The Customer Supply Chain Business Essay
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The report consists of a project entitled "Pillsbury: Customer Driven Reengineering" undertaken as a part of the course curriculum for the subject "Business Process Reengineering (BPR)". As a part of this project, after reading the case, a discussion took place between all the group members so as to clearly identify the problem definition.
As a next step, discussion of the various issues faced by Pillsbury were discusses followed by the evaluation of the efforts undertaken by it. Competitive pressures, technology advances, and demanding consumer preferences were causing all companies in the food industry to reexamine their operations and attempt to eliminate waste and inefficiency throughout the food chain. The Efficient Consumer Response (ECR) effort was a multi-industry project, ECR's goals were to reduce costs and drive inventory levels down throughout the system, while simultaneously enhancing capabilities to meet the needs of diverse consumer market segments.
Pillsbury executives were unsure whether their company was prepared for the new ECR environment. So, this report basically includes the entire experience involved in undertaking the planning of BPR at Pillsbury and the various phases it went through during the transition and the challenge faced by it i.e. whether to go for a continuous improvement program having a short term view or a redesign of processes which was more futuristic.
OBJECTIVES OF THE STUDY
To understand the practical implementation of BPR classroom concepts
To understand the degree of complexity involved in planning BPR implementation
To understand the importance of customer driven reengineering approach in order to adopt a "pull" strategy for the entire supply chain i.e. better matching Pillsbury's purchasing, manufacturing, and distribution operations to consumers' purchases
To understand how to use the available resources in an optimum manner
To understand the implications of a continuous improvement program Vs Redesign of processes.
To understand the importance and criticality of various performance measures like ABC costing.
Pillsbury is a brand name used by Minneapolis-based General Mills and Orrville, Ohio-based J.M. Smucker Company. Historically, the Pillsbury Company, also based in Minneapolis, was a rival company to General Mills and was one of the world's largest producers of grain and other foodstuffs until it was bought-out by General Mills in 2001. Antitrust law required General Mills to sell off some of the products. General Mills kept the rights to refrigerated and frozen Pillsbury products, while dry baking products and frosting are now sold by Smucker under license.
Leo Burnett who created Pillsbury's Doughboy and Jolly Green Giant considers them two of the agency's top five brand icons.
Pillsbury once claimed to have the largest grain mill in the world at the Pillsbury "A" Mill overlooking Saint Anthony Falls on the Mississippi River in Minneapolis. The building had two of the most powerful direct-drive waterwheels ever built, each putting out 1200 horsepower (900 kW).
There are now plans to convert it into a loft-style apartment building. The Cunningham Group plans to convert six historic buildings to a mixed-use project varying from 6 to 27 floors in height. The project will include 895 units of housing and 175,000 square feet (16,300 m2) of commercial space, including the Pillsbury "A" Mill.
The company originated in 1869 when Charles A. Pillsbury bought a share in a Minneapolis flour mill. After the purchase of additional mills and the introduction of enhancements to the milling process, his firm was reorganized in 1872 as C.A. Pillsbury and Company. It was sold in 1889 to an English syndicate, which merged Pillsbury with other mills in their holdings to form Pillsbury-Washburn Flour Mills Company, Ltd., with Charles Pillsbury as managing director. The Pillsbury family regained ownership of the company in the 1920s, and it was incorporated as Pillsbury Flour Mills Company in 1935. In 1972 Pillsbury began purchasing Burger King fast-food outlets, and it soon came to own the entire chain. Through the Green Giant Company, acquired in 1979, it began marketing canned and frozen vegetables and frozen prepared foods. It also acquired Häagen-Dazs, maker of premium ice cream and frozen yogurt, in 1983.
Pillsbury was owned by British company Grand Metropolitan, PLC (renamed Diageo PLC) from 1989 to 2001, when General Mills acquired most of Pillsbury's assets (Burger King remained as a separate division of Diageo until 2002). The Häagen-Dazs brand was marketed through a joint licensing agreement with Nestlé and General Mills.
The company manufactures a wide variety of consumer food products under the Pillsbury brand, including frozen biscuits and rolls, breakfast foods, cookie dough, cake mixes, and snack foodhttp://s3.amazonaws.com/gmi-digital-library/8b86b131-cccf-4292-b584-d216cf00fdd7.jpgBiscuitsBreads Grands!® Cinnamon RollsCinnamon RollsBuffalo Chicken Crescent PuffsReady To Bake!® Partner BrandsStrawberry Marshmallow Pie
Biscuits, pies, flour, pizza crust, cookies, crescents, cinnamon rolls and various partner brands like Green Giant and Cascadian Farm.
