Supply Chain Matters provides a follow-up to the previously announced acquisition of noted consumer product goods manufacturer HJ Heinz. This multi-billion acquisition by the combination of 3G Capital and Berkshire Hathaway earlier this year sent shockwaves across CPG industry supply chains because of the ramifications.
Yesterday, Heinz announced that it is consolidating its North America production operations after previously announcing corporate restructuring impacting 1200 people.
According to a published report in the Pittsburgh Post-Gazette, Heinz management announced that it would close three plants in North America in the next six to eight months, affecting 1,350 jobs in South Carolina, Idaho and Ontario, Canada. The Leamington, Ontario production facility was making ketchup among other products for more than a century. When that plant closes next year, 740 jobs will be lost. The Florence, South Carolina plant, which employs 200 people, makes Smart Ones frozen foods and had only been open a few years. The Pocatello, Idaho, plants produces frozen entrees and snacks, and it employs 410 people.
In-turn, the company plans to shift production to five existing plants in Ohio, Iowa, California and Canada, adding a total of 470 positions at those sites. It further indicates that it intends to invest more in these remaining sites although specifics are lacking.
According to the Gazette article, Heinz trimmed 600 office positions in its North American operations, including 350 jobs in the Pittsburgh area this summer. Layoffs also have come in other parts of the global company’s operations. In September, Heinz reported in a regulatory filing that about 1,200 employees had been affected by its restructuring.
As noted in our February commentary, 3G Capital has demonstrated a previous track record of wringing-out operational costs from previous its M&A efforts at AB In-Bev and Anheuser Busch, along with Burger King. The Heinz effort now rapidly continues with these continuing series of announcements.
Wall Street insiders conclude that previous efforts at cost cutting and headcount reductions have run their course across the CPG sector and the new path to growth lies in more industry consolidation and financial engineering. In the light of challenging revenue headwinds, CPG company senior executives, in order to ward off these threats, continue to support aggressive stock buy-back programs with available cash to potentially block a hostile takeover.
Just this week, Supply Chain Matters noted a judgment in the dispute between Starbucks and Kraft over packaged coffee distribution. The awarded $2.8 Billion arbitration award in that case is slated to fund additional stock buy-back by Kraft spin-off Mondelez International, which is under threat from activist investors wanting to form a new global snack foods giant. The Kellogg Company has also embarked on a multi-year supply chain efficiency and effectiveness effort.
The threat of a renewed hunker-down emphasis has the potential to once again foster highly lean CPG supply chains with little flexibility or capability to respond to more demanding customers, market opportunities or global risk. It leads to a different set of dynamics where cost-cutting once again becomes the dominant force and efforts toward supply chain transformation take on more short-term orientation. Perhaps Heinz will be different- perhaps not.
Some would argue, in the spirit of Darwinism that this is the current natural order of things, and that financial engineering accomplishes transformation in far speedier manner. Some can argue effectively that the cost in employee dedication, loyalty and innovation takes an even heavier toll, especially when a chosen few reap the financial rewards while added debt burdens the victims.
It is unfortunate that this is the current state of affairs among CPG supply chains.
The Kellogg Company, a consumer goods icon with brands such as Kellogg cereals, Cheez-Itc rackers, Keebler cookies and Eggo waffles, earlier this week announced a billion dollar cost cutting plan that would extend over the next four years.
This effort is reported by business media to be motivated by increased competition in the breakfast and snack food industry segments along with softer demand from economically distressed consumers. Business media reports that these cutbacks would result in the estimated loss of 2000 jobs, however, with the four year window, Kellogg management aims to achieve headcount reductions through normal attrition. From our Supply Chain Matters lens, the new Project K efficiency program looks more like an effort to drive global supply chain wide efficiencies and create more integrated supply chain business processes and services across global product lines.
In its most recent fiscal third-quarter financial results, Kellogg reported essentially flat revenues and decreased operating profits. While global net sales are increasing, North America based sales declined by 1.3 percent. The company has been forecasting sales growth of between 4-5 percent for the current fiscal year.
