Japan supply chain risk reverberates globally

As the crisis in Japan deepens by the day our immediate thoughts are with those people affected by the tsunami and the nuclear plant at Fukushima Daiichi.  Japanese police say 6,405 people are known to have died and around 10,200 others are missing. Relief workers bowed their heads as a show of respect for the dead at 1446 local time (0546GMT today), seven days after the quake.

Gillian Tett of the Financial Times (FT) writes an interesting article (Japan supply chain risk reverberates globally, 15 March 2011) highlighting the impact of the crisis on the world’s manufacturing supply chains, most notably in the auto and electronics sectors. Honda, Japan’s second-largest carmaker, said on Monday that it was halting domestic production for a week and that damage to its suppliers’ plants might disrupt its UK production. Toyota, Nissan and Mitsubishi Motors  also extended shutdowns of their plants in order to assess and deal with damage from the quake. Japan not only has some of the world’s leading OEM electronics companies, such as Sony, NEC and Hitachi, they also have a high number of first tier electronics suppliers. Japan produces about 30 per cent of the world’s flash memory (used in electronic cameras and smartphones) and around 15 per cent of the D-Ram memory (used in PCs). Further analysis in the FT (Global industries consider their options, 17 March 2011) highlighted one particular material used to make the substrates that connect chips to printed circuit boards used in handsets. Approximately 90% of the world supply of bismaleimide-triazine (BT) resin is made in Japan. Mitsubishi Gas Chemicals (MGC) makes about half of Japans output and closed its 2 plants on Friday.

Various analysts have commented on the crisis although opinions about its impact vary greatly. I think the most balance view comes from Société Générale, the French bank, commenting on the impact on China. Société Générale said there would be “noticeable short-term disruption” but that the impact was unlikely to be “lasting or devastating” since in many cases back up suppliers from other countries, such as Taiwan or South Korean, could be found. 

The effects of the crisis are being felt in the financial markets; the Nikkei 225 slumped amid panic selling although this morning it has bounced back following agreement to intervene in the currency.

Most purchasers are aware of the risks associated with their more complex supply chains. For some purchasers this crisis will put additional demands on their skills to evaluate the impact and to find alternative sources of supply. What is clear, however, is that the crisis is far from over.



CHC’s pro-active and flexible approach results in more work

Following the successful transition of the UK part of United Utilities’ non-regulated business to Veolia Water, CHC is pleased to announce that it has been awarded additional work with Veolia Water. Arwinderpal Heran, Performance Improvement Director at Veolia Water said that “Angus was tasked with ensuring the transition of 6 businesses, 180 new employees and 700 suppliers into the existing Veolia business and he met all his deliverables and objectives in the timescales and within budget. His pro-active and flexible approach was essential in delivering this project and I would like to thank him on behalf of Veolia Water for his support and contribution.” The additional work will enable CHC to help Veolia Water Procurement deliver the savings that have been identified as part of the integration while exploring new opportunities in indirect spend.

Headlines and highlife

If the number of headlines is anything to go by, then the surge in M&A activity that I wrote about a couple of weeks ago (2011 is a good year for M&A and is getting better) seems to be coming to fruition. The most eye-catching of the headlines this week have been those about News Corp and British Sky Broadcasting. It’s not all good news for those of us involved in M&A. Although Jeremy Hunt, the culture secretary, announced that he is not going to refer the deal to the Competition Commission, BSkyB’s shareholders want a lot more money than News Corp is currently offering. Also, Tony Jackson commented in the FT on Monday that Ashley Steele, a former colleague at KPMG, had seen the passenger numbers at Heathrow fall last year because it had been a quiet year for M&A. The evidence is necessarily anecdotal but interesting none the less. All the signs suggest that Heathrow should fair better this year but it should not count its chickens just yet.


