Kraft looks to slash supplier base

CHICAGO Wed Sep 9, 2009 9:09am EDT

Kraft Macaroni and Cheese is displayed at the company's headquarters in Northfield, Illinois, February 10, 2009. REUTERS/John Gress

Kraft Macaroni and Cheese is displayed at the company's headquarters in Northfield, Illinois, February 10, 2009.

Credit: Reuters/John Gress

CHICAGO (Reuters) - Kraft Foods Inc plans to cut its supplier base in half, a move that would affect more than 30,000 companies, as the largest North American food maker looks to save more than $300 million a year.

Consolidating its purchasing of everything from ingredients to packaging materials is part of a plan to improve productivity that also will encompass logistics and manufacturing, the maker of Oreo cookies and Ritz crackers told Reuters.

The review of purchasing comes as the company tries to simplify a procurement framework that evolved as Kraft acquired numerous companies over the years.

Kraft this week also publicly disclosed its attempt at another large acquisition, a $16.7 billion bid for Cadbury that the British candy maker has so far rebuffed.

Kraft will "continue to assess the opportunity and consider progressing to a formal offer," Kraft CEO Irene Rosenfeld said during a presentation at the Barclays Capital Back-to School conference, where the company discussed its cost-cutting strategy.

The review of purchasing and expected savings from cost cuts come before any potential Cadbury deal, a Kraft spokesman said,

"This is probably the first truly holistic view we've taken," Julia Brown, senior vice president of procurement at Kraft, said in an interview with Reuters.

"We're essentially taking a white sheet of paper and saying 'what is the right number of suppliers to support this particular category, who are they, what is the capability we need for now and in the future, and does the current supplier base have that.'"

The move comes after Kraft spent several years cutting costs via plant closings, divesting brands that did not fit its core categories and putting more money into advertising and product development to boost sales.

All told, Kraft's cost of goods sold was about $28 billion in 2008. Purchasing is the largest area where the company feels it can cut costs, spokesman Michael Mitchell said.

Kraft said it planned to cut overhead as a percentage of net revenue to about 12.5 percent in 2011 from 14 percent in 2008.

Kraft informed its suppliers in March that it was conducting the purchasing review. That review puts existing suppliers not only in competition with each other for Kraft's business, but also with potential new suppliers.

"We're inviting a lot of new suppliers to participate in this process," Brown said.

Overall, Kraft had cost-cutting programs in place that represented less than 3 percent of its cost of goods in 2008. By 2011, the company is pushing for that figure to be more than 4 percent, representing a difference of more than $300 million, Mitchell said.

In some cases it makes sense for an individual Kraft brand to buy its own items, to meet the expectations of the shoppers that buy a product, Brown said. But Kraft is also trying to determine areas where it could save money by purchasing items -- such as packaging materials -- for the entire company.

Currently, Kraft has more than 40,000 different specifications for its supplies throughout the world.

"So we're looking at where does it make sense to be more standardized," Brown said.

Some suppliers that win Kraft's business will benefit from having longer contracts with the food company, while Kraft hopes the stronger relationships will give it greater access to their new products first and exclusively, a key advantage for competing in the food industry.

"Our goal is to become the customer of choice to our strategic suppliers," Brown said.

Kraft shares traded at $26.75 on Wednesday in premarket electronic trading, up from Tuesday's New York Stock Exchange close of $26.45.

(Reporting by Brad Dorfman, editing by Matthew Lewis, Dave Zimmerman)

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