Management Accounting

Sara Lee Shells Out Sales to Save Suppliers

The food maker may give sow and turkey farmers up to two years' worth of business to encourage their lenders to loosen credit.
Sarah JohnsonJune 17, 2009

Editor’s Note: After this article was published, a Sara Lee spokesman contacted CFO to say Chappelle misspoke during the question-and-answer session of his presentation. In fact, the company does not offer written guarantees of future business to its raw material suppliers, which include pork and turkey farmers. The company does offer forward-looking contracts to other types of suppliers that produce products on behalf of Sara Lee. CFO stands by its reporting of the comments as made at the time.

The credit crisis has put pressure on companies to prop up critical business partners whose ability to get financing has severely waned or disappeared altogether. The worry that some of his suppliers may not survive without his help has been plaguing George Chappelle, chief supply-chain officer at Sara Lee, over the past year. He predicts the difficulties are likely to continue as the supply chains at companies like his continue to shrink.

To compensate, the food maker has reached deals with some of its critical suppliers that they can literally take to the bank. For instance, Sara Lee may promise in writing to give certain sow and turkey farmers up to two years’ worth of business in order to encourage those suppliers’ bankers to lend. To be sure, the act isn’t a selfless one: “One supplier can really change not just the availability of your product but the price of that product,” Chappelle told a roomful of finance executives at the CFO Core Concerns conference in Boston today.

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He predicted that shaky supply chains will lead to more macroeconomic troubles down the road, particularly in the food industry. The industry has already been hampered by the fall in consumer demand and the rise in fuel prices and feed corn. And some food companies may see their cost of doing business go up as restrictive legislation regarding food preparation makes its way through Congress, following recent deaths stemming from salmonella-tainted peanut-butter products.

Of more immediate concern: the tightened credit markets have hampered some of Chappelle’s suppliers’ ability to get the financing they need to keep their operations running between payments. “The system is stressed to a point where so many pieces are barely surviving,” Chappelle said. “At some point something is going to break in the system, and the whole [food] industry will be looked at differently.”

In particular, the volatility in commodity pricing for energy, corn, and soy has been top of mind for Chappelle. To make up for the higher cost of making its products – which include baked goods, hotdogs, and coffee – Sara Lee has raised prices. That process of price hikes, however, can take between six to nine months. The lag cost the company $50 million before the new prices took effect, a “devastating” hit, Chappelle said.

Other steps Sara Lee has taken to make up for the rise in commodity prices and the downturn include closing some of its plants and eliminating some product lines. Further, the company consolidated its supply-chain operations into one organization-a process, Chappelle acknowledged, that probably should have been launched earlier. Nevertheless, the reorganization has resulted in “tremendous financial benefit” for the company.

More than 10,000 employees out of Sara Lee’s total 400,000 workers are part of the North American supply-chain operations. The company has 23 manufacturing facilities and 11 distribution centers in the United States and Canada.