Kraft Heinz recently announced a $15bn impairment and dividend cut of more than 30%. CEO Bernardo Hees said the company had been “overly optimistic on delivering savings that did not materialize by year-end” – despite aggressive cost-cutting that raised concerns about impact on product quality.
In further woes, the company is undergoing a SEC investigation focused on “accounting policies, procedures and internal controls related to its procurement function”.
In this situation, it’s difficult to see how procurement can support the business achieve the “sustainable, profitable growth” which Hees was targeting. Yet with the right measures it’s still possible to increase profitability.
1. Know your market
It’s not uncommon for large brands to think they can withstand aggressive cost cuts. In the case of the food industry, one easy win is to reduce the base cost of ingredients. But America’s food industry is not what it was.
A more health-conscious customer base, greater choice and a squeeze on food companies by retailers are all reported to have contributed to Kraft Heinz’s troubles. But instead of slashing the cost of ingredients, procurement should seek to use wider levers that will not impact on the perceived quality of the end product.
Total cost of ownership is one such lever. Understanding the steps that go into making a product can help you be more targeted in supplier negotiations, not only focusing on the base price, but whether certain steps in the process are needed at all. This understanding can also help in de-risking the supply chain.
2. Governance measures
When delivering substantial savings, it’s important to put in place effective governance to allow reasonableness checks along the way. You need to develop a targeted category strategy based on a detailed understanding of the organization’s baseline status. To realize savings, buy-in to the supplier agreement is imperative.
Implementing a gated process at key milestones will enable you to manage expectations where analysis shows it’s not possible to achieve targets and get buy-in from key stakeholders where savings have been achieved.
3. Plan for the long term
In a situation like Kraft Heinz, it’s easy to focus on the short term – and specifically quick wins. But procurement needs to make savings sustainable and support continuous improvement.
By capturing, interrogating and understanding spend data throughout the life of a contract, you can drive value beyond the first flush of a new supplier relationship. Moreover, by adding contractual mechanisms that promote shared incentives, such as gainshare, you can ensure suppliers continue to advocate ongoing improvements.
This article was originally published by Supply Management