When the economic recession of 2009 hit global consumer markets, FMCG companies were forced to relook their supply chain management strategies in order keep their prices below those of competitors. With prices of raw material and power soaring, the company had to review its supply chain management and make several adjustments to remain competitive. Kraft Foods, the second largest food company in the world, has kept a keen eye on future growth requirements, even before the economic recession had set in.
As far back as 2007, the company earmarked an increase of cash flow by $1 billion. Philippe Lambotte, Senior Vice President – Customer Logistics, North America, says “The higher the cash flow, the better a company is able to gain access to capital and investment market with a lower rate of borrowing for capital expenditures, acquisitions and share repurchasing. While top-line and bottom-line growth are important, the necessary condition for them to fund growth is that free cash flow is available.” In this paper I will study the various supply chain management initiatives taken by Kraft Foods and analyze the effectiveness of these measures.
Kraft Foods’ annual revenue exceed US $43 billion. As Kraft Foods has operations in 70 countries and sells products in over 150, it is quite a task to find cash that needs to be freed up in the supply chain. Considering the size of the companies operations and reach, it required a specialized and department specific supply chain management plan not limited to its finance department if it was to meet its targets for improvement in cash flow. Most of the company’s cash flow revenues are locked in stagnant inventory.
The average percentage of costs tied up is between 20% to 30% while for popular products like biscuits it can be as high as 50%. Snacks, which include biscuits like Oreo as well as crackers, constitute around 40% of all of Kraft Foods’ revenue. Unsold inventory in warehouses or products sitting on shelves needed to be sold quickly as they accounted for a large amount of cash trapped. Kraft Foods needed to relook at its goods to market to consumer strategy to quicken the pace of products being sold in order to keep the cash flow running efficiently.
In the case of cookies, Kraft Foods has the sole ownership of in-store inventory of products and this made tracking of goods being sold all the more difficult. However, for other products the company only has rights till the client’s distribution center and because of these variations in distribution agreements, formulating a single supply chain management solution becomes a tough task. Kraft Foods also needed to bring about awareness among employees to improve their individual inventories. They wanted their employees to know the value that every unsold pallet of product in warehouses and stores.
To make supply chain management all the more complicated, Kraft is in the process of several mergers, acquisitions and sales, the largest of which are the acquisition of Cadbury’s and the sale of Kraft Foods North American pizza business to Nestle. Such major organizational changes require constant revamping of an already volatile supply chain. Business units need to be reformed, supply chains of sold businesses to be removed from the tracking system while the supply chain management system of acquired businesses need to be altered to be in tandem with Kraft Foods’ own processes. Especially for massive acquisitions like Cadbury’s that have mammoth global operations, streamlining their supply chain management will be paramount to making the deal a profitable one.
Kraft Foods recognizes and acknowledges the importance of using state of the art technology to run its supply chain management. Managing inventory is no more just about handling of physical goods. Over the years, it has taken on a more information heavy role where inventory managers needs to know exactly what amount of goods are demanded, how much is produced, how many products make it to the shelf and how long they say there. Traditional methods carried a high risk of errors and often provided incorrect counts. For an organization that has a massive production like Kraft Foods, these so called small errors can make for big risks in blocking up precious cash flow.
Additionally, a company as large as Kraft Foods is expected to be a leader in contributing to the community. The company’s strategies towards reducing its carbon footprint were regularly questioned and it became important that it undertook measures to make its supply chain management eco-friendly. Kraft Foods had to relook at its transportation process and revamp it in order to not only save cost but also make it a ‘greener’ process.
Solutions That Match Challenges
Kraft Foods conducted a cross organization analysis of factors like capital expenditure, inventory in hand, payables, receivables and working capital. In order to target poor distribution and inventory management across its vast yet varied operations, the company chose to analyze each unit individually and come up with solutions for their unique challenges. The company determined a two pronged tactic to tackle employee awareness on effective inventory management.
The Cash Flow Excellence (CAFÉ) Initiative: To begin with, the company initiated a bonus programs for managers who showed exceptional improvements in cash flow through effective management of stocks. In addition, a Cash Flow Excellence (CAFÉ) team was formed to provide expert training and guidance to individual business units. The team would visit units across the globe and conduct two day workshops headed by the unit’s general manager and attended by all the employees of the unit. The group would then conduct an in-depth analysis of the unit’s unique supply chain management challenges and brainstorm for best-fit solutions to optimize the cash flow, stock and sales formula. Timeline based action plans were developed, the implementation traced and their success measured.
