How Kraft Built a "One-Company" Supply Chain
By Stephen J. Tibey -- Supply Chain Management Review, 9/1/1999
In 1995, Kraft Foods Inc. began a major project to reconfigure its U.S. distribution network. While that initiative ultimately resulted in important operating efficiencies and cost savings for Kraft, it also delivered major benefits to our direct customers—grocery chains and food wholesalers. Through our "one-company" supply chain approach, our customers now can work with Kraft in a simplified and streamlined way. And this, in turn, has important cost, service, and operating implications for them and their customers.
In the mid-1990s, Kraft launched a major strategic overhaul that would change the way customers saw us. By integrating all our diverse food businesses under a one-company operating structure, Kraft hoped to simplify ordering, pricing, and deliveries for customers, making it easier for them to interact with the company.
Changes in the market also were fueling this initiative. Customers were asking Kraft to provide shorter order leadtimes, help them to reduce inventories, ship display-ready pallets, and achieve higher delivery reliability. To meet these requirements, Kraft recognized that it needed to reconfigure its entire distribution network.
This article chronicles how that process unfolded. It describes Kraft's former distribution network, tells how we decided what changes were necessary, and discusses how we implemented the changes. New technology infrastructure was an important enabler of the supply chain changes described here. The article also discusses some of those technologies. Finally, we present the results to date—both for Kraft and for our customers.
The Status Before ReconfigurationWhat is now Kraft Foods began as separate companies individually acquired by Philip Morris in the 1980s and early 1990s. (For an overview of Kraft Foods today, see accompanying sidebar on page 38.) Before 1995, these food and beverage companies operated as separate business units.
In 1995, senior management determined that Kraft could more fully leverage its scale if it were to operate as one company. Kraft, General Foods, and Oscar Mayer were consolidated into one company, and the task of integrating the different processes and functions began.
This strategic decision caused us to re-evaluate our delivery network, which had been built over time to serve the individual business units. As Exhibit 1 shows, each business unit had a different supply chain system.
Although the old network had evolved over time and supported earlier business alignments, it was not properly positioned to support the new Kraft Foods one-company approach for the following reasons:
- Products were stored and shipped through seven supply chain systems.
- Kraft supported more than 60 facilities, including regional and plant-based distribution centers, in a capital-intensive supply chain.
- Different business units used different warehouse management and logistics systems.
- Many facilities were more than 30 years old and were not designed to meet emerging customer requirements.
The disparate supply chain systems created the following problems:
- Extensive off-site overflow storage was required because of insufficient storage and working space at the regular distribution points.
- Space constraints drove warehousing and distribution decisions. For example, there was no warehousing at the Battle Creek, Mich., cereal plant, so product was immediately loaded on trucks and shipped to regional distribution points.
- It was difficult to provide special services for customers.
Most important, the complex product flow was confusing to customers, who could not order from one price list or obtain volume discounts based on their entire network of business relationships with Kraft. The network was inconsistent with the one-company strategy because commingled shipping could be done only on a limited basis. So, for example, our customers could not buy Kraft cheese and Oscar Mayer meats on the same order, even though both were refrigerated products. Similarly, customers could not purchase Stove Top stuffing mix—a product of the former General Foods—and Kraft macaroni and cheese on the same order, or obtain a quantity discount, or get the products delivered together.
Designing the One-Company Supply ChainDesigning the supply chain network to support the one-company strategy was a broad, cross-functional effort. Representatives from distribution, logistics, transportation, corporate strategy, sales, and customer service all participated. Sales and customer service, in particular, were important because we needed to ensure that the redesigned network would give customers what they really wanted. Because this change touched all of our business units, it went through a number of reviews internally to assure it was in alignment with Kraft's overall strategy.
The central principle underlying the restructuring is that customers can mix all Kraft products in one order, dependent upon temperature requirements. From Kraft macaroni and cheese to Post cereals to Maxwell House coffee—all could be delivered on the same dry truck. From Kraft cheese to Oscar Mayer cold cuts to Philadelphia cream cheese—all could be delivered on the same refrigerated truck.
We began our planning with the idea that we would structure our new network around plant-based distribution centers. After examining our customer base, the location of our 50 plants, and the traffic patterns involved, it became apparent that the best answer was a combination of plant-based finished-goods warehouses and regional mixing centers.
Ultimately we adopted this structure as a supply chain strategy that enables us to reduce transportation time and thus respond more quickly to customer orders. This structure consists of finished-goods warehousing associated with each production plant and seven regional mixing center complexes, each with dry and refrigerated facilities in a campus setting. (See Exhibit 2.)
The seven regional mixing centers make it possible to commingle all Kraft SKUs by temperature class. In addition, automation and layout changes facilitate special services like display-ready modules, which are an increasingly important competitive tool in the food and beverage industry.
