Ferrero: Sweetening the Supply Chain One Chocolate at a Time
Investing in digital technology is allowing Ferrero to better manage its complex procurement process.
Whether it’s the Rocher chocolate you buy for your Valentine’s date or the Nutella spread you eat as your guilty pleasure, Ferrero’s brands are well known globally. A leading Italian manufacturer and producer of high-quality branded chocolate and confectionary products, Ferrero has consistently focused on innovation in its production and packaging processes. It has, for instance, continually invested in research to implement advanced automation on its production lines [1].
While product innovation remains critical, Ferrero has become more focused on better managing the complexity of its procurement process. Generally, the food business has particularly intricate supply chains with distinct silos due to the various ingredients necessary to produce a single food product. Companies, therefore, have to deal with numerous suppliers [2]. Think about the ingredients that go into Ferrero Rochers: milk chocolate made from sugar, cocoa butter, cocoa mass, skim milk powder, anhydrous milk fat, lecithin, vanillin and then hazelnuts, sugar, modified palm oil, wheat flour, whey powder, cocoa, lecithin, sodium bicarbonate, salt, and vanillin [3]. Due to all the suppliers needed for these ingredients, a complex supply chain can crumble if one supplier doesn’t deliver its services. It can become expensive and inefficient if the whole process is not handled effectively. Thus, companies must find a way to combat mounting pressures on procurement to generate results at a lower cost and risk as the competitive landscape intensifies [4].
What is Ferrero doing about this? Whereas previously it was using separate, independent systems to deal with its elaborate procurement process, it now recognizes the value of and need for digital technology to create an integrated approach. Ferrero announced last month that it will implement SAP Ariba software to help manage costs and risks throughout its procurement practice. According to Jane Scott, Ferrero’s CIO, this is an “integrated platform on which we can consolidate all of our spend and collaborate with a global network of partners on everything from sourcing and orders through invoicing and payment” [5]. Ferrero will use several cloud-based applications, including strategic sourcing, supplier risk, spend analysis, commerce automation, buying and invoicing, and supply chain collaboration. As Paul Devlin, General Manager at SAP Ariba explains, through this digital technology “innovative companies like Ferrero can manage the entire buying process from source to settle, while controlling their spend, minimizing their risk, identifying new sources of savings and building a healthy, sustainable supply chain – all in one place” [6]. With the implementation of a digitized procurement system, Ferrero can maximize its efficiency and effectiveness, whereby enhancing the transparency and collaboration of the entire supply chain [7]. Further, this platform allows more inputs to be linked, allowing improved decision-making, insights, and strategies [8].
Long-term, Ferrero is focused on taking the digital technology now used in its procurement procedures to other parts of its supply chain and operations. The company recently set up an innovation lab at Cornell University’s technology campus to examine potential technological improvements to its systems and products [9]. While using platforms like SAP Ariba are instrumental to Ferrero’s ability to advance its supply chain, its own research may allow it to develop tailored technological solutions to company issues.
Although companies are slow to adopt digital technology for their procurement processes, Ferrero has proven its desire to invest for the future and stay ahead of the competition [10]. To continue moving in the right direction, Ferrero needs to keep investing in progressing the digitization of its supply chain. It should consider opportunities that’ll enhance the predictability and visibility of its supply chain and drive greater cooperation with suppliers. Given its inherently complex supply chain, Ferrero should test how different digital technology tools might improve its processes.
I am left with two concerns. Should companies develop their own technological platforms or outsource them as Ferrero did with its procurement process? Lastly, how can companies continue to invest in digital technology when they have tight operating budgets?
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Sources
[1] Ferrero U.S.A., Inc, “Research, Technology,” https://www.ferrerousa.com/fc-939/.
[2] Anni McLeod and Will Hueston, “Overview of the Global Food System: Changes over Time/Space and Lessons for Future Food Safety,” Institute of Medicine (US). Improving Food Safety Through a One Health Approach: Workshop Summary (Washington, D.C.: National Academies Press, 2012). https://www.ncbi.nlm.nih.gov/books/NBK114491/.
