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Breaking News: H.J. Heinz and Kraft Foods Mega-Merger Portend Additional Tremors Across CPG Supply Chains

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This morning, financial headlines reveal the rather stunning but not unexpected news that H.J. Heinz will merge with Kraft Foods Group in a combined public company that will be named Kraft Heinz Company. According to The Wall Street Journal, this deal will likely top $40 billion in valuation with the combined entity having revenues of approximately $28 billion. It would create what is expected to be the world’s fifth largest food and beverage company featuring many well-known consumer brands.

From the lens of this blog, this development reinforces a clear message to other traditional consumer product goods supply chains that business-as-usual is no longer acceptable, and that further industry changes and developments are inevitable.

This Heinz-Kraft deal is backed by infamous private equity firm 3G Capital Partners, and the financing of Warren Buffet’s Berkshire Hathaway, which are each contributing $5 billion in financing. The terms call for Heinz shareholders to hold 51 percent stake in the combined company while Kraft shareholders will hold a 49 percent stake. Once more, existing Kraft shareholders will receive a special, albeit hefty cash dividend of $16.50 per share representing a 27 percent premium over yesterday’s closing stock price.

Management of the combined company will consist of Alex Behring, current chairmen and managing partner at 3G Capital, as the new chairmen, and Bernardo Hees, current CEO of Heinz, assuming the CEO role. John Cahill, the relatively new chairmen and CEO of Kraft will assume the vice-chairmen roleCahill assumed the Kraft CEO role in late December with a mandate to speed-up business change, after Kraft reported flat annual sales and declining profitability. Indeed, in a mere 3 months, business change has occurred and will accelerate. As has been the case with prior 3G Capital actions, the combined company’s management focus will solely be that of 3G.

In its briefing to Wall Street analysts, 3G Capital executives indicated that the strategic intent for the combined company is to leverage product innovation and international reach.  However, cost-trimming is indeed part of the agenda with $1.5 billion or above in potential cost synergies being identified as likely opportunities.

Readers may well recall 3G’s prior track record with its prior acquisitions of AB In-Bev, Burger King and H.J. Heinz.  The firm actively practices a zero-based budgeting approach and every single year, 3G managed firms have to justify their cost and resource needs. In the situation of Heinz, the original goal of $600 million in cost savings amounted to near $1 billion in savings. Expenses were aggressively cut and production facilities were soon closed. Thousands of jobs have been shed among all of 3G’s prior acquisitions. In a Supply Chain Matters January commentary we echoed UK blogger David Weaver’s commentary on supplier bullying tactics occurring in Europe that specifically named 3G Capital managed companies such as AB In-Bev and Heinz’s practices for delaying payments to suppliers in some cases up to four months.

Once this latest mega-deal is consummated 3G will likely place an emphasis for expanding current well-known North American Kraft food brands to more global offerings among emerging markets while shedding other considered non-performing or non-strategic brands. Product innovation will indeed be the emphasis but more in the context of product formulation.  Have you tasted Heinz ketchup of late? From this author’s taste buds, it is far sweater and sugary in composition.

The irony here is that Kraft was once a food, beverage and snacks company with global aspirations.  Activist pressures precipitated the 2012 breakup of Kraft into two companies, Mondelez International and Kraft Foods Group. The declared strategic intent of the split was to create two smaller consumer products companies focused on different growth objectives, one being international snacks and convenience foods and the other, North American cheese and food brands Post split, Mondelez continues to struggle with sales and profitability growth after considerable cost cutting actions that impacted supply chain operations. An activist investor recently garnered a Mondelez board seat.

In a September 2013 Supply Chain Matters commentary related to Kraft’s supply chain profile at that time of the split, we outlined the significant business process and systems challenges that the Kraft supply chain team inherited.  We were tremendously impressed with the leadership of its integrated supply chain team at the time, as well as its direction, but now, more change can be anticipated. That indeed is the initial takeaway from today’s mega-merger announcement.

Our Supply Chain Matters Predictions for Global Supply in 2015 called for continued CPG industry turbulence because consumers are demanding healthy choices in foods and our shunning traditional brands that emphasize processed foods. Compounding this trend has been activist investors seeking accelerated shorter-term shareholder value, along with the shadow of 3G Capital and its track record of wholesale cost-cutting. The announced Heinz-Kraft deal obviously sends yet another troubling message to the consumer products sector, namely that financial engineering is a more preferable method of approach vs. continuous improvement.

Expect and anticipate more industry change to occur in 2015 and beyond. The emphasis is now focused on product innovation, doing more with less and market agility.

