How Kellogg's, Nike, and HP handled 2020 supply chain disruptions

Managers have been tasked with devising lean global supply chains resilient enough to withstand a certain level of risk. Few imagined the months of disrupted production and distribution that came with the COVID-19 pandemic.

Major public companies disclosed in their US financial filings the strategies they used to keep up sales and production during the pandemic. Those strategies include producing more of their most popular products; increasing online sales to consumers; securing alternate, local suppliers of materials and packaging; and building slack into their supply chain.

“The most resilient companies were the ones who had really embraced risk management planning — and had visibility into their whole supply chain network, not just their immediate suppliers,” said Mike Crum, DBA, professor of supply chain management at Iowa State University’s Ivy College of Business, in an interview with FM magazine.

Companies need to prepare for future supply chain disruptions, due to the potential for extreme weather, financial crises, terrorism, and future pandemics. In a recent report, the McKinsey Global Institute predicts the average company could expect major supply chain disruptions — those lasting at least one month — to occur every 3.7 years.

The financial disclosures of Kellogg’s, Nike, and HP showed that consumer-facing companies radically shifted their supply chains amid the pandemic to serve customers at home after their offices and institutions were forced to shut. Companies made use of slack built into their supply chains and earlier IT investments that let them track raw materials, components, and finished products. And while most credited the heroics of their staff during the pandemic, all three announced cost savings or accelerated investment in automation that could lead to job loss.

Kellogg Co. (NYSE: K)

Food companies such as Kellogg Co. had to flip from sending bulk volumes to schools and restaurants to feeding people working from home who suddenly had time for breakfast. Finding enough paperboard packaging for cereal boxes became a constraint.

With families staying home and limiting supermarket trips, the pandemic boosted sales of Kellogg’s cereals, noodles, and snacks. For the multinational, food consumed at home more than offset declines in on-the-go channels. While growth had moderated by September, Kellogg’s sales over the first nine months of 2020 increased 7% over the year-ago period, to $10.5 billion, excluding the effects of divestitures and currency rate fluctuations.

One highlight was the Asia Pacific, Middle East, and Africa (AMEA) region, where third-quarter net sales — excluding currency fluctuations — jumped by nearly 11% to $600 million and operating profit grew 6% to $59 million, over the year-ago quarter.

“There was one day in March when our third-party warehouse had to do the equivalent to a week’s worth of dispatching, and then we worked at that level for three weeks,” said Shanaka Wijesuriya, FCMA, CGMA, FCPA (Australia), CFO for Kellogg’s in Australia and New Zealand, who also heads up planning and end-to-end logistics. “We are used to big surges during promotions, but this was unprecedented.” The Sydney-based Wijesuriya said the company quickly went through its several weeks’ “safety stock” in Australia, where Kellogg’s has manufactured for 92 years. 

Wijesuriya was part of a steering committee that decided to focus on the top stock-keeping units (SKUs) of their more than 100 items, including Nutri-Grain cereal bars, Coco Pops, Special K, and Corn Flakes, the original product of the Battle Creek, Michigan-based Kellogg’s. They quickly used up a lot of the grains stored in silos and warehouses. Kellogg’s factory and warehouse employees — and those of its suppliers and transportation partners — “worked incredible hours” to ramp up production and quickly load more trucks and containers. “When your retailers are demanding extra things, it’s your warehouse that needs to stretch the most,” he said.

Packaging became a bottleneck, as the region’s Korean supplier ran short due to shipping delays caused by the COVID-19 pandemic. The procurement team “scoured the world” for a new source of paperboard and found an alternative supplier next door in New Zealand. Lower transportation costs helped to make up for the higher cost of the New Zealand paperboard.

For Wijesuriya, COVID-19 “highlights the importance of not having your supply chains spread out all over the world. It’s led us to look at the diversity of the supply chain … and the benefits of having a supplier closer to home,” Wijesuriya said. “Higher inventory was worth it to satisfy consumers who were glad to find a trusted brand on the shelf.”

Kellogg’s has emerged from the crisis having gained market share.

As companies move to automate processes, in part to withstand future health crises, Wijesuriya credits the human part of the supply chain for its ability to stretch. “We were able to do amazing things because of how the people across our business and supply chain banded together to meet demand,” he said. “I know mechanisation is coming and it’s a good thing, but our human spirit and resilience came out even more.”

Nike (NYSE: NKE)

The pandemic hit hard at Nike’s distribution, third-party manufacturing, and logistics operations. For 2020, net income before taxes fell by 40% over the prior year to $2.9 billion, according to its July annual report. After the pandemic forced Nike to shutter stores first in its brisk China market and then around the globe, inventory swelled 31% to $7.4 billion by fiscal year end on 31 May, compared to $5.6 billion at the end of fiscal 2019. Reduced shipments to wholesalers, labour shortages, and other “supply chain effects” curtailed Nike’s ability to calibrate supply and demand and increased costs of production and distribution.

