The Mondelez Diet: Leaner, Meaner Supply Chain

Will the ambitious streamlining initiative bode well for retailer fortunes?

Move over Atkins, Mondelez International is getting into the diet business. Even after its Oct. 2012 launch following the spinoff of its North American grocery operations, what remained from that “slim-down” was an unwieldy behemoth faced with a lot of operational moving parts. 

Apparently, no longer: The $35-billion maker of such brands as Chips Ahoy!, Oreo, Trident, Ritz, Triscuit and Wheat Thins is placing an emphasis on “power brand” supply-side efficiency. It made the announcement Tuesday, outlining a new manufacturing design and plant-based strategy aimed at improving efficiencies and ratcheting up capacity for cookie, chocolate and gum product lines.

The organization, which revealed the plan at the Barclays Capital Back to School Consumer Conference this week, also plans to collaborate closer with select consumer packaged goods companies to leverage operational improvements. And, it plans to streamline its supplier network to become more nimble and to accentuate speed-to-market acumen.

The blueprint outlined by the organization will hopefully result in operating income enhancements that ultimately could see a positive trickle-down effect for wholesaler/distributors and retailers, including c-stores.

Mondelez’s supply chain consists of 70,000 people in 80 countries serving 165 markets around the world. Supply chain upgrades would deliver $3 billion in gross productivity savings, $1.5 billion in net productivity and $1 billion in incremental cash over three years, said chairman and CEO Irene Rosenfeld during the event.

Rosenfeld said that snacking growth is “still much faster than most food categories.”

But she tempered those remarks, adding that “there is no question that the operating environment is becoming more challenging. We remain focused on winning within our categories by sustaining and building our share positions, by leveraging power brands and proven innovation platforms as we are expanding our sales and distribution capabilities. At the same time, we’re expanding margins through an intense focus on cost savings and productivity.”

Upheaval after split

Following the North America grocery operation spinoff, the supply chain network was nevertheless fragmented, complex and inefficient, said Rosenfeld.

The need for better efficiency, according to Rosenfeld, was clear: With 74,000 SKUs, “our average revenue per SKU is only about one-third of the leading CPG companies. In Europe alone, we have a scattered base of more than 4,000 suppliers. A number of our 170 plants around the world are old subscale facilities that require significant ongoing investment to maintain.”

Moreover, a silo mentality that pervades any ultra-large organization—even after the grocery divestiture—must be addressed. This encompassed procurement, manufacturing, engineering, customer service and logistics. “In its place, we built a truly end-to-end integrated organization focused on delivering back demonstrable competitive advantage,” said Daniel Myers, executive vice president, integrated supply chain, for Mondelez.

Myers shared an example of this new efficiency with revamped Oreo production. “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,” said Myers.

He said the physical footprint of the new Oreo lines takes about half the space as before. In addition, the new lines have doubled capacity of many of its current production lines as they require fewer people to operate. “We’re expanding this line of the future work to all of our biscuit power brands. We are executing similar transformations for chocolates and gums. In the next 36 months, we plan to install more than 60 production lines using these breakthroughs.”

The proximity and logistical emphasis embedded in the initiative could also have a major positive impact on direct store delivery efficiencies, another potential boon to c-stores and their upstream distributors. “We’re putting our platforms in strategic locations on where our consumers will be in the future. That allows our procurement teams to collaborate more effectively with suppliers to drive down cost,” he said.

Mondelez also plans to develop stronger and more strategic partnerships with fewer suppliers. In Latin America, it’s now spending about $50 million on flavors alone on its Tang powdered beverage business. “We had more than 400 flavor specifications, and we were working with 22 different suppliers, about half of which were non-core,” Myers said.

“We’re well-positioned for success,” said Dave Brearton, executive vice president and CFO of Mondelez, who added, “we’re bullish on the future and in our ability to deliver top-tier financial results and superior shareholder returns.”