BOCA RATON, FLA. — Operating in a logistics network that was optimized for the old Kraft Foods and not for a new biscuit-focused business put Mondelēz International in a disadvantaged cost position when it spun off from Kraft in October 2012. But the Northfield, Ill.-based company has set its sights on the reinvention of its supply chain, an effort the company expects to be the main driver of margin improvement.
In a Feb. 18 presentation at the Consumer Analyst Group of New York conference in Boca Raton, Mark Clouse, executive vice-president of Mondelēz and president of developing markets, said the company has put forth several building blocks: Developing a new state-of-the-art growth plant for the Americas; streamlining and upgrading its existing network; and optimizing its logistics.
“All of these steps will build on our improved processes and discipline across the entire supply chain,” Mr. Clouse said.
In looking at its growth plans for the Americas, Mr. Clouse said Mondelēz is building an integrated supply chain hub in Salinas, Mexico.
“This is part of our global efforts to manufacture our top products on advantaged assets at advantaged costs,” he said. “The facility is on track to open in the fourth quarter. It will be a fully integrated site with new technology, co-location of suppliers, integrated logistics and the ability to support growth and expansion for our power brands in the Americas.”
Mr. Clouse said Mondelēz has made “tremendous progress” in its construction of the facility, and when the plant opens it will have 5 lines entirely focused on growth with a potential for up to 14 for further growth and expansion.
“The new plant will showcase our lines of the future,” he said, adding that on average the lines will be 50% to 60% more efficient than other lines in the system. The plant also will include a logistics hub to take advantage of the company’s existing bakery in Monterey, Mexico, to scale shipments directly to Mondelēz’s branches, bypassing mixing centers.
“Every package that ships from this hub will be on average 1,000 basis points higher in gross margin than our existing network,” Mr. Clouse said.
While construction is under way on the Salinas facility, Mr. Clouse said Mondelēz is making headway on its second building block by consolidating facilities and upgrading assets to take advantage of the same breakthrough technology used in its Mexican bakery.
“We have already made tough decisions regarding our existing footprints, including the closure of our Lakeshore Bakery in Toronto last September and the planned closure of our Philadelphia bakery in early 2015,” he said. “These decisions are never easy, and we certainly don’t take the impact lightly. But it is a critical enabler in taking advantage of our scale and making us more competitive now and in the future. As we consolidate volume, we are also installing our new lines of the future. We are making our existing bakeries significantly more efficient and we are adding critical packaging capabilities and needed capacity.
“For example, we recently announced our decision to invest $130 million in our plants in New Jersey and Virginia. Across our North American asset base, we expect to install 16 new biscuit lines over the next five years. But we are going to also continue to focus on improving our fundamentals and driving both the old and new assets to optimal performance. We remain committed to delivering returns well in excess of capital cost for every dollar invested.”
The last building block of Mondelēz’s plan is to optimize its distribution model. At the time of the spin-off, Mondelēz had warehouses that had been built for the old Kraft Foods. Mr. Clouse said there were too many and they were positioned best to serve Kraft’s geographic footprints.
“For example, we had more inventory than we needed in the Midwest despite the fact that our business skews East because that is where the warehouse space was,” he said. “We have now exited three of those Midwest distribution centers and we have one more closure scheduled in Q3 this year. In doing so, we are moving our capacity closer to our business while reducing warehouse costs by 5%.”
The redesigned distribution network allows Mondelēz to ship products faster to customers by going directly to the company’s branches, he said.
“This enables us to be more responsive to demand and eliminate a step in the process,” he explained. “These shifts have already generated a positive impact on service and on-time delivery. Case fill rates have improved by 5 percentage points over the last two years while on-time delivery rates improved by 10 points. Going forward, these changes will significantly improve our ability to manage inventory and working capital to improve cash as we continue to keep pace with our manufacturing transformation.”