A published report on employee misconduct at Kraft Heinz sheds added light on supply chain new talent practices and the placing of too much responsibilities on unseasoned procurement professionals.

In late February,Supply Chain Matters highlighted the stunning financial stumble of Kraft Heinz. Specifically Kraft Heinz corp logonoted was the writing down of the value of the Kraft and Oscar Mayer brands by a whopping $15.4 billion and slashing of the company’s quarterly dividend to shareholders by 35 percent. A statement by the company’s then CEO : “The core of our shortfall in 2018 was forecasting the pace and magnitude of our savings curb.” That resulted in a $25 million quarterly charge for reported higher inbound direct material and other costs that should have been recorded in prior quarters.

Last week, global business network CNBC published a report, Misconduct at Kraft Heinz puts spotlight on employee pressure to meet bonus targets. The report is in conjunction with the need for Kraft Heinz to have to restate its financial statements for the years 2016 and 2017 because of alleged deficiencies in the company’s internal controls and corporate culture. In a government filing, the consumer goods producer indicated that following a subpoena from the U.S. Securities and Exchange Commission (SEC), discovery was made of employee misconduct in procurement practices.

Our consumer product goods readers are more than aware that 3G Capital’s aggressive zero-based budgeting cost cuts managed to extract upwards of $1.7 billion in savings directly from Kraft-Heinz’s balance sheet, including the shedding of thousands of experienced employees.

The report notes that the finding sparked a broader investigation that unearthed, according to the filing, weaknesses in accounting practices specific to procurement contracts, including the recognizing of cost benefits and rebates in the wrong time periods. According to CNBC sources,  a reported dozen employees have been reprimanded and no senior executives have been implicated. The net charge was $181 million, noted a small fraction of the company’s $26 billion in overall sales.

Yet, having to go back and restate two years of financial statements reflects a dark shadow for investors and senior corporate executives. From our Supply Chain Matters lens, the filing raises questions for both investors and industry procurement teams.

The report describes a post-acquisition management compensation framework that targeted company EBIDA performance for the majority of executive bonus plans, which for some could double overall compensation. As the company’s revenues declined from 2016 to 2017, pressure to increase EBIDA with cutting additional costs ramped-up, and one of the targets was procurement and operations teams, especially since other savings efforts stalled.  The report describes how younger professionals were recruited into management or procurement positions of broad responsibilities with the promise of “Wall Street” compensation levels if performance incentives were met. The company’s CFO was a 29 year old graduate  of Princeton University when elevated to this important role, having joined Kraft in 2015 as Vice President of Finance.

Specific to Procurement

Kraft Heinz suppliers indicated to CNBC that procurement employees were aggressive in demanding lower contract costs, sometimes at the sacrifice of longer-term practices utilized by other large consumer product goods manufacturers. One noted example was: “.. pushing for extra savings in the following quarter if a supplier was unable to do so in the current quarter.”  According to the SEC filing, a handful of employees were marking down savings of supplier contracts that should have been carried over to a longer time period.  Whether accidentally or intentionally, doing so results in an inaccurate statement that certain cost savings targets were achieved.

The consumer goods manufacturer indicated in its filing that it “has implemented and continues to implement certain remedial actions, including employee personnel actions and certain improvements to its internal controls, to mitigate the likelihood of this occurring in the future.”

Supply Chain Matters Perspectives

Multi-industry supply chain management and procurement teams are more than acutely aware that needs for overall cost savings often land at the feet of supply chain management teams.

Years of acquired experienced provide the nuances as to how to best implement such savings, given existing practices and short and longer-term business implications. It is always a balancing act that includes difficult decisions that weigh the pros and cons of such actions, and in properly briefing senior management of the implications.

Younger or inexperienced professionals lacking such nuances or mentorship relative to  the implications of aggressive categorization of cost cutting practices run the risk of finding out in a painful manner. Notice that thus far, no senior Kraft Heinz executives have been implicated in the overstatement of savings.

This is not to infer that new and up and coming talent cannot accomplish great achievements in procurement or supply chain management with broad or extensive responsibilities.

It is a matter of time and demonstrated experience in important decisions. It is further the nurturing of mentors among peer and senior management upon which to bounce ideas and proposals for two-way feedback as to implications.

The pressure to meet bonus targets can often lead to difficult decisions and implications, and time, feedback and experience serves as important mitigation factors.

Bob Ferrari

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