In the light of this week’s announcement of the mega-merger among HJ Heinz and Kraft, coupled with the new interest in zero-based budgeting techniques, we felt it was timely to provide a brief tutorial on the process.
A Google search can yield ample content and perspectives on this process.
In definition, zero-based budgeting (ZBB) is essentially a financial-driven process where budgetary resources are set to zero every year and must be justified for the new budget period. It was a process originally conceived in the seventies in an era where organizational bloat among large corporations was rather common. Instead of referencing the previous year’s budget, the slate starts over with managers having to justify their business assumptions and required expenditures for the upcoming period, as if they were a new business or support function. Every budget is viewed from a fresh perspective and evaluated and approved based on relevance to overall corporate goals and expected outcomes.
In context it is rather important to note that ZBB is often a financial-driven process and can be undertaken and applied within companies or organizations that are required to considerably reduce costs and improve profits. As some are now pointing out, that is why it is garnering increased interest in among large consumer product goods producers.
It is rather important that organizations understand the pros and cons of this process. In our effort to do so, we are sharing our perspectives. We certainly encourage our readers to add their perspectives and experiences in the Comments section associated with this posting so that many can benefit.
Pros of ZBB:
- A mechanism that facilitates much higher levels of cost reduction than traditional budgeting methods.
- Relate costs to the specific mission and purpose of an organization at a given time.
- Garner much more detailed understanding of an individual organization’s role and purpose and that organization’s staffing and resource levels.
- Weed out duplication, ineffective and/or counterproductive activities.
- Uncover additional opportunities for cost synergies.
- Provide a means for prioritizing spending cuts
- Some would argue that it diffuses an entitlement mentality by requiring detailed justification.
Cons of ZBB:
- Clearly ZBB consumes a tremendous amount of time and organizational energy. Some would argue it can take up the bulk of organizational time, constantly having to justify and re-justify efforts.
- In many cases, ZBB can stifle bottom-up or supplier based product or process innovation, since there is little time or resource for such efforts.
- Consensus is difficult and often painful.
- The impact to employee morale can be substantial, not only in the dimension of perceived perks, but in individual value and promotional opportunities.
- Pits individual organizations in competition with one another.
- Cuts can be taken to an extreme.
- There can be a loss of focus to new, emerging or undiscovered opportunities among business, industry or new markets.
- Needs to be implemented very carefully and skillfully.
Now at this point, you may have discerned that this analyst and consultant may have biases towards the cons of ZBB. Contrary to the past, many industries and businesses have undertaken initiatives grounded in Six-Sigma, Just-in-Time or Lean Manufacturing methods. Thus, a lot of bloat or excess has already been analyzed and addressed. Some might argue whether these efforts were ultimately positive or detracted from business goal fulfillment or the overall reduction of costs. Others would argue that the above methods did not effectively address organizational overhead or layering. I believe that on the whole, they were successful.
In my career, I have found that ZBB methods must be carefully and methodically conducted in the light of a well understood mission and clearly articulated strategic roadmap. Talent recruitment, skills development and ongoing career opportunities must not be sacrificed by the process. ZBB can often bring foreword a “survivor” mentality where political skills outweigh either proven years of experience or sacrifice the required leaders of tomorrow. ZBB can sometimes be a panacea for wholesale human resource shifts. The process can further serve as a radical change to supplier relationship and collaboration practices.
The difference today is that certain private equity investment firms such as 3G Capital are setting a different, or perhaps more acute standard.
We now invite our readers to weigh in. Share your pro and con perspectives
Since the announcement earlier this week, business and other media has generated a lot more background regarding the mega-merger of HJ Heinz and Kraft, and specifically the prime players behind this merger.
Reports indicate that the talks began in January when 3G Capital approached Kraft. This reports indicated that Kraft management was quite receptive to a potential merger or takeover, and the mutual talks moved swiftly leading to a Kraft board discussion in late February leading to the decision to sell the company. As occurred when 3G acquired HJ Heinz, Warren Buffet’s Berkshire Hathaway was brought in for financial backing.
The merger’s ramifications are already stark. The Wall Street Journal indicated that this merger promises to reshape the food industry and “could send rivals scrambling to shore themselves up with tie-up of their own.” In our Supply Chain Matters initial commentary, we pointed to additional tremors for consumer goods supply chains.
Further amplified has been 3G Capital’s current track record for aggressive cost-cutting, which sends further tremors among industry players. Since assuming operations management of HJ Heinz, upwards of 7000 jobs were eliminated in a 20 month span. New CEO Bernando Hees ultimately cut a third of the staff at Heinz’s headquarters including 11 of the company’s top 12 executives. Obviously, under 3G, there is little need for cross-functional collaboration. Readers can garner one descriptor of the 3G cost cutting methodology but viewing a Reuters / Chicago Tribune article, Pack up the peanuts: Kraft’s party is ending. Other CPG players will likely be broadening discussions with other private equity or activist firms for M&A opportunities that can match the industry shadow and bottom-line returns of 3G.
