Candy maker Hershey Foods announced this week that it has struck on outsourcing deal with a company called Barry Callebaut by which it will largely give up the business of making “block chocolate,” the primary basis for its line of chocolate candy bars. (See Hershey and Barry Callebaut Announce Strategic Supply and Innovation Partnership).

The move is another step in Hershey’s ambitious supply chain network redesign project (see Hershey Will Significantly Revamp its Supply Chain, Cut Manufacturing Costs). The original announcement in February outlined a plan for closing and consolidating a number of facilities, and shifting some non-core production to third parties. Many did not suspect, however, that meant outsourcing manufacturing of the block chocolate that is the main ingredient for products ranging from Hershey Kisses to Reese’s Peanut Butter Cups.

Under the agreement, Swiss-based Barry Callebaut will build and operate a facility to provide chocolate for Hershey's new plant in Monterrey, Mexico. It will also lease a portion of a Hershey plant in Illinois and operate the chocolate-making equipment at the facility. Hershey has committed to a minimum of 80,000 tons of chocolate sourcing from Barry Callebaut annually.

While it appears Barry Callebaut is a known manufacturer of high quality chocolate, the move, which will likely ultimately get Hershey out of the raw chocolate making business, comes as something of a surprise to many, and ends a tradition dating back more than a century to Milton Hershey's Lancaster Caramel Company, which became Hershey Foods.

Notes SCDigest editor Dan Gilmore, “This move just shows you the tremendous power and attractiveness of outsourcing strategies to most CEOs today. Is it the right decision long term? Who knows, but the reality is that companies like Hershey have their real value in their brands. Shedding assets and fixed costs and we assume reducing variable costs to outsource a raw material may make great sense, even if it seems unbelievable to many inside Hershey.