[3] Ferrero Canada, “Ferrero Rocher,” http://www.ferrero.ca/our-brands/ferrero-rocher/a-roasted-hazelnut.
[4] Oliver Wyman, “Digital Procurement: From Myth, to Unleashing the Full Potential,” Operations, 2017, http://www.oliverwyman.com/content/dam/oliver-wyman/europe/france/fr/Publications/Digital_Procurement.pdf.
[5] SAP Ariba, “Procurement Gets Sweeter at Ferrero with SAP Ariba,” https://www.ariba.com/about/news-and-press/procurement-gets-sweeter-at-ferrero-with-sap-ariba.
[6] SAP Ariba, “Procurement Gets Sweeter at Ferrero with SAP Ariba,” https://www.ariba.com/about/news-and-press/procurement-gets-sweeter-at-ferrero-with-sap-ariba.
[7] Oliver Wyman, “Digital Procurement: From Myth, to Unleashing the Full Potential,” Operations, 2017, http://www.oliverwyman.com/content/dam/oliver-wyman/europe/france/fr/Publications/Digital_Procurement.pdf.
[8] Deloitte, “The Future of Procurement in the Age of Digital Supply Networks,” Digital Procurement, 2017, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/process-and-operations/us-cons-digital-procurement_V5.pdf
[9] Keiko Morris, “Chocolate Giant Ferrero to Look for Innovation at Cornell Tech,” The Wall Street Journal, August 27, 2017, https://www.wsj.com/articles/chocolate-giant-ferrero-teams-up-with-cornell-university-1503857457.
[10] Nic Walden, “Four key areas for digital transformation in procurement,” Supply Chain Digital, April 28, 2017, http://www.supplychaindigital.com/procurement/four-key-areas-digital-transformation-procurement.
Interesting to see how Ferrero is consolidating it’s IT system when it comes to purchasing. Beyond doubt, this will allow them to get efficiency
gains thanks to the increased transparency – especially if they want to use these investments to “collaborate with a global network of partners”. Clearly, this will require some IT investments on their side as well. What puzzles me, however, is how this matches their desire to increase the share of “smallholder farms” in their supplier base. Can they make the required investments? If not, what are the tradeoffs to be made, and are they worth it?
I echo FD in the sense it’s great to see Ferrero making efforts to improve its PSM (purchasing & supply management) practices via an integrated technological platform. I can see them effectively leverage their global scale and purchasing power to drive tremendous cost savings. It’s clear to me personally that Ferrero made the right move by outsourcing this technology (vs. building their own), so it can focus on its core — making great confectionery products.
The consolidation of their supplier base will be an inevitable result of the integrated PSM practices, putting many farmers out of jobs. NPR wrote an interesting piece on cocoa prices, which are at an all time low (many Ivory Coast farmers are suffering as a result) [1]. This brings me to what’s Ferrero’s corporate social responsibility? Squeezing more out of an industry that’s already suffering could threaten the future viability of cocoa farming. The article spoke about the power of companies like Ferrero can have over regulating bodies — for example, factories are unwilling to pay the high prices set by governments to protect small farmers because they don’t offer high enough profit margins.
Mars, another global manufacturer of confectionery, is helping millions of cocoa farmers improve their operating practices through its Cocoa Development Centers [2]. The company understands that helping farmers thrive will maintain steady production of a resource that’s under threat. I would challenge Ferrero to create similar win-win scenarios from their procurement savings, and reinvest in improving the long-term prospects of cocoa and the people growing it.
