Our European based and other readers are probably very aware of the news last week that Swiss frozen foods producer Findus was forced to recall its beef lasagna products in the United Kingdom after it was determined the product contained horse meat. This is not exactly a savory development, to state the least, and British and European media have been quick to call more oversight in food product quality.

In the wake of this development, global consumer goods provider Nestle indicated that it has intensified the screening of and traceability of its food products. Nestle CEO Paul Bulcke indicated to business media that the horsemeat scandal will affect the entire industry even though Nestle product is not directly involved. In a Financial Times interview, Bulcke noted: “We check our suppliers very carefully, and of course, when something like this happens we intensify our procedures. But everything under our labels is not affected.”

Of course, every CEO of a consumer goods company wants to insure traceability across the supply chain but then again, how many have funded the proper tools and resources to insure such traceability? Once more, when the threat of acquisition and cost cutting looms large, will traceability needs see the light of day?

As investigations related to the European horse meat scandal run their course, companies may again discover that traceability and conformance extends to the lowest tiers of the supply chain. It is not about a primary supplier attesting to product conformity, but the supplier to that primary supplier. The rub often comes when negotiating supply contracts, when the customer refuses to acknowledge the need for added costs to insure product traceability and quality conformance.

In many of our past Supply Chain Matters commentaries related to specific food or drug product recalls, a common pattern is the eventual breakdown in quality conformance monitoring, latency in detecting unusual patterns, and waiting too late before a governmental regulator forces a product recall. In the specific prior case of the numerous Johnson & Johnson product recalls, an internal audit pointed to cuts in key quality conformance resources as the catalyst.

Many companies have painfully discovered that indeed, traceability is the key to food safety as well as protecting the brand. Europe now has a pointed reminder to that principle.

Bob Ferrari

Wall Street and business media is abuzz about the latest blockbuster M&A deal, the Berkshire Hathaway and 3G Capital $23 billion acquisition of consumer goods food icon HJ Heinz.

The byline serves as the fourth largest food and beverage acquisition thus far, perhaps the most stunning. Already, Wall Street watchers exclaim that merger activity is on a comeback while sharks are bantering names of new potential consumer goods acquisitions and a new wave of M&A activity for global bankers. Similar to the recently announced mega-deal involving Dell, the purpose is to take Heinz private to work on additional synergies and growth. The deal is expected to close later this year.

The deal itself is a bit unusual since Berkshire’s role is the primary banker while 3G Capital will serve as the hands-on management operator. According to The Wall Street Journal, 3GCapital, a private investment firm based in Brazil, has a reputation for a hard changing management style that has shaken previous comfortable executives at U.S. and European companies. The firm has demonstrated a previous track record of wringing-out operational costs from previous M&A efforts at AB In-Bev and Anheuser Busch, and Burger King. The firm has already cut operating costs at Burger King by 30 percent while shedding significant numbers of former corporate employees.

Heinz itself has a stellar brand and garners 20 percent of current revenues outside the United States. It has delivered five years of previous cost cuts and has delivered 30 consecutive quarters of revenue growth. However, this buyout will double Heinz’s existing debt to over $12 billion and already, its investment grade rating has been cut.

The logic for this pending new M&A wave is, in our view, troublesome for the global supply chain community.  Uncertainty in the global economy is causing noticeable headwinds for top-line revenue growth, especially within the promising emerging market regions of the globe. Just this week, Nestle warned of increased challenges across global markets. Increased occurrences of natural disasters climate extremes and political unrest are impacting consumer markets. Stalwart Procter & Gamble has been under enormous pressure these past months to produce additional growth and revenues.

Meanwhile companies sit on mountains of cash with reports that corporations in the S&P 500 are sitting on more than $1 trillion in such cash.  The banking industry is on the mend, having healed its previous abuses, and now ready to bankroll lucrative new deals.

In the light of challenging revenue headwinds, company senior executives have launched aggressive stock buy-back programs with available cash to ward off hostile takeovers. Alternatively, Wall Street analysts conclude that previous efforts at cost cutting and headcount reductions have run their course and the new path to growth lies in more industry consolidation and financial engineering. Thus another era of mega acquisition activity seems at the ready, and the psychology of senior executives’ shifts.

Surrounding all of this activity is the strategic use of cash, and potential reinvestment in supply chain productivity, supplier partnerships, business analytics and other required investments.  While the day-to-day challenges for managing the responsiveness and resiliency of the supply chain cry out for such investments, cash is diverted or channeled to other purposes such as increased product promotions, stock buy-back or M&A. In short, the supply chain does the heavy lifting to bankroll other cash and investment needs, without some piece of the investment pie. Business transformation initiatives languish, while priorities are placed in other dimensions.

The threat of a renewed hunker-down emphasis has the potential to once again foster highly lean supply chains with little flexibility or capability to respond to more demanding customers, market opportunities or global risk. Highly lean supply chain resources lead to breakdowns in product quality monitoring and assurance processes and increased occurrences of product recalls, ultimately damaging the brand.  Supply chain teams will thus revert back to efforts of outsourcing, operational consolidation and further cost cutting vs. selective investment in more productive and predictive business process capabilities.

We certainly do not want to sound alarmist but when will Wall Street ever understand that financial engineering does not necessarily equate to the existence world class supply chains, and of talented, skilled supply chain teams that are valued for their contributions.

The M&A bankers have big payoffs in their sights but not necessarily resilient supply chains.

Bob Ferrari