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Category: COST OPTIMIZATION Cutting the right costs at Campbell Soup has led to making many right investments.
Ann Monroe, CFO Magazine
September 1, 1998
For Campbell Soup Co., cost optimization is a key element of strategy. "It isn't about head- count elimination or cutting for the sake of taking costs into the bottom line," says Dale F. Morrison, CEO since June 1997 of the $6 billion food giant. "We call cost cutting a productivity program enabler, because it is providing the investment resources we need to grow the business."
For a company in the middle of a push to tighten its hold on customers, as Campbell is, cost savings is the only way to go, adds 52- year-old Basil L. Anderson, CFO of the Camden, New Jerseybased company. "To satisfy customers," he says, "we have to invest a lot of money in new-product development and marketing." At the same time, he notes, the company, which has been in the top quartile of its industry in earnings growth for six years, wants to stay there.
That goal has forced the company to find the investment funds it needs without affecting the bottom line. Anderson, who formerly served a stint as CFO at Scott Paper Co., under Al "Chainsaw" Dunlap, has risen to the challenge: in the past three years, he has identified cost savings in excess of $450 million--a total that was more than the company's net earnings in 1993. "Basil is very cost-oriented," says Terry Bivens, an analyst with Bear, Stearns & Co., "but not in a mindless, thrasher way, considering his history with [Dunlap]. And if you look at Campbell's margin expansion since he's been CFO, maybe breathtaking is too strong a word, but it's been very impressive."
To find the savings, Morrison and Anderson had to push Campbell to a new kind of thinking, which they call "thinking outside the can." They had to challenge employees throughout the company's divisions to question traditional assumptions, beginning with one that goes back to the company's founding-- the notion that the only way to make a good product is to control every step of its production.
"We were a cradle-to-grave producer," Anderson says. To make chicken soup, for instance, the company grew its own chickens and manufactured its own cans. That made sense when nobody else was making cans or growing enough chickens. But as more-efficient suppliers sprang up, Campbell was at an increasing cost disadvantage. One of Anderson's moves: sell the company's poultry operations to a division of Continental Grain Co. and negotiate an agreement for it to supply all chicken products in the United States. "They now make poultry for us," Anderson says, "and we lowered our cost by $20 million a year, plus we got the cash from the sale."
More Thinking Outside the Can
An even more culture-shaking move was the agreement last year to sell the can-making operations. Canning operations were entwined into every aspect of Campbell's operations and financial systems, but were not crucial to the business going forward. In delivering soup to market, says Anderson, as with any other product, the whole idea is to use the least possible amount of capital to produce sales. "It takes strategic thinking about where we add value and where we don't." In June, the company completed the sale of its can-making assets to Silgan Holdings Inc., of Stamford, Connecticut, for $123 million.
Persuading operations folks to trust outside suppliers "wasn't easy," Anderson admits. To win them over, he organized a series of meetings with potential suppliers, and made sure the deals involved strict quality controls. "The successful CFO today has to work very closely with operations," he says. "We assigned one financial person to work exclusively with operations, and put together a team that would have consensus within the corporation." Anderson, like most successful CFOs, is a "people person," Morrison says. "He is a very high-impact person, but he never raises his voice. He is a consummate diplomat."
Another Anderson innovation: looking for cost savings across the company, rather than division by division. One move was to set up a global chocolate task force involving all the divisions--from Godiva to Pepperidge Farm-- that use chocolate. "Each operation has been fairly independent in terms of buying," he says, "but by putting together a central group that focuses on chocolate, they can do better." So far cost savings in excess of $4 million have been realized in the face of a rising market.
As Campbell becomes a more global company, it is seeking out suppliers that are equally global. And it's finding ways not only to negotiate lower prices, but also to change its processes to drive costs even lower. "If you simply go out and negotiate a lower price for flour, that's short-term," Anderson says. "We save a lot more money by changing where and how we make things." In 1996, for example, the company cut the number of soup lines. It also centralized juice-and-sauce manufacturing in two plants, from which products could be shipped directly to customers. "In each plant, the ingredients had come from different sources," Anderson explains. "By standardizing the process, we were able to standardize ingredients, and drop from 30 or 40 suppliers to 1 or 2."
Perhaps Anderson's most important role, though, has been spearheading the strategic- planning process that began last October. Morrison says "he's played a key leadership role" in launching the process, which aims to make Campbell one of the best consumer- products companies in the world, not just one of the top food companies.
The process began with a meeting of all the company's key business leaders to talk about goals. "You have to start by getting everyone to recognize that the primary purpose of the business is to create wealth over time," Anderson notes. "And they must understand that the way to do that is by satisfying customers." That understanding led to a buy-in on the marketing effort, he says; after that, agreement on cost-cutting wasn't hard to get. The company is aiming to take out around $150 million in costs annually ($450 million over three years). "Everyone agreed it was necessary," he comments.
The group has set up a task force whose steering committee includes representatives from each business, and it has come up with a global game plan. "What we do with the savings is what matters," says Anderson. "Cost reduction by itself doesn't create much value. The issue is what do you do with the proceeds and how do you reinvest them back into our brands--that's what really drives shareholder wealth."