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September 10, 2009

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Kraft plans to reduce supplier base in effort to cut expenses

KRAFT Foods Inc plans to cut its supplier base in half, a move that would affect more than 30,000 companies, as the largest North American food maker looks to save more than US$300 million a year.

Consolidating its purchasing of everything from ingredients to packaging materials is part of a plan to improve productivity that also will encompass logistics and manufacturing, the maker of Oreo cookies said.

The review of purchasing comes as the company tries to simplify a procurement framework that evolved as Kraft acquired numerous companies over the years.

Kraft this week also publicly disclosed its attempt at another large acquisition, a US$16.7 billion bid for Cadbury that the British candy maker has so far rebuffed. The review of purchasing and expected savings come before any potential Cadbury deal, a Kraft spokesman said.

"This is probably the first truly holistic view we've taken," said Julia Brown, senior vice president of procurement at Kraft.

"We're essentially taking a white sheet of paper and saying 'what is the right number of suppliers to support this particular category, who are they, what is the capability we need for now and in the future, and does the current supplier base have that.'"

Kraft was to discuss the plan in a presentation to analysts late yesterday. The move comes after Kraft spent several years cutting costs via plant closings, divesting brands that did not fit its core categories and putting more money into advertising and product development to boost sales.

All told, Kraft's cost of goods sold was about US$28 billion in 2008. But purchasing is the largest area where the company feels it can cut costs, spokesman Michael Mitchell said.

Kraft informed its suppliers in March that it was conducting the purchasing review. It puts existing suppliers not only in competition with each other for Kraft's business, but also with potential new suppliers.

"We're inviting a lot of new suppliers to participate in this process," Brown said.

Overall, Kraft had cost-cutting programs in place representing less than 3 percent of its cost of goods in 2008. By 2011, the company is pushing for that figure to be more than 4 percent, representing a difference of more than US$300 million, Mitchell said.


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