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Category: Procurement and Sourcing

Kraft Heinz Hopes to Turnaround Performance through Major Improvements in Supply Chain and Procurement

 

Drop in Profitability Results from Operational Inefficiencies, as Stock Price has Tanked since 2016

Oct. 7, 2020
SCDigest Editorial Staff

In 2015, food giants Kraft and Heinz merged, with plans it seemed for great marketing and supply chain synergies.

It hasn't turned out that way, leaving shareholders to take the hit. The new Kraft Heinz company saw its stock price rise quickly after the merger to almost $90 per share, only to shortly thereafter start a log, steady decline to about $31 per share currently.

The root cause: slow growth and declining profits.

Supply Chain Digest Says...

Eloi said Kraft Heinz has identified several cases where the same materials have been bought across the company with up to a 20 to 30% price difference.

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Now, Kraft Heinz says it knows how to fix what ails it.

During a recent "investors day" video conference, company executives described a broad range of plans to cut costs and boost margins, largely through supply chain improvements across multiple functions, especially procurement.

That includes CFO Paulo Basilio, who emphasized a new "Ops Center" concept being rolled out across the company.

"What we want to focus on today is the big opportunity we have from simply getting back to the basics to established, tried-and-true principles and processes," Basilio said. "Initiatives that will unlock value creation in procurement, and execution efficiencies in manufacturing and logistics."

He noted that relevant to the company's EBITDA decline, "The primary cause has been our supply chain performance. We were not able to implement productivity initiatives, to offset cost inflation. So, we lost efficiency in procurement, manufacturing, and logistics."

Kraft Heinz has a "massive operation. But it was fragmented," he added.

The purpose of the Ops Center, Basilio said, is to align plans and practices across the organization; streamline day-to-day management and the processes behind its operations; and to deploy technology to ensure continuous improvement.

He said that the backbone of the Ops Center is Integrated Business Planning - a form of Sales & Operations Planning, or S&OP.

"Integrated Business Planning is not new to the world. But it is new to Kraft Heinz," Basilio noted, adding that "I truly cannot say enough about how Ops Center is transforming our operations, and our mindset."

Basilio said Kraft Heinz has identified $2 billion dollars of gross productivity efficiencies that can be captured in the next five years. Roughly $1.2 billion dollars will come from procurement and another $800 million dollars from manufacturing and logistics efficiencies.



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Next up was Marcos Eloi, Chief Procurement Officer at the company.

"We are deploying a comprehensive approach to unlock significant value," adding "Building a strategic procurement organization integrated with our stakeholders, both internally and externally."

Eloi added that "I'm very happy to say that since I joined a year ago, we have transformed our procurement leadership team, complementing existing expertise with new talents to create a diverse and top-tier leadership team."

Eloi and team mapped four key initiatives enabled by a new supplier collaboration model. The four are: boosting Kraft Heinz sourcing excellence; revamping its approach to external manufacturing; building a Procurement Center; and implementing "design to value" as a distinct opportunity.

In addition, Eloi said Kraft Heinz is pursuing a digital procurement transformation, including expanded use of tools such as e-auctions.

 

Kraft Heinz Drop in Margins Tied to Supply Chain Inefficiency

 

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Source: Kraft Heinz

Relative to suppliers that make product from the company, "Our external manufacturers should be an extension of our company, but we have been dealing with them in a very transactional way," Eloi noted "Relationships with our external manufacturers will now be driven by a streamlined process. On the first step we are developing a straight forward make or buy methodology, strategically evaluating whether we choose to outsource our product or not."

Eloi said Kraft will collaborate with external manufacturers to enhance their performance and also to co-develop innovation.

The Procurement Center initiative will in part focus on centralizing Kraft Heinz's indirect spend.

"With more than 20,000 suppliers, this is a heavily fragmented spend," Eloi said, noting that "By centralizing it we will ensure proper visibility and control to drive consolidation of spend with contracts and with automation, we will streamline our procurement operations to drive price savings

Eloi said Kraft Heinz has identified several cases where the same materials have been bought across the company with up to a 20 to 30% price difference.

"That's exactly what we're expecting to optimize and capture those opportunities as a result of this project," he added.

"We are implementing the procurement center in our North American operations as we speak, and we will roll out this project across our International zone within the next 2 years," Eloi concluded.

So ambitious plans from Kraft Heinz for improving procurement and the broader supply chain.

SCDigest notes the Investor's Day news hasn't done much for the share price, which is down a little since the presentations on Sept. 15.

Any reaction to Kraft Heinz's woes and plans? How could things go so bad? Let us know your thoughts at the Feedback section below.

 

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