How Bad Supply Chain Thinking Screwed-Up Iconic Brands

Heinz. Kraft. Kellogg. P&G. All great brands, but each company is under attack in the stock market. Investors are questioning choices made in supply chain management.

On April 16th, Robert Moskow, Credit Suisse analyst slashed the rating on Kraft Heinz. The reason? Worries on the 3G Capital culture and the capabilities to drive innovation. (3G is the take over firm that merged Kraft/Heinz.) Shares fell 1.2% in early trading. Employee turnover signaled the concern. In response to inquiries by the financial community, the company refused to publish data on employee turnover. The reason? Turnover is high. Employee satisfaction is low.

Ironically, we find in our research that the most important factor to managing costs in a global company is employee satisfaction. Companies that invest in employees--training, involvement/participation, and learning-- outperform their peer group in cost management. In contrast, companies that slash costs without building human capabilities struggle in the long term. This is what we are seeing in the 3G story.

This week, it was a story of Kellogg. The shares closed down -2.2% to $65.51 following the release of the company's first quarter earnings results. The company reported year-over-year first quarter sales fell -3.1% to $3.7 billion, missing analyst's estimates of $3.8 billion. The cereal and convenience food manufacturer posted net earnings of $1.01 per diluted share, beating analysts estimates by 4 cents. Over the last year, Project K was a Kellogg's focus. In this effort, the Company attempted to optimize the supply chain through consolidation of facilities and elimination of excess capacity. They attempted to improve productivity through consolidation of common processes across multiple regions and bring a global focus on categories. The goal was to invest the savings in brand-building initiatives, in-store execution, sales capabilities and innovation to stabilize sales. Kellogg expects $600-$700 million in Project K cost savings through 2019. The problem? It is not working. Kellogg has not innovated and brought value to the shelf. The markets reward growth. Kellogg is not growing.

Trian's push for a board seat at P&G is a similar story. Retail investors own roughly 40% of the company, compared with an average of 12% at the S&P 500. P&G shares over the past decade have lagged behind competitors’ and the S&P 500. Growth is the concern. P&G operates at a lower rate of Return on Invested Capital (ROIC) than their peer group. This is despite ownership of strong global brands. While the company is seen as a historic supply chain leader, innovation in supply chain processes over the last decade slowed as the company focused on M&A, cost cutting and business process outsourcing.

What can we learn? The supply chain needs to drive value. Simply put: it is growth with competitive performance in cost, customer service, asset utilization and inventory management. Dividing the organization with different goals cannot drive value. What we are seeing is a race to lower market share. Iconic brands are suffering. As I study supply chain, here is what I am learning:

1) There is no substitute for leadership. At each of these companies, there is a story of a struggle by good people to drive supply chain leadership. Supply chain leadership cannot be defined by reducing costs.

2) Throw away the pretty powerpoints. Saving money in the back office and investing funds in the front office does not work. If the supply chain is weak, it cannot deliver. The consultant promises of reaping low-hanging fruit and driving sales is usually a failed promise. Due to the lack of innovation, companies invest back office savings into front office brand extensions that add complexity, but do not add value. The starting place should be the alignment of front and back office teams to drive brand presence, but as shown in Figure 1, the teams are not aligned.

Alignment around the consumer and the building of the brand is job 1. This requires a strong supply chain and brand portfolio alignment based on customer insights.

Figure 1. Alignment on Go-to-Market Tactics

3. Build Outside-in Processes. No company today in the consumer industry effectively uses retail data in supply chain management. The reason? Traditional investments due not enable the use of new forms of data to sense and respond. Innovation is hampered by the functional definition of sales, marketing and supply chain. These functional definitions do not enable the building of effective horizontal flows to serve the customer. As a result, the processes focus on functional efficiency not brand effectiveness.

Figure 2. Use of Data in Analytics.

Within these companies there is a need to change from inside-out to outside-in processes to serve the customer and support the brand. This requires the use of point-of-sale data and the implementation of cross-functional processes enabled by analytics. As seen in Figure 3, this is a struggle in most companies.

Figure 3. The Struggle to Improve Revenue Management

What can we learn? The industry has been lulled to sleep by pretty Powerpoints and buzz word bingo. Supply Chain leadership is requires an effective process that spans from the customer's customer to the supplier's supplier. It is not a functional focus within the silos of manufacturing, logistics or customer service.

The programs that divide the organization do not support brand growth. The good news is that the financial markets are beginning to understand this reality. The bad news is that we do not see consultants changing their practices.