Jaap Verhoeven, Eight Advisory: ‘Due to a lack of know-how on how to go about it, many synergies remain untapped’
7 Jun 2023
Eight Advisory Amsterdam
Strategy & Operations
7 Jun 2023
Eight Advisory Amsterdam
Strategy & Operations
Inflation, faltering supply chains, a strained labour market and rising investment costs: business leaders and investors have their work cut out for them these days. Jaap Verhoeven of Eight Advisory advises: Get your operational base and supply chains in order whilst keeping an eye on the long term.
Inflation, geopolitical unrest and supply chain challenges: under external pressure and falling demand, many companies are faced with shrinking figures. A good reason, says Jaap Verhoeven, Director of Eight Advisory’s Strategy & Operations Practice, to take a closer look at operational management.
Depending on the company’s specific circumstances, the focus shall vary: for many start-ups, it will be the first time they experience a downturn, and it can come as quite a shock. Consider scale-ups, for example in the field of electromobility, which expanded very quickly thanks to investor funding and are now in difficulty.
“These companies experienced an enormous surge in demand, then concentrated on growth without focusing on direct profits. When demand plummets and the working capital is tied up in inventory, which has to be valued lower in the current market, an immediate liquidity crisis occurs. It is therefore important to free up cash as quickly as possible to meet payment obligations. You can do this by actively managing your accounts payable, accounts receivable and inventory.”
According to Mr. Verhoeven, a simple action like renegotiating trade conditions with suppliers can quickly result in a 5 to 10 per cent cut in working capital, especially if it has not been reviewed for some time. However, we are also seeing that companies amassed huge inventory buffers during the Covid crisis, resulting in a low cost of capital and disruption to supply chains. “There is still plenty of room for improvement, especially at the moment!”
However, without expertise in Strategy & Operations, it is inconceivable to simply reduce inventory levels, without examining the function of the various stocks, which could lead to delivery bottlenecks both in the immediate and longer term. This, in turn, can trigger panic within the chain, resulting in an upsurge in orders and inventories in the long run. This phenomenon has a name: the ‘bullwhip effect’, explains Mr. Verhoeven. In a nutshell, it means that companies faced with a drop in demand from their customers, first reduce their own inventories and may even cease to place orders with their own suppliers for a period of time. The further up the chain you go, the harder companies will be hit by this effect. They often stop the production of these goods altogether, which makes it impossible to ramp up production quickly afterwards. This is precisely what happened with the microchips for the car industry. There was a massive drop-off, after which suppliers gave priority to other customers.
Any decisions taken within the company have consequences further down the chain and are crucial to any future dealings with the supplier. It is therefore important to maintain good relations so that suppliers are keen to still work with you once the tide turns. “You need to keep an eye on your key suppliers and how you want to work with them. This rule applies not only to suppliers but also to customers.” In short, destocking must be carried out strategically and only after careful analysis, which requires a certain amount of expertise.
Mr. Verhoeven notes that, fortunately, companies are gradually recognising the strategic importance of good supply chain management. Especially after a string of wake-up calls in recent years. Take COVID -19: “Coronavirus has pushed the supply chain to the top of the agenda, in many cases with people who never thought much about it before because they took it for granted.” But, says Mr. Verhoeven, “the fact that it is high on the agenda does not necessarily mean that a professional supply chain structure is in place. Many companies are still a long way from having accomplished this.”
At the end of the day, having the right people with the right expertise is key. And this is perhaps where the problem lies: in times of labour shortages, is it possible to find the right people to implement the necessary improvements? “I am convinced that in supply chain management, the calibre of people can be systematically improved. Should that cost more? Not necessarily, by re-organising sensibly, it is often possible to manage the supply chain better by relying on fewer people, but using more skilled personnel. A prerequisite for this is a good support system. Thanks to smart algorithms and even AI, for example, supply chain planners increasingly have tools that fully grasp the complexity and provide timely solutions to keep track of it all.” The formula: bring the different employees together, back them up with reliable systems and proper leadership, and provide them with thorough training in their work.
According to Mr. Verhoeven, not just a clear strategy, but an operational plan and daily execution as well, are key for successful takeovers. “I have encountered many companies that have grown rapidly through acquisitions, but where the anticipated synergies failed to materialise. The business case was good, but there was no value added. It’s relatively easy to formulate the benefits of an acquisition in terms of synergies on paper, but it takes a lot to actually achieve them.” It is crucial that the organisation, processes and systems be streamlined so that the joint product range can actually be offered to the customer and that this is done efficiently. “In practice, however, you often see that the transformation needed to achieve synergy runs up against a lack of know-how on how to go about it.”
The growing role of private equity
Another major theme within the M&A community is the growing role of private equity, as more and more companies find themselves in the hands of such funds, which have a reputation for being sharp on profitability and efficiency. “I see this trend very clearly and it is very positive.”Ultimately, a company’s right to exist is based on its ability to deploy the capital it invests in such a way as to generate the highest possible return.
This is precisely the strength of private equity, Mr. Verhoeven believes. “Private equity monitors the entire company and has an overview of the balance sheet as a whole. Often, executives within companies, even up to C-level, tend to think within their own functional silo. Private equity, like us as external advisors, has a more outside-in view. This might be different for a manager in a company, but a PE investor will ask: where are the weak points in the system, what areas do we need to improve in the P&L or the balance sheet to get the highest possible return, and for what issues do we possibly need external help?”
Hence, private equity or consultants can sometimes better see from the outside what a company needs, but their view can sometimes be perceived by the company leadership as harsh, pushy or arrogant, without sufficient understanding of the daily practical hurdles to realise their advice. “Sometimes things can get a bit tricky: any business improvement can be interpreted as a disqualification. On the other hand, people who are familiar with the day-to-day operations often have a clear idea of what is possible or impossible in practice. At Eight Advisory, we believe that the only way to create and implement a solid improvement plan is through excellent stakeholder leadership and close collaboration with the company’s management.”
Difficult situations arise at any time, concludes Mr. Verhoeven. “People of my generation have witnessed planes flying into towers, which led to a wave of panic.” After 9/11, everything went back to normal, just as it did after the 2008 banking crisis. “We also have to look at the longer term: at the end of the day, profits will be made again. We understand that you have to look at companies with that kind of long-term view, and that’s also something we try to teach our staff, both in the workplace and through training.”
All in all, the complexity of today’s global supply chains, with their many financial and operational variables, poses a real challenge in identifying the best possible optimisation and creation of a realistic improvement plan, while taking into account that people, processes and systems are not that easily changed. But it is precisely in the complexity of this puzzle that Mr. Verhoeven and his colleagues find the appeal of the profession: “For me, this is the main motivation: it’s all about value creation. And there’s no doubt that at the time of a merger or takeover, there is a lot of potential and momentum to achieve exactly that.”
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