In our Part One posting, Supply Chain Matters provided commentary on the background and current situation facing Kraft global supply chain management team.  In this posting, we will focus on the upcoming future challenges, particularly those related to the Cadbury consolidation.

Future Challenges

Kraft’s supply chain is about to undergo a rather dramatic transition.  According to a presentation delivered by Chairwomen and CEO Irene Rosenfeld at this week’s GAGNY conference in Boca Raton Florida, over half of Kraft’s future business volume will reside outside of North America.  The company itself will morph to primarily be a confection and snacks oriented business with a presence in 160 countries.   Kraft’s current business lines lie primarily in beverage, cheese, grocery, and convenience foods business segments. One PowerPoint chart notes that if both Kaft and Cadbury were combined today, over $3.4 billion in revenues will reside from the so-called BRIC (Brazil, Russia, India, China) countries.  All of this has significant implication for Kraft’s future supply chain presence and capabilities.

With the acquisition of Cadbury, Kraft senior management has laid out $675 million of targeted cost savings required by 2012.  Of that total, the bulk of the target, $300 million, has been slated for procurement, manufacturing and logistics, another $250 million in general and administrative cost reduction, and $125 million in marketing and sales cost reduction.  This is in addition to separate aggressive productivity and overhead cost savings that are also required in order for Kraft to meet its new shareholder margin targets. Cadbury, itself, was also under considerable external pressures to increase margins prior to acquisition by Kraft, and its existing senior management team was calling for more supply chain innovation.

According to Kraft senior management, the initial consolidation plan calls for all backroom systems and processes to be consolidated to the Kraft platform.  Two senior managers, one from Kraft and one from Cadbury, have been targeted to co-lead the consolidation, and my sense is that the consolidation will need to be pushed on a rather aggressive timetable.  Kraft’s CFO noted that within 90 days, he expects the company to have identified some consolidation decisions and in 6 months to have a determination of the combined manufacturing and distribution network. There is no doubt that certain select Kraft and Cadbury supply chain team members will be increasing their frequent flyer status or at the least, getting intimately familiar with web conferencing techniques.

Summary of Pros and Cons

It is fairly obvious that the stakes are now very high for Kraft’s combined supply chain organization. On the positive side, one nugget of good news is that Cadbury also runs on an SAP backbone system, which should make the IT systems transition a bit less onerous.   We trust that the transition team will also make some impartial decisions on which supply chain analytical and business intelligence applications should be retained for best use in combined operations.  My view is that inventory optimization needs to be at the top of that list followed by smarter sales and operations planning and what-if analysis.

Another positive was recently noted in a Reuters press report that the combined company stands to be one of the top players in chocolate and confectionary industry by revenue, and thus will have increased buying clout in the current and future global cocoa market.  Cocoa futures achieved a 31 year price high in December, an indicator of a highly volatile market.

On the challenges side, overall inventory levels are a huge anchor of cost for Kraft. Consolidation of inventory with Cadbury, further extensions of supply chain to other global regions, and need for further new product introductions will now add to the complexity of the challenge to streamline overall inventory growth.  Kraft needs to get really, really serious about streamlined inventory management. An inventory turn rate of under 2 times per year is flatly unacceptable.

Other risks lie in the potential for increased mandated cost reductions in supply chain and manufacturing headcount, along with required consolidation in logistics and transportation.  The Cadbury consolidation and the need to transition the North America pizza business to Nestle will surely add further distraction and disruption in business processes and systems, not to mention the obvious need for dedicated resources to successfully manage the transition plans without major glitches.

The supply chain risk profile will also escalate for the combined Kraft-Cadbury because of its renewed presence in the developing regions of the world.  The recent melamine-laced milk powder incidents originating from China, while not impacting Cadbury directly, did have some impact on some of Cadbury’s local confectionary products.  With cocoa and sugar prices at an all-time highs, the risks for scrupulous suppliers to come up with certain replacement ingredients can be high, not to mention the fact that distribution channels in the developing regions tend to be rather multi-tiered and complex.

The supply chain challenges are significant and will require very strong leadership, beginning at the top.  Kraft senior management will need to further understand that determination of profitable products and businesses has to be made on the assumption of an industry efficient global supply chain.  At the same time, too much cost-cutting could significantly reduce the agility required to manufacture, distribute and provide service to such a diverse global footprint. Too often, senior management in the CP industry tends to focus more on the product marketing vs. operational excellence of its business segments.

Kraft’s surviving supply chain leaders have a new reality that the business segment and customers that they must now serve are dramatically different than the former dairy and cookie based businesses. A supply chain that caters to consumers motivated by impulse buying is different than one that serves grocery and dairy.

In summary, change can be incremental or dramatic. Change can come from within or from external events.  When it all comes in one hair-ball, it can be extremely daunting.

Time will provide the real conclusion to this ongoing global supply chain case study.

What’s your view?  Can Kraft overcome these challenges in the next two years?

Bob Ferrari

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