According to a report published in the Wall Street Journal, the new Project K initiative involves a complete re-tooling of the company’s supply chains that includes spending $1.4 billion by the end of 2017 to relocate production lines and globally integrate business process services. Kellogg is targeting upwards of $475 million in annual cost savings as of 2018, as an outcome from this latest announced initiative.
Supply Chain Matters calls reader attention to our June 2012 commentary regarding the acquisition by Kellogg of the Pringles snacks business from Procter and Gamble. In 2012, Kellogg was handed a fortunate opportunity to acquire the Pringles business after the deal to sell that line to Diamond Foods was undone because of certain revelations. Kellogg quickly agreed to a $2.7 billion all-cash deal to acquire a global, well-run brand and become a top player in the global savory snacks industry segment. However, Kellogg had to bring on a high debt load in order to pull off the financing of this deal, reported to be upwards of $2 billion. In the latest fiscal quarter that ended in September, the Kellogg balance sheet reported $6.3 billion in long-term debt.
At the time of our 2012 commentary, the combined synergies of the existing Kellogg and Pringles snack businesses were reported to be $10 million in 2012 and a range of $50-$75 million after 2013. In 2012, Kellogg has been in the process of re-implementing SAP within its U.S. operations, and the addition of the Pringles business presented an added opportunity to integrate within the SAP environment. P&G itself has committed ongoing service arrangements to transition Pringles and was a very sophisticated user of SAP applications. We speculated that Kellogg teams would gain valuable learning and insights particularly regarding deployment and use of SAP advanced supply chain related applications.
Prior to 2012, Kellogg had some previous supply chain related quality setbacks related to past product recalls involving its Eggo product line prompting its CEO to declare that the company had to restore investor confidence in Kellogg supply chain capabilities. The Pringles integration again offered opportunities to revisit needs in this area.
Of late, CPG companies continue to feel the Wall Street based reverberations of the previously announced $23 billion acquisition of HJ Heinz by Berkshire Hathaway and 3G Capital. Heinz, a stalwart of global brand identity was acquired to harvest the cost savings synergies of its global operations, and that tremor seems to haunt existing CPG manufacturers since activist investors continue to want to play-out the next cash generating opportunity. We have opined that 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 CPG senior executives’ shifts. These pressures naturally flow to supply chain leaders who must deliver more cost savings to fund other business investment needs. Some supply chain analysts chastise supply chain teams for not delivering industry leading metrics of performance. We believe that the realities of current or future business outcomes have more to do with performance goal setting.
The new Project K multi-year cost saving effort presents opportunities to rationalize global production capacity, consolidate category product management to a regional focus and provide common supply chain related business processes across multiple regions. It is probably another response to ward-off mega acquisition industry pressures. This effort probably should have pre-ceded efforts to adopt a standardized systems platform. None the less, Kellogg is now a global CPG branded company and must demonstrate market and supply chain response capabilities that exhibit responsiveness to changing consumer needs across global markets.
The Kellogg corporate mission statement includes the following: “We are a company of promise and possibilities.”
From this author’s perspective, the success of Project K needs to be firmly grounded in the above principle.
This week, the Wall Street Journal reported that Mondelez International, the snack foods spinout of Kraft, has set expectations of a large revamp of its complex supply chain. The goal of this latest effort is to facilitate a 5 percentage point improvement in operating income margin by 2016. The effort itself has large expectations for overall savings which include $3 billion in gross productivity, $1.5 billion in net productivity and $1 billion in incremental cash over the next three years, all stemming from supply chain improvements.
At face value, this type of concentrated supply chain cost savings initiative would probably be perceived as challenging. For the supply chain related teams associated with this chocolate, biscuit and candy producer with brands such as Nabisco, Trident and Cadbury it is doubly challenging because of earlier cost-saving efforts initiated when Kraft purchased Cadbury Foods.
