Pillsbury a Tale in Management free essay sample

A Revolutionary Tale In Management Written by: Louis Maatiaha Tangiia Pillsbury: A Revolutionary Tale In Management Assignment: Pillsbury Customer Driven Reengineering Date: 28/04/2013 Student Name: Louis Maatiaha Tangiia Student ID: 4594096 Abstract This report discusses the Pillsbury Companys reasons for changing their strategy and assessment of the new strategy using Value Chain Analysis and Activity Based Costing . A brief history of Pillsbury and its old strategy is outlined initially. The discussion then focuses on their new strategic focus with emphasis on the how and why of this change. The performance of Pillsbury is assessed using Value Chain Analysis with an explanation on how Pillsbury leverages primary and supporting activities to decrease cost and add value across the chain. Activity Based Costing analysis is used to gain insight into the cost structure of Pillsburys supply chain. Finally these insights gained from Activity Based Costing analysis will be explored by assessing Pillsburys ability to influence future decision-making. Table of Contents Abstract 1. 0 Introduction 2. 0 New Strategic Focus 3. 0 Pillsbury Leveraging its Activities 3. 1 Primary activity improvements 3. 2 Supporting activity improvements 4. 0 Activity Based Costing Analysis 4. 1 Cost structure of supply chain 4. 2 Influence on future decision-making 5. 0 Conclusion 6. 0 Reference List 7. 0 Appendicies Appendice 1 New Value chain 1. Introduction Founded in 1869 The Pillsbury Company began as a flour milling firm in Minnesota. This company was then bought by Grand Metropolitan (GrandMet) in 1989, a UK-based consumer goods and retail corporation who sought to become a world leader in branded food and drinks businesses. In 1994 Pillsbury North America sector created 50% of GrandMets 1993 sales of 8 billion dollars due to their 75% market share of refrigerated dough. A choice was made by CEO of Pillsbury Paul S Walsh to focus on core businesses, to consolidate the parts of Pillsbury that add value thus from 1991 to 1993 they sold all their flour mills but retained their procurements with long-term supply agreements. These asset sales were the beginning of many changes to come in their activities as they realised the competitive pressures, technology advances and demanding consumer preferences which were taking its toll on The Pillsbury Company achieving a sustainable profit in the future. 2. 0 New Strategic Focus Pillsburys top level managements realised that changes needed to be made if they were to compete in the current competitive environment. Although a 75% share was held on refrigerated dough products the company as a whole was subpar in relation to its competitors. As a result, the new strategy focus would be to work on improving relationships and activities throughout the customer supply chain rather than relying on their strong brands. Thus looking at Appendix A we can see that there is a priority on Research and Development. This is because original ideas were being researched into product mixes and customer preferences but more importantly costs were being allocated using Activity Based Costing (ABC) in order to single out certain product lines and their profitability. Pillsbury realised a competitive advantage by collaborating with their customers and suppliers. With a collaboration in place between Pillsbury and its customers, shelf space and choices of shelves could be negotiated. Since customers are now basing their choices more upon price and eye-line shelving the choice of shelves and the size of shelves are important factors in the selling of Pillsburys product. Realisation of consumers prioritising on pricing made Pillsbury concentrate on their costs within operations, their suppliers and their customers in that decreases of costs in one part will decrease the cost to the consumer. The management tools, Value Chain Analysis (VCA) which is explained in the following text and ABC thus allowed Pillsbury to realise their new Strategic Focus. 3. 0 Pillsbury Leveraging its Activities VCA is a tool used by many organisations to pinpoint ways of adding value or decreasing costs to their products in order to increase their competitiveness. Leveraging the activities identified is the focus of VCA and an understanding of these activities are directly involved with their organisations purpose and product. These activities are considered the primary costs of Pillsbury: Research and Development, Inbound Logistics, Operations, Outbound Logistics and Marketing and Sales. The other activities are those that support the primary activities and indirectly help in the production of an organisations goods namely: Procurement, IT Management, Service amp; HR and Infrastructure. 3. 