[1] https://www.npr.org/sections/thesalt/2017/03/03/518328252/a-dip-in-global-prices-creates-cocoa-crisis-for-ivory-coasts-farmers
[2] http://www.mars.com/global/sustainable-in-a-generation/our-approach-to-sustainability/raw-materials/cocoa#cocoa
As FD and Imran mentioned, not only is it great that Ferrero is investing in digital technology to improve its supply chain – it’s necessary. Most, if not all, companies are having to invest in innovations to maintain – or attempt to exceed – the same level of efficiencies as new entrants to their industry. Thus, to your question about investing in new technology versus having tight operating budgets, I think companies like Ferrero are having to take a significant investment hit in the short-term to generate, what they hope will be, long-term benefits that will more than repay the cost of the investment.
This technology also makes me question how the company’s buying process will change. With greater visibility to the entire process, will there be fewer or more buying cycles throughout the year? Similarly, what will the lead-time be now that the supply chain is more efficient? I’d assume that it would improve dramatically, which would, in turn, make me believe that buying cycles could be completed on more of an as-need basis. One could argue that this could lead to greater inventory management – particularly for a product that is ultimately perishable – and inevitably greater cost savings. It will be interesting to see how the SAP Ariba software performs for Ferrero!
I agree with what has been said above. There are several pros and cons that come to mind with outsourcing vs in house development. Outsourcing technology allows the company to make a smaller investment in technology particularly because they do not need to hire more labor or develop a new department. Secondly outsourcing would allow them to focus on their core business, creating chocolate products.
However, it could potentially be a good investment to develop their own technology if the economics allow. Since the world is moving to digital, developing their own technological resources could allow for greater customization in the process. They could be able to develop something that satisfies Ferrero’s needs and therefor make the process much more efficient. They would also be able to improve this technology as their business changes since the experts would be in-house and exposed to the company’s business.
As mentioned in the article Ferrero is now investing in technology for its procurement process. Are they planning to include technology in other operating processes? If so, maybe the investment will be worth the future benefits of having their own customize process but more importantly developers who are experts in the company’s core business.
Regarding your second question,
I fully agree that it makes sense to outsource a procure-to-pay system to somebody like SAP Ariba or Coupa. In addition to the supplier consolidation which will drive lower raw materials costs, a procure-to-pay system can offer supplier consolidation on indirect goods (e.g., all non-product related materials required to operate the business). While consolidating spend to negotiate a lower rate can drive significant savings on indirect spend, another significant lever is demand management (e.g., reducing total spend all together). Through a system such as SAP Ariba, procurement, in combination with the business and finance, can establish a spend control tower that will effectively govern spending thresholds throughout the organization and help companies adopt a zero based budgeting mindset to lower overall cost.
Thanks for an interesting read, KL! Your paper does a great job explaining the complexities of managing all of the inputs to what, at first glance, appears to be a relatively simple product.
Your article mentions some of the benefits to these digital investments, including risk mitigation and potential for savings, and number of comments above speak to some of the factors a firm should consider when deciding whether to build or outsource. I’d add size as a potential consideration. A firm must make meaningful investments to build its own technologies and support some of the costs that F1991 speaks to above. A large firm may be better positioned to absorb these costs; small firms may not be able to afford do so given their scale.
The budget issue you mention in your second question may also influence whether a firm builds or outsources. As brandlesswriter has referenced above, building a system comes with a meaningful cost in the short-term. Outsourcing over time may better align the timing of the costs of a system with the potential benefits. Firms with tight operating budgets may therefore prefer to outsource to avoid this cash flow challenge.
I think the answer to the first question you raised derives from the second question’s answer. Most companies have to invest in the success of their core business and have tight budgets to invest in systems that support the main business. In this case, it would be more efficient for Ferrero to invest in an external procurement platform rather than developing it in-house. SAP Ariba works with numerous customers creating a product that aggregates many different needs and requirements. Ferrero can enjoy a more comprehensive product that might include features that Ferrero wouldn’t have thought of on its own. There is no doubt that all companies should move to the use of a centralized automated procurement system to enable them to save cost and increase effectiveness.