Both the financial and supply chain worlds have been abuzz today regarding the blockbuster announcement that Warren Buffet’s Berkshire Hathaway Inc. has entered into a definitive agreement to acquire the Burlington Northern Santa Fe (BNSF) railroad in an acquisition estimated to be roughly $34 billion in value. Berkshire already owned 22 percent of BNSF, and today’s announcement, when consummated, will make Buffet the sole owner of 100% of the shares in this railroad.

From my view, this announcement has two significant headlines, one financial and one supply chain in scope.

Financially, at $34 billion, it represents, to-date, the largest acquisition in size made by Berkshire in its investment portfolio.  Berkshire’s $16 billion acquisition in 1998 of reinsurance company General Re held the former title.  Buffett also has a tendency to stray away from very large acquisitions because of his views on messy marriages among targets.  He prefers, instead, to incrementally invest in ongoing enterprises that have a unique or attractive upside potential in their industry or market segments.

The supply chain headline however is what Buffet stated this morning in his media interviews, his huge bet on the future of the United States and consequent needs for more efficient transportation infrastructure.  In the case of railroads, it is the reality that the compelling forces leading to the eventual return of high fossil-fuel prices, coupled with alternative energy realities, will make rail the most efficient alternative for moving goods across the country BNSF is in a great position to leverage these economic forces

BNSF has much to offer and closely fits Buffet’s investment criteria including: 

• A competent and visionary senior management team managing the railroad. BNSF’s productivity gains lead the railroad industry.
• Strategic routes focused on the movement of key commodities.  BNSF serves the majority of the U.S. major grain producing regions. A quarter of its revenue is derived from shipping bulk coal, but more importantly, it is the low-sulfur, cleaner burning coal mined in Wyoming and Montana, that is shipped East or to export markets.
• BNSF, by the location of its route structure, is a major provider of intermodal services involving ocean containers transported across the country by rail.

Many Wall Street financial analysts and other industry observers are weighing in from a longer-term perspective, this investment in BNSF makes a lot of sense.  Some even view it as a ‘can’t miss’ investment. As Tony Hatch, principal of ABH Consulting stated, it is not only a bet on the heartland but on globalization.

I myself embrace the broader view.  Buffet understands and pays close attention to long-term economic trends and he’s made a big-bet on the future of efficient transportation infrastructure for the U.S.  Having Buffet leading the charge for a more efficient U.S. rail system, in my lens, is a plus for America. Supply Chain Matters has at least a year ago, posted commentary regarding the lack of a comprehensive U.S. transportation infrastructure strategy.

I will make a prediction that there may be more transportation infrastructure investments in the coming years as the eventual BNSF business strategy begins to unfold.  If Buffet sees a future in making money on transportation, why not others?

Let’s not forget that Warren has been touted to be a “key economic and business advisor” and if Warren feels the railroads are critical to long-term U.S. economic strategy, can Washington be far behind?

 Bob Ferrari

One of my initial goals when I launched this blog in February of 2008 was to cite specific evidence where supply chain investments and business process excellence do add value to business.  Thus spawned the name of this blog to be Supply Chain Matters. Since that time, I continue to search out evidence and stories that reinforce supply’s chain’s value.

The latest evidence of supply chain adding value comes from the Q3-2009 earnings results from The Hershey Company, a global provider of chocolates and sugar confections  The company manufactures and distributes products related to the iconic brands of Hershey’s, Reese’s, Hershey’s Kisses, Kit Kat, Twizzlers and Ice Breakers, and recently Hershey’s Bliss chocolates..

For the first nine months of 2009, Hershey reported net income of $309.2 million, on sales of $3.9 billion.  This compares to a net income of $229.2 million on sales of $3.8 billion in the first nine months of 2008.  The ability of Hershey to generate increased profitability in such challenging times was directly attributed to supply chain and productivity performance, which is clearly stated in the details of its latest earnings conference call. 

Hershey’s CFO, Humberto Alfonso, pointed to the fact that operating gross margins in the third quarter increased 480 basis points, driven by price realizations, supply chain efficiencies, and productivity gains.  Margin gains more than offset higher raw material input costs of about 175 basis points. Inventory declined by $115 million and accounts payable declined by $32 million, representing 11 consecutive quarters of year-over-year reductions in net trading capital. Hershey expects this trend to continue in the fourth quarter, driven primarily by lower inventory. Keep in mind that Hershey’s product business model is highly seasonal in nature, with pre-holiday periods driving large volumes of order activities. The company, like many other confectioners has had to ovecome the challenge of large price increases in ingreedients such as sugar, cocoa, milk and other products. The price of sugar alone has doubled in the first nine months of this year.

David West, Hershey’s CEO and President cites the company’s Global Supply Chain Transformation Program, which was initiated in February 2007, as a key contributor to Hershey’s current business and productivity performance.  The three year program had a goal to significantly increase manufacturing capacity utilization by reducing the number of total production lines, outsource production of low value-added items, and construct a flexible manufacturing operation in Mexico. From an overall supply chain network perspective, six facilities have now been closed and the brand new facility in Monterrey Mexico is ramping-up production. Hershey estimates 2009 savings of $60 million to $80 million as a result of the Global Supply Chain Transformation Program, bringing cumulative program savings to a range of $140 to $160 million.

Over and above plant closings, the company has also stressed investments in better planning and and supply chain efficiencies. Investments in inventory optimization tools have helped the company take advantage of inventory reductions in both sourcing and procurement, as well as distribution of product.  In fact, CFO Alfonso responded to a research analyst’s question by noting the following: “I would say that our performance in supply chain overall was quite good, not just the Global Supply Chain Transformation Program….. So that (plant closings) combined with what I would say is also good performance, in just overall productivity within our supply chain is what was making the difference.”  CEO West later noted: “I think I would tell you is that we continue to focus on productivity within the existing facilities.  And that’s what any good supply chain organization does when- they know that they need to, at a minimum, offset their inflation with good basic kind of four-walls productivity, if you will. And that’s no different for us.”

These statements from both Hershey’s CEO and CFO in citing the benefits of supply chain initiatives to the business provides first-hand evidence of supply chain adding value.

Hershey is not curtailing its investments in supply chain business process and technology.  Recent capital additions include software investments, and $40 to $50 million of future capital investments are related to the Global Supply Chain Transformation Program.

I do not want to, if you pardon this pun, place a full sugar coating to this posting.  Obviously, the Global Supply Chain Transformation Program has caused some to lose their jobs and others to relocate.  There may also be an argument that at the start of these initiatives, there was quite a green field of value-chain inefficiency that needed to be taken on.  Regardless, these challenges were taken on, and the results to date seem to speak for themselves.

Join me in a shout out our collective congratulations to the entire Hershey supply chain team for an outstanding job, and proving that supply chain efforts do matter.

 Bob Ferrari

Disclosure: This author has received no monetary or other consideration from The Hershey Company, its investors or technology providers for publishing the above blog entry.