep and which to retire could be driven more by internal politics than by tangible business reasons.
Define an integrated systems landscape that incorporates best practices from other organizations and industries. Plan for desired functionality and work backward to define the appropriate systems.
Minimize risk. As with planning for the overall organization structure, avoid implementing too many technology systems at once. Develop a realistic timeline that prioritizes critical systems and avoids the unnecessary integration of non-future-state systems.
Focus on process improvement for the future operating model. If aspects of the acquired company are broken, invest resources in better processes instead.
Seize the opportunity to standardize. Use the integration to improve, optimize, and standardize globally across the organization, which could entail making changes to the core system infrastructure of the acquiring company as well.
Institute change management when implementing new or revised enterprise software. Among the challenges that post-merger companies encounter with ERP implementations are unique stressors that arise among employees at combined entities, such as resistance to new roles and responsibilities.

The beauty-products manufacturer we mentioned previously faced such challenges when it sought to integrate multiple manufacturing and distribution sites across the world. We helped the company define a long-term road map up front that focused on building flexibility into the design, and allowed for the integration of multiple WMS systems without converting each site to a single standard. It was a massive task that involved an international team that conducted site assessments, identified gaps, defined the core model, and ultimately designed the future state.

4. Reset relationships with customers and vendors for increased integration and collaboration

CPG mergers affect many upstream and downstream parties, including manufacturers, end customers, third- and fourth-party logistics providers, and vendors. Be as transparent as possible with these parties and involve them as early as possible, ideally in the integration’s planning stage.

Key considerations:

Engage vendors and customers in process improvements. Doing so during fit-gap workshops and as the company defines the core model will help identify and address issues early and gives these important entities the opportunity to provide input on the best future state.
Rationalize assortment. One of the key benefits of mergers is the opportunity to realize synergies with the combined product portfolio. However, too much change too quickly can be devastating from a customer standpoint. Instead, define the merger’s goal and plan its rationalization schedule accordingly. If growth is the goal, delay major rationalization until the transition is complete. If cost-cutting is the goal, resist pressure to rationalize quickly and pace product introductions, eliminations, or changes carefully to avoid losing customers.
Harmonize policies and contract terms. Contractual obligations and policies will certainly be different between merging organizations. However, define and transition to the future operating model before harmonizing policies to minimize changes, avoid scaring off vendors, and allow for more holistic decisions. Leverage the combined scale for another benefit—improved terms.
Consolidate 3PL providers. Initially focus on the seamless transition of operations with minimal business risk. Then undertake an exhaustive review and request-for-proposal process to consolidate providers and lock in savings by leveraging the larger spend.
Be proactive. Carefully develop a ramp-down and ramp-up volume plan and engage customers when the right time comes to avoid panic with potential fulfillment issues.
Engage sales and customer service. Develop a communications strategy to maintain smooth operations with vendors and customers.

A global Fortune 100 food conglomerate that our firm worked with recently took the above steps and saved nearly $30 million annually by partnering with existing 3PLs to consolidate their network of North American distribution centers. The company achieved volume discounts, gained optimal pricing, and reduced overall network complexity.

Exceed expectations by creating greater value

Companies that do not swiftly capture M&A synergies risk destroying value. In particular, inefficient M&A causes managerial distraction and ballooning one-time charges that erode shareholder returns. Such value destruction can imperil the acquiring company’s core business, causing it to lose ground to rivals that move more swiftly into high-margin markets.

From our collective experience with hundreds of successful large-scale supply chain integrations, investing time and resources on the four key areas we described above will help companies outperform expectations and create greater value for shareholders, employees, and customers.