Last April, Procter and Gamble announced its intent to merge its Pringles® business into Diamond Foods. At the time, Supply Chain Matters believed that this deal had significant supply chain implications.  That was then. Like many business stories of late, unplanned and troubling events concerning Diamond have led P&G to opt for another suitor. The deal was undone by revelations that Diamond senior management has wrongly accounted for payments to walnut growers, and both Diamond’s CEO and CFO have been sacked.

This week, the new acquirer for Pringles® is cereal maker Kellogg Co., who as Diamond had before, has the opportunity to become a top player in the global savory snacks business.  This new all-cash deal has a total value of $2.7 billion and is expected to close by the summer, pending regulatory approvals. When the news broke, Kellogg’s stock price rose almost 5 percent, optimistic news that Kellogg has sought for some time. This new business adds an additional $1.5 billion in annual sales on a global scale along with many upside potentials, but Kellogg also takes on an incremental $2 billion in new debt.

The Wall Street Journal in its reporting noted that P&G heard from other interested parties in acquiring Pringles® but CEO Bob McDonald declined naming any of these.  We speculate that most all of the current top market players in global snacks were knocking on P&G’s door. The WSJ further noted that because of legal restrictions related to the previous deal with Diamond, the deal with Kellogg was consummated in all night sessions over the last four or five days. Kellogg’s last major acquisition was a $3.8 billion deal to acquire Keebler in 2000.

As we noted in last year’s commentary, Pringles dominant presence lies among mass merchandising (48 percent), grocery (25 percent) and convenience (12 percent). Kellogg on the other hand has a current high presence in grocery with some mass merchandising, but lacks any substantial global presence. Pringles should immediately add such presence, bringing along a world class manufacturing and supply chain capabilities, including production presence in the U.S. Europe and Asia, and a distribution presence among 140 countries. Pringles joins Kellogg’s other savory snack brands such as Cheez-It, Keebler, Nutri-Grain, Special-K Cracker Chips.  The addition of Pringles almost triples the size of the existing snacks business, and when completed Kellogg’s cereal and snacks business will be of similar size.  The initial estimate of combined synergies are $10 million in 2012 and between $50 million and $75 million after 2013.

Kellogg also has its own unique supply chain challenges having been involved in some visible product recall incidents involving Eggo® Waffles in 2009, and later a cereal recall. In January 2011 Kellogg’s CEO publically noted that the company would put additional time and effort into restoring investor confidence in its supply chain. Kellogg senior management has since taken some considerable heat from Wall Street analysts for admissions that it cut too much in supply chain resources and needed to invest in additional resources to insure consistent product processes which Supply Chain Matters praised.

The new challenge will of course be overall integration.  With Pringles, Kellogg inherits significant presence in emerging markets such as Latin America, China, Russia and other countries.  But as supply chain distribution professionals know, distribution channels and logistics to serve these markets are far different.  In our view it would be very wise for Kellogg’s SCM team to allow the Pringle’s SCM team to lead in driving global distribution needs. Kellogg’s for the most part has been emphasizing a direct-to-store distribution model which does not lend itself well in emerging markets.

From a technology and systems perspective, Kellogg has been in the process of re-implementing SAP within its U.S. operations, and management indicates that the addition of Pringles business presents an added opportunity to integrate within the SAP environment. P&G itself has provided ongoing service arrangements to transition Pringles and is a very sophisticated user of SAP applications, often serving as a lighthouse customer.  Here again, Kellogg teams can gain valuable learning and insights particularly regarding deployment and use of SAP advanced supply chain related applications.

As in the prior Diamond acquisition, on paper, the potentials of a Kellogg snack business with the addition of Pringles look rather promising but the devil always rest with the details.  For our part, Supply Chain Matters will keep a watchful eye on ongoing developments.

Bob Ferrari

© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.

Supply Chain Matters has previously noted that in these challenging business times, even the best organizational supply chains can experience a snafu.

Procter and Gamble, on just about every influencer’s listing as one of the top rated supply chains, is experiencing an uncharacteristic supply snafu which is gaining wider visibility. The timing is not ideal since P&G recently disappointed Wall Street by reporting a 49 percent drop in quarterly profits (quarter ending Dec. 31), a hefty write-down of previous acquisition costs, and 1600 planned job cuts.  The Wall Street Journal reported that P&G lost market share in a greater portion of its business lines during the past quarter partly because competitors held back on product price increases while P&G raised prices. P&G is now reversing some of these previous price increases.

