Hershey to implement supply chain transformation program

by Eric Schroeder
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HERSHEY, PA. — The Hershey Co. on Thursday unveiled a comprehensive, three-year supply chain transformation program that it said will greatly enhance the company’s manufacturing, sourcing and customer service capabilities. In addition, the program, which will be implemented in stages over the next three years, will generate significant resources to invest in the company’s growth initiatives, including accelerated marketplace momentum within the company’s core U.S. business, creation of innovative new product platforms to meet consumer and customer needs, and disciplined global expansion.

As part of the program, Hershey said it will undergo several actions, including significantly increasing manufacturing capacity utilization by reducing the number of production lines it operates by more than one-third; outsourcing production of low value-added items; and, constructing a flexible, cost-effective production facility in Monterrey, Mexico, to meet current and emerging marketplace needs.

Hershey also said the program will result in a total net reduction of approximately 1,500 positions, or about 11.5% of its total work force, across the company’s supply chain over the next three years. When completed, manufacturing of approximately 80% of the company’s production volume will take place in the United States and Canada, Hershey said. In addition, finished products will be sourced from fewer facilities and increased access to borderless sourcing will further leverage the company’s manufacturing scale within a lower overall cost structure.

"Hershey has delivered superior marketplace and financial performance since launching its value-enhancing strategy in 2001," said Richard H. Lenny, chairman, president and chief executive officer, Hershey. "The changing marketplace presents both challenges and exciting opportunities for our company. In order for Hershey to remain competitive, we are implementing a comprehensive strategic agenda focused on increasing our North American marketplace leadership and developing a truly global footprint for Hershey’s iconic brands.

"When completed the transformation program will deliver a flexible, advantaged supply chain designed to meet a diverse range of consumer and customer needs while generating significant resources available to invest behind our strategic growth initiatives."

Mr. Lenny said the initiative will involve "considerable change" over the next three years, but the company intends to make the transformation as smooth as possible.

Hershey said the program will incur pre-tax charges and non-recurring project implementation costs of approximately $525 million to $575 million over the next three years, including $475 million to $525 million in pre-tax business realignment charges and approximately $50 million in project implementation costs. The charges will be incurred primarily in 2007 and 2008, Hershey said, with approximately $300 million expected in 2007.

Once in place, the supply chain transformation program is expected to boost gross margin, with ongoing annual savings of approximately $170 million to $190 million generated by 2010. Hershey said a portion of the savings will be invested in the company’s strategic growth initiatives, in such areas as core brand growth, new product innovation, selling and go-to-market capabilities, and disciplined global expansion.

David J. West, executive vice-president and chief operating officer, said the long-term benefits of the program will include helping the company target profitable international expansion such as the joint venture announced last month in China with Lotte Confectionery Co.

Hershey reaffirmed its long-term goals of sales growth of 3% to 4% and growth in diluted earnings per share from operations of 9% to 11%.

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