Resilience and ESG in supply chains have long been a focus for acquirers, but the US tariffs and Middle East troubles have thrust complex issues into the spotlight. David Prosser looks at how firms are mitigating global supply-chain risk in choppy waters.
The fall-out from President Trump’s ‘Liberation Day’, the day after April Fool’s Day, continues – including US court rulings that his swingeing trade tariffs on countries worldwide are illegal. Anyone expecting an early return to calm is likely to be disappointed. The US President insists he will stick with an agenda that is driving geopolitical conflict and leaving companies scrambling to work out what tariffs their supply chains expose them to.
In truth, supply-chain disruptions began well before President Trump’s return to the White House. Brexit had put supply-chain issues firmly on the agenda for UK businesses. The COVID-19 pandemic, wars in Ukraine and the Middle East, and tensions with China have all had profound effects. Natural disasters exacerbated by climate change have added to the chaos. ‘Black-swan events’ such as the Ever Given container ship blocking the Suez Canal in March 2021 have piled on the misery. All of which has forced many companies to rethink complex global supply chains designed to maximise efficiency and minimise cost. What these companies want now is a supply chain that is resilient and agile enough to ensure the business can continue to function when the unexpected happens – even if tariffs mean that costs more.
Shifting sands
Back in 2022, Bain & Company reported that 63% of businesses were moving away from globalised supply chains and focusing instead on onshoring and nearshoring – that is, working with suppliers and production facilities in their own countries, or at least nearby. In an update on that research this year, Bain reports that 80% of companies plan to step up this shift.
That certainly makes sense in the context of trade tariffs. Businesses making sales in the US – both domestic firms and exporters to the country – will face tariffs based on where goods are manufactured and from where components are sourced. There was already a case to cut back supply-chain exposure to far-flung markets in order to reduce supply-chain complexity and ease dependence on more risky countries – particularly China. Now that many of these countries – China again – are subject to significant tariffs, the case has become even more compelling.
Still, making such changes is often far from straightforward, warns Brian Connell, director and supply chain specialist at KPMG, particularly since it is so difficult to predict the medium- to long-term impact of tariffs, given the uncertainties of the Trump administration’s approach. “There may be a trade-off to make between the volatilities of politics and the deadweight cost of capital investment,” Connell says.
There may be a trade-off to make between the volatilities of politics and the deadweight cost of capital investment
A business that currently sources commodity products from China, for example, may be able to find new suppliers in less challenging markets from a tariff perspective relatively easily and quickly. However, a company with extensive manufacturing operations in China may find it much more onerous to move production closer to home. While pursuing that process, executives will no doubt have nagging doubts that the US administration may change tack, rendering capital and resource investment redundant.
“The imperative is to assess the impact of tariffs under a range of different scenarios and to analyse potential mitigations in detail,” adds Connell. “And sometimes the right mitigation might be to do nothing.”
Acquirer checklist
Supply-chain due diligence in M&A begins with a mapping process, through which acquirers build a picture of the target’s suppliers – and the broader supply-chain ecosystem on which those suppliers in turn depend. That picture now needs to be more detailed than ever before. Vulnerabilities may stem from a supplier that is several links down the chain.
Armed with this map, the acquirer can evaluate the following:
Potential supply chain risks
These include risks stemming from a supplier’s business or location, including political risks and climate exposures, as well as any concerns about the supplier’s business practices, such as fraud or corruption worries.
Suppliers’ financial stability
Reviews of data such as financial statements and creditworthiness enable the acquirer to assess the danger of a supplier ceasing to trade.
Supply-chain sustainability
Acquirers will need to assess the environmental impact of the target’s supply chain as a whole, including energy consumption, greenhouse gas emissions, water usage and waste generation, as well as the impacts accounted for by individual suppliers.
Additional potential ESG exposures
These might stem from a supplier’s policies and procedures on labour practices and its compliance with laws and regulations; governance structures may also be a concern.
Supply-chain efficiency
This will include a review of the flow of goods and materials through the supply chain, identifying bottlenecks and potential solutions to improve efficiency.
Supply-chain resilience
Acquirers will need to identify dependencies on particular suppliers, countries or regions and assess whether these need to be mitigated.
Acquisition questions
Such debates are also playing out in the M&A market, where the new-found prominence of supply-chain risk as a C-suite concern is forcing dealmakers to respond. Many acquirers now accept they must understand targets’ supply chains in more granular detail than ever before.
Already, 47% of the companies taking part in recent research by RSM report that their dealmaking processes over the past two years routinely included due diligence work on their target’s global supply chain. However, 68% say supply-chain due diligence will be a priority in deals taking place over the next two years.