The supply snafu involves the market introduction of a new branded line of Tide Pods, a capsule blended laundry detergent that was originally planned for market introduction in August of last year.  P&G product management had to push the market entry date to this month, and it now appears that supply constraints may limit how much supply will be available at retail outlets to support a broad product launch.

An article published on the Cincinnati Business Courier web site cites a Deutsche Bank analyst as indicating a second supply delay involving Pods and that P&G is communicating to retailers that constraints will limit supply for shelf displays only, and that off-the-shelf volume promotions should be timed for no sooner than July of this year. Noted was that the “three-chamber unit dose” delivery system for Tide Pods required special manufacturing processes to be developed. A spokesperson for P&G noted: “Unfortunately, we recently experienced unexpected challenges as we ramped-up new manufacturing capacity and processes in mid-November and December. However, we continue to see improvements in the manufacturing processes and are confident we will achieve the manufacturing capacity we expect on Tide Pods.”

An article appearing on AdvertisingAge noted that P&G appeared to have a first-mover advantage in the biggest laundry innovation in 25 years, but these latest supply setbacks provide an opportunity for laundry detergent competitors to launch their own versions of blended product.  That article notes: “A slew of ultra-concentrated detergent “packs” that are slated to hit stores in February are expected to ratchet up marketing outlays in the category by nearly $300 million.” The article also cites an executive at a P&G competitor indicating that “retailers are furious” and that P&G’s sales force is “having to use up chips saying they’re sorry” for changing plans twice in six months.

While competitors will seize on market opportunity, P&G as a leader in global supply chain capability will eventually bounce back and manage this Tide related supply crisis. Articles have also noted that P&G has complete patent protection on this new formulated product. As is often the case, lessons will be learned, especially regarding the alignment of product management, sales, marketing, and global supply planning in new product introduction involving highly complex manufacturing processes. There well may be lessons related to the executive S&OP processes, and in handing competitors an unplanned opportunity to seize on supply constraints.

We suggest that the takeaway for readers is that even the best supply chain teams can stumble, and when it occurs in the public limelight, when disappointing financial news is being communicated the headlines well become magnified.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC, and Supply Chain Matters.  All rights reserved.

In August of 2011, consumer goods provider Kraft Foods made a surprising announcement that included global supply chain implications.  The company announced that it would split into two independent public companies, one to be focused on a global snacks business with the other being the company’s core grocery business.  The timing of this split is slated for late this year. The snacks business unit will have responsibility for $32 billion in global revenues while Kraft Foods (Grocery) will be responsible for half that amount, namely $16 billion in revenues.

At the time of this announcement, Supply Chain Matters provided a commentary with an open question, namely how will the company respond with its corresponding supply chain and distribution strategy alignment. The essential challenge is that the global snacks business is driven by fundamental different performance metrics and investment needs than grocery. The former is high touch, complex channels driven while the latter is high volume, designated channel,  low margin driven.

The latest indicators related to supply chain realignment came this week when Kraft initially named the senior leadership team among both companies.

Irene Rosenfeld, current Chairmen and CEO of Kraft will be the designated Chairmen and CEO of Kraft Foods Global Snacks.  Ms. Rosenfeld leadership team will essentially be the same as existed in the singular company, including EVP’s of Europe, North America, marketing, human resources, R&D and quality.

The Kraft Foods Business will have as its CEO W. Anthony (Tony) Vernon.  Vernon is the current EVP and President of Kraft Foods North America. Vernon’s management team is essentially the same North America team with the exception of the CFO, who is designated as Timothy McLevish, the current CFO for all of Kraft.

Supply chain team leadership among both companies is split, but has senior management leadership designation.  Daniel Myers, the former P&G executive who was recently recruited and named Chief Supply Officer of Kraft was named EVP, Integrated Supply Chain for Global Snacks.  His responsibilities are noted as procurement, manufacturing, engineering, logistics and customer service. The EVP, Integrated Supply Chain slot for North America Grocery is currently noted as open. While it does appear that Kraft management recognizes that each business unit will have to be driven by different global supply chain leadership tenets, we wonder aloud if there will be some form of shared services arrangement for certain functions among both companies.  More details related to supply chain strategies and resources will obviously follow in the coming months but we trust that both organizations will have the autonomy to drive distinctive strategies and deployment models for each business unit.

In the critical area of information systems, the Global Snacks business will have IT reporting under the office of the CFO.  Kraft Foods (Grocery) will have IT reporting to the EVP for corporate strategies, mergers and acquisition. We can each make our own interpretations of these structures for IT, suffice to state that they are different.

