BOSTON — Over a five-year period ended in 2008, Kraft Foods Inc. spent $3 billion on a restructuring program the company said would optimize its capacity and leverage its global scale.
Apparently, it wasn’t nearly enough.
Even though the program was expected to generate $1.4 billion in annualized savings and included the closing of 35 production plants, a top Mondelez International Inc. executive on Sept. 3 described the company’s supply chain network in 2013 as “fragmented, complex and inefficient.”
In a presentation at the Barclays Back-to-School Conference, Daniel P. Myers, executive vice-president, integrated supply chain, painted a bleak picture of the company’s manufacturing infrastructure and described ambitious plans to address the problem. Mr. Myers did not offer a cost estimate of the planned new production capacity. In the form of new plants or new lines, the planned capacity additions and replacements (as well as its few state-of-the-art plants operating presently) between now and 2020 will be near or possibly greater than the company’s entire capacity operating in 2013.
Contributing to the company’s problems is a massive line of 74,000 stock-keeping units with average revenue per s.k.u. that is only a third of what is generated at other leading consumer packaged goods companies, Mr. Myers said. The s.k.u. count remains this large even after the 2012 spin-off of Kraft Foods Group, which accounted for about 33% of the former Kraft Foods Inc. annual sales.
“In Europe alone we have a scattered base of more than 4,000 suppliers,” Mr. Myers said. “A number of our 170 plants around the world are old, subscale facilities that require significant ongoing investment to maintain. In Europe only about 15% of our 70 plants are ‘A’ rated. And in North America about 60% of our manufacturing lines are over 40 years old.
“In addition, many of these lines are subscale. In many locations we have very high labor costs with significant variations within and across countries within a region.”
In addition to being costly, the aged manufacturing base makes it difficult to deliver optimal service levels to customers, Mr. Myers said.
“In many plants we have low capacity utilization on some products while being short on others, especially our growth platforms. So the question becomes, how do we fix it?”
Changes in staffing and culture have been made to position the company to address the supply chain problems, Mr. Myers said. Over the past 12 months, 30 vice-president and director level staffing changes have been made, he said.
“Importantly, we have broken down the silos of the different functions required to operate the supply chain, from procurement, manufacturing to engineering to customer service and logistics,” he said. “In its place we built a truly end-to-end integrated organization focused on delivering that demonstrable competitive advantage.”
To gauge the company’s progress, Mr. Myers said Mondelez will be benchmarking against best-in-class performance in “any industry, anywhere.”
Much of Mr. Myers’ presentation was focused on plans to transform the company’s “manufacturing platforms.” Again, he said the shift will be based on benchmarking best practices at Mondelez and its key suppliers around the world.
At the heart of planned changes in the Mondelez production platform will be a standardized modular concept Mr. Myers said would allow the company to “quickly install and modify lines to optimize current operations and launch innovations.”
Mr. Myers said the effort to develop this new standardized system began about 18 months ago.
“Imagine if we could install new lines with 30% less capital, deliver $10 million in operating savings per line and 500 basis points in gross margin improvement,” he said. “We wanted to be able to install new capacity in one third of the time using a modular format, focusing on seven days start up and using a Lego building block design, we do the engineering design once for the line, for the building and for all facilities.”
This vision has been accomplished with a prototype and is “becoming the basis for the reinvention of our supply chain,” Mr. Myers said.
“We imagined it, we have funded it and we built it,” he said.
“As you can see in this schematic (see drawing below), the physical footprint of our new Oreo lines takes up half the space as before. What is more, these new lines have doubled capacity of any of our current production lines. And they require fewer people to operate.”
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Mr. Myers said Mondelez will be bringing its “line of the future” to all its biscuit power brands and that similar transformations are being implemented for the company’s chocolate and gum businesses.
“In the next 36 months we plan to install more than 60 production lines using these breakthroughs,” he said.
The new modular lines will be part of a larger overhaul of the company’s global manufacturing footprint in the coming years, Mr. Myers said. The company needs to increase overall capacity by 25% in the next three years and will do so by building “eight new flagship plants,” he said. These include facilities recently announced for southern India and northern Mexico.
“And, subject to discussions with unions and work councils, we’ll also consolidate a number of subscale facilities,” Mr. Myers said. “This will change our footprint considerably.”
Already in 2013, Mondelez has announced plans to close a dozen production and distribution facilities around the world.
“By 2020, we expect to build another five greenfield sites capacity and double capacity at 16 strategic sites while consolidating other subscale plants and distribution centers,” he said.
With these changes, Mondelez aggregate production at what Mr. Myers called “low-cost, globally advantaged assets” will rise to 80% of the company’s output by 2020 from about 50% in 2016 and 15% today.
Mr. Myers offered a dramatic contrast between the company’s plants of the future and the standard facility it is operating today. For example, he described a biscuit plant under construction in Mexico City.
“This facility will open in the second half of 2014,” he said. “It will be dramatically different from the average operations of our plants around the world today. Instead of a typical footprint of 15 to 25 acres, this site has 125. It is adjacent to two major railroad lines and major highways that serve Mexico and the rest of the Americas.
“Most of our plants today are not co-located with supplier base or with distribution centers. But here we worked with the government to reserve 250 acres for use by strategic suppliers. We will also have a distribution center on site to enable direct shipments to customers. This plant will require only about one-third of the staff to produce the same capacity as one of our older facilities today. And it will be certified with stringent LEED environmental building standards. This is the design of the future. Advantaged platforms in advantaged locations with real scale leveraging supplier partnerships and optimized streamlined logistics.”
With the new production footprint, Mondelez will boost productivity with what Mr. Myers termed “three critical programs” — Lean Six Sigma, procurement transformation and simplicity.
The Lean Six Sigma program, a managerial program aimed at eliminating various kinds of waste, was launched four years ago and has been accelerated under Mondelez, Mr. Myers said.
The company has achieved “breakthrough performance” at 14 plants designated as “lead sites.”
“The lead lines in these plants are delivering an average of 15% more capacity and saving about $1 million per line,” he said. “With success like that we are planning to triple the number of sites by the start of next year, and we expect to expand these best practices to more than 100 facilities by 2015.”
Changes in the company’s procurement organization also date back four years, Mr. Myers said. Initially, the objective was a focus on better leveraging the company’s scale, particularly on “key commodities.”
“In the next phase we are focused on simplifying what we buy,” he said. “We’re shifting our resources from local or regional to enterprise wide.”
The Mondelez biscuit business also has been the testing ground for the company’s simplicity program, Mr. Myers said. Specifically, he said the company has been reviewing its portfolio of brands and product forms in Europe against the needs of consumers and retail customers.
“Now by really zeroing in on key consumer needs we can simplify product format, packages and recipes, this enables us to eliminate s.k.u.s, reduce complexity and deliver preferred products with streamlined technology on fewer production lines.
“For example, when we acquired the LU biscuit business it had over 4,000 s.k.u.s in Europe. By applying simplification tools that number will fall to 2,500 by 2016. We expect to see meaningful reductions in format, technology and production lines, too. This initiative is expected to reduce the complexity of our biscuit operations in Europe by 60%. That will deliver about $100 million in savings and enhance biscuit gross margin in Europe alone by 300 basis points by 2016. We are leveraging this great work and implementing similar simplification programs right now both in chocolate category in Europe and in biscuits across North America.”