This commentary on Kraft Foods is divided into two separate Supply Chain Matters postings.

Background

If you have been staying current on business headlines these past weeks, you no doubt have heard a lot about Kraft Foods, specifically its acquisition of global confectionary company Cadbury.  Much has been written and opined regarding the acquisition, and this author does not portend to be a commentator on the financial advantages or shortcomings of this particular acquisition.  Supply Chain Matters does, however, provide commentary related to global supply chain business process and IT matters, and I believe it is timely to add a present perspective on the future supply chain challenges facing Kraft, which I believe to be rather challenging.

Before I begin, I should add a disclosure.  I own Kraft stock, and have so since Kraft split away as an independent company.  Thus, I tend to follow the company closely.

To provide some perspective, the last Supply Chain Matters direct commentary on Kraft was back in April of 2008. At the time the CP industry was facing considerable challenges in exploding inbound commodity costs.  I shared some observations on how important supply chain strategy in sourcing, inventory management, business process and IT systems would be in navigating not only that current set of challenges, but ongoing as well.

Situation

Today, Kraft formally reported both its Q4 and total 2009 annual results.  While the current headline reads that Q4 revenue results beat Wall Street expectations, I would not categorize the supply chain of Kraft in terms of stellar performance.  Once more, with the potential for disruption relative to the consolidation and integration of Cadbury operations in the coming months, added to the recent sale of Kraft’s North America pizza business to Nestle, the agenda looks rather complex.

While Q4 net revenues increased 3.2%, 2009 net revenues declined by 3.7%.  Operating income margin has increased to 13.7%, but is far below the mid-teens income margin goals that Kraft senior management established for the next two years.  Overall total inventory levels reflect 1.8 annual turns, with slightly less than 200 days inventory outstanding (DIO) by my calculation.   That is not anywhere near top performance in inventory management.  While total inventories were decreased $108 million from 2008 levels, DIO has actually increased.  I find that a bit perplexing since Kraft had previously invested in advanced inventory management technology.

On the sourcing and procurement side, Kraft has been hard at work in further consolidation of its supply base, along with practicing active commodity price hedging.  Positives have been noted in transportation cost savings as well as leveraging green supply chain initiatives in packaging and transportation.  But the sobering fact is that the challenge stakes have now been dramatically increased.

Current Structure

It is rather important to take a step back and reflect on Kraft’s operating model.  The company itself has grown through a series of companies that have been bought and sold involving high profile consumer brands.  They include General Foods, who then acquired Kraft, and Kraft’s subsequent acquisitions of businesses such as Oscar Meyer, Nabisco and others.  Kraft today includes a stellar listing of consumer brands in food, dairy, meats and convenience foods, and has grown its brand presence across the globe.

The company previously found itself in a rather top-heavy centralized corporate structure, and has been transitioning to a more de-centralized operating business unit structure.  This transition includes a corporate-wide shared services structure where functions such as IT and human resources reside.  Supply chain functions however, such as supply chain planning, manufacturing, procurement, distribution and logistics seem to reside in either business or shared services, and it is not clear to me whether Kraft has really solidified its supply chain organizational structure during this transition.  Kraft’s goal was to move decision-making regarding product development and manufacturing to lower levels of corporate hierarchy. The backbone ERP system for Kraft is SAP, but select supply chain best-of-breed applications reside among various functions. Some of Kraft’s IT functions are outsourced to third-party providers.

In our Part Two posting, I will comment on the future challenges facing Kraft under the combined Kraft-Cadbury operating model.

In the meantime, feel free to share your own comments and observations regarding Kraft’s current and future global supply chain challenges.

Bob Ferrari

Disclosure: The author of this posting is a current shareholder of Kraft Foods Inc.