The Key Role of the Mixing CentersThe new mixing centers were designed to enable us to meet important customer requirements, such as lower inventories, shorter order leadtimes, provision of display-ready pallets, increased service reliability, improved product freshness, and flexible distribution alternatives.
The location, design, and layout of the mixing centers are based on how customers order our products. We performed extensive modeling to determine optimum geographic locations for the centers based on total volumes and our long-range business plans. We used operations research to determine the optimum size of each facility.
Decisions about the mixing centers—like everything else in the supply chain reconfiguration—were driven by customer requirements. But we placed the mixing centers where we did to minimize transportation times to customers. With the geographic locations chosen (see Exhibit 3), we are in position to provide overnight delivery to a majority of customers. And that's important in our business.
Because of the complexity of rolling out seven new facilities over a period of approximately three years while simultaneously either closing or converting approximately 20 warehouses, we decided that we needed the help of third-party logistics specialists. In addition, because the speed of our rollout would challenge a single provider, we turned to two different third-party providers: Power Logistics and AmeriCold. The selection process for these third-party providers was rigorous and comprehensive. (For more on the criteria used, see sidebar on page 40.)
Five of the seven mixing centers are third-party operated: Stockton, Calif.; Ontario, Calif.; Aurora, Ill.; Fort Worth, Texas; and Bethlehem, Pa. Kraft owns and operates the mixing center in Norcross, Ga., and leases and operates the center in Columbus, Ohio. We like this balance of Kraft-operated and third-party—operated mixing centers because it enables us to retain a core competency in warehousing and distribution, while allowing us to benchmark the performance of our facilities against the third-party centers. In addition, we wanted all the mixing centers, including those operated by third parties, to use standard "best practices." Thus, all of our mixing centers look very much alike inside, even down to the design of the administrative offices. In addition, all mixing centers use MATRICS, our warehouse management system (discussed below). Furthermore, every third-party center has a small staff of Kraft administrative employees on site.
We work together as business partners with the third-party operators. Rather than compensate the third-party operators on the basis of weight or number of pallets, we have incentive-based operating agreements. We set budgets together and establish incentives for achieving annual cost and operating goals, so the third-party providers have a vested financial interest in performance against the budget.
The mixing center strategy gave us the chance to start at ground zero and to follow best practices without any pre-existing constraints. So, for example, we now are able to locate high-volume products near shipping areas. We thought about the best way to store products—in racks or free standing. Then, after deciding on racks, we considered which types were best. We could decide how many truck doors we needed—not just do the best we could with the number of truck doors we had. We addressed how big the loading dock should be, based on the best practices in our company and outside. In every mixing center, we constructed special areas for assembling display modules and providing special services to customers. The old distribution centers had limited space for these value-added activities.
The mixing centers are the primary delivery source, with the majority of volume moving from these facilities to customers. We can ship from a truckload down to a 5,000-pound less-than-truckload order. The 60-foot docks in the centers easily accommodate cross-docking. And the spacious lots accommodate up to 500 trailers.
Plant-Based Warehouses Cut Transportation Time and CostAnother key component of the redesigned supply chain is the operation of plant-based warehouses. Kraft owns and operates the plant warehouses, which were individually built or redesigned to meet the new supply chain requirements. For example, we needed a large plant-based warehouse for cereal in Battle Creek, Mich. Unfortunately, we did not have the land footprint size to accommodate a conventional warehouse. So rather than a 450,000-square-foot conventional warehouse, we built a 160,000-square-foot warehouse that is 65 feet high and uses completely automated dense storage.
Because we were changing the role of the warehouse, even existing warehouses had to be redesigned. Today, we tend to ship products from plants to the mixing centers in full pallets, one SKU to a pallet. While the mixing centers might have several thousand SKUs in storage, the plant warehouses would have at most a few hundred SKUs.
With the new supply chain design, product flows are more efficient. We don't bring any product into a plant warehouse that is not made at that plant. And finished goods are shipped from the plant warehouses only when the mixing centers place orders. The mixing centers base their orders on sales forecasts. Because we do less redistribution of product within Kraft, inventory requirements are lower and we have product available when customers need it.
Direct plant shipments, another key element of Kraft's supply chain strategy, are made possible by the increased warehousing capacity at the manufacturing sites. DPS benefits everyone: Customers get price incentives, while Kraft becomes more efficient by eliminating one step in the product-handling process. Importantly, Kraft has been able to standardize guidelines for DPS from one plant to another.
Common WMS Improves Information Flow to CustomersEven before Kraft decided to reconfigure its physical distribution network, we had decided to implement a new warehouse management system (WMS). Building new warehouses and renovating old ones created an ideal opportunity to roll out a common warehouse management system in all of our facilities. Previously, Kraft used different software solutions in different warehouses.
