This week, consumer goods provider Kraft made a surprising announcement that comes with global supply chain implications.

The company announced that it would split into two independent companies, one focused on the global snacks business, with the other being grocery.  The announcement was reported as a reversal from Kraft’s previous bigger-is-better growth approach.  The Wall Street Journal in its reporting of the story noted that just 18 months ago, CEO Irene Rosenfeld told investors that “scale is a source of great competitive advantage.”

Financial media are reporting that under the proposed split, the snacks business and confectionary business may consist of Kraft’s European business and developing markets groups, along with the North America snacks and confectionary businesses, amounting to a $32 billion annual business. Brands that could be included are Oreo cookies, Cadbury chocolates and Trident chewing gums. The grocery division is initially planned to include Kraft’s current North America grocery businesses, and include brands like Kraft Cheese, Maxwell House coffees, Oscar Mayer meats and Jell-O. Grocery would amount to a $16 billion business.

Supply Chain Matters has published multiple commentaries regarding Kraft, particularly its controversial $19 billion acquisition of European snacks and confectionary company Cadbury last year.  The most detailed was in February of 2010. In that commentary we noted that Kraft’s supply chain was about to undergo a rather dramatic transition, with challenges related to new geographic distribution channels and the need for more cost synergies in merging of two supply chains.  At the time of the Cadbury merger announcement, Kraft management issued a target of $675 million of cost savings required by 2012.  Cadbury itself was also under considerable external pressure to increase margins prior to the acquisition and was bloated with inventory.

This week’s announcement, we believe, puts an entirely different lens and perspective for Kraft supply chain strategies moving forward.  Snacks and grocery are driven from different business and distribution models.  The snacks business provides rather optimistic numbers for market growth but its distribution model is more focused to the higher touch and direct to store needs of convenience stores and smaller retail.  Snack food consumers are impulse buyers, with promotions, market timing and inventory strategies that require considerable sophistication and proper timing.

The grocery business provides a business model with much more conservative growth, higher margins, and more high volume focused warehousing, distribution and supply chain needs. Much of Grocery’s customer base is large supermarkets and retailers, with high dependency on either vendor managed inventory or store replenishment business process support.

The open question is how Kraft will respond with its supply chain and distribution strategies as a result of the proposed split. As noted, Kraft established a target of $675 million in potential cost savings through the combination of operations and supply chains. We presume that some of these savings may have already been garnered but then again, more may be required.  We at Supply Chain Matters were a bit perplexed as to how Kraft would be able to service both types of businesses under a singular structure.  Would cuts be made in the wrong areas?  Did grocery really understand the unique high touch direct-store needs of snacks?  How would supply chain costs be apportioned?

With this dramatic announcement of a corporate split, various other options will undoubtedly be put on the table and Supply Chain Matters speculates that the options could include independently splitting each business supply chain, creating some form of a centralized supply chain shared services model, or investigating some hybrid that includes various internal and externally sourced distribution services.

The good news is that Kraft recently recruited Daniel Myers, a former P&G executive at the company’s Beauty and Hair Care divisions, to be its new Chief Supply Chain officer.  Myer reports directly to Kraft CEO Irene Rosenfield and is a member of the Kraft senior executive team.  That reporting relationship will prove to be rather timely as Kraft embarks on its newest supply chain challenge, and will hopefully provide a more unbiased, outsider perspective to the challenges ahead.

The Gartner 2011 Supply Chain Top 25 supply chains ranking for 2011 pegs Kraft in the number 25 and last position and notes Kraft’s leading channel management strategy as its biggest strength. One wonders which of Kraft’s pending two companies will fare in future rankings.

Stayed tuned to our blog for more Kraft postings in the coming months.  In the meantime, Supply Chain Matters welcomes commentary from readers regarding Kraft’s new supply chain structural challenges.

Bob Ferrari

©Copyright 2011 The Ferrari Consulting and Research Group LLC