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The Power of People: McCormick & Company's procurement transformation
In many supply chain organizations, change happens gradually: a partial reorganization here, a shift in suppliers there, and, after a few years, perhaps some new software and an executive appointment or two.
But that's not how the procurement team at McCormick & Company Inc. rolls. When the U.S.-based producer of spices and other flavoring products set a new, long-term agenda that emphasized global growth, procurement leaders recognized that their organization could play a crucial role in supporting that strategy. Rather than wait for change to gradually filter down from the top, they developed a vision for a new position for procurement in the context of McCormick's strategic objectives. After getting top-level support for that vision, the team embarked on a carefully planned yet bold change initiative that can rightly be described as transformational.
Today, procurement at McCormick is very different than it was just five years ago. The transformation program has reshaped the function's strategy, priorities, and organizational structure. It has also affected what people do and how they do it, not just at its U.S. headquarters, but also on a global basis. The procurement team did not adopt that global approach simply because spices and flavorings are bought and sold all over the world. It also reflects something that has been part of McCormick's corporate culture since the early 1930s: the "Power of People"—the belief that every employee is valued and respected, and that each person plays a part in the company's success and its customers' satisfaction.
A change in strategy
The McCormick name is a familiar sight on grocery store shelves. While the company is best known for spices and flavor extracts, such as pepper, cinnamon, and vanilla, it also sells a variety of other products under its own name and nearly two-dozen other brands. Just a few examples from the brand portfolio include French's, Lawry's, and El Guapo in North America; Gourmet Garden and Aeroplane in Australia; WAPC in China; and Ducros, Schwartz, and Giotti in Europe. In addition to consumer products, McCormick also supplies standard and custom flavorings to food and beverage manufacturers, restaurants, and other industrial customers.
Headquartered in a suburb of Baltimore, Maryland, USA, McCormick has approximately 11,000 employees and facilities of various types in 27 countries. In 2016, the company recorded total annual sales of more than US$4.4 billion in approximately 150 countries and territories around the world. As of 2016, it operated principal manufacturing facilities in 11 countries; in addition to distribution and warehouse space at those plants, McCormick also leases regional distribution centers in the United States, Canada, and France, and has arrangements for additional manufacturing, warehousing, and distribution space as needed worldwide.
Historically, procurement of spices and herbs, and later sugar and other ingredients, was handled at the company's headquarters in Maryland. Over the years, as McCormick acquired other companies and expanded its U.S. domestic and international business, "procurement evolved in almost the same way as the manufacturing model ... there was a time when the process was at the factory level, and each area had its own purchasing group," says Donald Pratt, managing director, global ingredients. "It was very inefficient, and they were not aggregating their spend."
Later on, the procurement model was primarily regional, with some categories handled globally. This continued to limit the company's ability to leverage its volume, says Brant Matthews, vice president of global strategic procurement. That model also made it difficult to adopt a category management approach, a strategy that allows managers to focus on one category of product or service and leverage their expertise and decisions on behalf of the entire organization. Leadership believed that the decentralized structure led to other missed opportunities. For example, the procurement team could not get a complete picture of suppliers' market capabilities and the mutually beneficial synergies they might offer. They also felt that the existing structure did not allow procurement to leverage cross-cultural and geographic diversity to drive the best category strategy for the business, Matthews says.
In addition, although procurement influences major components in the overall cost of goods, and therefore influences profits and growth, "that value proposition was not widely recognized," Pratt says. Procurement was largely seen as having a focus on savings, and not as a key participant in the development of higher-level strategies, he adds. "We were not consistently at the table bringing innovation [and] insights to the commercial side of the business or to the leadership of business units."
That would all change following a major rethinking of McCormick's business strategy. A few years ago, company leadership adopted a long-term business plan that focuses on global growth. McCormick also implemented a wide-ranging program called Comprehensive Continuous Improvement (CCI). CCI's objectives are to improve productivity, reduce costs, and increase cash flow throughout the organization. In its first five years, CCI achieved nearly US$400 million in cost savings; McCormick has committed to achieving similar savings over the next four years.
Procurement leaders understood that the team could provide crucial support for McCormick's global growth strategy, and that procurement would be a major player in the CCI initiative. Toward that end, they focused on answering two big questions. The first, Matthews says, was "how do we get more scale and leverage" across McCormick's product categories? The second was "how do we elevate procurement's impact and provide a greater value proposition for the business?"
Becoming a global organization
The answer to both of those questions involved a big change for the procurement team: moving away from a primarily regional focus to a more centralized, global organization. Matthews and Grace Woo, McCormick's director of supply chain strategy, spearheaded the development of procurement's global strategic plan. Any solution they and their team devised would have to support McCormick's three main strategic objectives:
- Global growth. McCormick's long-term objective is to achieve annual growth through increases in its base business, product innovation, and acquisitions.