1 Primary activity improvements Pillsbury understood that to begin their new strategic focus they had to Research. Improvements were made to this activity when they decided to gain competitive advantage by sharing information with their customers. Information sharing has proven to aid consumer preference. This is helpful because different regions may buy different goods compared to another region, so information sharing systems will for example help delivery times and stock shortages. This consumer demand knowledge could help operations in designating batches and prioritising setup times for certain products, decreasing delivery times to customers and making more efficient purchase choices with suppliers. An important aspect of leverage with information sharing is that the Pillsbury customers see the changes in consumer trends, earlier, which will allow a proactive stance in product differentiation, new products and cake recipes. An example of this is the changes in consumer diets towards healthier choices. As stated above, one activity improvement will produce a domino-effect that improves other activities across the chain. A new information system with the customer will decrease delivery times to customers. Inbound Logistics is a primary activity which focuses on Pillsburys suppliers. This supplier relationship also benefits from the competitive advantage of sharing information. The operations activity benefits as well since the batches could be designated to decrease delivery lead time and setups could be decreased to cut costs. An objective of Pillsbury was to achieve a 100% fill rate. However, this can only be achieved by collaboration. With the realisation that Pillsbury-Customer relationships are a competitive advantage, why cant this relationship extend to Pillsburys suppliers? Historically, Pillsbury exerted price pressures and long-term supply agreements on their suppliers to decrease costs. Although this could only work to a certain extent. Thus Pillsbury realised that having more flexible and better ingredient specification would allow them to find better vendors, and the same collaboration with their customers could be used with their suppliers. If an information system existed with suppliers as well, Pillsbury could decrease stock levels of raw materials, understand and realise new opportunities for different ingredients or use this relationship to garner prioritisation for new products from suppliers. This whole information sharing system will induce cost savings for all parties including the consumers. On the other hand operations could more effectively test their products or find cheaper options for packaging. Testing and packaging could be simultaneously done and outsourced, this would decrease costs and could increase quality of outbound products to customers due to specialisation of the outsourced organisation. In addition an important aspect in Pillsburys case is the utilisation of its assets. For example if the operations sector increased the flexibility of its equipment then set ups could be reduced as one set up would be able to cater to multiple products. Additionally, marketing and sales is the most effective activity for swaying consumer demand for Pillsburys products. Whether it be promotions or advertising, Pillsbury tried to eliminate trade spending inefficiencies with the use of promotions. Pillsbury realised that their most profitable products will allow marketing and sales to target and promote the best products. However promotions must consider consumer preferences as well. 3. 2 Supporting activity improvements Supporting activities can be attributed to one or all primary activities. For instance improvements in HR and Services activity would improve all primary activities. The new strategic focus has forged the way for project teams in Pillsbury. These project teams have effectively initiated Reengineering Programs that are the reason Pillsbury made estimations of $100,000,000 in savings. HR activities increased the value of customer relationships by using teams for their diversity. Multi-skilled, multi-functional teams (finance, marketing operations, logistics) were used to communicate with customers, as this type of team could cater to all contingencies made by customers to attain the best deal. These teams could both increase value and cut costs when contracts are made with customers. 4. 0 Activity Based Costing Analysis Pillsbury originally used traditional costing to assess the costs of production. Initially, traditional costing systems attempt to assign cost directly to products, rather than to activities first and then from the activities to product units. The typical cost report gives information on what is spent, but not why it is spent. This general allocation of costs does not work efficiently since Pillsburys products are different, use different machines and take different times to set up. This is why ABC is used to improve the control of overheads by a cost-cause relationship. The system is flexible enough to relate costs to customers, processes, management responsibility and not just products. 4. 1 Cost structure of supply chain In 1991 Pillsbury launched ABC to examine its high cost structure. By studying 20 Plants in the U. S.  they realised that the costs were drastically different at times when the processes were the same for each plant. Pillsbury also noticed the significant amounts of excess capacity at peak periods immediately after crops were harvested. This was most likely due to decreased costs associated with bulk buys and the use of quick freeze equipment. Referring to exhibits 4 and 5 of the Pillsbury case we can see in both instances large discrepancies that could not be associated to just a smaller volume produced by the respective plants. Exhibit 4 shows the drastic differences in finance costs of London and Dayton plant, and a one sided ANFK plant that only incurred F91 type costs. These outliers show a definite issue that could be