General Mills Adds More Outsourcing Partners as It Aims to Meet Packaged-Food Demand
July 27 2020 - 05:59AM
Dow Jones News
By Mark Maurer
General Mills Inc. is relying more than ever on third-party
manufacturers to meet heightened demand for its products, though
asking others comes at a significant cost to the maker of cereal
and soups.
Packaged-food companies are striving to keep grocery shelves
stocked during the coronavirus pandemic as consumers continue to
eat more meals at home. Disruptions in the supply chain have made
it hard for manufacturers such as Minneapolis-based General Mills
to replenish stores with Progresso soups and Betty Crocker cake
mixes, despite its factories operating at capacity.
To bolster its supply chain, General Mills has struck several
new partnerships with contract manufacturers and suppliers of raw
materials -- and expanded existing ones -- since March, when demand
started to soar, finance chief Kofi Bruce said.
General Mills will boost the number of partners by as much as
20% on top of the 200 it had before the pandemic, said John Church,
chief supply chain and global business solutions officer at General
Mills. The packaged-food giant expects these third parties to be
part of its supply chain until at least next summer, the executives
said.
The company has worked with manufacturing partners for decades
in the U.S. and Europe, contributing to the making of roughly 30%
of General Mills's North American products, Mr. Church said.
The company's existing relationships have made it easier to find
partners that are ready to pick up production. But these services
come at a higher price because of heightened competition, finance
chief Mr. Bruce said.
"It will cost us more to operate in this environment," Mr. Bruce
said. "But these are the things that are necessary for us to be
agile and nimble and prepared to deal with a longer period of
sustained higher demand."
Mr. Bruce declined to name the cost of increased outsourcing,
but described it as "tens of percentage points higher cost versus
an internal manufacturing cost."
Still, General Mills views it as a clear alternative to building
new plants, in part because of the amount of time it would take.
The company operates 47 food-production facilities globally,
including 24 in the U.S.
General Mills also plans to significantly increase capital
spending to support its operations. It is weighing to what extent
it can streamline production to make enhancements such as adding
plant lines or removing bottlenecks from existing lines, Mr. Bruce
said.
"What's unknowable right now is how long you are going to need
the additional capacity, which is the benefit of seeking out an
external supply-chain capacity solution," said Mr. Bruce, who
joined the company in 2009 and became CFO in February of this year.
"You're not stuck with the cost of those assets if the demand
evaporates or goes away pretty quickly."
Typically, these other manufacturers would make a portion of a
type of product -- ranging from dinner kits to granola bars -- or,
they would test out a new product. "If you need a place to sleep
for the night, you can build a house or you can rent a room in a
hotel that's already built, " Mr. Church said.
The company can only partially offset that cost by running its
internal plants at full capacity and spreading the fixed costs over
as many units as possible. The company also tries to offset higher
operating costs by managing margins in manufacturing, logistics and
sourcing efficiency in an effort to protect against cost inflation,
Mr. Bruce said.
General Mills has to accept lower profit margins on the
outsourced products to maintain its position against rivals, said
John Baumgartner, an analyst at Wells Fargo & Co. "You may lose
the availability on the shelf, which may hurt you longer term if
your competitors are willing to go and accept that lower
profitability," Mr. Baumgartner said.
The company reported a 16% increase in comparable sales for the
most recent quarter ended May 31. Its U.S. cereal sales, which were
on the rebound even before the pandemic, climbed 26% in the
quarter.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
July 27, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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