Last November, Supply Chain Matters alerted our readers among consumer product goods supply chains that the Kellogg Company announced a billion dollar cost-cutting plan termed Project K, a significant initiative that would extend into the next four years. The plan calls for a goal to produce a run rate of cash savings between $425 and $475 million by 2018. It unfortunately outlines headcount reductions amounting to upwards of 7 percent of the global workforce in that same time period.
At the time of the announcement, business media had reported that the motivation for this initiative stemmed from increased competition in the breakfast and snack food industry segments along with softer demand from economically distressed consumers. From our lens, the Project K program appeared to be more of acknowledgement of permanently shifting consumer demand patterns along with an effort to generate cash to reduce the company’s excessive debt burden. The sum total objective is to drive greater global supply chain wide efficiencies and create more integrated supply chain business processes and services across global product lines.
There is now additional evidence unfolding regarding the scope of Project K.
In early December, Kellogg announced the closure of production facilities in Australia and Ontario Canada, while expanding operations at an existing cereal and snacks production facility in Thailand. Both the Australian and Canadian based plant are schedule to close by the end of this year. In January, the company announced that it was investing in a new snacks manufacturing facility in Malaysia to expand the production of Pringles potato chips for Asia-Pacific markets. The Malaysia facility is expected to be operational by mid-2015 and produce 300 jobs locally. Keep in-mind that at the time of the Kellogg acquisition of the Pringles brand from Procter & Gamble, the firm inherited all existing production facilities and existing supporting systems.
This week featured further evidence for the strategies surrounding Project K. This morning Kellogg reported both Q4-2013 and full year 2013 financial results. In the final quarter net sales were reported as a negative 1.7 percent while operating profits increased 10 percent. Gross margin was essentially flat with the year-ago period. For the full year, net sales and operating profits increased 4.2 percent. Long-term debt remains at $6 billion. North America operations reflected negative growth. All the warning signs remain.
The company further announced the closure of a cookie and snacks plant in Charlotte North Carolina and elimination of two snacks production lines in Cincinnati Ohio, also scheduled to close by the end of this year. A posting from the Charlotte Business Journal indicates that the local plant was acquired by Keebler in 1998, and assumed by Kellogg in the 2001 acquisition of Keebler. The plant currently produces Famous Amos and Austin Sandwich Cremes products.
Presentations from senior management regarding Project K indicate a strategy for closing or reducing capacity among facilities servicing developed markets while increasing investments in emerging markets including India, Poland and Southeast Asia. Information further alludes to a global shared services model related to value-chain business process service needs. We strongly suspect that the common shared services effort will include adoption of standardized information technology applications.
As we noted in our original commentary, Kellogg is responding to realities of today’s CPG market forces and investor climate. Market growth, profitability and more timely shareholder return trump all other strategies and supply chains are caught in the middle of this ever shifting backdrop.
Certain industry analysts provide industry supply chain teams provide a plethora of multiple ratios and trending of financial metrics and key performance indicators as benchmarks for determining needed performance improvements. That can often be the rear-view mirror approach, allowing past performance to chart the future. In certain industry environments such as today’s consumer product goods industry, corporate strategy, business objectives and external forces trump historic ratios and unfortunately call for significant global value chain realignment in production, sourcing of capacity and service needs.
The Kellogg Project K initiative provides such an ongoing example.