According to published reports, consumer packaged goods producer Kellogg Company is about to embark on a $45 million restructuring of the company’s North America based supply chain. The question that we submit is whether the effort is driven by needs for added efficiency, supply chain resiliency or both.
A company statement indicates the effort is focused on efforts to, “drive increased productivity, help offset cost inflation and reinvest in our brands.” Such a statement from a consumer goods producer implies ringing out increased cost efficiencies from supply chain operations. The company further describes the North America supply chain restructuring as part of a broader, “robust commercial strategy that includes brands building investments, capacity and capability investments at some of our RETC plants, as well as ongoing innovation plans.” That seems to imply innovation, but the question is where innovation investment will be applied. Often that turns out to be in increased marketing and digital advertising.
In early August when the company’s quarterly financial performance was reported, CEO Steve Cahillane indicated to Bloomberg that the company ongoing supply chain challenges were in the ability for certain production facilities to be able to produce a variety of products in a more flexible manner while getting materials and products where and when they needed to be. The company benefitted by COVID-19 stay-at-home related packaged foods demand for specific products, but the production facilities designated to produce such products became capacity constrained. For other products, supply network shortages created the need for added flexibilities among production lines. In another example, a recent fire that occurred at a cereal plant in Memphis, Tennessee temporarily suspended production requiring cereal products to be produced by other U.S. plants.
According to a recent SEC 8K filing, the reorganization plan spans a three-year period extending thru 2024 and is “designed to drive increased productivity.”. The producer noted in its filing that it does not expect to close any production facilities but is also setting aside $4 million to compensate for employee related costs including severance and other termination benefits. Cash costs are expected to be upwards of $21 million consisting of charges related to capital expenses. Non-cash costs are expected to be upwards of $20 million primarily of accelerated depreciation and asset write-offs.
Supply Chain Matters Added Perspectives
Prior to the global pandemic, consumer packaged goods companies typically viewed supply chain focused operations thru a cost center perspective lens. This is an industry that was surrounded by activist investors seeking the next era of growth but at the same time, added dividends and increased short-term returns for shareholders. A further dark wave surrounding this industry was often termed the “3G Effect”, that being the presence of 3G Capital’s Kraft Heinz model of acquire and squeeze out all forms of cost and the industry zeal of zero-based budgeting and cost control. That came to a head in February 2019 when Kraft Heinz reported a stunning multi-billion financial setback.
Five years of the zero-based budgeting squeezed an estimated $1.8 billion in accumulated annual spending cuts. Then, the industry encountered the global pandemic and the consequent sudden need to be able to respond to both dramatic shifts in product demand along with simultaneous supply network disruptions. Stay at home consumers added to product demand needs for basic products thru non-traditional channels such as online ordering. Restaurant and institutional product demand was dramatically cut in the initial stages’ of 2020 virus spread because businesses and restaurants were forced to shut operations.
Now in 2021, North America based product demand comes from both channels, and companies such as Kellogg’s have been impacted because of the lack of flexible production sourcing, distribution or packaging capabilities. Added flexibilities and sophistication in planning processes is a further transformational need. In other words, the experience of the pandemic and now the added consequences to excessive demand with limited capacity in production, transportation and logistics services needs has constrained abilities to meet such demand. At the same time costs are exploding, and again, the remedy seems to evolve one of financial restructuring and added productivity related savings.
We hope that this may not be the case and that the industry has acquired added learning from both pre-pandemic short-term thinking and now, longer-term thinking as to what supply network capabilities need to occur in planning, production and supply chain resiliency along with better informed decision-making in multi-channel and digitally based product demand needs.
Kellogg’s CEO describes the company’s challenge to reporters as, “no fundamental change in global demand, only bottlenecks on supply.” We trust the industry will overcome its biases to former thinking in relationships to viewing supply chain needs.
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