KraftHeinz Procurement Bends to 3G Capital’s Policies: How’s it Working Out for You?

Several stories came out this week, related to KraftHeinz’s share price, its procurement department, and the fate of its parent company, 3G Capital.

First, Fortune reported that the stock price of Kraft Heinz plunged 20% late Thursday after the food giant disclosed it received a subpoena from the Securities and Exchange Commission and reported a large net loss due to the reduction of goodwill in some of its best-known brands.

Kraft Heinz also said in a conference call discussing earnings that it cut its quarterly dividend to 40 cents a share from 62.5 cents and that it was considering selling off some of its businesses to help pay down debt. The company reported $30.9 billion in long-term debt at the end of 2018, up from $28.3 billion a year earlier.  In its earnings release, Kraft Heinz said it received a subpoena last October related to its “accounting policies, procedures, and internal controls related to its procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to its agreements with its vendors.”

The amount pales in comparison to the company’s other bad news Thursday — when it said it wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion dollars and it slashed dividends, sending the stock down 20% at one point, the Journal reports.

Hmmm… I wonder what this could be?  Pierre Mitchell, an expert on procurement from Spend Matters  Spend Matters Chief Research Officer Pierre Mitchell has looked at how any procurement department should work with finance departments, and thinks it may be related to shodding accounting practices.  He notes:

“Based on our research, procurement executives need to be tightly aligned with finance executives, especially with controllers related to aligning supplier contracts and associated obligations, risk, and liabilities to financial statements,” Mitchell says. “This is especially critical for global organizations with large commodity spending — especially in consumer packaged goods, where working capital demands are front and center. Things can go wrong on many fronts: commodity hedging, ‘tax-efficient supply chain’ models, third-party financing (e.g., reverse receivables factoring like P&G’s efforts), rebates, pass throughs and other areas.

“Procurement executives have a fine balancing act in terms of aligning the interests of business units, finance (including audit and legal), shareholders and regulators with its own need to drive down total costs, optimize working capital (and not destroying value by just blindly stretching it), and tap supplier innovation. Getting this alignment is not easy, and that’s why we’ve spent a lot of effort researching it (a free webinar replay on the research can be found here and here’s a shorter fun read on it).”

In my own humble experience, I think that KraftHeinz is following the lead of the company that bought them out, 3G Capital, which has a reputation for employing something called “Zero Based Budgeting”.  The idea behind this approach, as documented in the Journal, is to acquire a company, separate its spend into “packages”, and start the budget for each package at zero, forcing everyone to account for every dime.  What this means, however, is that procurement is not building up their cost from the ground up, using approaches such as “should-cost modeling”, but comes up with crazy and unrealistic budgets based on guesses, that are primarily price focused.

I witnessed this personally when working with a large 3PL company, who had worked with KraftHeinz for more than ten years.  Every year, they came up with productivity improvements, which they shared with the company.  The year after 3G Capital took over, the procurement team suddenly started telling them they “need 10% off the price”, without giving any justification.  The 3PL showed them the costs to deliver the business, to distribute their product, to run the warehouse, etc., but procurement didn’t want to hear it.  “10% or we go elsewhere” was the new mantra.  Finally, the 3PL just walked away, telling their procurement team, we are not going to sell to you at a loss.

A year later, Procurement’s efforts at “Zero Based Pricing” are apparently not working out so well.  Procurement is coming up with mythical cost savings, accounting for these savings in non-standard ways, and is failing to invest in new products, new distribution methods, and is falling behind.  The SEC is probing them, and their sales are tanking.

KraftHeinz seems to have forgotten about an important principle:  Procurement’s role is to deliver value for the end customer.  In good times, supply chain and marketing leadership is supposed to invest in innovation, particularly during the massive disruptions we are seeing in the digital ecosystem today.  But KraftHeinz is going for the lowest price, and raking suppliers over the coals to get it.  How’s  that working out for you?