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Upcoming Webinar: Supply Chain Segmentation- The Key to More Predictable and Profitable Business Outcomes

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This is a brief reminder that JDA Software and Supply Chain Matters will be hosting an upcoming webinar: Supply Chain Segmentation – The Key to More Predictable and Profitable Business Outcomes. In this webinar, this author will provide perspectives on the increasing importance of linking supply chain segmentation and more predictive planning and analytics capabilities to insure more predictable and profitable outcomes. I will further address how elements of supply chain advanced technology that can aide in linking such supply chain segmentation efforts.

This complimentary webinar is scheduled for Wednesday, April 1st at 11am Eastern. Joining me in this webinar will be Puneet Saxena, Vice President, Manufacturing Planning at JDA Software.

Readers can register for this webinar at this registration link.

Join us as this coming week as we discuss today’s process and business requirement needs related to supply chain segmentation.

Bob Ferrari, Founder and Executive Editor


Supply Chain Matters Tutorial- Pros and Cons of Zero-Based Budgeting

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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

Bob Ferrari

 


More on the Heinz-Kraft Mega-Merger

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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.

Bob Ferrari

© 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

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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.


Alcoa’s Strategic Positioning within Commercial Aircraft and Aerospace Supply Chains

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In the prior Supply Chain Matters commentary, we reflected on some current commercial aircraft industry developments from the lens of product demand reflected by the building voice of the industry’s most influential customers.  In this commentary, we focus on the strategic supply aspects of aerospace supply chains and provide background to this week’s news regarding another strategic acquisition announcement from AlcoaBoeing 787 production line

Earlier this week, this aluminum producer announced its intent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. According to business media reports, RTI’s business focuses is centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft.  The Wall Street Journal reported that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector.

The RTI acquisition follows last year’s acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.

Titanium is a very essential and critical commodity and component aspect for aerospace and commercial aircraft design and production.  The country of Ukraine currently is a prime source of the concentrates used for the fabrication of titanium. During the recent building political tensions among Russia, the United States and Europe over hostilities in Ukraine, Boeing and United Technologies augmented safety stocks of this key metal provided by VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. Last August’s report indicated that Boeing and UT had amassed upwards of six month’s supply of safety stock of highly customized titanium forgings.

Another rather important strategic commodity for newer, lighter and more efficient aircraft is that of carbon fiber.  So much so, that in November of last year, Boeing initiated an $8.6 billion long-term supply agreement with Japan based Toray Industries. The ten year supply agreement was initiated to support Boeing’s ongoing 787 Dreamliner production program along with provisions to supply wing structures for the new 777x aircraft development and production program.

Strategic sourcing teams for both Airbus and Boeing have to further consider mitigation of global supply risk and must practice a balanced component sourcing strategies to avoid too much dependency on a single region or suppler.

With current huge multi-year order backlogs, Alcoa’s strategic moves into key strategic commodity areas of commercial aircraft production assure a faster and perhaps more profitable growth prospect. The metals producer is also positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.

In July of 2010, Boeing’s CEO candidly admitted that industry-wide growth was highly dependent and/or constrained by many of the key suppliers to this industry. Six years later, with even heavier order backlogs that supplier dependency remains, particularly when it concerns key commodities and fabricated components. Thus, Alcoa’s strategic moves to tap into the key component needs of this industry may prove to be rather interesting in the months to come, with prospects for additional high dollar multi-year supply agreements.

As the pressure mounts on Airbus and Boeing to step up delivery volumes for vast backlogs of newly designed commercial aircraft, strategic suppliers of key commodities and advanced components will ultimately be the linchpins for successful customer fulfillment.

It should therefore be no surprise that other global producers are positioning to harvest some of the benefits.

Bob Ferrari


Latest Reports of 2014 Smartphone Sales: Focus Beyond the Eye Catching Headlines

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This week, IT media publications are running the headline that in the last quarter of 2014, Apple edged out Samsung in smartphone sales.  While the Q4 smartphone numbers would indicate such an obvious eye-grapping headline, both of these smartphone producers, along with their respective supply chain ecosystems, should be more concerned with the implications of the total unit sales volumes in 2014.

Media is actually reporting the latest shipment numbers provided by research firm Gartner.  While Apple sold 74.8 million smartphones in Q4, vs. the 73 million sold by Samsung, a review of the full 2014 data provided in a Giga posting provides more concerning trending.  According to Gartner’s analysis, 1.24 billion smartphones were sold to consumers in 2014.  That represents a lot of production, supply chain, LCD and semiconductor component capability.

Both Samsung and Apple lost market share in 2014 by Gartner’s estimates, albeit Samsung took the brunt with a 6.2 point drop in market share. However in overall unit volumes for all of 2014, Samsung sold over 307 million smartphones, far outpacing Apple’s 191 million. From a supply chain scale and volume perspective, Samsung appears to stand tall, and yet, its supply chain does not garner the accolades that Apple garners.

Market share gains came from Lenovo, Huawei and a broad category grouped as “Others”. Readers might recall that Lenovo recently acquired the Motorola brand of smartphones and that Lenovo has strong market share within China.  That “Others” category, which supposedly consists of brands such as China based Xiaomi as well as India based producers, gained over 5 points in global market share. These producers are garnering increased consumer attention across emerging and developing markets, offering far more cost affordable features and options. Their momentum is collectively rising.

As consumer electronics and telecommunications focused supply chains know very well, the most important trend to focus on is overall scale, namely how many installed smartphones exist to generate more profitable and recurring electronic content sales. The 1.2 billion added smartphones in 2014 provides ample evidence of that potential.

From our lens, the most staggering statistical trend for global product development and supply chain teams to dwell on is that according to Gartner, Google’s Andriod operating system now powers upwards of a billion phones, up from 761 million recorded in 2013.

The takeaway is one that many a supply chain or product management planner should know all too well. Rather than a shorter-term focus on the latest quarter, the more meaningful analysis is to focus on bigger picture market insights and individual geographic country  data reflecting on market shifting.

The desired business outcome for smartphone focused supply chains is not so much the profitability and margin of the hardware, but rather the time-to-market and scale of installed devices.

Bob Ferrari


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