Management Accounting

Kraft Finds a New Place to Cut Costs: Purchasing

Lusting to acquire Cadbury, the food maker is looking to chop its current list of 70,000 suppliers in half.
David KatzSeptember 9, 2009

To keep their bottom lines stable in a time of anemic revenues, many companies have slashed their workforces and inventories to the bone and watched their receivables and payables like hawks. Have they reached the point where there’s nothing else to cut?

Currently lusting to acquire Cadbury and seeking more ways to let sales drop to the bottom line, Kraft Foods executives think their company, at least, hasn’t. Another way to curb near-term costs, they say, is to radically cut the company’s list of suppliers.

Indeed, said Kraft CFO Tim McLevish at Barclays Capital Back-To-School Conference Wednesday, “We’re narrowing our number of strategic suppliers to fewer than half the current 70,000. We’ll select those that offer sustained competitive advantage and who can grow with us.”

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In March Kraft told its suppliers it was conducting a purchasing review that put existing suppliers in competition both with each other and with potential new suppliers, according to Reuters. The company is also trying to gauge where it could save money by buying packaging materials and other items for the entire company, the news service reported.

Calling the strategy a matter of “better leveraging our scale,” the finance chief said the food maker was also looking to make a deep cut in its current number of 40,000 raw-material specifications. “We’re reducing this number by standardizing wherever possible,” said McLevish. “Only where there’s a difference that adds consumer value will we differentiate. We think the cost savings from this alone will be quite substantial.”

It better be. Kraft has already seen $1.3 billion in savings from closing 36 plants and eliminating 19,000 jobs. At the conference, the finance chief said the company wants to cut overhead as a percentage of net revenue to about 12.5% in 2011 from 14% in 2008.

Besides via procurement, the company is looking to cut costs by reducing its 46-day 2008 cash-conversion cycle by about 5 days by 2011. It also wants to streamline manufacturing, the finance chief said, and is pursuing the goals of “removing bottlenecks, reduc[ing] waste, optimizing labor, and streamlining inventory.”


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