Franz-Josef Vogelsang talks with Michael Sharkey about Kraft’s initiative to manage global value-chain complexity.

For years, driving complexity out of the global supply chain served as a key tool for Kraft Foods to reduce costs—an initiative that yielded minimal savings. But when the company turned to the consumer to help determine the difference between “wanted” and “unwanted” complexity, it began to see substantial results.

“Everyone is trying to reduce complexity, but you can make bad decisions if you look at it just from an internal perspective,” said Franz-Josef Vogelsang, executive vice president of Kraft’s global supply chain. “Conversely, if you put the consumer first, and you determine what is wanted versus unwanted, then you are able to generate growth and cut costs at the same time.”

Eliminating unwanted complexities to reduce costs while simultaneously adding wanted complexity as a growth driver became a top-down strategy for Kraft Foods in 2004. Since then, smart complexity management has become a cultural initiative that is helping to transform Kraft and generate long-term, sustainable growth.

Franz-Josef Vogelsang

Consumers first
Headquartered in Northfield, Ill., Kraft Foods is the largest food and beverage company in North America and the second largest in the world. A long-time wholly owned subsidiary of Altria Group, owners of Phillip Morris, Kraft went public with an IPO in June 2001. The company markets such iconic brands as Oscar Mayer, Post Cereals, and Maxwell House Coffee in more than 155 countries and operates 166 manufacturing facilities with a worldwide workforce of over 98,000 employees.

In January of 2004, Kraft announced a three-year restructuring program to leverage global scale, realign and lower the cost structure, and optimize capacity utilization. Critical in that strategy is the development of a culture that identifies and eliminates unwanted complexities.

“Complexity is a challenge for all businesses,” Vogelsang said. “On one hand, you want to grow the business by creating new products for consumers. On the other hand, creating new products adds complexity, which adds costs. The question becomes, how do you resolve this dilemma? We believe we have a way to do just that by determining what is wanted and what is unwanted complexity.”

When you begin with the consumer and find out what it is they want from a specific product in terms of flavors, sizing, and packaging, you can transfer that knowledge to the value chain to become more efficient, Vogelsang explained. For example, two of the company’s biggest chocolate brands, Freia and Marabou, were being manufactured across multiple plants without any real scale. By reducing the number of packages and formats for the chocolates, the company was able to centralize production on one new, world-class production line. And the cost savings achieved in production allow Kraft to source its chocolates into new geographies to more aggressively compete with private label products.

“To simplify our processes and drive out costs most effectively, we truly must understand consumers and every way in which they interact with our products,” said Nigel Kirtley, senior director of global technology and quality. “We can’t just trim away at the obvious. We have to start with a clean slate, reducing unnecessary complexity while keeping the benefits consumers want. The keys to our success with our assorted chocolate initiative were new consumer insights and an unprecedented technological solution. We reduced costs, consolidated manufacturing, and began producing even better products.”

Follow the rules
According to Vogelsang, there are six important steps for companies to follow if they want to successfully manage complexity:

1. Take a top-down approach. “The CEO and the leadership team have to lead it, or you won’t have a chance,” he said.
2. Implement across the entire value chain. The approach must be implemented in all aspects of the business to have the optimal effect.
3. Understand wanted versus unwanted complexity. “Often, there is a view that all complexity is bad,” Vogelsang said. “Organizations have to learn to identify the good versus the bad, and they can do this through the consumer.”
4. Take out unwanted complexity. “If the consumer is willing to pay for it, then you know you’ve kept the wanted complexity,” he said.
5. Build this thinking into the business model. By understanding what impact complexity has on inventory, cycle time, customer service, and marketing, the business model becomes more efficient.
6. Make it a cultural change.

For an organization to accept complexity management, it has to become a cultural initiative that is business driven, Vogelsang said. When employees see how complexity management can be applied to grow the business with specific examples, more people will buy into the strategy.

“One of the three guiding principles of our culture is to put the consumer first,” he said. “Starting with that perspective is one of the best ways to win the internal battle in terms of cultural change. If the consumer wants and values it, we provide it. If the consumer doesn’t want or value it, we don’t provide it. Focusing on the consumer becomes an enabler to speed the culture change. Our people see the consumer as front and center, and it makes it easier to drive global alignment around the strategy.”

Global flexibility
Part of Kraft’s overall effort to create sustainable growth is to expand global scale. The goal is to grow in established markets, create efficient business models in small markets, and invest in the high-growth developing markets of Brazil, Mexico, Russia, and China.

To be truly effective in these global markets requires flexibility, Vogelsang said. Complexity management is not a one-size-fits-all model and must be appropriately applied in each market with local, regional, and global strategies. Although there are distinct advantages in the supply chain with global brands, converting a popular local brand to a global one can be costly and result in a loss of market share. “It’s about smart complexity management,” he said. “The point is to get an alignment across the entire value chain where you take out the unwanted complexity and leave the things that are important. When there is a strong local brand in a country or region, we don’t touch it.”

When Kraft does launch a new global brand, it makes sure to keep the wants and needs of consumers in different markets in mind. For example, in 2004, the company launched its Tassimo hot beverage system in Europe. The system meets consumer demand for coffeehouse quality beverages, in-home convenience, variety, and easy preparation and cleaning. Consumers simply insert T-Discs of their favorite coffee, tea, or chocolate, and their beverage is instantly brewed.

The European version of Tassimo was launched with small size servings and popular European-brand T-Discs such as Carte Noire, Kenco, and Mastro Lorenzo, while the US version features larger serving sizes and brands such as Maxwell House, Gevalia, and Twinings.

“The Tassimo system is the best example we have in the organization of complexity management,” Vogelsang said. “Sizing in the US versus Europe is a clear example of wanted complexity. You couldn’t launch this type of system in the US with European sizes.”

“We’re making the same decisions everyone else has to make in terms of reducing costs, but the filter we’re using is the reverse,” he concluded. “Instead of targeting X amount of reduction, we’re going to the consumer first to determine what we need to keep and what we don’t. We’re going out and finding the right level of complexity, and that is helping us generate sustainable growth.”