Pillsbury entered Customer Driven reengineering initiative expecting to achieve significant levels of cost reduction and efficiency. To its delight, it also discovered a new way to compete.
Competitive pressures, technology advances, and demanding consumer preferences were causing all companies in the food industry to reexamine their operations and attempt to eliminate waste and inefficiency throughout the food chain. The Efficient Consumer Response (ECR) effort was a multi-industry project .ECR's goals were to reduce costs and drive inventory levels down throughout the system, while simultaneously enhancing capabilities to meet the needs of diverse consumer market segments. Pillsbury executives were unsure whether their company was prepared for the new ECR environment.
The executives perceived that Pillsbury lacked several critical capabilities to win in this new environment. In 1991, Dan Crowley as Controller of Green Giant, had launched an activity-based cost (ABC) initiative to examine the group's high cost structure. The study revealed startling plant-to-plant variations in costs for essentially the same process, large dispersion of actual costs from the company's standard cost per case.
In August 1993, Crowley and Slocumb took a BPR proposal to CEO, Paul Walsh's, Strategy and Policy Group, which comprised the division presidents of Pillsbury's major business units and the top functional department heads. The proposal identified a process which would complement Pillsbury's existing strategic plan to achieve top quartile financial performance amongst its strategic peers.
The case describes the various efforts undertaken by Pillsbury during this transition and the various phases of the reengineering problem detailing various activities undertaken in every phase. The major challenge faced has been a choice between redesign of processes or continuous improvement because the target set in the earlier stages seemed a bit too "achievable" in the later stages
NEED FOR REENGINEERING
Customers perceived Pillsbury as an average company, not the best, not the worst, and without much innovation.
John Mann, Senior Vice President and General Sales Manager, and another newcomer to the Pillsbury senior management team, concurred with McWilliams' assessment: "We were viewed as a laid-back Midwestern company, one that found it difficult to create a sense of urgency."McWilliams felt that Pillsbury had to become a different company if it was to change the perception of customers.
Pillsbury executives were unsure whether their company was prepared for the new ECR environment. The executives perceived that Pillsbury lacked several critical capabilities to win in this new environment.
First, the company was still organized according to traditional functional lines: purchasing, operations, distribution, finance, and marketing and sales. This organization led to local excellence and optimization of the individual functions but not necessarily to the optimization of the entire value chain.
Second, the company's financial measurements and performance measurement system reinforced local optimization.
The food market had become fragmented and the majority decisions taken by the consumer were made in the retail environment diluting the effect of the brand image. Thus Pillsbury had another challenge to transform its arm's length relationship with the retailers (transaction based) to relationship oriented.
DRIVERS FOR BPR AT PILLSBURY
Highly competitive environment.
Pillsbury lacking the necessary capabilities to compete in such environment.
Lack of optimization of the entire value chain.
The need to transform the arm's length relationship with the retailers.
To have an Information system to enable fact based marketing
To develop a customer driven supply chain i.e. transition from push to pull strategy of supply chain
Eye opening results of activity based costings. The project team prepared the classic ABC "whale curve" which showed a few product lines producing all the profits, with the remaining SKUs either breaking-even or losing money. Based on the insights from the ABC analysis, Green Giant management closed about a half dozen plants and consolidated operations more efficiently in the remaining plants. Crowley then took on a broader finance role within Pillsbury as Operations Controller and extended the ABC analysis to many of the dough manufacturing plants.
Pillsbury now had good insights about the cost drivers for its cost of goods sold. The weak link was developing comparable information for its warehouse, sales, marketing, and promotion expenses. It had no ability to trace these expenses to its customers so that it could produce individual customer P&L's.
Skepticism that TQM was delivering its promised benefits to the P&L bottom line within a reasonable time frame. For example, an internal study compared companies known to have adopted TQM principles with a control sample of "non- TQM" companies. The study found no discernible difference in financial performance between the two sets of companies.