In response, the Beaverton, Oregon, company accelerated plans to expand direct online sales, where profits are 10% higher than when it sells products wholesale, CFO Matthew Friend said on the first-quarter earnings call. Nike Brand Digital was its “fastest-growing channel, growing 79% on a currency-neutral basis with each of our geographies growing over 50%”, for the quarter ending 31 May, the company said in its annual report. The athletic wear maker cleared inventory by cancelling factory orders, offering discounts, and shifting product destined for stores to fulfil online orders.

Already in 2020, Nike’s success at raising average selling prices “was more than offset” by higher US tariffs on imported goods, according to its annual report. The pandemic increased costs for cancelled purchase orders and led to higher inventory obsolescence. Margins dropped as its supply chain costs were spread over “a lower volume of wholesale shipments”.

CEO John Donahoe called COVID-19 “a stress test” of the company’s direct connections to consumers, setting a goal of selling 50% online. In 2020, the company sold about 35% or $12.4 billion of its $35.6 billion in Nike-branded goods online, either directly or through partners.

While the company makes nearly all of its products in Asia, Donahoe said the company would try to speed delivery through “a more dynamic supply chain network that positions product closer to the consumer”, according to his July letter to shareholders.

During the pandemic, Nike depended on its use of radio-frequency identification (RFID) technology, which uses tiny radio parts embedded in tags to automatically identify and track all its footwear and most of its apparel. During the supply chain disruptions, Nike tracked “1 billion units at 99.9% readability”, Friend said during the September earnings call. “We were able to leverage the inventory visibility in order to be able to take advantage of … the demand that we had across the marketplace and across our retail stores.”

Nike expects RFID to lower the cost of inventory holding and transportation, building on the data capabilities it bought through its 2019 acquisition of Celect, a predictive analytics and demand-sensing company. “That’s where the scale competitive advantage comes from in our supply chain because we will be able to forecast demand, get the right inventory in the right places to get it to consumers quickly both for ourselves and maybe even over time, that’s an added benefit for our strategic wholesale partners,” Donahoe said on the September earnings call.

HP Inc. (NYSE: HPE)

During the pandemic, videoconferencing became essential to connect people suddenly working, studying, and socialising from home. Demand for notebook computers exploded, and an industrywide shortage of computer panels and central processing units constrained supply.

COVID-19 radically shifted demand for computers that could be used in offices to those for the home, where adults worked and children now logged in for school, creating both challenges and opportunities for the California-based maker of computers and peripherals. By May, HP’s Personal Systems division was selling more “as the focus moved to keeping people connected, productive, and secure”, according to the second-quarter earnings call. Demand rose for printers and ink supplies as people set up home offices and remote-learning sites. On the other hand, HP’s office printing business suffered with office closures and cancellations of large events.

HP ran out of certain products after the pandemic forced it to close factories in China and Southeast Asia. That didn’t stop consumer demand. “The PC is more central to daily life than ever, and PC use is up more than 20% since COVID emerged,” CEO Enrique Lores said in the third-quarter earnings call on 27 August.

As countries went into lockdown, logistics problems delayed deliveries of printing and personal computing equipment to sellers and direct customers, HP announced in its third-quarter filing. Regulations to stem the spread of COVID-19 also disrupted HP’s retailers, or channel partners, who cancelled and reduced orders.

The printer and personal computer maker said manufacturing capacity had returned to normal levels by early May, except in Southeast Asia, where local regulations slowed the recovery until June. Industrywide shortages of computer panels and central processing units (CPUs) was expected to keep manufacturers including HP from fully meeting demand for notebooks through the first half of 2021, Lores said on the 24 November earnings call.

HP finished its fiscal year with $56.6 billion in revenue, down 3.6% from the prior year’s $58.8 billion. Net earnings slid further, down 10% to $2.8 billion from $3.2 billion the prior year, as the company absorbed higher costs on lower volumes.

Marie Myers, acting chief financial officer, said in the company’s fourth-quarter earnings call that volatility in the supply chain and the need to ship more products via air added costs. Interestingly, strong sales of home printers also dented profits, as they have “negative margins upfront”, meaning that the company sells printers at a loss and makes money selling ink. The relatively short supply of home computers and printers let HP cancel plans to offer discounts and helped it keep pricing higher. The company accelerated planned cost-cutting to bolster its margins.

HP introduced new products and services to make it easier to work and learn from home, including monitors to lower eye strain, subscription ink business, and a centralised billing service for commercial clients working from home.

2020 tested companies’ ability to overcome supply chain disruptions by spending more to meet consumer demand. They also accelerated plans to cut costs through restructuring and automation, processes that in turn may reshape companies faster than they had imagined.

— Sara Silver is a freelance writer based in New York City. To comment on this article or to suggest an idea for another article, contact Chris Baysden, an FM associate director, at Chris.Baysden@aicpa-cima.com.