Kraft Foods to Slash Supplier Base
By Tom
Ryan
In a move expected
to drive more than $300 million in annual savings, Kraft Foods is cutting
the number of suppliers it uses by more than half. The food giant is reviewing
everything from ingredients to packaging materials as part of a plan to
improve productivity.
An article in Reuters noted
that in March Kraft told suppliers it was undergoing a thorough purchasing
review that put existing suppliers in competition both with each other
and with potential new suppliers.
Speaking at Barclays
Capital Back-To-School Conference last week, Kraft CFO Tim McLevish said, “We’re
narrowing our number of strategic suppliers to fewer than half the current
70,000. We’ll select those that offer sustained competitive advantage and
who can grow with us.”
“This is probably
the first truly holistic view we’ve taken,” Julia Brown, senior vice-president
of procurement at Kraft, told Reuters. “We’re
essentially taking a white sheet of paper and saying: ‘What is the right
number of suppliers to support this particular category, who are they,
what is the capability we need for now and in the future, and does the
current supplier base have that?’"
Ms. Brown said
that, in some cases, an individual Kraft brand may buy its own items if
it’s necessary to meet shopper expectations. But the world’s second largest
food manufacturer is also looking to determine areas where it can use its
leverage to make better buys on items – such as packaging materials – that
can be used across brands.
Currently, Kraft
has more than 40,000 different specifications for its supplies throughout
the world. “So we’re looking at where does it make sense to be more standardized,” Ms.
Brown said.
The purchasing
review comes as the company tries to simplify a procurement framework that
evolved as Kraft acquired numerous companies over the years. Kraft has
already realized $1.3 billion in savings over the last few years from closing
36 plants, divesting non-core brands and eliminating 19,000 jobs. At the
same time, it’s invested more into advertising and product development
to boost sales.
The company,
with brands such as Oreo, Chips Ahoy, Oscar Mayer, Cool Whip and A-1 Steak
Sauce, said it feels that purchasing is the biggest area where it can cut
costs. Its goal is to cut overhead as a percentage of revenues to about
12.5 percent by 2011 from 14 percent in 2008.
Discussion Questions:
What are the pros and cons of Kraft dramatically reducing its supplier
base? What risks may this present to Kraft’s brands? Do you expect other
suppliers to make similar moves?
This move is long overdue. There are no real risks to Kraft brands – only benefits. The risks of an obscure and complex supply chain are many. Kraft is not the only manunfacturer that needs to simplify and standardize its supply chain and supplies. The dust of the consolidation craze needs to be cleaned up.
Actually I am somewhat surprised that in a company with the size and sophistication of Kraft that procurement reviews are not an on-going process. Perhaps as the article indicated the size and myriad of acquisitions of the years is exactly why it hasn’t been. We often refer to the “total cost of acquisition” when clients talk about the cost of product. The phrase is meant to cover both the hard and soft costs of purchasing products and/or services from a supplier. One of those soft costs is how well the supplier is positioned to service their future needs.
The issue for Kraft is can it secure the same ingredients, etc. for better total costs? As recent articles on Cadbury have pointed out, their candy is different here in the U.S. than the same brands in the U.K. because of what some might say are small differences in the ingredients. If they can maintain their ingredient slate then there should be no impact on their brands.
I think the publicity surrounding Kraft’s efforts to lower the cost of its purchasing will generate interest from other companies trying to do the same. It is likely that the ripple effect will negatively impact not only the smaller Kraft suppliers but others as well.
Fewer suppliers = higher volume with each supplier = more leverage = better prices, terms, relationships, inventory management, etc. In other words, more efficiency.
A former boss of mine once said that in order to understand something, you must understand its opposite. And I would claim the opposite of efficiency is not inefficiency, it’s robustness.
Fewer suppliers = fewer fall-back suppliers if something goes wrong (production delays, quality issues, price disagreements, strikes, etc.). Imagine if Kraft had chosen to buy all their peanuts and peanut products from the Peanut Corporation of America. Or all its poultry from Imperial Foods (the processing company that had the major fire).
Of course, with 70,000 suppliers today, there’s probably some room for increased efficiency without sacrificing *too much* robustness….