VISION: Crowley and Slocumb's vision of a potential for 15% cost improvement (about $300 million) in a staid and mature food processing company was met with some understandable skepticism and disbelief. Despite that, Walsh and his management team provided to Crowley and Slocumb a modest budget and 90 days to develop a business case to determine whether a $300 million cost reduction was possible.
Crowley was appointed to a new position, Vice President for Customer Driven Reengineering, and Slocumb became Vice President for Business Process Reengineering. The business case was to focus on cost and margin improvements in three major divisions: Pillsbury branded products, the Green Giant products, and the frozen pizza businesses. These businesses had $2.5 billion of sales in Fiscal Year 1994.
Reengineering: Phase I
The Pillsbury team selected a consulting firm to work with them to help build the business case. Three months of analysis led to identifying three core business processes that offered targets for improvement:
â€¢ Customer Supply Chain
â€¢ Brand Management
â€¢ New Product Commercialization
The Customer Supply Chain (CSC) was decomposed into three sub-processes:
â€¢ Total Customer Development
â€¢ Fast Flow Demand Replenishment
â€¢ Value Based Sourcing and Supply
The team then proceeded to identify the opportunities for process improvement within each of the three CSC sub-processes.
Value Based Sourcing And Supply
The third CSC sub-process, Value Based Sourcing and Supply, focused on Pillsbury's extremely complex system of vendors and sourcing arrangements for its more than $500 million of raw material purchases.
Historically, Pillsbury had reduced its material costs by exerting price pressure on its suppliers. Further gains from such price pressure were considered limited. The project team believed that more flexible and robust ingredient specification would allow them to select more efficient vendors, and that additional gains could be realized by leveraging vendor resources and knowledge. To gain these benefits, however, vendors would have to become partners with Pillsbury in a total cost reduction process. Cost savings from Value Based Sourcing and Supply were estimated at about $40 million (around 8% of purchases), plus savings in working capital reduction of about $14million.
Outputs of phase 1: A business plan that promised margin improvements through cost reductions and revenue enhancements of more than $100 million, plus reductions in working capital of about $25 million.
Reengineering: Phase II
Phase II was launched in January 1994 to determine whether the business case developed in Phase I was feasible and realistic.
About 25 Pillsbury employees, supported by the external consultants, spent four months analyzing customer data bases on more than 100 top accounts, conducted in-depth interviews with key customers and suppliers, and mapping and assessing the state of all existing internal business processes in the customer supply chain.
The study of internal processes revealed highly complex, time-consuming processes with dozens of handoffs, and multiple recycling of requests for decisions and resource authorizations. The customer interviews revealed that important food retailers, wholesalers, and brokers were moving aggressively forward with plans for category management. Category management promised to give retailers far more effective management capabilities over their store shelf space allocations, SKU rationalization, and demographic marketing plans.
The Phase II studies confirmed the vision established at the end of Phase I (see Exhibit 17)
that reengineering the customer supply chain could provide upwards of $100 million in benefits.
About half would come from working more closely with customers-adopting a more focused customer segmentation strategy, targeted marketing using local demographic information on consumer purchasing behavior, and exploiting store-specific cost and profitability information to promote the most profitable mix of brands and SKUs for both Pillsbury and the local store. The other half would come from better managing Pillsbury's entire supply chain-from growers and other key vendors, through manufacturing, transportation and distribution to warehouses and individual stores.
It needed to take activity-based costing (ABC) down to retail store level P&Ls. The old financial model calculated standard costs per case and produced product line P&Ls. The new model will measure activity-based costs of entire processes and give Pillsbury customer P&Ls.
Service based pricing: shifting its pricing focus so that it can charge more for special services that some of our customers may desire but that others do not want. It can define a base level of service that everyone receives, with an explicit statement of what that includes.
Major change in measurement: performance measurements will need to be driven by customers' and consumers' expectations
In June 1994, the Pillsbury team had completed the customer analysis and was ready to move into redesign. Before the meeting to present the findings and recommendations to the Integration Committee, Slocumb expressed some concern about the current set of recommendations.
The business case to achieve $100 million in cost savings and margin enhancements was then credible. But the target may be too reachable. People may obtain the $100 million in cost savings from local process improvements, not from the complete redesign of its high-level business processes that were described in Phase I. the target of $100 million had come to be the objective rather than the fundamental redesign of our Customer Supply Chain.