Category management qualities

There’s a great article in Supply Management (“Divide and concur” 17 February 2011) about category management.  The article states that just 10% of companies considered their implementation of category management to be successful (Eric Evans & Associates). It goes on to clearly set out the difference between the skills required for category management and those used in “traditional” buying. In addition to good communication skill, commercial awareness and market intelligence, it states that category management requires:

  • Leadership to run cross functional projects
  • Change management to convince people of the need for change
  • Strategic vision to understand how the category management strategy aligns with the overall business goals

Unfortunately there are a lot of quotes that I’ve seen many times before such as “category management is more strategic and holistic than traditional buying”, that “more engagement from the business is required” and training is needed for buyers. There is, however, one quote that really stuck out. Rebecca Howard, associate director at ADR, says that category management means that you’ve got to “be really good with numbers” because it’s important “when it comes to cost analysis”. I think the importance of this is often overlooked and means that procurement doesn’t maximise its impact.

Category management is challenging and does require a lot from an individual. If, however, it is implemented effectively then it can drive the rest of the business. For me, this is the key to procurement getting representation at board level.


2011 is a good year for M&A and getting better

The FT reported (“Big merger sceptics ready for deal rush” 21 February 2011) that deal volumes so far this year are higher than last year ($99bn compared to $87bn) and that big investors are bracing themselves for a rush of mergers. The highest proportion of deals occurred in the energy and power industry (20%) followed by Financials (15%) and Materials (11%).

It also reported that a survey by KPMG based on the period from 2007 to mid 2009 showed that a third of takeovers (31%) boost the share price, a third (37%) have no effect and a third (32%) “ravage” value. KPMG’s global M&A predictor suggested demand for M&A is highest in the telecoms sector where forward price to earnings ratio has crept up and that the sector benefits from a net cash position. Another study by Towers Watson and Cass Business School shows that companies with a history of deal making outperform that market in the short and medium term. 

Once again, I think this highlights that M&A is a risky activity and that it is important to hire an experienced team. 


Getting smarter about M&A

Anyone interested in business in general or M&A in particular should read the article in the HBR called The Big Idea: The New M&A Playbook by Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck (March 2010). It contains a useful summary of some of the statistics around M&A such as companies spend more than $2 trillion on acquisitions every year and study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. It goes on to provide some analysis to explain the abysmal statistics. In short, the success or failure of an acquisition lies in the nuts and bolts of integration. What makes this article different from many others on the same subject is that it sets out a robust theory that identifies the causes of those successes and failures.

The authors identify two reasons to acquire a company. The first, most common one is to boost the company’s current performance either by helping it hold on to a premium position or to cut costs. The authors call this “leverage my business model” (LBM). For this kind of deal, CEOs are often unrealistic about how much of a boost to expect, pay too much for the acquisition, and don’t understand how to integrate it. This is where CHC can help. Apple’s $278 million purchase of chip designer P.A. Semi in 2008 is an example of just such an acquisition. Apple historically had procured its microprocessors from independent suppliers. But as competition with other mobile-device makers increased the competitive importance of battery life, it became difficult to optimise power consumption unless the processors were designed specifically for Apple’s products. This meant that to sustain its price premium, Apple needed to purchase the technology and talent to develop an in-house chip design capability—a move that made perfect sense.

The second, less familiar reason to acquire a company is to reinvent your business model and thereby fundamentally redirect the company. The authors call this “reinvent my business model” (RBM). Take, for example, information technology giant EMC’s acquisition of VMware, whose software enabled IT departments to run multiple “virtual servers” on a single machine, replacing server vendors’ pricey hardware solution with a lower-cost software one. Although this offering was disruptive to server vendors, it was complementary to EMC, giving the storage hardware vendor greater reach into its customers’ data rooms. When EMC acquired VMware, for $635 million in cash, VMware’s revenues were just $218 million. With a disruptive wind at its back, VMware’s growth exploded: Annual revenues reached $2.6 billion in 2010. Currently, EMC’s stake in VMware is worth more than $28 billion, a stunning 44-fold increase of its initial investment.

The poor success rate is borne out of the fact that executives often confuse the reasons for acquiring a company. As a result they pay too much and fail to integrate them properly.

 To read more, follow the link http://hbr.org/2011/03/the-big-idea-the-new-ma-playbook/ar/5#

CHC website is launched

The website was launched on 14 February 2011, and in the end, it felt very much like a labour of love. 

I would like to thank the following people: Andy from 146 Design for guiding a novice through the process of web design, Claire for deciphering my notes and writing the copy, Adrian for pointing out the areas that could be strengthen, Mat for making the best of a bad job and taking a decent photo and finally Fiona for developing the marketing strategy and providing constant support.

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