Case Study

Operational Due Diligence in Industrial and Logistics Operations

Goals: conduct operational due diligence to identify operational efficiencies, costs and risks, to inform a strategic M&A decision

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Context and objectives of the project in the M&A process

In a potential M&A (Mergers and Acquisitions) context, the interested investor recognized the importance of conducting an operational due diligence to assess the business’s viability and potential for improvement and growth. To support a well-informed investment decision, the Kaizen Institute conducted a comprehensive analysis, focusing on two industrial units and logistics operations. This approach aimed at providing a clear and detailed view of the true value of the target company.

Strategic objectives and identified needs

To expand its operations through a potential acquisition, the buying company required a detailed study of the industrial and logistics operations of the organization under evaluation. The operational due diligence had the following main objectives:

• Evaluate the operational efficiency of the factories, including resource utilization and production line productivity.
• Understand the cost structure, covering raw materials, supplier management, and energy efficiency.
• Assess financial and operational sustainability, considering EBITDA, COGS, OPEX, and the evolution of fixed assets.
• Evaluate logistics efficiency by analyzing fleet utilization, transportation distances, and key operational indicators (KPIs).
• Identify logistics optimization opportunities, including route efficiency, fleet management, and transportation outsourcing.
• Assess operational risks that could compromise the business’s future success.

The challenge was to provide strategic insights to support the investment decision, while ensuring the operational continuity and profitability of the industrial and logistics operations.

Approach and applied methodology

The scope of the operational due diligence conducted by the Kaizen Institute is always tailored to the specific needs of the requesting organization and the context of the evaluated company. To meet the defined objectives, an operational due diligence was conducted, covering industrial and logistics operations, with a focus on:

1. Industrial evaluation:

• Business overview: Analysis of revenue, EBITDA, operational and production costs.
• Raw material cost analysis: Cost evolution, product composition, supplier contracts, utilization rates, collection vs. need, cost variation, and impact.
• Equipment and production capacity analysis: Line capacity, production times and stoppages, efficiency, impact of continuous operation, setup frequency.
• Labor cost analysis: HR costs, employee number evolution (FTE), productivity, absenteeism, team sizing, HR cost model.
• Energy cost analysis: Gas, electricity, and water consumption.
• Maintenance and CAPEX asset replacement analysis: Fixed asset evolution and maintenance investment needs.

2. Logistics evaluation:

• Overview of logistics operations: Fleet size, vehicle types, capacity utilization, and driver allocation.
• Cost structure analysis: Fuel costs, leasing, tolls, maintenance, insurance, and personnel expenses.
• Transportation performance: Distances traveled, loads transported, and trip efficiency.
• Operational KPIs: Tons/trip, pick-up points/route, and cost/ton transported.
• Logistics risk assessment: Supply route risk levels and potential mitigation measures.

The approach adopted provided a comprehensive and detailed view of the industrial and logistics operations, offering the company the strategic insights necessary to make informed decisions about potential investment.

Throughout the process, frequent meetings were held with the company requesting the assessment. In these meetings, the analysis and conclusions of each area were presented in detail, allowing for the clarification of doubts and direct feedback. This continuous exchange contributed to the construction of truly actionable recommendations.

The operational due diligence was crucial for the company to understand the risks, operational and logistical synergies, and value creation potential, assisting in evaluating the business and return on investment.

We are committed to respecting our clients’ confidentiality. While we have altered or omitted their names, the results are genuine.