Beyond the current ebullient lens of Wall Street are the longer-term realities for both addressing the market challenges of Kraft as well as the fusing the synergies of two very large consumer goods entities.
From a supply chain perspective, Heinz garners nearly 60 percent of current revenues from international markets. Thus its supply chain capabilities are grounded in global customer fulfillment nuances. Heinz further has a keen focus on food and restaurant channels and services, especially in the light of 3G Capital’s other investments. Kraft on the other hand has been completed focused on North American customers. That strategy was cemented with the prior split-off in 2012 that created Mondelez International, which was created and resourced to be the global growth entity. An area to keep an eye on is the how the merged company focuses on core channels and customers, whether they are supermarket, food services or convenience store. As noted in our prior commentary, how suppliers are treated under the merged entity will be another area to watch, particularly concerning efforts directed at product and process innovation.
Today, Mondelez holds product licensing agreements to distribute certain Kraft brands globally, which promises to be very interesting in the months to come when 3G begins its consolidation and global growth efforts for Kraft. The Heinz and Kraft supply chain resources are likely to be brought together very quickly with additional consolidation and collapsing of organizations.
To be balanced, some Wall Street influencers praise 3G for its willingness to sustain its investments and management of the companies it has acquired, far more than other private equity firms. However, the difference with Kraft is that it is a far larger and far more complex entity with lots of moving parts. If 3G proves successful in its efforts over the long term, then so be it.
One thing is certain, throw away all of the prior notions of consumer product goods historic industry indices, managed transformation or continuous improvement. This week marks a considerable change and a new playbook for CPG focused supply chain teams. What appears today and what the industry ends up to be in two or three years can well be dramatically changed.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.
Breaking News: H.J. Heinz and Kraft Foods Mega-Merger Portend Additional Tremors Across CPG Supply Chains
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 role. Cahill 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.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
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.
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.
Supply Chain Matters provides added rather important data point concerning the ongoing significant business challenges associated with many large consumer packaged goods providers and their associated supply chain teams. Multiple U.S. based food producers continue to serve up grim financial and operating news from their latest quarter. Most all of these ongoing challenges are attributed to the industry’s abilities to adapt to fundamental shifts in consumer tastes, changes in previous market growth assumptions and now, the added significant financial implications related to foreign currency effects.
This week, the largest globally focused food manufacturer by revenues, Nestle SA, reported its slowest annual sales growth since 2009 and 2015 will likely provide added challenges. Nestle’s organic sales growth for all of fiscal 2014 was reported as 4.5 percent, a number that perhaps most other large CPG producers would relish at this point. But, that number fell below Nestle’s declared growth target of five to six percent organic growth. Real internal sales growth was noted as 2.3 percent while operating profit was up 30 basis points in constant currencies but 10 basis points in net. In terms of quantification, Overall sales in 2014 were down 0.6 percent and Nestle executives indicated that negative foreign exchange shaved that number by 5.5 percentage points, which is a very significant amount.
From a geographic perspective Nestle’s organic growth was described as broad-based and included 5.4 percent for the Americas, 1.9 percent in Europe and 5.7 percent in Asia, Africa and Oceania. Business media noted that growth in developed and emerging markets is moderating. The CPG producer indicated the need to adapt with the fast-changing expectations of the Chinese consumer. In fact, throughout its earnings release, there is a constant theme of continuous product innovation, re-formulation and re-launching, which all impact the underlying supply chain.
Other noteworthy financial numbers were that Nestle’s cost of goods sold (COGS) fell by 30 basis points driven by product mix and pricing actions along with savings generated by Nestle’s Continuous Excellence program which more than offset increases in raw material costs. Distribution costs were up 10 basis points. The global CPG producer has further established a Nestle Business Excellence initiative at the executive board level in an effort to aggregate line-of-business support services. Thus, the pressure on costs, added efficiencies and productivity continue along with needs for continuous innovation and resiliency to global market changes
Campbell Soup also reported financial results this week, along with added plans for a multi-year zero-based cost focused initiative to slash costs and restructure certain operations. CEO Denise Morrison provided another profound quote: “We are well aware of the mounting distrust of so-called Big Food, the large food companies and legacy brands on which millions of consumers have relied on for so long” and further noting that changing consumer tastes remain a key challenge for the industry. Campbell’s has plans to re-organize its businesses by product category as opposed to geographic regions. According to reporting from The Wall Street Journal, Campbell’s has hired Accenture, the same consultancy that assisted 3G Capital with its efforts to consolidate the operations of HJ Heinz, ant those of Mondelez International, to assist in the Campbell initiative.
Supply Chain Matters reiterates that rapidly shifting industry markets and consumer preferences imply a critical need for increased product innovation and quicker introduction of new products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. Volatile and rapidly changing global markets require that Sales and Operations Planning (S&OP) teams be more responsive and anticipate such changes. The focus clearly turns toward an outside-in perspective, allowing the supply chain to quickly sense changes in product or regional demand and respond as quickly as possible to market opportunities or threats. Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.