Manufacturing in the M&A Crosshairs
Manufacturing companies involved in a merger may find that they have too many plants or plants in the wrong locations and look to outsourcing as a quick fix. However, outsourcing manufacturing as part of post-merger integration isn't always the best decision. Not only may it fail to deliver cost savings, but a poorly designed outsourcing model can also lead to organizational instability and loss of strategic advantage. In some cases, it may even risk the overall viability of the business.
To Outsource or Not? Two Examples
To avoid these pitfalls, companies should not make a snap decision to outsource, but rather evaluate their business model and create a detailed business case prior to taking action. The following two case studies illustrate how adopting these practices may help reduce risk and increase the overall effectiveness of an M&A deal.
Case 1: Create a valid business case prior to making the outsourcing decision.
A multimillion-dollar telephone equipment company using an outsourced manufacturing model acquired a smaller wireless equipment company with insourced operations. Before the deal closed, executives made the decision to outsource the acquired company's products. This decision was made, however, without careful analysis of the acquired company's product cost structure. Decision makers assumed that outsourcing to Asia would be less expensive than manufacturing in North America.
After the deal, the company worked with the preferred contract manufacturer to develop a cost model. The analysis showed that while many direct costs would be greatly reduced (e.g., wages, material), other indirect costs would only be partially reduced (e.g., IT, legal, facilities, insurance) under a fully outsourced operating model. Some other costs (e.g., travel) would actually increase. The total outsourced cost per unit was only marginally lower than the in-house cost per unit, which did not justify the large set-up costs.
Lessons Learned and Effective Practices
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