How to recover from a procurement scandal

16 September 2020

Kraft Heinz aims to save $1.2bn by 2024 by generating efficiencies through procurement as the firm sets to recover from its procurement scandal. 

Miguel Patricio, Kraft Heinz CEO, speaking during the firm's investor day, said it had identified roughly $2bn of efficiencies that could be generated through a combination of procurement, manufacturing and logistics.

The firm has an opportunity to change its mindset from “cost reduction to continuous improvement” and will be focusing on “innovation with a bigger payoff”, he said. 

Last year, US authorities launched an investigation into procurement at Kraft Heinz, with the firm confirming that multiple employees in the procurement function had “circumvented controls” to meet financial targets. 

Following the scandal, Marcos Eloi, who joined Kraft Heinz in late 2019 as CPO, told Food Navigator the firm was committed to doing things “the right way every time” without taking shortcuts that could compromise its credibility and integrity. 

During the investor day Eloi said the firm was looking to build “true partnerships with suppliers” and turn the procurement function into a “competitive advantage” for Kraft Heinz.

He said the procurement leadership team had transformed in the last year and standardising and enhancing the way Kraft Heinz operated across the whole company was a priority.

Four key initiatives are crucial to deliver results, including “boosting sourcing excellence, revamping the approach to external manufacturing, building a Procurement Centre, and implementing design to value as a distinct opportunity”, Eloi said. 

1. Sourcing excellence

Eloi said there was an urgent need for Kraft Heinz to elevate procurement capabilities to “address unexplored opportunities, enhancing sourcing results while strengthening relationships with key suppliers”.

As a result, the procurement team is building solid strategies for key categories that “take advantage of both our global scale as well as the agility at our zones to identify and capture efficiencies locally”.

He said: “We are also building our digital transformation roadmap and investing to enhance our current systems as well as increasing the adoption of some of our current tools to address effectively our broader spend and drive efficiency. 

“At the same time we are working to secure our growth agenda by addressing the key risks on supplier dependencies.”

2. External manufacturing

Kraft Heinz currently has around 350 external manufacturers and spends around $2bn dollars annually, but they had previously dealt with these suppliers in “a very transactional way”, Eloi said. 

As a result, Kraft Heinz was developing a straightforward “make or buy” methodology, to evaluate whether to outsource the product or not.

Eloi explained: “If we decide to outsource, we will define the best approach, selecting the right partner for what we need. Then, we will evolve on the way we manage our relationship. It shouldn’t be that different than the way we are managing our own operations.

“We will collaborate with our external manufacturers to enhance their performance and also to co-develop innovation.”

3. Procurement Centre

Eloi said the firm’s indirect spend was “heavily fragmented” with more than 20,000 suppliers. 

Now Kraft Heinz is looking to centralise this spend to “ensure proper visibility and control to drive consolidation of spend with contracts”.

Automation will also be used to “streamline procurement operations to drive price savings”, he added. 

“We identified several cases where the same materials have been bought across the company with up to a 20% to 30% price difference. That’s exactly what we’re expecting to optimise and capture those opportunities as a result of this project,” Eloi said. 

The centralised approach is currently being implemented in North America, and will be rolled out to international operations over the next two years, he said.

4. Design to value

The next step for the firm is to implement a comprehensive “design to value” methodology which would drive value engineering opportunities and feed its innovation pipeline, Eloi explained. 

“We’re using our consumer insights and competitive benchmarking, addressing both our cost structure as well as our product designs. This is not just to take cost out but also to add value to our products and brands,” Eloi said. 

“Last year, we ran our first pilot in the US, covering only 25% of our spend. As a result of this pilot, we were able to identify a pipeline of initiatives that doubled the size of value engineering savings that we normally implement every year.” 

The methodology will be rolled out across key categories in the US and internationally as part of efforts to revitalise relationships between Kraft Heinz and its key partners, he added.

“These projects will be enabled by a strong supplier collaboration programme, evolving our relationships with key strategic suppliers, to co-develop initiatives that drive efficiencies, innovation and sustainability, supporting our future growth.”

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