"If we get $100 million in benefits, that's certainly a worthy goal, but it will not redefine the organization. We have a choice whether to be a company with a $25 stock price, or take the actions that will take us to a $50 stock price.", Tom Debrowski, Senior Vice President of Operations and Chairman of the Integration Committee
Pillsbury should be re-designing the organization around customer and consumer values to create a new and sustainable competitive advantage. It should strive to be the best in providing the freshest product at the lowest cost to retailers along with unique consumer insights from its superior information systems.
It can achieve the $100 million without redefining the way they do business. But to achieve the $300 million, it will have to become a very different supply organization. It will have to get the supply chain to a high level of competitive fitness by getting cost savings that will make it more efficient than its competitors, and, then generating growth through its value-added consumer insights, getting the right product to the shelf at the right time at low cost to the retailers. The largest barrier for achieving this level of competitive fitness is introducing and managing change. Multi-skilled, multi-functional teams, including finance, need to be working with our customers.
To achieve the $300 million improvements, Pillsbury needed to approach the organization with a completely open mind, to think the unthinkable. It will force it to think completely out of the box if they are going to achieve benefits of that magnitude. They need to stop managing individual functional departments, and begin to manage core operating processes.
With the old model, the manufacturer, the distributor, and the retailer each attempts to optimize its own operations. The new way, through reengineering, should enable them to optimally source raw materials, convert to finished goods, distribute to trade customers, and sell to consumers in ways that minimize total system cost. By determining who can do each process in the chain most efficiently, it can let that process get done only once, at the most efficient site. That way it can eliminate waste from the system.
The success needs the following. The Analysis, Design and Prototype yielded the pain areas and laid out the broad road maps. But implementation needs the following to be successful -
Senior management must drive reengineering initiatives with a well-articulated vision that is appropriate for the situation.
IT is an undervalued asset that can be tapped through reengineering to transform a company from a make-and-sell-oriented enterprise to a sense-and-respond-oriented enterprise.
Successful implementation of reengineering projects requires the involvement and participation of the company's managers and employees. Consultants and outsourcing are important for various aspects of a reengineering project, but they are insufficient without the buy-in from managers and professionals in the organization.
Business process can be streamlined or reengineered, but to change the long-term economic picture, a transformation initiative needs to encompass the reevaluation of communication systems and the sharing of intellectual assets.
The organization should have a clear target in mind, whether it is to incorporate a continuous improvement philosophy or a complete redesign of processes.
AFTER EFFECTS OF REENGINEERING EFFORTS
During the last three years, the entire strategic direction of the company has changed.
Selling off the flour mills was an epochal event. It was a major cultural shock to many people inside and outside the organization who thought of Pillsbury as a vertically-integrated flour manufacturing company.
They have demonstrated that they can become a consumer-based company that is prepared to get out of operations that do not add value.
An integration of the entire value chain was the target driven by the customers leading to a pull based strategy. Information systems were to enhance the communication capabilities to incorporate fact based marketing.
Major cultural change was seen with the relationship with the customers transforming from merely an arm's length relationship
Major improvements in expenses and profitability were expected rendering Pillsbury with the capabilities required in such competitive environment.
The problems initially faced by Pillsbury required a complete redesign of the processes and not merely a continuous improvement effort. Thus the decision taken by the management to extend the target to $300 million was a correct decision if a long term view was to be considered.
The major changes that were to incorporated as a result of this BPR effort were necessary for Pills burry to have the necessary capabilities to compete in the highly fragmented and competitive market.
The reengineering effort was well planned in various phases describing the various considerations of each phase starting with the development of a business case followed by its feasibility analysis. The areas chosen for improvement were
Customer Supply Chain
New Product Commercialization
These areas provided great opportunity for integration of the entire value chain and to transform into a pull based value chain with the customer as the major driver.
The efforts undertaken have led to great motivation amongst all the stakeholders and they believe that Pillsbury is not a laid back organization anymore. Their customers are enthusiastic about shifting from changing the way they do business together and are willing to endorse new relationships, such as service-based pricing.
The importance of manufacturer-retailer relationship in this highly fragmented market.
The difference in continuous improvement efforts and redesign of processes
How to approach a BPR problem in a systematic way demarcating the tasks to be done in a particular order in various phases.
The importance of techniques like ABC Costing and the utilization of the revelations such techniques make
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