At the time of the Cadbury merger announcement, Kraft management had declared a target of $675 million of cost savings required by 2012, the bulk of which, $300 million, was targeted for procurement, manufacturing and logistics cost savings. An initial consolidation plan called for all backroom systems and processes to be consolidated under a single Kraft supply chain platform. Something changed, however. Activist investors aggressively pushed for a split of Kraft under the belief that the snacks businesses would provide a far higher trajectory of growth and profitability than the traditional grocery and cheese products lines. The split indeed happened, and the previous plan to consolidate supply chain activities under a single umbrella fell victim to a Wall Street focused decision. Now, both of the split companies, Mondelez and Kraft, and their respective supply chains have operating margin challenges to address.
To add more drama, one of the most activist investors, Nelson Peltz, has since publically called for PepsiCo to buy Mondelez, combine both snacks businesses, and spin off the Pepsi beverages business. But, we get ahead of ourselves in focusing on the current supply chain challenge.
Some details regarding the Mondelez supply chain cost reduction effort are beginning to see light. The September 2nd edition of Fortune features an opinion column, A Snack Maker’s Unsavory Business Practices, penned by business network CNBC anchor Becky Quick. This is the Becky Quick who can garner a three hour on-air interview with the likes of Warren Buffet. Her article observes that earlier this year, the snack producer sent a letter to its key suppliers and announced a 120 day payment policy for goods purchased. A profound quote from Ms. Quick in contrasting other consumer product good companies supplier payment policies states: “But with its planned four-month delay to pay bills, Mondelez is engaging in a stunning example of one-upmanship.” Later in the article, Quick cites an unnamed industry observer indicating that on the customer side, Mondelez tailors its account receivable terms so that customers are penalized if they do not pay for confection products within 15 days, and snack related products within 25 days. We applaud Ms. Quick for also pointing out to readers: “that in the long run, big businesses are only as healthy as their supply chains.”
Supply Chain Matters is not alone in pointing out that numerous risks and drawbacks associated with leveraging cost reduction efforts on the backs of suppliers. Even though these delayed supplier payments tend to continue, we do not believe in the long run, that they provide any longer-term benefits. Quite the contrary.
On the inbound side, confectionary and snack related supply chains are often challenged with volatile commodity costs for items such as cocoa, sugar and grains. While global purchasing scale can provide procurement leverage, Mondelez must deal with the ups and downs of the market, particularly in the current era of extraordinary weather patterns brought about by climate change. We tend to believe that paying suppliers in four months probably will not help in securing favored buyer status. Developing consumer growth markets such as China as well as mature markets place a high premium on brand and quality because of prior history of tainted or harmful products. As we have noted in repeated prior Supply Chain Matters commentaries, a glitch in a production process or a reduction in quality oversight has huge implications for consumers, as evidenced by the recent incident involving Fonterra.
On the outbound side, a confection and snacks oriented business with a presence in 160 countries presents its own set of unique challenges. This business is more focused on higher touch and complex distribution channels. There are direct to store needs of supermarkets, convenience stores and smaller retail. Snack food consumers tend toward impulse buying, with promotions, market timing and inventory strategies that require considerable sophistication and supply chain wide execution. The Mondelez supply chain must compete with that of competitors Nestle, Unilever and other who continue to invest in more sophisticated supply chain process capabilities, and who demonstrate highly collaborative actions with suppliers and customers on product and process innovation.
The latest cost reduction challenges facing the extended Mondelez supply chain are yet another manifestation of the new financial engineering that surrounds the consumer goods industry, where supply chain efficiencies and cost reduction fuel needs for heightened short-term business performance expectations by Wall Street and the broader investor community. Supply Chain Matters is of the belief that the Amazon model for sustained investment in supply chain business process and future revenue growth capability far outweighs one that has the supply chain constantly uncovering rocks to find the next iteration of cuts.
Too often, suppliers, customers, consumers and supply chain teams themselves tend to pay the price for these actions.
However, the supply chain community consistently rises above and responds to both the near-term improvement and consequent results of these efforts.