RSM partner Marianna Vintiadis says: “While our research points to strong confidence in M&A activity in Europe over the next 12 months, it is also tempered by the extent to which we see businesses prioritising the de-risking of their supply chains and their laser-like focus on regulatory compliance.”
Acquirers need to get comfortable with the supply-chain exposures a target brings, says Nick Partridge, strategy and transactions partner at EY-Parthenon. “Where acquirers have tended to pursue cost reduction opportunity in the supply chain – for example, from rationalisation, or procurement synergies – the focus has shifted to pay greater attention to risk and resilience.”
Where acquirers have tended to pursue cost reduction opportunity in the supply chain, the focus has shifted to pay greater attention to risk and resilience
It is crucial to be holistic in such assessments, warns Nick Wildgoose, CEO of Supplien Consulting. “Supply-chain due diligence is not a new idea – advisers and procurement teams have been doing it for years, but they’ve often largely focused on financial stability. Other risks have often been overlooked; including geopolitical risks a supplier might pose but also issues such as vulnerability to physical events such as an earthquake or flooding and, of growing importance, cyber risk.”
Closing those gaps means casting the net wide. Due diligence should map the target’s entire supply-chain ecosystem to identify the individual businesses that play a role at each tier – and the different types of risk they pose. A business’s ability to control its inventory, manage distribution and forecast likely demand patterns is a crucial focus. Often, these competencies will be impacted by the investments it has made in modern supply-chain technologies.
“Ultimately, this work is about making sure you clearly understand how the target business’s supply chain will support or erode competitive advantage,” says Suren Thadani, partner in Deloitte’s value creation team.
“Buyers who make the effort to do this work will not only be prepared for further supply shocks, but are also in a position to leverage the supply chain for value creation, for the business itself and for its customers.”
Regulation on the rise
Regulation of supply-chain activity continues to grow in many jurisdictions. In the UK, the Modern Slavery Act has been in place since 2015, requiring larger companies to publish statements about their efforts to combat slavery and human trafficking in their operations and supply chains. The Environment Act of 2021 imposes restrictions on businesses aimed at preventing deforestation.
Many UK firms are also impacted by EU regulation, including the EU Supply Chain Directive and the Corporate Sustainability Due Diligence Directive (CSDDD). Both directives were passed into European law in July 2024 and make businesses over a certain size address potential environmental and human rights harms in their supply chains.
The Supply Chain Directive applies to all firms operating in the EU bloc with at least 1,000 employees and an annual turnover of at least €450m. It sets out due diligence obligations to comply with international agreements on human rights and environmental standards. Companies must set up a comprehensive risk management system and carry out regular risk analyses. CSDDD places obligations on directors to integrate due diligence into corporate strategy and to consider the human rights, climate change and environmental consequences of their decisions.
The US has also introduced regulation in this area. Firms with US activities will need to consider the requirements of the US Supply Chain Security Review Act. This requires firms to consider potential national security risks posed by foreign-owned logistics suppliers. Of course, that may change.
Vendor prep
Sellers unable to reassure acquirers in this regard – and to support them in building a value creation story – can expect difficult conversations around valuation and deal terms, Thadani warns.
“We are seeing deal processes slow right down in cases where the buyer is struggling to identify that story,” he says. “Often, it ends up with them looking for a discount on price or seeking to impose additional deal terms.”
That provides further incentive for businesses to address supply-chain risk and resilience. Corporates considering potential carve-outs and divestments will need to be confident that supply-chain issues will not undermine their plans; private equity investors looking to exit face the same imperatives.
Pre-diligence work is increasingly common for prospective sellers, adds Thadani. “Clients are looking for help with identifying the most relevant supply-chain metrics and with thinking through the supply-chain decisions they’re going to have to make in the future,” he says. “They want to be able to articulate their resilience initiatives in terms of why it matters in terms of stability today as well as future value creation potential.”
Today, companies are discovering they have supply-chain exposures to tariffs they previously knew nothing about
None of this is to suggest this work is straightforward. Larger companies may be exposed to thousands of individual suppliers across the multiple tiers of their ecosystem. Even assuming each of these suppliers can be identified, subjecting all of them to the same level of scrutiny simply isn’t practical.
“The work has to be risk-driven – the goal should be to identify high-risk, high-impact suppliers,” adds Wildgoose. “However, multi-tier environments are often still not well understood. Today, companies are discovering they have supply-chain exposures to tariffs that they previously knew nothing about. It’s a repeat of what we saw following the earthquake and tsunami in Japan in 2011 – the first time some western manufacturers found out their supply chains depended on Japanese suppliers was when their production lines ground to a halt.”
