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Kraft Foods Supply Chain problems (Cash flow) and Approaches used to solve the issue
Introduction
Kraft Foods Incorporation is involved in operations that are in the beverage and food industry. Its headquarters are located in Chicago, America, and it is the second largest such industry ( HYPERLINK “http://www.amazon.co.uk/Rebecca-Vickers/e/B001K8CMO8/ref=ntt_athr_dp_pel_1” Vickers, 2005. 3). The company has subsidiaries in over 70 countries, worldwide. There is a total of 98000 employees also, its products can be found in almost all the continents including Africa. The two Major subsidiaries of Kraft Foods are Kraft Foods North America Inc, and Kraft Foods International Inc. Kraft Foods is involved in marketing and packaging various retail food products. The latter varies from cheese products, confectionery, processed meats, juices and coffee, among others. The products are extremely useful to many consumers as they are found in categories such as Convenient Meals, Cheese, Snacks, and Beverages. Kraft Foods makes use of multiple distribution channels in order to distribute its products.
Kraft Foods also sell key brands that are popular with consumers such as Oreo, Maxwell house, Jacob’s and Post, among others. Kraft Foods seeks to ensure that consumers are provided with products that make their lives more healthy than usual. They seek to make available to consumers premium products, quick meals and snacks, which promote wellness, as well as health. In order to supply its products, Kraft Foods makes use of channels of distribution such as depots, cold storage facilities and satellite warehouses, among others (Ferrari, 2012. 1a).
This paper seeks to give a critical analysis regarding the Kraft Foods supply chain issues. Moreover, it seeks to find out approaches that can be used in solving the problem, in order to increase cash flow.
Critical analysis of the supply chain problems at Kraft Foods and how they can be solved
Everyone who has an opportunity of watching business news cannot have avoided the story concerning Kraft Foods. The supply chain department at Kraft Foods has faced many challenges in the past few years. Kraft Foods has had to free up cash, as well as to cut costs, in order to solve its supply chain problems. Currently, there is an economic downturn, and many companies are trying to find ways of navigating through it. Furthermore, there has been an increase in credit rules, as they have been made to become quite tight and thus, confronting. Kraft Foods have had to find ways through, which their cash flow, can be increased. It is evident that matters that concern supply chain are vital, and thus, urgency needs to be considered in solving the situation (Ferrari, 2012. 1a).
It is a fact that the company seeks to become imperative in an attempt to free up its cash. Before the economic meltdown in the year 2007, a strategic plan had already been devised in order to improve its financial capabilities. A goal had been established by Tim McLevish, Kraft Foods Chief Financial Officer, to increase its cash flow. He wanted to ensure that the company obtained cash flow as high as one billion dollars. Many people believed that he had set an extremely high goal that could not be realized. McLevish claimed that Kraft Foods had to plan well for its future. According to the senior vice president at Kraft Foods, Philipe Lambotte, “The higher the free cash flow, the better a company is able to gain access to capital and investment markets with a lower rate of borrowing for capital expenditures, acquisitions, or share repurchasing,” (Ferrari, 2012. 1a). Furthermore, he believed that bottom line and top line growth are vital and should not be ignored. The latter are needed as they help in making sure that free cash flow and fund growth are available.
There were many factors, which have to be considered, if Kraft Foods is to come up with an initiative on cash flow. The management should realize that they have to focus on key areas, such as capital expenditures, working capital, receivables and payables. This includes even being keen on inventory on hand, and the days, which they took place. Some people thought that this issue concerned the finance department, but they were extremely wrong. It should be known that the supply chain is the main reason why the problem existed (Ferrari, 2012. 1b). For example, there many cases whereby, some of the employees at Kraft Foods would take home stock that did not sell. They assumed that since the consumers did not want to buy certain products, they needed to take them. On a normal working day at Kraft Foods, costs of inventory, which is tied up, reaches up to 30 percent or twenty percent. The latter is related to the products available as well as the costs incurred. According to Lambotte, some products have high inventory and costs, which can reach up to 50 percent. It seems that Kraft Foods needs to ensure that it only suppliers to its stores, the right quantity of products. Also, ensure that the consumers obtain the products as soon as possible. If this takes place, cash will be obtained easily, as products are sold at a fast pace. A strong relationship should exist between cash flow and inventory and its supply chain department should engage in this project (Ferrari, 2012. 1b).
