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.
We pen this commentary from Scottsdale Arizona and our attendance at Kinexions 13, the annual customer event sponsored by Kinaxis, Inc. This is our second live commentary and readers can review our initial commentary by clicking on this link.
In our summary commentary from last year’s Kinexions, we noted one of the consistent and somewhat unique themes that we have consistently and objectively observed at past Kinexions, namely customer’s open articulation of their enthusiasm concerning the value that Kinaxis RapidResponse software has provided in their business and decision-making processes, coupled with the ongoing existence of a positive partnership with a software vendor, one that consistently demonstrates responsiveness to their needs. Trust me in the statement that while many software and services vendors consistently attempt to achieve this state in a customer focused event, it is something that cannot be consistently scripted or orchestrated. It has to be organic and living.
This year, as in previous year’s that presence of customer’s articulation of value continues. Both in the invited session for analysts and industry influencers, and on the conference main stage, customer’s describe how Kinaxis technology has delivered on its purpose and how the vendor itself remains responsive to their individual needs.
In the on-stage keynote session from First Solar, Shellie Molina, Vice President Global Supply Chain, Shannon Rawlins, Director, Sales and Operations Planning, and Mark Zeni, AE Fulfillment, each articulated both the unique industry and supply chain business challenges that were encountered. In the specific case of First Solar, it was the radically changing business environment in alternative energy that required the company to be highly responsive to a rapidly changing dynamic of market and customer demand. In 2006, the company’s solar panels were on a steep growth projector, but the magic carpet ride changed rather quickly thereafter. The history of involvement with Kinaxis RapidResponse began in the termed glory days of huge industry demand that later culminated in industry-wide consolidation and a highly re-focused First Solar. Shellie Molina described the prior state as no one really concerned with state of inventory, but highly concerned and focused in the latter stage. She knew in her gut that the supply chain team had to be ready and responsive to that need, and needed the right tools to be able to navigate lots of change. Shannon Rawlins described how S&OP planners had developed great Excel spreadsheet models and skills, while struggling with the need to keep up with changing data requirements for these spreadsheets. She described the challenge as: “Moving on to the business of planning vs. honing Excel skills.” Mark Zinney who manages First Solar’s new Solar Systems business described how the revised business model led to the need to link the First Solar supply chain to multiple solar field installation projects, and how the new RapidResponse project management turned out to be the best option. Each of the presenter’s described bedhow Kinaxis remained responsive to their individual needs and work with the team through these various iterations. As Molina described, even though it has been a challenging journey of business change, they knew that RapidResponse was the right technology to help support their supply chain decision support needs.
Jim White, Vice President Operations, Applied Materials described the case study of RapidResponse utilization at the Varian Semiconductor business unit. Applied Materials and its associated business units support capital and production equipment needs for today’s highly dynamic and changing semiconductor industry. The industry landscape was described as narrowing margins, changing industry dynamics and constant need for product innovation. “Speed is what matters and you differentiate on time-to-market and customer service. Growth is mandatory.” In case of many of Applied’s products, customer requested lead times were shorter than actual design and production lead times, requiring the need for accurate and responsive planning processes. This business also tends to be highly cyclical in nature, driven by either customer production innovation or investment budgeting cycles. The Varian Semiconductor case study involved a concentrated make-to-order planning process involving complex bills of material. The challenge was described as constantly syncing with the “technology nodes” of customers and not getting locked out of a technology investment cycle. Kinaxis RapidResponse is utilized to plan engineering phase in and phase out cycling, to focus on specific needs for supplier collaboration and prioritization modeling for constrained parts. White admitted that he was initially a skeptic to the described benefits, it sounded too good. He and his CFO were won over . Now every Wednesday, Jim and the Varian senior management team conducts a weekly operations review to target key customer delivery objectives. Scenarios developed in Kinaxis RapidResponse are reviewed and evaluated and decisions are made based on identified options.
In the invited influencer session, three other Kinaxis customers articulated their individual experiences. The themes were similar:
- Constantly changing business and supply chain environments requiring more responsive and more predictive planning
- A realization that the majority of today’s supply chain information exists outside of an organization’s backbone or legacy systems.
- Either frustration with attempting to implement an existing ERP based planning application, or current gaps in required planning capabilities needed.
- Seeking a trusted partnership with a technology vendor and insuring that the vendor is responsive to ongoing needs.
- The critical need to insure user acceptance and adoption of any tool selected, and that the system actually does what it is supposed to do.
To be fair, advanced technology and vendor relationships, even those related to Kinaxis do tend to have challenges, and behind the scenes, there are such challenges. From our view, it’s the relationship that matters and those relationships continue to be communicated in positive tones.
For its part, Kinaxis must continue to adapt to a rapidly changing and consolidating technology market. In our next commentary, we will share some observations in that area.