Supply chain M&A driver
When Novo Holdings acquired Catalent – a US-based pharmaceuticals manufacturer – last year, the deal raised eyebrows. Novo Holdings, the investment arm of charity Novo Nordisk Foundation, had never before contemplated such a large transaction.
However, the rationale for the deal quickly became clear. Novo Holdings explained it would immediately sell three of Catalent’s largest manufacturing sites to Novo Nordisk, a separate business in which it owns a controlling stake. Novo Nordisk is the company behind the anti-obesity drugs Ozempic and Wegovy, for which demand has soared.
The deal is the most prominent example of a new trend – growth in M&A activity inspired by supply-chain drivers. Novo Nordisk had previously warned that supply-chain bottlenecks were hampering its ability to produce Ozempic and Wegovy in the quantities demanded. It couldn’t build new capacity quickly enough to overcome the bottlenecks, which was hampering growth. Large-scale M&A was the solution – the value for Novo Nordisk of acquiring just three new factories was sufficient for its biggest investor to pursue the $11bn deal. “The Catalent manufacturing sites will enable us to serve more people living with diabetes and obesity,” explained Lars Fruergaard Jørgensen (above), Novo Nordisk’s president and chief executive.
The same theme has been playing out in the transport and logistics sector. Deloitte data shows deal volumes in the European transport and logistics sector rose 14% last year, despite an 8% dip in total European M&A.
AI assistance
New technologies potentially have much to offer in this regard. The supply chain software industry is growing at pace, harnessing tools such as artificial intelligence to help companies map and analyse their ecosystems in greater detail. Such solutions enable more sophisticated scenario analysis and contingency planning.
In truth, however, many businesses should already have made substantial inroads into these workloads. The growing volume of environmental, social and governance (ESG) regulation in many countries and regions has already created a requirement for supply-chain ecosystems mapping with greater precision. Without such data, they are unable to fulfil obligations such as reporting on Scope 3 carbon emissions or monitoring for problems such as modern slavery.
Building on systems implemented for ESG compliance may be the way forward for many organisations. EY-Parthenon’s Partridge says: “ESG remains a key part of supply-chain due diligence.” It’s not a standalone consideration, but part of the broader risk and resilience theme, he argues.
All of which is going to drive businesses to seek more and more support with supply-chain mapping and analysis – both in an M&A context and the broader transformation agenda. This was also revealed by RSM’s recent research, adds Vintiadis: “Our survey highlights the emphasis investors are placing on leaders using external specialists to fully understand supply-chain risks and to strategise transactions to unlock maximum value.”
Demand for advisers with supply-chain expertise is increasing, agrees Partridge, although it is challenging to secure people with the right mix of skills. “Firms such as EY are trying to recruit more people like me,” he says. “However, finding people with this combination can be a challenge.”
Closing that skills gap is imperative. The closely watched Global Supply Chain Pressure Index compiled by the Federal Reserve Bank of New York continues to show high levels of volatility. In this “dynamic and unpredictable environment”, every deal will now be scrutinised through this lens, says James Hawker, a director in the integration and separation team at KPMG.
“Ultimately, there are two issues you need to address,” he says. “First, does this business have a supply chain that is fit to support its business plan? And second, how well does that supply chain perform?” Every acquirer should be asking those questions – and every business should be in a position to answer them.
Changing priorities
For years, the Japanese auto manufacturer Toyota represented the gold standard in supply-chain efficiency. The just-in-time model, with materials delivered only when needed, minimised inventory costs, boosting cash flow and profitability. But then the 2011 earthquake and tsunami hit Japan, brutally exposing the fragility of Toyota’s approach. Its production dropped by 78% year on year in April 2011.
That chastening experience – and similar shocks during the COVID-19 pandemic and following Russia’s (second) invasion of Ukraine – persuaded companies across the world that had copied the Toyota model to change tack.
Carlos Cordon (above), professor of strategy and supply chain management at Swiss business school IMD, says: “We are in a totally different ball game. The priority now has to be security of supply. The threats change but they’re constant. Whether the cause is a natural disaster, a cyber attack or trade restrictions, businesses have learned that the impact on production is potentially disastrous if they do not have contingency plans.”
That has seen the rise of dual-purpose resilience strategies – tactics that enhance resilience, but improve efficiency during non-disrupted periods. One such tactic is safety inventory. Holding more stock provides protection during disruption but also ensures the business can meet unpredictable demand fluctuations, even in stable times.
Similarly, volume flexibility enables firms to adjust production levels to meet demand surges while acting as a buffer against disruptions. It has also become more important to build stronger relationships with multiple suppliers and to embrace flexible transport and logistics options.
Dedicated resilience levers, even costlier ones, have become widely used. Examples include insurance policies against specific events, or contracts with suppliers that come into play when a problem arises.
