5 Ways to Tap Value Creation in Today’s Market
In a volatile market with tighter and higher-cost credit, even world-class corporations are under pressure to generate value and ensure future performance. Regardless of how they define value creation—enabling growth, lowering costs, accelerating cash flows—the Private Equity/Debt firms with the brightest futures are asking critical questions that reveal five advantageous ways to tap value creation now.
1. What do we keep and what do we change?
Companies have passed through the looking glass several times: before, during, and after Covid. Along the way, they changed part or all of their sourcing strategy, logistics, workforce, make identity, partners, and suppliers. They may have learned lessons worth keeping—or they may be stuck in strategies that no longer apply. Private equity investors and their lenders need to evaluate the current performance of each company against their pre-Covid and post-Covid strategies to separate the value-generating long-term strategies from the merely reactive. Investors and company management can drive productivity and increase value creation by exploring such strategies as:
- Optionality in the supply chain, including suppliers, channels, and geographies
- Operations excellence, including planning, buying, making, and fulfillment
- Network design and footprint optimization, including locations and transportation options
- Capacity and inventory planning, to ensure the right products are in the right places and the right time
- Spend analytics, to understand the drivers of inefficiency and improve forecasts of needs.
2. How do we reduce risk?
Risk may come from single- and sole-country sourcing; automating too fast or too slow; investing in new technologies (or not); and from changing regulations, a volatile economy, man-made and weather-related disasters; and so on. While these risks can be addressed separately, any change in one part of the supply chain, upstream or downstream, inevitably affects the other parts and could cause unanticipated and unwanted consequences. To reduce risk and create value at the same time, company management and private equity/debt firms must turn to two key strategies:
- Move from traditional failure mode analysis and mitigation to structural risk management and resilience, using predictive analytics and scenario planning.
- Move from a siloed perspective to evaluate a broader range of outcomes across key business functions, including sales, inventory, and operations planning, supply and demand planning, and both procurement and logistics management. That evaluation should also be conducted before and after any merger, acquisition, or carve-out.
These two key strategies not only reduce short-term risk but shore up the future supply chain operating model, enabling quick pivots while also unearthing value creation opportunities.
3. Where will working capital come from?
In a time of tight credit, working capital must come from the business, not from outside sources of financing. Companies need to be smarter about how to preserve and extract cash from areas that were untouched or too mired in operational stress for the past several years. Action must be taken whether or not a company faces immediate cash flow risk, because competitors are already taking the opportunity to build a productive cash culture.
As a first step, PE sponsors and direct lenders should ensure that companies are aligning sales with inventory, so the company knows what needs to be fulfilled at any given time. Next, companies should deploy automation and digitalization to optimize payment cycles, the management of disputes, billing, and collections, while increasing accuracy and reducing errors. In procurement, a strategic negotiating approach toward price discounts and payment terms will also free up cash.
4. How can we afford sustainability?
Government regulations, accompanied by fees and potential lawsuits, are making sustainability a non-negotiable issue. But the right approaches in procurement and logistics offer the double benefit of gaining traction against sustainability targets while also delivering higher EBITDA.
For example, companies that optimize transportation routes reduce their carbon footprint, increase customer satisfaction, and mitigate labor shortages. Companies that diversify their sourcing find suppliers who will partner to meet sustainability requirements, reducing the risks and costs of compliance for everyone.
5. How do we seize value creation opportunities?
By working with a trusted, highly awarded, global specialist in supply chain and operations, private equity sponsors and their portfolio management teams can effectively make strategic changes, find working capital, and afford sustainability, to achieve results while reducing the risks of value deterioration. Whether for investment or exit strategies, the consulting firm should serve as a trusted partner, developing the data-based playbook that shows investors and PE firms to new ways to tap value creation.
Recognized by Consulting.us among others as the #1 Private Equity Consulting Firm in North America for global supply chains and operations, SGS Maine Pointe has partnered with PE sponsors, direct lenders, and company management for more than two decades. Together, we reduce costs, improve cash flows, reduce operational vulnerabilities, and realize value throughout the plan-make-buy-move supply chain.