Full Disclosure: Kinaxis is one of other designated sponsors of Supply Chain Matters
Each October since the founding of Supply Chain Matters in 2008, we have had the opportunity to attend Kinexions, the annual customer conference of our lead sponsor, Kinaxis, Inc. We are penning this initial commentary from Scottsdale Arizona where the weather has been stunning and beautiful.
Readers will recall from our coverage of last year’s Kinexions, and for that matter, other previous occurrences, there has always been a consistent theme of customers articulating their experiences with both Kinaxis, and the Kinaxis RapidResponse technology, and that theme has definitely continued. Throughout these years, there has also been an added element of education, learning something you did not know previously. Industry analysts, market influences and invited prospective customers are provided unrestricted access to all of the conference sessions and allowed to mingle with all attendees, something that unfortunately, all software or services vendors do not practice. Our one restriction as an independent industry analyst and supply chain social media mechanism is to respect the stated confidentiality needs of specific customers or Kinaxis, which is appropriate.
The theme of last year’s conference was stated as The Power of One. This year’s Kinexions featured the theme of Know Faster – Act Sooner, and it seemed, at least to this author, to be rather appropriate. The overall scheduling of the event was rather different this year, in that it was pretty much a weekend event. Pre-conference training sessions for customers began on Thursday, and main conference activities have been scheduled for Friday and the Saturday morning. Attendance does seem to be slightly down this year although we have not had the opportunity to view the actual numbers. With today’s rather hectic work schedules across multiple industry supply chain environments, software vendor events scheduled during a weekend present challenges. None the less, the enthusiasm of customers that are attending and presenting content has been enthusiastic.
This author was invited to attend the dedicated session for industry analysts and market influencers that was scheduled Thursday afternoon where Kinaxis executives shared direction and a select group of customers articulated their experiences with Kinaxis RapidResponse. We will feature some observations from this session in a later commentary, but there where restrictions as to how much we can comment related to certain shared information.
For the remainder of this commentary, this author wanted to highlight on the welcome and opening remarks from Kinaxis President and CEO, Doug Colbeth. In his remarks, Colbeth re-iterated what he believes to be the unique business model of the company, one totally focused on the needs of supply chain management. It shared that his leadership principle for Kinaxis remains and has always been building something that does not exist in today’s market,. He described the Kinaxis corporate culture as: “extremely innovative and extremely focused.” Further shared with the audience was that at Kinaxis board meetings, the discussions are always focused on ways to add value for customers vs. existing customer’s in the market: “Why would we want to emulate the competition?” By our view, those comments indeed provide the true descriptor of the unique fabric that makes up Kinaxis and its approach with customers.
Stay tuned for further commentaries.
Full Disclosure: Kinaxis is one of other designated sponsors of Supply Chain Matters
Supply Chain Matters does not normally cite or comment on the huge plethora of opinion research studies concerning the discipline and state of global supply chain management. By our view, there are too many outlets, beyond experienced analyst anchored firms, producing so called research vs. opinion of the day among a limited set of respondents.
We were recently able to obtain a copy of The Chief Supply Chain Officer Report 2013, Pulse of the Profession, conducted and compiled by SCM World, and we were impressed with the research approach as well as the key findings. The full report is available for no-cost download by registered members of SCM World and is well worth a reading. An Executive Summary can be obtained by no-cost registration.
This is fourth year of this particular study and the continuity of the study and its findings adds particular meaning. This year’s research survey was conducted during late July and August of this year and was noted as including over 750 completed responses, which is a substantial study considering today’s practices in these types of surveys. It is current and timely.
The goal of this commentary is not to re-produce the findings but rather to add some of our impressions to the findings. SCM World, the authors of the report have done a great job of articulating individual findings.
Our impressions are the following:
More and more, senior supply chain executives now have a seat at the senior executive table but that comes with the reality check of added accountabilities. According to the summarized findings, supply chain leaders are apparently caught in the middle of rising customer demands and expectations and the global growth ambitions of their firm’s management teams. The conundrum of objectives directed at continued reductions in costs while helping to grow the business are being taken on. There is rather interesting detail that points to how these pressures now manifest themselves in stated supply chain process and management objectives, which should capture the attention of peer supply chain executives.
By our Supply Chain Matters lens, this is not an area that is addressed by summarizing multiple years of industry performance and metrics, but rather leadership for weighting and interpreting key business objectives to required supply chain outcomes.
The report further provides compelling evidence on the impact that omnichannel online fulfillment is having on retail supply chains as well as key suppliers to retail. The report concludes: “the omnichannel model is swamping traditional store-based operations.”