A review of the newly announced management teams seems to evoke an impression that management loyalties prevailed over management cross-seeding or balance among both of the newly created entities.  Then again, that may allow the grocery business team to shine with more innovative out-of-box thinking that includes supply chain capabilities.  As is usually the case, only time will provide the real story.

Bob Ferrari

We provide our first update to our early November commentary reflecting on the holiday fueled fulfillment battle of Amazon’s Kindle Fire vs. the Barnes and Noble Nook Color.  Both e-readers were expected to be one of the hottest selling gift items for the 2011 holiday season, and indeed they were. While both providers appeared to rise to the challenge of supporting consumer fulfillment needs, each ran into some difficulties. Overall, it appears that Amazon has initially risen to the challenge.

Visibility to these two e-reader offerings stems from the acceptance by consumers of an alternative to Apple’s highly popular, but more expensive iPad E-reader. The battle of e-reader market presence is a high stakes one and includes the broader implication of a mass of installed devices that become conduits for very profitable content sales for years to come.  Thus, the supply chain strategy is one of supporting volume, and as pointed out in our initial commentary, sacrificing some margin on hardware for the broader implication of future recurring sales of electronic content.

For its part, Amazon was not shy in hyping the success of the Kindle during the holidays. While not disclosing a specific number, Amazon did disclose that customers purchased well over one million Kindle devices per week with all three members of the Kindle e-reader family holding the top three slots on the Amazon.com best seller list. The Kindle Fire was noted as the number one best-selling, most gifted and most wished product on Amazon, since its introduction just before the holidays.  You gotta just love the power of web analytics!  As to the strategy of leveraged content sales, Amazon reports that Christmas Day was the biggest day ever for Kindle book downloads.

All is not completely rosy and as is the case with new products that may have been rushed to market, there are reports of some quality problems among early Kindle Fire users. A New York Times article published in mid-December(paid subscription or free metered view) notes customer complaints related to lack of external controls, other than the on-off button, web pages that are slow to populate along with concerns for overall security and parental  controls.  A similar mid-December commentary published in the International Business Times notes the top ten problems concerning the Fire, again reinforcing these same issues.  The Mobile Gadgeteer featured on ZD Net recently notes a more troubling problem related to random freeze-ups of the device with the need for a hard re-boot that can cause the loss of some existing content.

For its part, Amazon is demonstrating a proactive response to customer feedback and concerns offering lots of helpful hints or advice for remediation.  There is also speculation that Amazon will provide some form of an upgrade in the early spring.

Today, Barnes and Noble announced that Nook sales surged 70 percent during the holiday season with better than expected sales of the Nook Tablet as well as associated electronic content. However,  a breaking news article published by the Wall Street Journal (paid subscription or free metered view) quotes B&N as noting that it had “overanticipated the growth in consumer demand for single purpose black and white reading devices this holiday” and incurred significant expenses in advertising and promotional support. In our minds, that translates to significant missed forecast of anticipated demand. Once more, B&N disclosed that it is exploring options to separate its Nook business with strategic partners.

There will certainly be more detailed information over the coming weeks including news from Apple on holiday sales related to holiday sales of the iPad.  In its quest to provide a lower cost, reasonably featured e-reader, Amazon may well encounter more consumer feedback in the coming weeks.

From the information thus far, it would appear that the fulfillment battle of Kindle vs. Nook is leaning more toward the former in terms of order volume penetration and supply chain responsiveness during this past holiday season. Supply Chain Matters will feature more follow-up commentary in the coming weeks.

Bob Ferrari

© 2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

This week, consumer goods provider Kraft made a surprising announcement that comes with global supply chain implications.

The company announced that it would split into two independent companies, one focused on the global snacks business, with the other being grocery.  The announcement was reported as a reversal from Kraft’s previous bigger-is-better growth approach.  The Wall Street Journal in its reporting of the story noted that just 18 months ago, CEO Irene Rosenfeld told investors that “scale is a source of great competitive advantage.”

Financial media are reporting that under the proposed split, the snacks business and confectionary business may consist of Kraft’s European business and developing markets groups, along with the North America snacks and confectionary businesses, amounting to a $32 billion annual business. Brands that could be included are Oreo cookies, Cadbury chocolates and Trident chewing gums. The grocery division is initially planned to include Kraft’s current North America grocery businesses, and include brands like Kraft Cheese, Maxwell House coffees, Oscar Mayer meats and Jell-O. Grocery would amount to a $16 billion business.