Lambotte says "Some business units may have more raw material on hand than finished goods, or one with a very heavy manufacturing process may have more value in spare parts. Some business units may have too much inventory tied up with inefficient payment terms or long payables. The list could be one page but big and difficult. Or it could be short-term and very easy."
The CAFÉ team and individual business units came up with several unique tactics that went a long way in attaining the overall organizational objective of streamlining supply chain management. To begin with, several business units negotiated with customers and distributors to develop a more realistic number of stock keeping units (SKU). Products with highly fluctuating demand and low levels of revenue were targeted first and although this resulted in minimal loss of revenue, the cash flow freed up was comparatively substantial.
The Repetitive Flexible Manufacturing (RFM) Initiative: Another initiative accepted and implemented by several units is what Kraft has termed Repetitive Flexible Manufacturing. In this form of manufacturing, the units slit their production into smaller portions produced more frequently than manufacturing products in bulk. While this method definitely reduces time spent by products on shelves and warehouses and frees up cash flow, it does end up impacting customer service levels. However, this method is perfect for slow moving SKUs where sales are few and hence the customer service levels are not as greatly impacted.
Lambotte adds "Improving working capital does require less inventory, which can, in turn, lower customer service levels. When an SKU has a lower shelf velocity, it might not matter so much to provide high service, since the customer's purchase frequency is not so high. Therefore, reducing service levels of the lower-demand SKU can provide a good possibility to free cash flow. We have successfully piloted this approach with some of our retail customers."
The IT and Software Acquisition Initiative: Kraft Foods invested heavily in acquiring supply chain management software that enabled its clients to place orders electronically via the Electronic Data Interchange (EDI). The company incorporated an Advance Shipping Notification (ASN) system that intimated customers on when to expect the next shipment and in what quantity. Kraft Foods deployed this software installation across its global operations in order to maximize its benefits. The aim of this major move was bring about better communication between the customers and the managers who handled inventory.
Automating the ordering process also meant that orders could be tracked more efficiently and data could be analyzed to identify purchase trends which the company could then use to plan its repetitive flexible manufacturing. An electronic system is also easier to implement in newly acquired businesses. The process of harmonizing supply chain management and streamlining it becomes faster and more effective. This can prove to be very useful during the Cadbury’s acquisition when Kraft Foods will need to bring the acquired business’ global supply chain on the same page as its own.
The Global Data Synchronization (GDS) Initiative: Data accuracy has been a prime focus when it comes to freeing up trapped cash flow. For this purpose, Kraft Foods has implemented a Global Data Synchronization system. The objective of this initiative is to standardize data sharing with retailers world wide. The system fast tracks communications of price change, product alterations as well as helps in tracking inventory. Streamlining communication with retailers can result in major cost benefits for the company and reduced the risk arising out of errors caused by miscommunication.
The ‘Green’ Initiatives: Kraft Foods has mainly targeted its transportation in order to reduce its carbon footprint. The company associated with its customers and distributors to maximize the use of space on transport vehicles. This meant that vehicles were loaded to maximum capacity with products, thus reducing the number of ‘empty miles’ or the distance covered by a vehicle without any goods. The company also formed an association called the Transport Alliance which is pushing for manufacturing companies to shift to using 96,000 pound, six axle trucks that can carry a greater weight of goods. This initiative not only saves energy and fuel, thus reducing the company’s carbon footprint, but streamlining the transportation provides added cost benefits.
The Self-Distribution Initiative: Kraft Foods acknowledges the importance of effective processes within self distributing customers and believes in working with them to streamline their supply chain process in order to gain a mutual benefit. The company encourages self-distributors to approach them for advice and guidance on effective processes and help them identify improvements that can be made to costs, working capital and cash flow. The company also guides them on how to reduce transportation costs, reporting unsalable products, reducing wastage as well as replenishing stocks in a manner that products reach the distributors in time and yet do not end up lying on their shelves for too long. Through this initiative, Kraft Foods not only helps its customers gain business benefits but also streamlines its own supply chain efficiency to free up cash flow. Lambotte states “Retail chains need to collaborate with Kraft Foods. We can provide a menu of solutions to help them be more efficient in their supply chain needs. We can benchmark them against a number of metrics to show where they stand from our vantage point. We usually tackle areas where they are weakest because that is where the biggest leverage points are.”