Stay tuned.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.


An Important Milestone Reached in RFID Enabled Item-Level Tracking

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It was nearly 10 years ago when the initial hype of item-level tracking enabled by RFID began to emerge across retail and other consumer and industrial focused supply chains. The vision for the ability to connect the physical and digital aspects of the supply chain was within grasp and the hype cycle was extensive. Our readers might recall Wal-Mart’s highly visible corporate initiative for mandating RFID-enabled tracking across its supply chain as well as the U.S. Department of Defense efforts to do the same. But something happened, namely learning that seems to be rather consistent with advanced technology initiatives.

In the early days of RFID, there were challenges involved with the economic cost of individual RFID tags. Recall the threshold number of tags eventually costing less than 5 cents each. The IT infrastructure of required mobile and fixed readers, antennae, and database systems was more expensive than vendors were communicating.  Industry-wide consistent information transfer standards development was elusive because either technology vendors continued to advocate for certain proprietary standards, hoping to cash in on the new technology wave, or specific industry groups themselves favored certain standards.

It is therefore very noteworthy to reflect on results of a recent survey conducted by GS1’s US Apparel and General Merchandise Initiative. For those unfamiliar, GS1 is a global information standards based organization that fosters trading-partner collaboration through adoption of global-wide consistent item numbering and identification electronic information exchange. Keep in-mind that apparel and merchandise supply chains operate on narrowest of product margins, with cost, inventory and shrinkage being prime challenges. Apparel and general merchandise was one of the prime targets of the early RFID mandates.

Last week the organization released the results of a 2014 survey providing indicators for how apparel and general merchandise manufacturers and retailers are utilizing item level Electronic Product Code (EPC) enabled RFID tracking. That survey indicates that nearly half of the manufacturers surveyed now indicating that they are currently implementing RFID, with a further 21 percent planning to implement within the next 12 months.

Of the retailers surveyed by GS1, more than half reported current implementation efforts underway with another 19 percent planning to implement in the next 12 months.  Retail respondents indicated that on average, 47 percent of items received in their supply chains have RFID tags. In the news release, an Auburn University researcher indicates that retailers are garnering greater than 95 percent inventory accuracy, decreased out-of-stocks, increased margins and expedited returns.  That phrase should sound familiar since it was the original declared benefits of the prior mandate efforts.

In the current clock-speed cadence of business where results are measured and expected in weeks and short months, 10 years is a lifetime. Yet, that it what was required for the technology maturity and economics of RFID item-tracking to reach what appears to be the dawn of mainstream adoption.  This GS1 survey announcement should be viewed in that light.

For RFID enabled item-tracking, the early innovators have paved the way of learning and economics, as well as what worked and what did not. We at Supply Chain Matters have already brought to light the next wave of item-level tracking, sensor tags that can monitor the composition, state and movement of products across the global supply chain utilizing today’s mobile technologies and near-field communications (NFC). These tags will eventually provide for use cases in supply chain settings requiring higher levels of monitoring and detailed visibility such as fresh foods, pharmaceuticals, aerospace and others.

What is ever more important is that as a community, we learn from previous technology adoption curves where elements of business process adoption, standards and cost-effective technology all interplay.  One obvious conclusion is that supplier mandates for technology implementation will not work if these elements have not been realistically evaluated.

Beyond all the hype are the inherent realities. Advanced technology does provide meaningful business benefits when applied to well-understood business process needs, challenges and cost factors. Technology adoption is not driven by vendor product marketing but by business education, process maturity, people and process realities.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.


Wal-Mart’s Laundry Detergent War- A Shot Across the Bow to a Longstanding Collaborator

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Last week. The Wall Street Journal reported that there is: “a war bubbling up in laundry aisles of Wal-Mart” (paid subscription of free metered view), and it involves two global giants in the consumer product and household goods area, namely Procter & Gamble and Henkel and their respective premium-priced laundry detergent branded products.  This story is yet another example of how Wal-Mart can leverage the power of any supplier, even one with a long-lasting and presumed highly collaborative relationship.

Wal-Mart recently decided to stock and feature Henkel’s Persil laundry detergent along-side the iconic Tide branded detergent. According to the report, Tide currently accounts for 60 percent of all U.S. sales of laundry detergent along with an estimated 85 percent of the profits. The brand received a prior sales boost with the introduction of Tide Pods in 2012, but that came after an uncharacteristic and visible supply stumble involving the product’s initial introduction.

Persil itself has generated over a billion dollars in annual sales and is available in 60 countries. However, the brand was not featured in the U.S., at least not till Wal-Mart’s recent actions. Last year, to drive more revenue and profitability, P&G elected to raise the consumer price of Tide while reducing the amount of detergent and number of loads per container.

