Supply Chain Integration Issues From Acquisitions

On January 26, 2015, Medtronic announced that they would be acquiring Covidien. Medtronic (MDT) is a company headquartered in Minneapolis, MN and Dublin, Ireland. Medtronic is known for being a global leader in medical technology, services, and solutions. Covidien, another company centered in Dublin, is known for their production of medical devices and supplies. Medtronic’s CEO, Omar Ishrak was quoted saying: “We can now bring together the extensive and innovative capabilities of both Medtronic and Covidien with an underlying objective to solve healthcare’s biggest challenge – expanding access and improving clinical outcomes, while lowering costs.”

This is an important issue when it comes to supply chain integration because it is integrating two supply chains into one. Medtronic has a broad demographic of global clients and 85,000 employees in 160 countries. Integration of supply chain is a crucial part of business because, as a medical company, you need to have a huge connection with many hospitals global as well as ensuring the medical device arrive on time to the right place.

The first problem that can occur in regard to supply chain in acquisitions is combine to customer networks together. Being that both companies are in the medical field, Medtronic already has a significant experience in this field. With this being said issues can still arise.

The next issue that should be highlighted is supplier relations. If the two companies have different suppliers which do they continue to work with or do they continue to work with both considering the two companies are in the same field of business. Additionally, the level of supply chain visibility can be a considerable factor in acquisitions. This is due to the fact that if the acquirer, Medtronic, maintains a high level of visibility and Covidien, acquiree, does not then establishing this level of visibility can be costly and time consuming regardless of the level of benefit gained.

The final issue that should be assessed is the logistical nightmare of combining two companies. Logistics is the how effectively business operate in day to day operations from supplier to warehouse to customer. When acquiring a company, the key question is do you continue to allow the acquired company to operate as is or to integrate them fully into the parent company. If you choose to fully integrate many costs will arise. The main cost is the money and time it would take to reeducate all employees from the lowest level, like the floor workers at the warehouse/manufacturing plant, to executives.

To this date Medtronic’s acquisition of Covidien has been stable. Both company are reaping the benefit of an acquisition and their stock prices are trending upward.

Link: http://newsroom.medtronic.com/phoenix.zhtml?c=251324&p=irol-newsArticle&ID=2010595

 

5 thoughts on “Supply Chain Integration Issues From Acquisitions

  • April 18, 2018 at 7:36 pm
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    It is very interesting that I never considered the impact of acquisitions on supply chains in general, but it very much makes sense. Merging of supply chains is incredibly costly (https://www.thebalancesmb.com/supply-chain-impact-mergers-and-acquisitions-2221426) and to get two potentially completely different supply chains to work together to still meet the expected demand schedules and quality levels as before must be incredibly difficult.
    interestingly enough, when attempting to do some research on this topic, most of the articles tend to be about how to prepare a company, way far in advance, for a merger or acquisition and how to make sure that it will be as cheap, easily, and hopefully painless as possible (https://logisticsviewpoints.com/2018/01/11/three-ways-design-supply-chain-mergers-and-acquisitions/). Most of the articles included in this search seem to feel that it is the responsibility of every company to make sure that their operations are designed in a way that things such as mergers can happen as seamlessly as possible, very well far in advance, regardless of whether or not these mergers or acquisitions will ever occur.
    Realistically, it seems like a good move. If your company acquires another company, the plan will be easier to implement and make you look good, whereas if your company is acquired, you may save your job by being so indispensable in the process.

  • April 18, 2018 at 9:00 pm
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    Good post, Tyler. Medtronic and Covidien must think about many factors when integrating supply chains if they want to successful merge businesses. The four main factors are supplier relationships, order fulfillment, customer relationships, and new product design. I agree with you about how merging customer bases can be tough. Like most people, I need to trust my medical care providers, and when there is a merger, name change, etc. people can lose trust. A trust issue can occur on the suppliers side as well. Change comes with time, and suppliers take a while to adapt while two companies merge. Suppliers must know new supply chain locations, what to produce, etc. All these factors can lead to unsuccessful order fulfillment and faulty product design. While merging two companies can lower costs and increase market share, it takes time to integrate two supply chains.

  • April 18, 2018 at 11:25 pm
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    When it comes to the medical industry supply chain management is potentially even more important than other industries because lives can depend on certain deliveries. Perhaps the best part about this merger is the fact that both companies will have more contact with potential customers that were perhaps unavailable before the merger. With increased locations as a larger company they can potentially have a greater and improved impact on the customers they serve. Mergers and acquisitions go beyond simply growing a company. Often times an important part of a merger or acquisition is synergies that the companies may have. In this case there are likely strong synergies between the two companies because they happen to be in very similar markets. Hopefully that will allow for easier transition and integration of the two companies supply chains. When determining which companies to acquire or merger with a company needs to consider more than just what the other company produces but also how they produce it, and the structure of their supply chains. If the two companies did not see certain compatibilities between their supply chains then I doubt they would have gone through with the merger. According to a Deloitte article on how to manage mergers they state that merging two companies comes with the expectation that one plus one will equal something more than two. Hopefully this acquisition of Covidien by Medtronicn will allow both companies to use the resources and supply chains that each other have in place to produce a new supply chain that is able to satisfy customers even better than before.

    https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-man-auto-maoperationalsynergiespov-part1-110713.pdf

  • April 18, 2018 at 11:51 pm
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    The fact that Medtronic’s acquisition of Covidien has been successful is impressive because the majority of mergers and acquisitions fail to consistently deliver superior value. The Covidien acquisition was a backward integration, which represents Medtronic’s movement upstream toward the sources of raw, materials, parts, and services. There were both vertical and horizontal dimensions to the acquisition as well. The acquisition was vertical because it further integrated a fragmented supply chain. The risk of supply of medical devices was reduced after the acquisition because Medtronic used to have to communicate with Covidien on fulfilling orders and making sure that supply met demand. Depending on the amount of supply chain visibility, a shock to supply could have left Medtronic out to dry. Medtronnic now has greater control of [production and distribution which could potentially cut costs if logistics are properly mapped out. The acquisition was also horizontal because Covidian offered different products/services than Medtronic, so Medtronic can offer its customers a greater variety of products. This move makes sense because the two companies were not in direct competition with each other but operate in the same industry with similar costs of holding inventory, order sizes, etc.

  • April 19, 2018 at 11:37 am
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    I agree that the merging of these two massive companies seems extraordinarily difficult. Something interesting to consider is the benefit that the company hoped to achieve by merging. Maybe the company saw possible opportunities for synergies by combining their supply chains. The companies might have seen that they can cut costs significantly by potentially sharing suppliers or distribution networks. In my corporate finance class, we discussed that this is often the case when companies decide to merge. Through this process, the new combined company now has the value of both firms with reduced costs.

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