Because we have such a wide variety of products with different handling and storage requirements, we needed a system that would be highly flexible and tailored. We believed that the best way to achieve this objective would be to develop our own WMS, which is called MATRICS. In-house development, moreover, was the best way to satisfy all of our businesses—from Breyers yogurt with its very short shelf life and critical code date to shelf-stable products like Maxwell House coffee. Kraft originally used MATRICS in its Oscar Mayer unit, which has strict code-date rotation and traceability requirements. Then, we enhanced the WMS to support the other businesses.
MATRICS has robust functionality. It incorporates a radio-frequency system with directed pick and put applications. A screen on the lift truck directs the driver to locations to select or store product. MATRICS provides all the information necessary for advance ship notice (ASN) capability—shipment-level detail (like the purchase order number, the ship date, and the carrier) and pallet-level detail (like code dates by SKU). MATRICS connects easily to other Kraft systems and allows for cross-docking.
Responding to the Implementation ChallengesIt took about three years to roll out the supply chain changes, which included the following activities:
- Siting, designing, and constructing seven mixing center complexes.
- Constructing new finished-goods warehouses at six plants.
- Modifying layouts extensively at eight plant warehouses.
- Designing and installing automated systems at two sites.
- Installing a common warehouse management system.
- Closing or converting approximately 20 warehouses.
Perhaps the toughest challenge was starting up new facilities as we were closing old ones. We wanted to close facilities in a way that would avoid any disruptions to product flow. So we developed detailed timelines for bringing volume down at the old facilities and ramping volume up at the new ones. As of spring 1999, we had opened all of the new facilities and closed the old ones.
Recounting the BenefitsThe real driver of change in Kraft's supply chain was to improve service performance to customers. We would not have undertaken a project of this magnitude had we not thought that it would lead to this overriding objective. Kraft's new delivery network has enabled many of our customers to reduce inventories, to attain the best possible pricing, and to drive out waste and inefficiency.
Customers receive the best price when they order a full truckload of product. Through our one-company approach, they can buy all Kraft products in the same temperature class together, thus benefiting from volume discounts and consolidated shipping.
This is very powerful for the trade. Because the full range of Kraft products can now be bought on a commingled basis, customers who previously had difficulty buying at our best price qualify for lower prices because their orders are larger. And even the bigger customers have increased inventory turns and reduced their inventories of Kraft products. Instead of buying a truckload of Post cereals, for example, customers can combine different products in one order. In addition, by ordering smaller quantities more often, they can offer consumers fresher products.
The new delivery network makes it possible for customers to receive products directly from the production plant and obtain a price incentive. In the past, direct plant shipments were not widely available.
In addition to price benefits, the supply chain changes make it easier to do business with Kraft. Kraft now has standard policies and procedures for product deliveries, fewer shipping points, and fewer price lists. The mixing centers can respond quickly to a sudden demand, giving customers the option of filling the truck with other products and gaining volume discounts. And advance ship notice gives customers detailed information on the status of their orders. In addition, the mixing centers operate 24 hours a day, seven days a week, and customers are able to pick up their product if they prefer, based on a half-truck minimum.
Because we can now assemble display modules at the mixing centers, Kraft has been able to increase its use of this important merchandising tool. In the past year, the volume of display modules has increased 25 percent, giving us a tremendous opportunity to leverage the Kraft brand.
Customers like the changes. They have been able to reduce inventories by ordering mixed truckloads of products. They like being able to receive display-ready modules. And many customers are taking advantage of opportunities to backhaul from Kraft to their regional warehouses because of the convenient location of the Kraft mixing centers.
We view this initiative as a core component of a broader business strategy. Kraft has established a vision to be the undisputed leader in the food industry. We are making good progress toward this ambitious goal. By linking the supply chain reconfiguration tightly to other companywide strategies (see Exhibit 4), Kraft Foods is better positioned to meet current and future customer needs.
Our business results since 1995 have been excellent. Since 1995, volume has grown 3.5 percent per year and compound annual earnings are up 8.8 percent. Income from operations more than tripled from $900 million in 1994 to $3.1 billion in 1998. When Kraft took on the challenge to really become one—in all aspects of its business, including the supply chain—the effect was powerful.
| Initiative | Linkage |
| "One-Company" | • Consolidated DC network |
| • Common warehouse management system | |
| ECR (Efficient Consumer Response) | • Expanded DPS opportunities |
| • Commingling across divisions by temperature class | |
| • ASN and cross-docking capabilities | |
| Business Growth | • Improved "special services" capability |
| • Leverages Kraft Food scale advantage | |
| Inventory Reduction | • Support finished-goods inventory reduction |
| ROMI (Return on Mgmt. Investment) Improvement | • Leasing of new facilities |
| • Sale of obsolete DCs |
| Author Information |
| Stephen J. Tibey is vice president, operations services at Kraft Foods North America in Northfield, Ill. |
|
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