May 26, 2015 Heinz-Kraft Merger Raises Questions About Supply Chain Operations

Volume 18 | Issue 3

The recent announcement of the Heinz-Kraft merger has many of us wondering how two giant companies can smoothly transition into one entity

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The newly-formed super company is the fifth largest food and beverage enterprise in the world and third in the U.S., which equates to a massive supply chain and a hefty list of suppliers. Before the merger is underway, Heinz-Kraft will have to rework logistics and decide which supplier contracts to keep—and which ones to drop.

Kraft and Heinz will begin to operate together in the upcoming summer months. The merger is raising some eyebrows due to a few recent bumps in the road on Kraft’s part, including a break up with its global snacks partner Mondelez Inc. in 2012 (which has limited the company’s operations to North America), the loss of their CEO in December and the recent recall of blue box mac and cheese. Kraft’s struggles could serve as a disadvantage to Heinz’s operations and the newly-formed entity. The companies will have to band together in more ways than one, reworking contracts and operations to prevent any major mishaps moving forward.

In an M&A, whether it’s a PE takeover or a true merging partnership, there are generally a few routes organizations take, with the end goal always being to generate the most profit once the transaction is finalized.

M&A Goals:

• Nixing competitors;
• Breaking up the acquired company and selling off parts;
• Leveraging components of both organizations to make the new entity stronger than ever.

In the case of Kraft Heinz Co, the positioning is that of the latter. Both organizations stand to benefit, with the merged entity predicting revenues of approximately $28 billion. The goal is to determine which parts of the companies overlap and how to leverage their similarities to create a top-notch competitor in the food industry.

Companies who find themselves in a situation like Heinz and Kraft need to plan and prioritize to deal with the risks and uncertainties involved in large-scale mergers. This process begins at very early stages of a merger, and must be considered before any plans are carried out. Kraft Heinz Co. likely began the dealing and planning phases months—if not years—ago.

Here are some of the most important stages of an M&A, and those that are often times the most overlooked.

PLAN
The best way to tackle a merger head-on is to plan out the details far in advance. A merger doesn’t begin when it’s announced –the planning process begins far before to mitigate any potential complications before the transition actually begins. Conducting risk assessment is one of the most important phases within this stage of an M&A, and this process takes time. Mergers, particularly in the food industry, bring a special set of challenges. Technology disconnects, data standards and infrastructure around supplier information can make transitions difficult, especially for large companies like Kraft and Heinz, where food safety and potential risks create more of a challenge for suppliers and company leaders. In this stage of a merger, all of the goals, regulations and standards, and potential issues need to be laid out so companies can plan for the worst.

PRIORITIZE
During major transitional periods, poorly thought-out plans are the first to die. It’s pertinent to prioritize parts of the plan and decide which aspects are essential to successful execution. One of the major considerations in the Heinz-Kraft case will be dealing with the overlap of suppliers and contracts. As the third largest food and beverage distributer in the U.S., it would be negligent to overlook supply chain operations before carrying out a deal. Why? Before they planned on coming together, Heinz and Kraft were likely using many of the same suppliers. Overlap will only increase once the deal gets carried to fruition. When this happens, entities on both sides must look at supplier contracts from a buyer-centric point of view. But this can create a disconnect with well-established suppliers.

EXECUTE
Many manufacturers, in the food industry and otherwise, are devoting significant time and resources to market activity as a core part of their growth plans, whether to drive global reach, expand vertically, or optimize logistics and supply chain models. Throughout this process, planning and prioritization will remain some of the most important objectives.

Unfortunately, even the most fail-proof plans can fall victim to poor execution. In many cases, the operational and logistical complexities are some of the most challenging to address in practice. In the case of Kraft Heinz Co, this will become especially apparent when the nuances of a global supply chain post-merger integration are addressed. Organizations finding themselves in a similar position should plan and prioritize, but stay flexible to account for any potential disruption.

Large-scale mergers are often the most difficult to carry out due to complicated supply chain management and new supplier relations. The best way to handle prioritizing and planning is to keep a conservative outlook when measuring success. But the challenge isn’t determining which parts come together and which ends fall apart—it comes down to execution. Now that the planning stages are over, Kraft Heinz Co will have to deliver for consumers as well as suppliers.

Paul Noel is SVP of Procurement Solutions, Ivalua.

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