The WSJ cites as spokesperson for Wal-Mart as indicating that the stocking of Persil provides U.S. customers another laundry detergent option and that the brand is already stocked in the retailer’s other global based stores. Another spokesperson indicated to the WSJ that competition is good for the category and good for consumers.  Who can argue with that.

However this new development involving the marketing and availability of laundry detergent is from our lens, a clear “shot across the bow” among two previous strong collaborators. It is therefore keen to keep abreast of how this U.S. laundry detergent war eventually turns-out.

If there was any supplier more experienced in working with and collaborating with Wal-Mart, it was P&G. Their collaboration in joint marketing, supply chain stocking and promotional initiatives was the basis of many a consumer product goods marketing case study in win-win. Now that relationship may have suffered a setback.  However, Henkel and its Persil brand stands to gain a rather powerful U.S. presence, one that can be leveraged to other retailers down the road.

Supply Chain Matters has featured recent commentaries relative to the tectonic market shifts occurring in the consumer goods market, and their associated supply chains.  Those shifts are predominantly on the demand and cost pressure side. This latest development involving Wal-Mart and two laundry detergent giants is an indication of perhaps other dynamics involving prior long-standing relationships among key retailers. Then again, we are discussing Wal-Mart, and this global retailer gets to play by its rules.

Bob Ferrari


Industry Disruptor: Tesla and the Automotive Driving Experience

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We are often reminded that one of the most common traits of industry disruptors is that they think differently.  They challenge the notions of industry norms, current practices and business processes or the leveraged use of technology in product and service delivery.   Telsa Motors Model S

Over the coming weeks, Supply Chain Matters will feature a series commentaries focused on industry disruptors and their implications to existing customer fulfillment.

Fast becoming one of the icons of disruptive thinking approaches is Elon Musk with his current ventures in the automotive and space exploration and aerospace sectors.  The two companies he leads, Tesla Motors and Space Exploration Technologies have each challenged legacy industry practices.

Supply Chain Matters has featured a number of prior commentaries specifically focused on Tesla and how this automotive producer has challenged existing norms in is driving re- thinking in supply chain vertical integration, advanced manufacturing practices, service and distribution strategy. Tesla’s fundamental approach is that an automobile serves as a transportation device that is primarily powered by computer intelligence and the user experience. There is little need for intermediaries or after-market providers.

This week, Tesla has invigorated both social and business media on the news of its latest series of software upgrades planned for the Tesla Model S. At a recent automotive industry conference, Musk declared that it will soon become illegal for humans to take the wheel once the technology of self-driving cars have proven themselves. If you sit in a Tesla vehicle, it’s visually striking that the huge 17 inch LCD screen takes-up more driver attention than a traditional automobile dashboard.  It was designed as such.

Last October, IHS reported on its initial analysis of a teardown of the components of the Tesla Model S with the headline: Is it a Car or an iPad?  The article is impressive and worth a read.

What is extraordinarily impressive is that Tesla’s software upgrades are delivered wirelessly to individual owned consumer vehicles in the truest form of cloud delivery. There is no need for the traditional automotive industry dealer visit. Musk views such upgrades in the same context as updating a laptop computer or a smartphone. He further categories autonomous driving as a “solved-problem”. Last year, Tesla began equipping its Model S with on-board cameras and sensors to be powered by a sophisticated system termed “autopilot”.

Over the coming weeks and months planned upgrades will include functionality that completely puts the driver at-ease regarding the existing range of the car’s battery power. The software analyzes the current driving route, road conditions, topography and location of available battery charging stations. If the car is going to exceed the range and distance to the nearest charging station, a real-time warning is issued along with GPS coordinates to the charging facility. According to Musk, “it makes it almost impossible to run out unless you do it intentionally.”

In an upcoming release 7.0, a new user interface will provide the ability of the car to operate with complete autonomy on highways when the driver lets go of the steering wheel.

In the context of the consumer experience, like Apple, Tesla delivers on design elegance and the interactive user experience. The car you may have purchased one or two years ago, has newer functionality and user experience features delivered by the cloud than when you purchased that vehicle.

For the remainder of automotive related industry, a disruptor such as Tesla will elicit more accelerated innovation in applied technology and the driver experience. Suppliers are already working on more sophisticated processors, sensors, embedded systems and driving aides.

Is it any wonder that when news broke that Apple was working on its own secret development of an electric vehicle, that social media lit-up like fireworks and the automotive industry shuttered.