Supply Chain Matters has published multiple commentaries regarding Kraft, particularly its controversial $19 billion acquisition of European snacks and confectionary company Cadbury last year.  The most detailed was in February of 2010. In that commentary we noted that Kraft’s supply chain was about to undergo a rather dramatic transition, with challenges related to new geographic distribution channels and the need for more cost synergies in merging of two supply chains.  At the time of the Cadbury merger announcement, Kraft management issued a target of $675 million of cost savings required by 2012.  Cadbury itself was also under considerable external pressure to increase margins prior to the acquisition and was bloated with inventory.

This week’s announcement, we believe, puts an entirely different lens and perspective for Kraft supply chain strategies moving forward.  Snacks and grocery are driven from different business and distribution models.  The snacks business provides rather optimistic numbers for market growth but its distribution model is more focused to the higher touch and direct to store needs of convenience stores and smaller retail.  Snack food consumers are impulse buyers, with promotions, market timing and inventory strategies that require considerable sophistication and proper timing.

The grocery business provides a business model with much more conservative growth, higher margins, and more high volume focused warehousing, distribution and supply chain needs. Much of Grocery’s customer base is large supermarkets and retailers, with high dependency on either vendor managed inventory or store replenishment business process support.

The open question is how Kraft will respond with its supply chain and distribution strategies as a result of the proposed split. As noted, Kraft established a target of $675 million in potential cost savings through the combination of operations and supply chains. We presume that some of these savings may have already been garnered but then again, more may be required.  We at Supply Chain Matters were a bit perplexed as to how Kraft would be able to service both types of businesses under a singular structure.  Would cuts be made in the wrong areas?  Did grocery really understand the unique high touch direct-store needs of snacks?  How would supply chain costs be apportioned?

With this dramatic announcement of a corporate split, various other options will undoubtedly be put on the table and Supply Chain Matters speculates that the options could include independently splitting each business supply chain, creating some form of a centralized supply chain shared services model, or investigating some hybrid that includes various internal and externally sourced distribution services.

The good news is that Kraft recently recruited Daniel Myers, a former P&G executive at the company’s Beauty and Hair Care divisions, to be its new Chief Supply Chain officer.  Myer reports directly to Kraft CEO Irene Rosenfield and is a member of the Kraft senior executive team.  That reporting relationship will prove to be rather timely as Kraft embarks on its newest supply chain challenge, and will hopefully provide a more unbiased, outsider perspective to the challenges ahead.

The Gartner 2011 Supply Chain Top 25 supply chains ranking for 2011 pegs Kraft in the number 25 and last position and notes Kraft’s leading channel management strategy as its biggest strength. One wonders which of Kraft’s pending two companies will fare in future rankings.

Stayed tuned to our blog for more Kraft postings in the coming months.  In the meantime, Supply Chain Matters welcomes commentary from readers regarding Kraft’s new supply chain structural challenges.

Bob Ferrari

©Copyright 2011 The Ferrari Consulting and Research Group LLC

Various financial and business media report that Nestle, the global goliath in food production, is one of several companies in confidential talks to acquire and form a partnership with Hsu Fu Chi International (HFCI), China’s largest confectioner. The company produces chocolates, candy and pastry. Shares of Hsu Fu Chi stock were voluntarily suspended yesterday on the Singapore Exchange as a result of this news.

So much for confidential!

The deal if successfully completed will have significant impact, including supply chain related implications. The company reported a 31 percent increase in fiscal year  2010 profits.  The supply chain profile of HFCI includes 45 production plants that produce more than 700 different confectionary products.  Products are distributed through retail, hypermarkets and supermarkets.

Supply Chain Matters readers will recall our previous commentaries related to Kraft Foods and its acquisition of Cadbury PLC, a move to broaden and diversify Kraft’s presence in the confectionary arena and particularly in growing emerging consumer markets such as China and India. Kraft has had to re-orient its supply chain production and distribution plans to support both its traditional food and now confectionary products, whose distribution channels are somewhat different.

Nestle, on the other hand, has been very experienced in global markets and distribution channels, particularly those in China. Its recognition in China dates back 20 years. The company has set a goal to dramatically increase its penetration of these markets.  If this potential deal, either in partnership or acquisition is successful, it will clearly deepen Nestlé’s influence and penetration in one of the world’s potentially largest consumer markets.  The Nestle brand  has garnered far more consumer trust in China in the wake of the previous milk powder contamination incidents that occurred in 2008. Chinese consumers have preferred trusted foreign brands over those within China. Nestle currently operates 23 factories in China and employs over 14,000 people.

Whoever is successful in a broadened business relationship with HFCI will likely inherit a broader and deeper distribution channel relationship within China which could prove to be a major plus.

Bob Ferrari