resolved by moving operations to other plants which will both maximise asset utilisations and definitively decrease costs. Exhibit 5 remarks on the lowest finance cost producing plant Hoopeston, the array of cost versus production volume for several types of beans. There is a high cost outlier Some. Spec. BBQ product that may need to improve its costing to be profitable. The high cost of the product may also relate to inefficiencies in its production as well which could be due to specialised equipment which would increase setup time. The cost hierarchy used would be batch-level costs since the complexity of the product introduces more cost into every set-up and thus the focus would be on decreasing complexity. Pillsbury used this information to begin the closing down of around 6 plants, by figuring what product lines used what cost drivers. These cost drivers showed surprising results, for instance one cake mix product was unprofitable even though it sold in high volumes due to its complexity (Kaplan, 1995). This instance of complexity is governed by the facility-sustaining costs since Pillsbury effectively decreased the number of plants it needed to sustain output. Exhibits 6 and 7 of the Pillsbury case show significant differences from traditional costing to ABC in relation to cake-mixes. ABC more accurately measures the costs each cake mix make revealing that the Caramel Bundt cake-mix was largely understated cost-wise using the traditional costing method. Batch-level unit costing would have been used to understand these costs since these high cost low volume cake-mixes required extra processes to produce them. Some cake-mix products required a hand-insertion process where special ingredients had to be placed. Exhibit 8 corroborate this with correlation to high volume efficiency versus low volume inefficiency in that the change over costs become significant because the product lines of low volume products arent effectively utilised. Exhibits 9 and 10 of the Pillsbury case relate the amounts of store keeping unit (SKU) to volume to all of Pillsburys products. facility-sustaining costing is used here as complaints are being made by customers because those low volume unit products in the previous exhibits tend to have high SKUs which means that by the time consumers receive their product through Pillsburys customers the product is old. SKU is the amount of inventory held of a product and so high SKU means products arent sold quickly. Inventory then runs the risk of becoming obsolete. 4. 2 Influence on future decision-making All of these estimable improvements due to VCA and ABC sparked several reengineering programs. The VCA helped realise deficiencies in the customer supply chain. Pillsbury improved this by partnering up with their vendors and their customers to improve customer demand and cut costs throughout the whole chain. The use of multi-skilled teams were the lynch-pin in servicing these improvements between customer and supplier. Value-adding activities included specialised services for different customers. Higher costs were placed on customers that wanted services like category management, modular pallets for promotions, direct store delivery and other delivery options to give diversity to our customers which in turn increases relations. Decisions were made based on ABC, including the cutting of certain products due to losses made on those products and the stream lining of its operations by closing down plants. Pillsbury also conducts Reengineering: Phase 2 which focussed on getting customers to include ABC in their own calculations of stock. Pillsbury now has a budget target that seems too easy to accomplish. ABC and VCA analysis has decreased the costs of production considerably and have created new avenues of uncharted territory to investigate and improve. For instance as I said above packaging and testing processes have yet to be improved and outsource capabilities maybe available to consolidate even further Pillsburys change from a flour manufacturing company to a consumer-based company. 5. 0 Conclusion Pillsbury changed its ways. The new strategic focus enabled that. This report showcases the ability for different tools to synergise. The VCA realises what activities are inherent in an organisation and is a spring board for cost savings and value added processes. The ABC tool enables these cost savings and value added processes by pinpointing accurately the function of costs and how they relate to not only products, but customers, processes and management responsibility. Without these tools Pillsbury would neither compete effectively nor reply to consumer demand. This is shown when they increased competitive advantage by collaboration throughout the customer supply chain. However we can also see that ABC works more prominently in the operations activities than anywhere else, which is why the barriers for change to ABC was prominent in the marketing and sales activity. Pillsbury effectively brought down the barrier with the use of multi-functional teams. This enabled Pillsbury to be more proactive in all areas whether from Logistics outbound/inbound to research and development, which definitely promoted sustainable profits for Pillsburys future. 6. 0 Reference List Kaplan, R. S. (1995). Pillsbury: Customer Driven Reengineering. HBS Case No. 9-195-144. 7. 0 Appendix Appendix 1 New Value Chain