The matter concerning freeing up cash is a focus, which is natural, for the supply chain at Kraft Foods. This means that it will not be easy trying to find extra money, due to the supply chain problems. As a result of the company’s diversity and breadth, the problem cannot be attacked. The latter is due to the initiative that is ‘one size fits’ also, because it is centralized. Annually, Kraft Foods earn as much as 43 billion dollars in revenue as it is a multinational company. It needs to find ways to ensure that the revenues do not decrease, and at the same time, increase its revenues. Since Kraft Foods has diverse markets and brands, it has come up with a total of 23 units (Supply Chain Digest, 2012. 1). In Europe and North America, the business units will focus their attention on specific products. These include products such as food service, beverages and dairy. Out of the entire twenty three units, only twelve units follow the model that has been mentioned. The rest of the units focus their attention on China or Brazil, which are considered being national markets that can carry diverse brands. Lambotte claims that the unique and different supply chains exist for the various business units.
There is a complex supply chain that exists at Kraft Foods, as well as that of inventory ownership. The latter depends on the customer’s sales arrangement. Most times, the products found in shelves are owned by the company, and such items include cookies and pizza. However, a product like coffee is normally owned by the company in terms of inventory. Kraft Foods only loses its ownership after the coffee is at the distribution center that belongs to the customer. There are various inventory-ownership arrangements at Kraft Foods, and they have a significant impact. It is quite unfortunate that the company could not find a way of ensuring that all the business units generated cash (Roberts, 2012.1). In turn, those in charge of the projects should focus on the individual supply chains of the business units. This is referred to as ‘case by case bases in matters that concern supply chain. Lambotte claims that “When you think about inventory, you have to think about the flexibility of your supply chain as well as that of your retail customers,” (Mentzer, 2001.23). It means that making right decisions is extremely vital and should not be ignored. It can lead to few items on the shelves and even, there being fewer inventories. Moreover, it goes against the principles that seek to ensure that cash flow is improved.
Distribution channels at Kraft Foods
The company mainly makes use of the distribution and supply channel known as Direct Store Delivery. This means that distributors and suppliers are the ones who deliver products to the store directly. Therefore, there is no retailer who acts as a distributor center at Kraft Foods. There are a lot of advantages obtained from using the DSD channels, such as in store forecasting, shelf inventory management and even store ordering. Also, it assists in promotion and price execution, and even management of items at the stores. The other type of distribution channel used by Kraft Foods is the Centralized Distribution Logistic Networks. In this system, the products are transported to the retail stores from the wholesaler. Thus, Kraft Foods uses a DSD network that is two tiers, as well as a Centralized Distribution Network. For example, the Nabisco Biscuits is delivered through the DSD two tier networks, while most frozen foods are delivered through the Centralized Distribution Model (Ferrari, 2012.1b).
The Case by Case Analysis
The leader at Kraft Foods, in charge of supply chain matters, should recognize the need to ensure that all managers and employees are involved in the initiative. They all have to ensure that the cash flow at the company improves. They have to put more emphasize on the inventories value by changing their mindset. The leader should recognize that the employees have to be informed about their actions, which are causing inventory problems. For example, if an employee stored products without attempting to sell them, they were causing supply chain problems (Simchi-Levi &Kaminsky & Simchi-levi, 2004). It meant that the employee was reducing the economic value of the product by making it become tied up. It is only when a product is removed from the shelf and sold that it gains economic value. This is the mentality that everyone working at Kraft Foods needs to keep in mind.
In order to solve the supply chain problem, Kraft Foods should adopt the twofold approach. It would make it mandatory to ensure that the business units are provided with incentives. The latter will assist in making the working capital improve. Furthermore, any manager who would free up cash well would be entitled to a cash bonus. The approach would give expert assistance to the various business units, and that would take the form of Cash Flow Excellence. They would act as consultants who were internally based at Kraft Foods. Those chosen to be the team’s experts should be the company’s middle managers. They have for many years dealt with issues concerning cash flow at Kraft Foods. In turn, they will be able to ensure that sound practices are followed by all the business units. The team can be compared to that of a SWAT team, which has various experts on supply chain (Simchi-Levi &Kaminsky & Simchi-levi, 2004). The team would work towards improving the various business units, whether they were in the United States, Russia or even Brazil. It does not matter, which question is asked, as the team members are able to answers the various questions well. It is a fact that the managers have the ability of solving the situation that they encounter as they have skills.