Business Benefits and Future Prospects
In 2007, Kraft Foods Chief Financial Officer, Tim McLevish, set a target of US$ 1 billion in cash flow improvement. The company implemented its CAFÉ initiative in the same year for the United States and expended to Europe in 2008 and the rest of its global business units in 2009. The results of the initiative have been very promising. For the year ending 31 March 2009, Kraft Foods had increased its cash flow by 19.9%, up to US$ 4.3 billion from the previous 12 month period amount of US$ 3.6 billion. Most of the cash flow improvement came from the company’s supply chain management initiatives. Lambotte adds “We're aiming for an incremental $1 billion versus what we did two or three years ago, and we're almost there. Clearly, our days of inventory on hand has been going down by a double-digit percentage. The trick will be to continue that on an ongoing basis.”
According to a statement made in February 2010 by the company’s Chairwoman and CEO Irene Rosenfeld, 50% of Kraft Foods over all business revenue is expected to be generated outside the United States in the near future. The company will focus on its confections and snacks business line, expanding to 10 more countries, taking the total to 160. Post the Cadbury acquisition, Kraft Foods had earmarked a cost saving of US$ 675 million by the year 2012, US$ 300 million of which is expected to be generated by its supply chain. Kraft Foods immediate target for the Cadbury acquisition is to consolidate all its supply chain processes and backroom systems in tangent with Kraft Foods’ platform. The company has set a timeline of 6 months to come up with a standardized combined system for manufacturing and distribution.
Detailed Analysis of Kraft Foods’ Supply Chain Strategy
Kraft Foods faces a major supply chain challenge in effectively streamlining Cadbury’s supply chain while maintaining its own progress towards its cash flow improvement targets. On the IT front, while both Kraft Foods and Cadbury use SAP systems, the transition team at Kraft Foods will need to be careful which selecting the best business intelligence and supply chain analytical applications from the host of choices that will be available to them from both confection giants. Considering the massive combined global reach of the companies, inventory management will need to be a top priority as it will pose a major challenge to supply chain management and cash flow optimization. Extending its reach to new markets, consolidating Cadbury’s inventory and planned introductions of new products will add greatly to the complex nature of the company’s supply chain.
It should also be noted that head count for supply chain management will be expected to grow during the transition period. The Cadbury acquisition as well as the sale of the pizza business to Nestle will lead to dilution of human capital invested in supply chain and inventory management. Kraft Foods will need to undertake major consolidation measures with regards to head count, transportation and logistics in order to avoid unnecessary escalations in cost.
The senior management at Kraft Foods will need to be extremely careful while planning their manufacturing and product lines during this period. It is vital that products yielding poor sales results be eliminated from the production line in order to bring about a more focused and profitable distribution. At the same time, considering the diverse markets that the company will now attempt to reach will make it difficult to identify the true sales potential of products. Tracking of product demand and sales across its global operations will pose another major challenge. The company will need to find a fine balance between marketing its products effectively and attaining maximum operational efficiency.
Considering its current line up of supply chain initiatives, Kraft foods will need to work on the double to maintain its course towards its targeted cash flow improvement. To begin with, IT processes and software implementation across newly acquired businesses will need to be fast tracked in order to attain standardization as swiftly as possible. The risk of errors in data collection and analysis runs high during the transition period and standardization across its combined global operations will go a long way in easing the process.
The CAFÉ initiative will need to be taken up on a larger scale as business units will nearly double with the Cadbury acquisition. This means that Kraft Foods will have to increase the number of its CAFÉ teams. While this will make the streamlining of supply chain in individual business units more effective, it will be a challenge to provide dedicated resources during the transition period when the company will already be facing a growing supply chain head count.
Finally, while its Corporate Social Responsibility and carbon footprint initiatives go a long way in building goodwill, the company will need to focus on optimizing its transportation and logistics process with the sole focus of optimizing costs. Communication with retailers will have to be at its best in order to effectively plan the distribution and transportation of products where they are needed most.