In mid-May, Supply Chain Matters called reader attention to a study issued by Alix Partners that cited a narrowing gap in the sourcing of production in China vs. the United States. Last month the Boston Consulting Group reiterated its prior message that the increased competitiveness in United States based manufacturing will capture $70 billion to $115 billion in annual exports from other nations by the end of the decade. In an August 20th published BCG Perspectives report (no-cost sign-up required), BCG declares that the current momentum in U.S. manufacturing is just the beginning, and that by 2020, higher U.S. exports combined with production work that will likely be “re-shored”, could create 2.5 to 5 million additional factory and service jobs. The strategy firm declares that its analysis suggests that the U.S. is steadily becoming one of the lowest-cost countries for manufacturing in the developed world, as much as 8 to 18 percent lower than countries such as France, Germany, Italy, Japan and the United Kingdom. The full impact of the shifting cost advantage is expected to take several years to be felt and BCG advises that manufacturers and retailers should recognize that structural cost changes underway represent a potential paradigm shift in global manufacturing sourcing. At the same time, BCG advises supply chain teams to maintain diversified manufacturing operations around the globe.
Some well-known retailers and manufacturers are now demonstrating more noticeable awareness to these trends, for obvious business reasons.
On August 22nd, global retailer Wal-Mart sponsored a U.S. Manufacturing Summit. At the event, Bill Simon, President and CEO of this retailer’s U.S. based operations delivered what seems to be a passionate address to the attendees where the transcript was captured on the Wal-Mart web site. Simon declared his belief that this is a transformative period in history, that opportunity in America and growth of the middle class was predicated on a job at the local factory. His argument is that the current U.S. “hourglass” economy has caused a rift, with groups calling for reform of either too much wealth or too little unskilled wages. He argues that filling in the middle through a revitalization of U.S. manufacturing could help boast the U.S. economy. He reiterated a takeaway from this Wal-Mart sponsored summit that: “the next generation of production will need to be built closer to the points of consumption.”
Of course, Wal-Mart has skin-in-the-game on these arguments since its core customers represent a good portion of middle class consumers, and they have been showing a tendency of late to shop at other lower-cost outlets. None-the-less, Wal-Mart continues in its effort to commit $50 billion, no small sum, toward increased sourcing of products among goods manufactured in the U.S. The retailer has appointed a senior team to lead this effort and has stated its willingness to sign long-term supplier agreements when it makes sense to provide manufacturers more certainty in sourcing. Simon implored other retailers to do more in their sourcing commitments. Some other passionate statements were: “I tell my team all the time that that our $50 billion commitment is our starting point. If we put our minds to it, there’s no question to me that we can achieve and exceed it. I want us to think bigger.”
Supply Chain Matters readers will recall that our numerous ongoing commentaries regarding Apple and its supply chain, cite CEO’s Tim Cook’s commitment to bring forward a U.S. based manufacturing presence it its assembly of end-products, albeit an initial small presence. That announcement was been communicated in the declared commitment to produce a new line of Mac computers in 2013 at a U.S. based facility. In late May, Cook declared to a U.S. Senate Subcommittee that the new Mac assembly facility would be in Texas. According to his testimony” “The product will be assembled in Texas, and include components made in Illinois and Florida, and rely on equipment produced in Kentucky and Michigan.” While we and other sites speculated that the new U.S. presence would be overseen by contract manufacturer Foxconn, a mid-June posting on Mac Rumors.com quotes a Taiwanese equity analyst as indicating that Apple will actually be partnering with contract manufacturer Flextronics for the new upcoming Mac Pro. The 450,000 square foot Flextronics facility near Fort Worth is also reported to be the manufacturing site for Motorola’s new Moto X smartphone. Astute readers may also pick up on the fact that Texas is a no-income tax state, which provides an added incentive and economic justification to make it the home of Mac Pro production.
Yesterday, Parade Magazine featured an article, Made in the U.S.A., which cited other manufacturers upping their commitment to increased U.S. manufacturing including General Electric and a host of non-U.S. automotive brands. One interesting statistic: “according to Libby Newman, a vice-president at the American International Auto Dealers Association, about 55 percent of all light vehicles sold in the U.S. through July were foreign brands- but more than half were built in America.”
While readers might argue that some of the cited companies we note in this commentary have obvious motives behind their renewed interest in U.S. based manufacturing sourcing, the economics and the noticeable shifts in momentum towards a re-discovery of U.S. based manufacturing attractiveness is underway. Supply Chain Matters has further cited structural shifts in global transportation that reinforce a paradigm shift in supply chain related economics.
