Private equity firms are building bridges to Supply Chain

More and more private equity firms are discovering that the supply chain determines the success of the companies they invest in. But do private equity and supply chain professionals understand each other? To what extent do they really hear one another? In collaboration with SCM Executives, BLMC and Slimstock, Supply Chain Media brought both sides together in mid-October at the SCM Private Equity Working Dinner. ‘If it turns out that the chosen direction isn’t working, you have to stand strong.’

By Marcel te Lindert

The first hundred days after a company has been acquired by a private equity party are crucial. ‘That is the period when the tone is set for the intended sustainable value creation,’ says Dominique van Wijnen (pictured). She is co-owner of SCM Executives, an agency regularly engaged by private equity parties to find a new chief supply chain officer for their recently acquired companies. ‘In the first hundred days, it becomes clear how the partnership between the private equity firm and the company’s management is going. Do they understand each other? Do they know what they want from each other? Constructive collaboration is crucial from the very first day.’

Multiple stories in the press show that such partnerships don’t always run smoothly. In his kick-off to the SCM Private Equity Working Dinner, Supply Chain Media’s Martijn Lofvers outlines a world of diverse stakeholders, from the investors to the supervisory board and from the chief supply chain officer to the operating partner. ‘That’s the person employed by the private equity firm who often acts as a kind of interim supply chain director. All these parties speak their own language and have their own objectives. To what extent do they really hear one another?’

Change of direction

The answer to that question usually emerges in the first hundred days. One crucial point is when it turns out that what the private equity firm calculated in spreadsheets beforehand is not possible in real life. ‘That is a tricky moment,’ says one of the participating CEOs. ‘You often try to stick to the chosen direction for as long as possible. And you take some extra time to investigate whether it is possible to maintain that direction. But if it turns out that you really won’t succeed, you have to stand strong and discuss this with the investors. It is important to reach joint agreement that the direction has to be changed. To do that, you have to be able to substantiate the need for a change of direction.’

It is far from just the disappointing financial performance that leads to friction between private equity firms and acquired companies. A COO recounts how employee resistance to the new owners ran high. ‘They saw how a crane arrived to remove the old logo from the roof, and how the two ladies working on reception lost their jobs. It seemed like everything the company had built up over 15 years was cast aside. It didn’t help that the private equity firm was in Paris. If you’re investing in a new sector for the first time in a new country, you should really use the first year to observe and build trust.’

Due diligence

The question is whether the problems really don’t arise until those first hundred days, or whether they actually emerge in the due diligence phase that precedes them. That usually consists of nothing more than a review of the financial situation. And that financial situation is sometimes portrayed more attractively by the previous owner than it really is. Interested private equity firms are not given the opportunity to talk to employees and customers. ‘You only discover what the culture within the company is like when you walk around for a while,’ says one participant. ‘I have often seen things go wrong because of a mismatch between the culture of the private equity firm and the company.’

One investor in the audience advises against focusing only on actions aimed directly at increasing profits. ‘Very high customer satisfaction may cost slightly more, but it pays off enormously in the long run. Of course, as a private equity firm, you have to be very concrete, set targets and make them measurable. But you also have to clearly state the reason for doing it all. And if that is good service to customers, that costs money. If you manage to find the big common denominator, it also benefits employee satisfaction.’

First cracks

Not only the first hundred days, but also the second hundred days are important. ‘Just like in a real relationship, this is when you see the first cracks appear. The question is why these cracks appear and, above all, how you can solve them,’ says Michel van Buren, director of consultancy firm BLMC.

During the ensuing discussion, the answer comes from a former chief supply chain officer who is now employed as an operating partner by a private equity firm. ‘The first hundred days are important to avoid cracks, but eventually they are unavoidable. At that point, it is important to keep communicating based on a relationship of trust. You build that by simply being there. Not just during regular meetings, but also by walking around the company a bit more often than once a month.’

One participant indicates that it is crucial to maintain engagement within the company. ‘Engagement is needed to work out any cracks together.’ Another participant quotes his former CEO: “Paper starts tearing at the top”. ‘Employees want to work at a company that is doing well. Often things go wrong when cracks start to appear at board level. When the supply chain director and the sales director are at odds with each other. Those cracks work their way down.’

New role

The discussion ends with the conclusion that appointing an operating partner may well be a crucial step in the pursuit of success. An operating partner with a supply chain background can build bridges between the private equity firm and the company. ‘It is a new role that is booming within private equity firms,’ says a participant who fulfils that role himself. ‘There is also another reason for that. Competition within the private equity sector is increasing, making it necessary for firms to get more return from their investments in companies. The role of operating partner contributes to this.’