Kraft Buys Into the Mirage of Vendor Rationalization

“How important is effective internal collaboration? Just ask a candy company in the U.S. mid-west. As the manufacturer of a number of leading brands, this organization grew dramatically in a very short period of time through a series of acquisitions. Unfortunately, an extemporal supply base was a byproduct of the transactions leaving the acquiring company with a highly suspicious, deeply segmented group of suppliers.

The biggest challenge as expressed by a senior procurement manager for the parent organization was convincing the former suppliers of the acquired companies that becoming part of a larger pool would expose them to opportunities for increased sales.

Their suppliers weren’t buying the “increased opportunity” mantra and as a result, the transition process was challenging to say the least.

from Yes Virginia! There is more to e-procurement than software (Part 2), Procurement Insights – Sept. 20, 2007

In yet another example of the “when will they ever learn” category, About.com’s Martin Murray’s article “Kraft To Rationalize Vendors” reported that the company “announced that it is planning to cut its supplier base in half, affecting more than 30,000 businesses, but possibly saving Kraft more than $300 million a year.”

Putting aside for a moment that enterprise-wide rationalization strategies rarely deliver the sustainable savings that are expected – it would be interesting to see how the $300 million per year number was actually calculated – history has shown that the “sifting” process usually results in a supply base composed of the least desirable vendors.

Consider the negative vendor response regarding the Procter & Gamble save money “plan,” through which the industry heavyweight is looking to reduce the number of production companies with whom it’s brand agencies can deal from a current 125 to 30 through what they are referring to as a “preferred vendor” status.

Or the precipitous collapse of the GM North American supply base through the implementation of misguided mainstream strategies that also included a“drive on price reduction, low cost country (LCC) sourcing, and extension of terms.”

In other words, there is no shortage of case references or research material to clearly demonstrate to Kraft Foods that the over-utilized, under-achieving rationalization approach delivers anything more than a eroding supply base that once lost, is not easy to rebuild.

In my September 27, 2009 post “The Continuing Dangers of Vendor Rationalization,” I had cited that “while advocates point to several commonsense reasons for a reduced or rationalized supply base, such as lower administrative and operational costs, increased quality control through more strategic relationships, and the ever popular volume discount savings, tangible statistical support has been less than convincing. In fact, when broadly applied across an enterprise’s entire spend, statistics clearly indicate that the practice of rationalizing the supply base will actually lead to increased costs in areas such as Indirect Material procurement.”

I now find myself asking the same question almost 2 years later . . . why? “Why continue to perpetuate a practice that has yet to deliver the promised results, while simultaneously alienating key stakeholders such as regional or local buyers and suppliers?”

The only answer besides an unimaginative, and short-sighted executive vision is that the common denominator has and continues to be linked to an adjunct IT or ERP-centric strategy. One that is built upon a somewhat static foundation that fails to recognize and therefore adapt to the dynamic realities of what are today increasingly complex, global supply chains.

An irony of course is that while pursuing a rationalization strategy, real supply chain risks that pose a serious threat to supply and profitability are by and large being ignored.

A 2008 Aberdeen study found that 99% of supply management executives reported disruptions in their organization’s supply chain in the previous 12 month period. The reported disruptions negatively impacted key areas including customer relations, earnings, time to market cycles, sales, and overall brand perceptions.

However, and despite the frequency of the disruptions and far reaching negative consequences, the survey reported that 84% of executives believe that their company is not prepared to respond to a disruption in their organization’s supply chain.

A further consideration when contemplating a rationalization strategy is that pricing risks and risks/delays with suppliers were identified as the top two concerns of the majority of executives who responded to the poll.

Against this backdrop, one cannot help but wonder how a rationalization strategy that alienates rather than engages suppliers could be pursued as a sound approach to achieving decreased costs and increased savings?

Perhaps I will have to accept the likely reality that we will find out how they get the “caramel into the Caramilk bar” long before a logical explanation will be given for pursuing an enterprise-wide rationalization strategy in the absence of any tangible supporting data.

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