Each supply chain organization will have to analyze their own business factors but take heed to these messages since more noticeable momentum and commitment towards favoring U.S. manufacturing is underway.
Has your senior management teams been advised of these trends?
Readers of Supply Chain Matters are aware of our recent string of commentaries that have pointed to what we believe our structural shifts underway in global surface and air freight transportation. Our perspectives have been directed at the blatant realities of quickly changing global sourcing and trade patterns and too much capacity chasing lower transport volumes, or shipper’s desires for most cost-affordable but reliable global surface transportation. Ocean container industry executives need to adjust their expectations to a lower growth of global transport volume, just as a new class of fat larger and more-efficient ocean container mega-ships begin to make their presence on global routes.
There has been much visibility placed on the impacts that the new mega-ships will have on the operations and routes of the various global shipping lines. But there are also implications for major ports, port operators, and the infrastructure services that support these ports.
A recent article appearing in Bloomberg Businessweek calls attention to the significant investments, characterized in the billions, required by major ports to accommodate the new class of “Tripe-E” vessels. It notes that terminal operators at ports such as Rotterdam and Felixstowe in the U.K. are investing billions in deeper channels, larger cranes, longer berths and larger container staging areas to accommodate such vessels. The article quotes Drewry Shipping Consultants data indicating that average vessel capacity on the Asia-Europe trade route rose 7.6 percent to a record 10,279 containers in the first quarter of this year. Drewry further estimates that average size will rise to 11,200 TEU containers by the end of 2013, and 22,000 TEU’s by the end of the decade.
The implication of these trends is that major port operators, who want to remain favored as the destination on prime travel routes, will remain challenged to achieve profitability at levels prior to the 2008 recession.
The impact involves more than just the port operators, since rail and trucking operators servicing these prime ports are also faced with the need for added investments in capacity and efficiency. Compounding all of this are labor agreements. These massive ships require far heightened levels of automation and associated productivity in both unloading and loading operations, as well as in inter-modal transferring. Labor unions have been reluctant to negotiate needs for far greater levels of productivity because of the risk of losing jobs. There are also issues that in some Asia based ports, working conditions for port personnel and crane operators has been less than ideal while some have not been granted desired wage increases for quite some time,. These issues were brought to light in the recent labor dispute and port closing that occurred in the Port of Hong Kong.
The Bloomberg article additionally notes that the older 6000-8000 TEU capacity vessels are now being shifted to other, lower volume or specialized routes, for instance, South America.
In the end, we could observe additional shifts in favored ports across global destinations. Shifting trade patterns, much higher capacity vessels requiring vastly increased port efficiencies and throughput, and complex labor negotiations could all interplay to change some of the landscape in the coming years.
Transportation, sourcing and procurement teams obviously need to keenly monitor these ongoing trends and developments to ascertain their implications to current and future global logistics and landed cost needs.
Supply Chain Matters has featured many previous commentaries related to challenges occurring at Sony and its associated supply chain structure. In May, we issued praise to the Sony executive team. Forty of Sony’s top executives, including its CEO, agreed to forgo end of year bonuses amounting to 30-50 percent of their compensation because the company failed to keep an all important promise to return the group’s consumer electronics division to profitability for the fiscal year that ended March 30.
This week, Sony officially reported that after three consecutive years, its consumer electronics division finally recorded a profit. This milestone was a key objective of the company’s new CEO, Kazuo Hirai, which prompted key executives to forgo bonuses last quarter in order to meet this objective. Other cost reductions involving the consumer electronics supply chain, including major shifts toward outsourcing of manufacturing, also contributed to the milestone. The company itself recorded a six-fold increase in operating profit while its net profit climbed to $35.6 million. Sales increased 13 percent in the quarter. A weaker Japanese yen also contributed to these positive results.
Supply Chain Matters therefore extends its Thumbs-up recognition to Sony, including its extended supply chain team, for accomplishing this important milestone.
Much work remains however, it areas of product, process and organizational innovation. For now, Sony can celebrate a very important milestone on its ongoing transformation journey.