Looking For Value

Dec. 21, 2004
Reducing internal costs and enhancing customer value draw attention.

Always happy to talk about company strategy or new products in the pipeline, corporate executives' eyes glaze over when the discussion turns to the supply chain. Rick Blasgen, vice president, supply chain, for Kraft Foods North America, knows this. "Most major manufacturers, ourselves included, are driven by senior leaders who are primarily general managers, or marketing or brand managers. They don't sit around thinking about satisfying the needs of the customer at the lowest total delivery cost. We do that," the fast-talking, 43-year-old Blasgen affirms. As a consequence, he takes his role as salesman seriously, and is always more than willing to talk about the value his organization brings to the company. Moving up through Nabisco, which was acquired by Philip Morris in 2000 before Kraft's IPO last year, Blasgen was named to his current post this past June. His view is that, in an organization as large as his -- North America accounted for 74% of Kraft Foods' $34 billion in revenues last year -- whatever his group does to streamline the supply chain reduces cost of goods sold and therefore has a direct impact on the company's bottom line. "If you treat your organization as a cost center, then you will be a liability to be managed, and somebody in the financial organization will manage you," Blasgen states. "You can operate that way, or you can operate to where you can add value." To this end Blasgen likes to talk about the "horizontal" supply chain, a concept that encompasses all of the logistics activities that go into delivering product to customers. This begins with bringing raw materials, ingredients and packaging into the manufacturing plants, planning capacity and scheduling production at those plants, and managing the inventory flow on the outbound side through the various distribution networks. At Kraft Foods, including warehouse handlers and drivers, this is the job of more than 5,000 people. Blasgen talks about the horizontal supply chain because he believes his organization's objective is not to optimize at the functional level, but across the order-fulfillment process as long as the lowest total cost objective is met. Kraft will spend $500,000 in manufacturing for example, if it will save $1 million in transportation or warehousing costs down the line. This, in fact, is what Blasgen says he likes about working in the supply-chain arena, interfacing with almost every area of the company and demonstrating to people in sales and marketing, finance, procurement, manufacturing and research and development, that by hooking up processes differently, not only can internal costs be reduced, but customer value can be enhanced as well. "You're going to do things to allow your selling organization to do business easier in the marketplace," he says. As another example Blasgen describes a customer that's going through a SKU rationalization -- trying to reduce the number of stock-keeping units on its shelves. After considering advertising and marketing issues, the customer will pick the manufacturer that offers the best product availability, delivers orders on time and damage free, invoices accurately and is generally easier to do business with. These performance areas are aspects of what's known in the supply-chain world as the "perfect order." Kraft constantly measures how it's doing with regard to on-time delivery, case fill, invoice accuracy, and damage-free shipment. By consistently doing well, Blasgen believes his organization can operate at a higher level of integrity and credibility than the average consumer-packaged-goods supplier, allowing a customer to reduce the amount of Kraft product in its inventory system from three weeks to two weeks, for example. This represents real value for the customer because it frees up cash flow for other purposes, such as building new stores. And because his organization tracks performance so closely, Kraft can offer high-volume customers a break by shipping product directly from manufacturing plants. The key is to offer potential discounts intelligently. "We know exactly how much it costs. We know what the savings are, and this allows us to work with customers to come up with the best joint product flow," he says. Such customer relationships require a lot of trust and a willingness to share information, and the ability to weather occasional product availability or surplus problems, says Blasgen. Similar trust-based relationships must also extend to transportation and warehousing providers, and material suppliers. "It's a matter of willingness to share risks and rewards. And it's also a matter of leveraging and exploiting the opportunities that each one bears."

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