I had the opportunity to listen in on the Kraft Foods Q1-2008 earnings results conference call this morning, and there were significant messages reinforced for supply chain management professionals residing in food-related and consumer goods supply chains.Many readers are aware that Kraft is one of the largest global food and beverage companies, with 2007 revenues of more than $37 billion, commanding a strong brand presence in many markets. Kraft has also made continual investments in supply chain process efficiency as well as supporting technology.

From a supply chain strategy, planning, and execution perspective, I heard some significant messages which need to be reinforced for supply chain professionals.  First, the extraordinary high costs of food commodities, or input costs, remain a huge challenge.  I was struck by a chart that reflected the 2008 year-to-date commodity market prices above the average price for the last 10 years (1998-2007):

U.S. Barrel Cheese up 36%

Coffee- NY ‘C’ up 60%

Wheat Chicago up 199%

Soybean Oil up 152%

Paper Packaging up 31%

Resin Packaging up 58%

Crude Oil up 152%

Kraft continues to overcome these price increases with certain price increases to retailers, but at these extraordinary levels, cost reductions must come from other areas of the supply chain, especially continued price hedging of supply, working capital and efficiency gains.

Hearing the breakdown of quarterly performance of individual product sectors further reinforced other supply chain implications:

  • Profitable growth today stems from non-U.S. markets- Kraft experienced 9.5% organic revenue, and 47.7% income growth in Europe, with double digit growth rates in coffee, cheese, and chocolate brands. Developing markets also grew revenue by 21.7%, with profits up. Coincidentally, P&G today also cited continued emerging market double-digit growth rates in the high teens.
  • In an environment of frequent price increases, and more complex global retail channels, future volume forecasting across product lines will become a more significant challenge. The need for more sophisticated forecasting and demand planning tools will be paramount.
  • The management and optimization of both inbound and finished goods inventory remains essential. To Kraft’s credit, they had the foresight to invest in inventory optimization technology in the U.S., and are in early stages of deployment in Europe. While the overall inventory to sales ratio has remained flat, it has not deteriorated in this volatile and challenging environment.
  • Manufacturing and quality enhancements were cited by Kraft senior management as positive contributors to working capital improvements, reinforcing the message that we can never take our eye away from lean and six sigma improvement.

If we believe Warren Buffet’s latest predictions, the U.S. economy may well have a longer recessionary period.  For food and consumer goods supply chains, past and current investments in supply chain analytical and intelligence based processes and technology tools will play a more critical role in bottom-line results for consumer goods companies.

Bob Ferrari