We were fascinated with some of the findings related to changing perspectives and landscapes surrounding the firm’s supply chain related social and environmental responsibilities (SER). Responses point to more and more focus towards leading corporate social responsibility efforts, while consumer willingness to pay for socially responsible products remains low. SER efforts continue to be driven by cost and efficiency goals, but the recent visibility to health and safety issues has increased the ranking of health and safety objectives across the global supply chain
Concerning the area of supply chain risk management, the authors point to responses indicating easing concerns in this area. Executives actually quantified multi-million impacts of recent risk events in their responses and the report authors conclude that this easing stems from supply chain teams investing in risk sensing and management capabilities these past few years. Survey findings rank the top ten risk mitigation practices, and by our view, tend to have a procurement focused bias toward continuity of supply. Report authors point to more executive mindshare now focused on other cost and price risks which we believe, further reinforces a procurement lens, and perhaps the need for broader cross-functional perspectives related to other forms of key risk.
In these times, no supply executive survey neglects to reinforce the challenges related to overall talent management and the annual occurrence of this particular survey provides a historic perspective to some progress being made in this area. The findings point to specific successes in knowledge workforce development but efforts to provide an overall compelling career management perspective in supply chain remains challenging. Again, there is interesting data related to different perspectives, a broader skills umbrella, and advocating for broader cross functional and cross business training initiatives.
Overall, we view this research as insightful and thought-provoking, and recommend that industry supply chain executives take the time to review and absorb the findings.
In August of 2011, consumer product goods producer Kraft Foods made a surprising announcement that included significant 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 North American grocery business. The snacks business unit, which was subsequently named Mondelez International has responsibility for $32 billion in global revenues while Kraft Foods Group is responsible for more than half that amount, namely $18 billion in revenues. The former Kraft North American grocery business umbrellas 9 major brands including names such Kraft Cheese, Cracker Barrel, Philadelphia Cream Cheese, Maxwell House coffee, and Oscar Mayer hot dogs and meats. Supply Chain Matters posted a recent commentary regarding supply chain challenges at Mondelez, and in this posting, we reflect on Kraft Food Group.
In January of 2012, Supply Chain Matters posted a commentary concerning the implications of the corporate split on each company’s supply chain and supporting systems. An important indication of the critical contribution of supply chain management led to the decision to have leadership for both of the split integrated supply chain organizations to have direct reporting relationship to respective company CEO’s. At the time, the Chief Supply Chain Officer of the former singular Kraft was recruited to lead the integrated supply chain of Mondelez, and leadership for Kraft Food was initially classified as open.
As is often the case with large mergers or acquisitions, our commentary wondered aloud what the impact of having to split out shared business processes and systems would be for both companies. We also pointed to specific differences in business strategy and outcomes that each of the supply chain organizations had to overcome.
Last week, while attending the S&OP Innovation Summit held in Boston, we were able to peek into the new chapter for the Kraft Food integrated supply chain team and to state the least, we were tremendously impressed. Specifically, we witnessed Robert (Bob) Gorski, Executive Vice President of Integrated Supply Chain for Kraft Foods articulate the supply chain transformation that is underway. Gorski landed at Kraft in March of this year after initially retiring from a 32 year supply chain related career at Procter& Gamble. As Gorski describes, that retirement lasted a mere 3 weeks. He apparently wasted no time in concluding that in spite of internal beliefs, a holistic transformation was needed across the Kraft North America supply chain.
Processes needed to be simplified, streamlined and integrated. Gorski and his current leadership team have outlined a transformation which is termed “Symphony”, one sheet of music for all. The powerful analogy used was a marathon, not a sprint, in the ways work gets done and how businesses are run. Gorski leans heavily on Vice President, Process Transformation, Rajan Nagarajan who came to Kraft with a track record in driving process change.
The presentation described product demand and supply processes touched literally 60 different times with little effect on forecast accuracy. Supply chain wide metrics were at odds with individual plant and functional metrics, some in direct conflict. There was a lack of a fixed execution planning window with 60 percent of plan changes occurring in the execution window. Production lines, on average, were forced to shutdown every 4 minutes because of various maintenance or setup issues due to inconsistent process specifications. Gorski articulately described the new goal as moving from metrics in isolation to metrics as part of a performance culture.
After the former single company invested what was described as $700 million in a global SAP ERP rollout, much of the systems were customized or augmented globally. The corporate split has caused the awareness for the need for more streamlined SAP standardization. Plans are underway to integrate 25 major platforms to integrated demand and supply planning, order management, procurement, and manufacturing control.
This author has been involved in various aspects of supply chain management for over 30 years. Thus, I have witnessed many a supply chain or operations leader. After witnessing Bob Gorski articulate a supply chain transformation plan, there is no doubt in my mind that Kraft Foods and its associated supply chain team will be the beneficiaries. You can sense a leader in his or her’s presence, style and charisma.