The pros of Kraft’s plans are that it will reduce costs. The cons are that it might go a wee bit too far if $300 million becomes too easy to attain, possibly jeopardizing tastes expected by its consumers or even affect quality levels. And, naturally, its competitors will follow suit.
One wonders why this hasn’t been an ongoing process.
It makes sense for Kraft to take steps to create greater cost efficiency across brands and the company as a whole. However, there should be safe guards in place to insure quality and innovation are not sacrificed.
More and more companies have taken these very same steps to limit the number of marketing research companies they do business with. And corporate procurement agents have been the go to person regarding RFPs and proposals. What is sometimes lost in translation is the relationship between the marketing research and the business decision to be made. You can’t buy research by the pound. Well, maybe you can. But you can’t use that approach and guarantee the consumer insights will provide the nuance for a brand’s competitive advantage.
And that’s where the risk is for Kraft and its ingredients, packaging supplies, etc. Managers who want to hold onto their positions will be less likely to stick their neck out for a supplier that offers an advantage at a higher price. In fact, they probably won’t speak to anyone not on the preferred vendor list.
Taking the path of least resistance can put Kraft on the road to “ho hum” and lost opportunities. That’s why I recommend the initiative includes periodic reviews so that quality and innovation are not jeopardized, but rather encouraged. However, for the short term their bottom line will look fantastic.
As long as they can maintain SKU count and product quality, saving a few bucks is a good thing. Mind you, Kraft has been the subject of ridicule when it comes to their brands and sub-brands and sub-sub-brands and the tiers within those sub-sub-brands. They sell Mac’n Cheese really well. Do they need an Alfredo or Spicy Asian variant? Seems like they may be losing focus on the core money makers so cutting suppliers may help them refocus their business.
If it does not affect the quality and availability of its products, Kraft is wise to squeeze cost out of its supply chain. As retailers are demanding that manufacturers take on more of their costs and lower prices, and as consumers are looking for increased value from brands, it makes sense for Kraft to cut costs without sacrificing product quality. If they aren’t doing it yet, most manufacturers will soon be on board with similar programs.
They used to call it zero based budgeting, but the Kraft announcement seems to be a timely reaction to the external economic environment. The decision seems to have been made in the beginning of this year. As events have moved quickly, it is difficult to remember how dire things seemed back in January. Although the fear seems to have abated, there is still a lot of uncertainty in forecasts. What better time to negotiate costs and trim expenses?
Suppliers wanting to avoid the loss of business are going to be much more eager to negotiate. The reductions in cost will go directly to the bottom line. Whether or not we see a recovery in demand, the company will see an improvement in profits.
We all agree it is a no brainer, and many of us are surprised that it was not done long ago. But a word of caution, I will use the recent example of Nutro Pet Foods. Nutro is the worlds largest purchaser of lamb meal in fact they us over 50% of world production and they had only one supplier of meal. Great for negotiating prices devastating when your prime supplier goes bankrupt. Which is exactly what happened. Consequently their production of lamb and rice dog food (their most popular brand) was shattered overnight. They have spent the last year recovering from lost customers and market share.
Like others have said earlier, you would think vendor reviews are an ongoing discipline, however, 70,000 vendors is simply unmanageable. Just think of the possibilities for efficiencies and the leverage they will have for not only cost savings, but creativity, speed to market, limited resource acquisition, etc. There will be fallout from suppliers of ingredients, displays, packaging components, and office supplies.
As a sales guy, I would love to get the Kraft Account for my product or service. As a share holder, I love the way they are thinking, however, they are probably being conservative. $300 million is less than 1% of net revenues.
Good stuff!
It’s called supplier rationalization and everyone’s doin’ it! One of the many initiatives-behind-the-initiative in Walmart’s recent overhaul of its Great Value brand is supplier rationalization. Picking and choosing the best suppliers, bringing more stringent criteria into the process (traceability, sustainability, etc.), and, when it’s more efficient to self-manufacture, going direct.
Seems to me this should have happened a long time ago. Simple commodities where supply and demand would come into play. Demanding more from smaller number of suppliers would lead to a price drop and better control of quality.
All those who agree with me that this will firm up Cadbury’s resistance to a takeover, raise their hands.
I can certainly see the sense in it from Kraft’s perspective but an atmosphere cost cutting is not necessarily conducive to attracting loyalty from a company that does not want to move under their umbrella.