In today’s industries, change is constant and the termed clock speeds of product innovation are indeed accelerating.  Supply chain teams will invariably be either on-board facilitators or unfortunate obstacles to these changes.

Bob Ferrari

Note: This author is not a current owner of a Tesla automobile nor  a stockholder, rather an observer and enthusiast of automobiles.

 


Technology Responds to Consumer Demands for Specific Knowledge of Food Supply Chains

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Just about two weeks ago, this author had the opportunity to be the opening speaker at the Intesource 2015 Innovation Best practices in Sourcing Conference held in Las Vegas.  Intesource’s customers generally reside within various tiers of food and beverage supply chains either as retailers, wholesalers or restaurant services providers. Besides addressing significant converging industry, IT and people skill megatrends impacting supply chains, I also addressed the needs for greater levels of multi-tiered visibility and transparency across food supply chains. Consumers now demand quality choices in the food they consume and branded products can no longer stand on just presence but on the composition of the products offered and served by the brand.

I was therefore pleased to read in the Wall Street Journal CIO Blog (paid subscription or complimentary metered viewing) that Bumble Bee Seafoods is planning to launch a website that allows consumers to trace the origins of their tuna utilizing specific codes printed on cans.  Information will reportedly consist of where and how the fish was caught and by which fisheries. According to this report, much of the data for this traceability initiative already exists in the company’s procurement and supply chain systems.

The same article makes note that Whole Foods has technology projects underway to provide shoppers with information such as animal welfare ratings, whether a food contains genetically modified products (GMP’s) or modified ingredients.

These are just two examples of how consumers are fundamentally changing the product demand and consumption dynamics of food and beverage supply chains.  On Supply Chain Matters, we have called attention to the next wave of smarter item-level tagging that not only traces product identity and movement but monitors the state, genealogy and condition of products. More discerning and informed consumers who are increasing health conscious continue to elicit greater levels of visibility and smart sourcing and sustainability of animal, farm, fishery and food products. I certainly look forward to utilizing such applications when they become available and I suspect that I will not be alone in that effort.

Sourcing and procurement professionals as well as brand and product management teams must continue to be on the forefront of these advanced technology efforts.

Bob Ferrari                         


Labor Union Seeks Organizing Vote at Boeing South Carolina Facility

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The largest organized labor union within Boeing has filed with the U.S. National Labor Relations Board (NLRB) for a labor union organizing vote within the aerospace producer’s North Charleston South Carolina production facility. The move comes after a number of workers at this facility signed authorization cards indicating interest in

Boeing 787 first ship from South Carolina facility

Source: Boeing Website

being unionized.

The North Charleston South Carolina production facility was established as a secondary production and final assembly facility for the Boeing 787 Dreamliner aircraft.  Six years ago, among selection criteria for this plant was its existence in the Southern region of the U.S., a predominant non-union regional environment. According to business media reports, the plant has struggled to meet increasing production volume requirements and that seems to be the point of contention among existing workers seeking to be organized. First customer ship of a 787 originating from the Charleston facility occurred in July 2012.

This particular facility has been a flash point concerning Boeing’s dealings with its primary labor union, the International Association of Machinists and Aerospace Workers (IAM) and this latest development will most likely add to ongoing tensions. There have been prior reported and rumored efforts to organize workers at this facility since it was opened.

Prior to the current filing, Boeing had already initiated efforts to dissuade employees from seeking union representation. Reports indicate that in January, Boeing assigned manufacturing executive Beverly Wyse to take over for a retiring executive whom workers and union organizers claim were the root of alleged grievances. According to The Wall Street Journal, Ms. Wyse, who previously managed the 737 manufacturing program in Renton Washington has had a better relationship with organized labor at that facility.

It is unclear at this point as to how the NLRB will rule on the outstanding petition and possibly call for an election process among workers. Local political leaders, including South Carolina Governor Nikki Haley have already spoken out against unionization.

The facility has proven to be a flash point for Boeing and the IAM. In 2011, the NLRB ruled that the plant selection was retaliation for a two-month strike conducted by organized workers among Boeing’s Seattle production sites. That NLRB action resulted in Boeing and the union eventually coming to terms to keep production of single-aisle commercial aircraft contiguous to the Renton Washington facilities.

Boeing is in the process of organizing a far reaching social-media based campaign that includes a special web site, a dedicated Facebook page and other outlets to express its views regarding union organizing efforts. The IAM will continue to be active as well.

This development adds further tensions to Boeing’s ongoing efforts to ramp-up monthly production volumes for the 787 Dreamliner and will warrant further monitoring.


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