Readers can expect to read of positive transformation and business outcomes emanating from the Kraft integrated supply chain team in the months to come. At the beginning of this year, Supply Chain Matters began a new series of calling out distinguished supply chain management professionals. We were impressed enough to now include Bob Gorski in this category.
Boeing reported its fiscal Q2 2013 earnings this week and there were many sound bites related to the company’s global supply chain capabilities, and more challenges yet to come.
The financial numbers were stellar. Total revenues increased by 9 percent while profits rose 13 percent. Those were fairly sound numbers when you consider the challenges this aerospace manufacturer has had with the 787 Dreamliner. However, the company warned that it is bracing for potential “draconian” cuts in military and defense spending, which accounted for over one-third of revenues in the past quarter.
One of the very first topics from CEO Jim McNerney in the earnings briefing was to address the recent 787 aircraft fire that occurred at London’s Heathrow airport. He reminded analysts that Boeing was limited about what it can publically disclose. However he did make reference to the UK Air Accidents Investigation Bureau (AAIB) and its post-incident investigation that pointed to the Emergency Locator Transmitter located at the upper rear of the aircraft as a possible cause. This transmitter has been reported to be produced by Honeywell International, and is installed on a number of different aircraft types. The Wall Street Journal reported last week that people familiar with the investigation indicated that it was unclear if the transmitter triggered the fire or provided additional fuel for the fire. This transmitter is not part of the main electrical system of the aircraft and is powered by its own battery. Examination of the aircraft by AAIB investigators indicated extreme heat generation that appeared to melt through the carbon-fire skin of the aircraft. Yesterday, the U.S. Federal Aviation Administration and other global aviation authorities issued a directive instructing 787 operators to remove and/or inspect the subject emergency locator transmitter. Honeywell continues its investigation of the incident.
CEO McNerney once again re-iterated the company’s confidence in the integrity, safety and performance of the 787. He confirmed that all 787 battery system enhancements were completed on both previously grounded operational aircraft and those on the production ramp. There should have been a shout-out to the Boeing tiger teams who completed this exercise under considerable time constraints.
Highlights of other supply chain related news included that Boeing’s commercial airplane backlog of orders now stands at 4800 aircraft. An extraordinary situation, one that many companies would envy. The again, it adds considerable stress the to the company’s global supply chain network which has to deliver all of this aircraft according to customer expectations and needs.
The division itself has had its highest output levels in nearly 15 years. The company delivered 169 aircraft in its just completed quarter including the 16 787’s that had been queued during the aircraft’s operational grounding earlier this year.
Boeing acknowledged customer requests to accelerate deliveries “continues at a healthy pace.” The company launched the newest version of the Dreamliner, the 787-10 last month with 102 orders and commitments. Interest in the new 737-MAX continues with 1400 orders to-date. McNerney stated that the company was on-track to increase 737 production to 42 aircraft per month by the second quarter of next year. He further stated that Boeing was positioned to add more production capacity if customers require. In its reporting, the WSJ noted that the 42 number matched that of Airbus in its competitive A320 aircraft, and that exceeding that number would put Boeing in the position of being able to boast of the largest output producer for the category.
Production rates for the 787 remain on-target at the rate of 7 per month, increasing to 10 per month by the end of this year. One other interesting note from the briefing was that total inventories increased by $1.5 billion during the recent quarter, attributed to the anticipation of increased production volumes of the 787. Apparently, suppliers continue to ship to earlier commitments.
Boeing forecasted commercial airplane deliveries in the range of 635-645 for 2013, which implies an average run-rate of 53 aircraft per month. Next year, that number gets even higher.
One added note. In the Q&A session, at least two equity analysts had probing questions related to Boeing’s plans for increased engagement with partners and suppliers. CEO McNerney responded: “If you work with us there is a chance to increase volumes significantly, while helping Boeing in delivering cash and margin goals.” He further indicated that it will take time to work on business equations with certain suppliers that make sense for both partners. Our interpretation of these statements is a message to suppliers that the potential of high volume Boeing business exceeds current operational frustrations in delivery and payment rates. What comes to mind is the analogy of the automotive industry and its former supplier relationships. You need to stick with us, despite the financial pain we can incur, because our business is massive.
One of the important observations to keep in mind is that despite the number of very high-visibility negative developments concerning the 787, Boeing stock has risen in value. That, as our readers know, is extraordinary since major supply chain snafu and disruption tend to have some negative consequences on a near-term company stock price.
However, with this latest briefing, Boeing appears to be warning investors that potential cutbacks in the defense sector can be of some concern. We speculate that this will add additional pressures to the commercial aircraft business to meet aggressive delivery commitments while continuing to reduce cost. That’s a tall order for any global aerospace provider’s supply chain network.