The turmoil among consumer product goods focused supply chains promises to increase with the implication of today’s business media headlines concerning Nestle and Unilever. These implications relate to ongoing merger and acquisition developments and the continuing effects of foreign currency headwinds, which are negatively affecting U.S. producers while positively impacting European based firms.
While speaking at its Annual Meeting this week, Nestle’s Chairmen acknowledged that the combination of H.J. Heinz and Kraft Foods, being orchestrated by 3G Capital Partners and Berkshire Hathaway would create a formidable competitor, particularly in the United States. Because of this, the global CPG provider indicated to shareholders that it will accelerate its shedding of marginal performing businesses.
Readers may recall that CPG industry icon Procter & Gamble is similarly involved in a shedding of non-performing or non-core businesses.
According to a report published by The Wall Street Journal, Nestle Board Chairmen and former CEO Peter Brabeck-Letmathe indicated that Berkshire Hathaway and 3G have “pulverized” the food industry.
The CPG company has already sold off ice cream and water related businesses, has struck deals to sell the bulk of its Jenny Craig diet business as well as an ice cream business and is reported to be in talks to sell its frozen food business. The CEO further indicated that Nestle needs to better leverage its global scale more effectively. According to the WSJ, that could imply even more added pressure on suppliers for better buying terms.
Earlier today, Nestle announced its operating results for the March-ending quarter. Those results included an overall 4.4 percent organic growth of which 2.5 percent was attributed to pricing moves. Sales increased a mere 0.5 percent with the effects of negative foreign exchange attributed to 4.5 percent. In its full-year outlook, the company remained committed to achieve organic growth of around 5 percent while improving margins.
That level of sales growth challenges many of today’s large global CPG producers.
The positive or not so positive shadow of foreign currency effects was further evident in the operating results of Unilever, whose first-quarter total sales rose 12 percent largely due to the effects of a stronger valued U.S. dollar, amounting to a 10.6 percent boost. Once more, Unilever indicated that factoring current exchange rates, its full-year earnings growth would be in the 7-8 percent range.
On the flip side, U.S. headquartered CPG producer Colgate Palmolive indicated a 9 percent negative impact on sales while Procter and Gamble indicated in January that it was anticipating currency swings to curb profit by as much as 12 percent.
Thus the pending Heinz-Kraft combination coupled with the current foreign currency shifts is indeed precipitating more industry turmoil. Many CPG businesses are being pitched for sale and/or consolidation.
When penning our Supply Chain Matters commentary related to the Heinz-Kraft announcement we opined that a clear message was now sent to consumer product goods supply chains that business-as-usual was no longer acceptable, and that further industry changes and developments were inevitable.
Add the current effects of currency and those in the industry negatively impacted may well initiate changes in product sourcing, promotion and distribution to help offset currency effects. Meanwhile, product innovation in more natural and less processed foods remains the key to longer term growth, whether by acquisition or by supply chain sourcing and development.
There is literally a new playbook for global based CPG firms and their respective supply chain teams, and be prepared for constant change in the months to come.
Since the beginning of the 2014 holiday fulfillment surge period in September of last year, Supply Chain Matters has featured commentaries related to potential impacts to multiple industry supply chains located in the United States. This week, the ISM PMI Index provided quantification of such impacts.
We provided numerous commentaries, insights and updates related to the U.S. west coast port disruption that dragged on past December and into early this year. Those ports are still trying to recover and multiple manufacturing and retail focused industry supply chains were impacted by the delayed arrival of components and finished products. We featured two commentaries on the current surge in the value of the U.S. dollar, and its impact on U.S. imports and exports. Finally, weather patterns brought severe cold and winter storm conditions across the U.S., particularly among the northeast states and across the New England region.
Earlier in the week, the Institute for Supply Management (ISM) disclosed the PMI value for March which indicated the fifth consecutive month of decline and the lowest reading since May 2013. The March value of 51.5 while a continued indication of expansion is considerably below the average PMI reading of 57.7 recorded for the 3 months in Q4. U.S. supply chain activity led all global regions throughout 2014 but has since fallen back due to headwinds.
According to ISM, PMI survey participants indeed pointed to lingering problems from the west coast port disruption, unusual winter weather and the stronger dollar as current challenges. Noted was that 11 industries reported slower supplier deliveries in March. Export orders declined for the third consecutive month. Eight industries reported higher inventories in March which could likely be an indicator of select shortages of key components or unplanned contraction in product demand. According to the ISM report, customer inventories were noted as being too low, yet another indicator of disruption. The Backlog of Orders index declined two percentage points from the February reading. There were mixed indications relative to the current lower cost of crude oil.
However, based on trending data, ISM indicates some optimistic news indicating a likely rebound in the index in the coming months. Of the total 18 industries reported in the index, 10 of these industries reported growth in March. Nine industries reported growth in New Orders as well as growth in Production.
We will have further insights when we produce our review of select global-wide PMI Indices in our March quarterly newsletter. All registered subscribers of this blog automatically receive a copy of our quarterly newsletter. You can register via the Join Our Mailing List box located on the right side panel.
Earlier this week, this author had the pleasure of delivering a JDA Software sponsored webcast titled: Supply Chain Segmentation- The Key to More Predictable and Profitable Business Outcomes. We have since received positive feedback regarding the content.
- Industry supply chains increasingly cannot support one-size fits-all supply chain fulfillment
- Supply chain segmentation continues to garner increased interest and multi-industry deployment
- This is a transformative level strategy and needs to be approached in this context
- Advanced technology is an ever more important key enabler
- Consider more predictive and prescriptive planning capabilities within your strategy framework
In the one-hour webinar, I provide grounding perspectives for today’s industry and business environments, convergence of technology trends, as well as insights on analytics focused strategies. I further provide a more succinct definition of supply chain segmentation and address the various process components to this strategy.
Among the key takeaways for supply chain segmentation teams were:
- Segmentation strategy has to be grounded in detailed analysis and intelligent on the entire value-chain.
- Consider the need for the process to be oriented toward externally focused, predictive and responsive capabilities focused on expected business outcomes in contribution margin, service levels and other key metrics as well as the velocity, clarity and context of information needed for more timely decision making.
- Focus on smarter data strategies when considering analytics in this process.
- Do not neglect the all-important skills impact that segmentation requires.
There is certainly much more and JDA Software has graciously made this webcast available on-demand, for viewing at your convenience. The webcast is available by accessing this web link and providing some basic registration information.
If your organization is considering a supply chain segmentation strategy or if your current efforts in this area are in need of a re-look, I believe you will gain some insightful learning within the webcast.
Bob Ferrari, Founder and Executive Editor
Disclosure: JDA Software is one of other sponsors of the Supply Chain Matters blog.
Upcoming Webinar: Supply Chain Segmentation- The Key to More Predictable and Profitable Business Outcomes
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
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.