How can PE owners create value from supply chain data in their portfolio companies?

Zoe Wakeham and Daniel Wood from Odgers Interim’s Consumer & Retail Practice, and our Head of Private Equity Solutions, Ross Gordon hosted a virtual round table featuring supply chain experts Jochen Grosspietsch and Raul Portela da Cunha.

Value creation in the supply chain is a hot topic across numerous sectors and from various vantage points. Private Equity (PE) owners have a keener interest in this area than most as they look to maximise value within portfolio companies ahead of a (hopefully highly profitable) exit, and good quality data holds the key to making the right strategic decisions.

Odgers Interim held a Virtual Round Table featuring two guest speakers who are experts in this field: Raul Portela da Cunha, a former PE Operating Partner, specialising in supply chain within retail and consumer environments, and Jochen Grosspietsch, a former McKinsey supply chain partner (retail and consumer goods) and Chief Supply Chain Officer of Lekkerland, a leading German convenience wholesaler active in six countries where he was responsible for the logistics operations of 23 sites and subsequently led its post-acquisition integration into REWE Group.

More information on our guest speakers can be found here. Rahul also contributed to this insightful piece on supply chain value creation under PE ownership, written by Ross Gordon.

In PE settings, it is vital to put in place a plan that not only describes value creation levers but prioritises them and gives a timeframe for each. Jochen began by speaking about the findings from years of McKinsey benchmarking and best practice research among retailers and other kinds of business as they grappled with issues such as whether to invest in service or growth, and how to reduce inventory and take out capital.

The McKinsey data showed a group of retailers with service performance superior to others – in terms of availability, they performed one and a half percentage points better. But closer analysis found no evidence that these higher performing companies were investing more on costs and inventory.

“Nothing is easier than to bring down inventory or reduce logistics costs,” Jochem told our Round Table audience. “Just stop ordering, and the inventory goes down. Or deliver only once a week instead of every day and the transport cost will go down. But of course, this has an immediate negative impact on the short term. The question is always, what are the structural differences to approach?”

The data pointed to two consistent levers over time. First, how well a retailer manages stores and logistics as a “joint entity” and not as separate things. (The same held true for manufacturing and other parts of the supply chain.) Second, capabilities in planning, including visibility and the use of data to manage and steer the supply chain most effectively.

These two top levers “always came up.” Additionally, PE owners may also be able to create greater value through “segmentation” by targeting service levels and processes to different elements of the supply chain.

Rahul pointed to the turbulence and uncertainty of the macroeconomic picture, especially the impact of high interest rates on PE investment horizons. Elongation of exit timeframes has brought new value creation challenges.

“If your holding period is three to four years, there are a number of different low hanging fruit intervention levers, some one-off initiatives around inventory and capital, that you can pull off very quickly with very low risk levels,” said Rahul. “But we now find ourselves in a situation where we have to increase the level of complexity, the level of risk, to continue to add value, and to bring additional creation of value that keeps everybody happy, as we hold those investments for longer. This means you have to go beyond the easy fixes. You have to look into areas that involve investment in technology, or capital, such as robotics or automation. Investments that do not generally have the expected two to three-year return period.”

Planning, Rahul continued, is attracting a lot of attention. One aspect of this centres on integration of suppliers and customers. Rahul said investment in integration and outside-in planning can create value through better visibility and collaboration. While with procurement, potentially significant gains can be made by integration which shares visibility and capacity with suppliers, albeit that not everyone is comfortable with such openness.

“How do we integrate all the different players? Our suppliers, tier one, tier two, tier three, tier four, and so on, but also customers, so we can orchestrate the flow of goods and financial results and data in a much more integrated way.”  

One Round Table participant made the point that in his experience of PE, there was “hardly any eagerness” to invest in long term programmes and projects for supply chain management.

In response, Rahul agreed that this was often the case historically when interest rates were lower. However, he added that it was his belief that in the next 12-24 months, we will see some PE investors distancing themselves from this short-term pressure by trying to add more value into the pipeline.

Jochen highlighted how investment can make a big difference. “If you talk resilience, you can talk about nearshoring and reducing the risk of your footprint of suppliers; you can talk about investing in warehouses to enable growth and adding capacity. But there's an often-overlooked element of the value of planning and the visibility. A £2 million investment in IT and technology could enable you to understand earlier the impact a crisis might have, to think through scenarios, to be able to predict and react much earlier. Perhaps you don't need the £10 million warehouse extension, because you can do with less inventory, and you still have a system that is more resilient than one that has just physical stock in many locations.”

Planning visibility across the supply chain is crucial. Yet while this is appreciated by supply chain professionals it is frequently undervalued by people outside the supply chain in the rest of the business.

The supply chain community, Jochen added, is one of the first functional areas to get value from AI. Companies using advanced machine learning tools for forecasting and demand planning have a better view of future requirements.

Embedding predictive functionality and scenario planning into the “control tower” to understand the implications of, for instance, a truck not arriving, or a ship being blocked, could be hugely advantageous in mitigating risk. The forward march of Generative AI presents opportunities to take this to another level.

“With Generative AI, you will be able to automate a lot of the responses to that, and there are tools already doing that to some degree,” says Jochen. “You can have decision rules and thresholds to which you allow the tool to take decisions on its own and then send a mail to a supplier, saying ‘we anticipate that will be delayed by X. So, we propose that we allow you to use air freight with the following limit’ and so on.”

Yet no one is suggesting AI will have all the answers. A Supply Chain Director participant observed that he always remembers a phrase used several years ago by one of his bosses: precise inaccuracy. “I have yet, in all of my career, to come against a plan that we've actually achieved, because you start the year with one, you finish with something different!” Use automation to help make informed decisions, he elaborated, but human expertise is critical.

“Whilst integrated, connected and reliable data are key enablers of any supply chain, leadership and the ability to interpret the data to identify value pools, make decisions and formulate strategy remain key attributes for supply chain and procurement leaders,” says Lucy Harding, Partner and Global Head of Procurement and Supply Chain Practice at Odgers Berndtson. “The pace of decision making and exposure to board discussions and subsequent action in PE portfolio companies remains an attractive environment for supply chain and leadership.”

There is no doubt that great people as well as great data and flexibility are necessary to add value and resilience to a supply chain. Sometimes interim management talent is the key to unlocking greater supply chain value, and that is where we at Odgers Interim are delighted to help.