As mergers and acquisitions continue to increase in the automotive supplier industry, financial and strategic buyers have various potential deals to choose from. How can they choose the best investment opportunities? In our experience at Roland Berger Strategy Consultants, an independent analysis of internal and target company manufacturing and engineering capabilities (i.e., operations assessment) will help in M&A activities.
The shakeout in the automotive supplier industry will continue, as stronger players and private equity firms buy weak suppliers and strategic assets. Mergers and acquisitions can help the supplier industry address several key issues, as strong partners offer liquidity, access to capital, talented management and a long-term view.
What is it that acquirers do that enable them to generate untapped benefits from the resources of the acquired? Simply looking at financial statements or paper strategies is not enough to ensure a successful merger or acquisition. Rather, in order to identify potential synergies and generate optimal value, acquirers should thoroughly understand the manufacturing footprint, engineering capabilities, and the impact of integration. Operations assessments are a useful tool to achieve these objectives.
Our approach to operations assessments includes three main phases:
- Planning (Identify the key operations for assessment)
The planning phase includes developing the screening criteria, KPIs (key performance indicators); discussing alternatives with management; and selecting representative operations for assessment. The deliverables include various agreed-upon financial and operational KPIs, and a list of target locations for assessments.
- Implementation (Conduct assessments and management interviews)
The implementation phase includes developing assessment criteria; conducting site assessments, and interviewing management. Outputs include standardized operations assessment criteria and grading, as well as the actual operations assessments and documentation. In this phase, various potential operational improvement opportunities and synergies are identified.
The assessment criteria typically looks at all aspects of manufacturing and engineering operations. Financial metrics are not the issue here; rather, management, manufacturing engineering, inventory control, labor productivity and labor rates, quality control, materials management, and operational layout are more relevant. Commonly used criteria include:
Shop floor operations and layout
Maintenance and support functions
Material management and production planning
Shipping, receiving, transportation
As individual perceptions may vary widely, teams that conduct operations assessments should ensure they have a common framework. This can be done by commonly assessing the first few facilities to calibrate among the team members.
- Results (Develop improvement opportunities)
The analysis phase includes benchmarking, identifying best-in-class performers, sizing gaps and improvement opportunities, and reviewing findings with stakeholders for feedback. Finally, the team should prioritize improvement opportunities, construct a detailed implementation plan, and gain investor buy-in.
Any merger or acquisition process in the manufacturing sector would be flawed if it excluded operations assessment. However, the tool’s utility is not restricted to due diligence.
Operations assessments can be invaluable even for suppliers who are not undergoing restructuring or partaking in the M&A frenzy. In order to improve manufacturing efficiency and capacity utilization, outside analysis and competitive benchmarking of production facilities will help identify improvement opportunities and generate value. Periodic operations assessments are a tool most suppliers should consider in these turbulent times. Automotive OEMs frequently conduct assembly operations assessments, and suppliers should move in the same direction.