This week, the Wall Street Journal reported that Mondelez International, the snack foods spinout of Kraft, has set expectations of a large revamp of its complex supply chain.  The goal of this latest effort is to facilitate a 5 percentage point improvement in operating income margin by 2016. The effort itself has large expectations for overall savings which include $3 billion in gross productivity, $1.5 billion in net productivity and $1 billion in incremental cash over the next three years, all stemming from supply chain improvements.

At face value, this type of concentrated supply chain cost savings initiative would probably be perceived as challenging. For the supply chain related teams associated with this chocolate, biscuit and candy producer with brands such as Nabisco, Trident and Cadbury it is doubly challenging because of earlier cost-saving efforts initiated when Kraft purchased Cadbury Foods.

At the time of the Cadbury merger announcement, Kraft management had declared a target of $675 million of cost savings required by 2012, the bulk of which, $300 million, was targeted for procurement, manufacturing and logistics cost savings. An initial consolidation plan called for all backroom systems and processes to be consolidated under a single Kraft supply chain platform. Something changed, however.  Activist investors aggressively pushed for a split of Kraft under the belief that the snacks businesses would provide a far higher trajectory of growth and profitability than the traditional grocery and cheese products lines.  The split indeed happened, and the previous plan to consolidate supply chain activities under a single umbrella fell victim to a Wall Street focused decision. Now, both of the split companies, Mondelez and Kraft, and their respective supply chains have operating margin challenges to address.  

To add more drama, one of the most activist investors, Nelson Peltz, has since publically called for PepsiCo to buy Mondelez, combine both snacks businesses, and spin off the Pepsi beverages business.  But, we get ahead of ourselves in focusing on the current supply chain challenge.

Some details regarding the Mondelez supply chain cost reduction effort are beginning to see light.  The September 2nd edition of Fortune features an opinion column, A Snack Maker’s Unsavory Business Practices, penned by business network CNBC anchor Becky Quick. This is the Becky Quick who can garner a three hour on-air interview with the likes of Warren Buffet. Her article observes that earlier this year, the snack producer sent a letter to its key suppliers and announced a 120 day payment policy for goods purchased. A profound quote from Ms. Quick in contrasting other consumer product good companies supplier payment policies states: “But with its planned four-month delay to pay bills, Mondelez is engaging in a stunning example of one-upmanship.” Later in the article, Quick cites an unnamed industry observer indicating that on the customer side, Mondelez tailors its account receivable terms so that customers are penalized if they do not pay for confection products within 15 days, and snack related products within 25 days.  We applaud Ms. Quick for also pointing out to readers: “that in the long run, big businesses are only as healthy as their supply chains.”

Supply Chain Matters is not alone in pointing out that numerous risks and drawbacks associated with leveraging cost reduction efforts on the backs of suppliers. Even though these delayed supplier payments tend to continue, we do not believe in the long run, that they provide any longer-term benefits.  Quite the contrary.

On the inbound side, confectionary and snack related supply chains are often challenged with volatile commodity costs for items such as cocoa, sugar and grains. While global purchasing scale can provide procurement leverage, Mondelez must deal with the ups and downs of the market, particularly in the current era of extraordinary weather patterns brought about by climate change. We tend to believe that paying suppliers in four months probably will not help in securing favored buyer status. Developing consumer growth markets such as China as well as mature markets place a high premium on brand and quality because of prior history of tainted or harmful products.  As we have noted in repeated prior Supply Chain Matters commentaries, a glitch in a production process or a reduction in quality oversight has huge implications for consumers, as evidenced by the recent incident involving Fonterra.

On the outbound side, a confection and snacks oriented business with a presence in 160 countries presents its own set of unique challenges.  This business is more focused on higher touch and complex distribution channels. There are direct to store needs of supermarkets, convenience stores and smaller retail.  Snack food consumers tend toward impulse buying, with promotions, market timing and inventory strategies that require considerable sophistication and supply chain wide execution. The Mondelez supply chain must compete with that of competitors Nestle, Unilever and other who continue to invest in more sophisticated supply chain process capabilities, and who demonstrate highly collaborative actions with suppliers and customers on product and process innovation.

The latest cost reduction challenges facing the extended Mondelez supply chain are yet another manifestation of the new financial engineering that surrounds the consumer goods industry, where supply chain efficiencies and cost reduction fuel needs for heightened short-term business performance expectations by Wall Street and the broader investor community.  Supply Chain Matters is of the belief that the Amazon model for sustained investment in supply chain business process and future revenue growth capability far outweighs one that has the supply chain constantly uncovering rocks to find the next iteration of cuts.

Too often, suppliers, customers, consumers and supply chain teams themselves tend to pay the price for these actions.

However, the supply chain community consistently rises above and responds to both the near-term improvement and consequent results of these efforts.

Bob Ferrari