All the business unit employees have to undergo workshops that last at least two days, and are held by the experts. During the sessions, all employees including the unit’s general manager have to attend as it is mandatory. At the sessions, the employees are to analyze the supply chain issues facing the specific business unit. Also, they have to find possible ways by, which the cash can be freed up. It is due to the case by case approach that Kraft Foods can become successful (Simchi-Levi &Kaminsky & Simchi-levi, 2004). By focusing on the pinch points and the situational analysis, of the different business units, it is possible to solve supply chain issues. For example, there are business units that have more finished goods, as compared to the raw materials. There even those that deal with spare parts, and thus, do not have extreme processes of manufacturing. On the other hand, there are business units, which have long payables, and payment terms that are inefficient. In turn, the unit ends up having a lot of inventory that is tied up. Some refer to this situation as being quite easy and short term or, difficult and big.
Suitable ways of solving the problem concerning inventory
There are steps that have to be adopted by the business units, in order to liberate their cash flow. If there is a need to reduce inventory that has not been sold, customers have to take part in the selling process. The Stock Keeping Units numbers have to be rationalized depending on the customers. Also, products that produce low revenue and are high in volatility, have to be phased out. It should be known that revenue is reduced when some items on the shelves are eliminated (Kaushik & Cooper, 2000.70). Furthermore, the cash flow is increased by the remaining products, which are profitable and better selling. Another tactic is to engage in repetitive flexible manufacturing, as it aids in ensuring that inventory is paired down. It is better as compared to constantly having to respond to changes in demand. Manufacturing lines are known to produce fixed quantities and regular frequency products, at extremely high volumes. For example, when making cookies it will be easy to use the manufacturing system to make the cookies on a weekly basis. This will assist in only producing the right quantity that can be sold and bought by the customers. It means that the SKU, which has a low demand, has to have its service levels reduced, in order to create cash flow (Kaushik & Cooper, 2000.79).
At Kraft Foods, there is a need to use multiple distribution channels. This means that products will be distributed to various locations by different suppliers. This ensures that products are delivered to Kraft Foods stores depending on certain factors. This can be quality and quantity of the products, or even the location of the Kraft Foods stores. Moreover, Kraft Foods should find a way of venturing and distributing its products into new markets. If it does the latter, it is sure to increase the revenue that it makes. For example, in Finland, Kraft Foods has made use of sales promoters who will distribute the products. They act as mediators between the Kraft Foods and other merchandisers. Furthermore, they can assist the company acquire products at cheap prices.
Lastly, Kraft Foods should know that by having few inventories, working capital does not improve. Also, the latter does not affect the levels of customer service. Other companies, which have followed this approach, have succeeded up to date. It seems that it is vital to ensure that inventory is slimed down. Also, Kraft Foods should purchase software that assist in supply chain matters. Also, the software will help in knowing locations and right quantities of stock that are needed. In supply chain, it is vital that forecasting is done, as it will help in selling the products, when inventories are kept at a minimum (Ferrari, 2012. 1a).
Conclusion
In conclusion, it is evident that Kraft Foods has faced many challenges, in matters that concerned supply chain. Also, the current economic crisis has made the company not to increase its revenues as it needs to. Furthermore, customers are not buying products from Kraft Foods as they used to some time back. The supply chain at the company can be improved through adapting to the latest technology, the twin fold approach, and the case by case approach. These recommendations should be closely followed in order for Kraft Foods to retain its glory among its customers, also, to earn high revenues.
Work Cited
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HYPERLINK “http://www.amazon.co.uk/Rebecca-Vickers/e/B001K8CMO8/ref=ntt_athr_dp_pel_1” Vickers J.L. Kraft: The Founder of Kraft Foods (Lives and Times). New York: Heinemann Library, 2005.Print.