- Performance improvement. As part of the CCI initiative, McCormick in 2016 set a four-year, $400 million cost-savings target.
- The right organization and leadership. McCormick wants to ensure that its organizational structure and its current and future leadership have the capability to achieve the company's growth and performance objectives.
One of the first steps in formulating the new plan was to develop a definition of the current state of the procurement function, including policies and practices. Another was to project how trends like globalization, geopolitics, and demographics could affect procurement in the future. For example, because McCormick sources over 3,000 different agricultural products from about 50 countries, the procurement team considered major commodity trends and other, long-term factors that could potentially affect crops, such as changes in weather patterns and the growth of an urbanized middle class that is demanding more meat, and therefore is imposing increasing strains on farmland. All that information, Matthews explains, would inform "what capabilities we would need to build to capitalize on trends and stay ahead of them while delivering strategic value and competitive advantage."
Over the next year, Matthews "built, refined, and socialized the plan," as Pratt describes it. The CEO at the time, Alan Wilson, who had extensive experience in procurement and supply chain, gave his support "right away," Pratt recalls. Once a detailed framework for the new structure was in place, the global procurement leadership team was formed. In 2014, the regional directors started reporting directly to Matthews, and the new global framework was fully adopted in late 2016.
Today, Matthews says, the procurement organization is built around "three pillars":
- The global category management team, with members located around the world, focuses on the majority of McCormick's spend on ingredients. Category leaders have formal, monthly strategy reviews with the leadership team to ensure that decisions made in each category align with the strategic goal of adding value for business partners.
- Regional procurement teams make sure procurement's objectives are aligned with the day-to-day operational needs in each business unit. They also support the growth of new products.
- The sourcing excellence team has two main charges: to provide enabling technology and analytics support to category managers, and to ensure key programs and processes, such as category management, are aligned globally and can be easily scaled up to keep pace with growth.
The new structure meant that some responsibilities that previously had rested entirely with regional or local groups would shift to new "owners." For example, Pratt notes, category managers started developing and building contracts, and the sourcing excellence team took on some inventory responsibilities, while purchasing at the plants became responsible for execution of the purchase orders for incoming raw materials.
The new strategy affected McCormick's suppliers, too. Adopting a category management strategy led procurement leaders to "redefine who we want to work with, and to build much better relationships" with those suppliers, Matthews says. The new focus also included assessing whether suppliers had the capabilities to meet McCormick's future needs. Some, but not all, were willing to invest the necessary time and effort to work within the new procurement approach. Some contracts were renegotiated, and new suppliers were brought on board in some geographies and supply categories.
The new strategy offers benefits for both McCormick and its suppliers. For one thing, Pratt says, aggregating ingredients portfolios and buying on behalf of the entire business provides transparency into the economics of the commodities, such as geographic variations in pricing. For another, it allowed procurement to harmonize its policies and messages, standardizing its approach to McCormick's vast community of suppliers. Moreover, suppliers who may have been dealing with buyers from multiple product lines now have one main contact they can work with for the particular material or ingredient they provide. "Now we can work with them as partners," Pratt says. "We've created relationship managers who can talk strategically with them about issues like long-term growth and innovative things we can do together."
McCormick's procurement organization has made significant investments in technology in support of its new approach to strategic sourcing. "We have dramatically increased our use of e-sourcing, including for some very complex exercises," Matthews says. "In transportation, for example, there are endless permutations of routings for raw materials coming in and finished goods going out. Now we can use very sophisticated bid evaluations to find the optimal solutions." The procurement team has also invested in data analytics by hiring an in-house data analyst and making the information category managers need readily available in a Web-based application.
Critical success factors
It was not easy to implement the new strategy—not surprising given the size and ambitious scope of the project. When the global procurement reorganization finally went live, there were some administrative issues that needed to be fixed, but by and large, everything worked properly and there were no business disruptions. Why did such a massive undertaking go so smoothly? The procurement team points to a number of actions and decisions that were critical to the transformation's success:
Implementation was neither too fast nor too slow. "Many people were eager to move faster, but implementing at the proper pace was critical, so everything was carried out in a planned manner, with no disruption to the business," Pratt says. At the same time, says Matthews, it was important to build momentum with some quick wins to build a track record of results and demonstrate the value of the transformation early on.
The plan didn't just come from the top. While Matthews, Woo, and other executives led the strategy's development, in keeping with McCormick's philosophy of the "Power of People," they wanted to make sure all team members understood that they could make an important contribution. Accordingly, they engaged team members throughout the procurement function in designing some of the transformation plans and determining how best to execute them.
Every business unit received its due. The team went to great lengths to ensure that the transformation plan and policies were not U.S.-centric, and that they acknowledged the unique needs of McCormick's international business units. The plan also avoided prioritizing based on a business unit's size. "We wanted to make sure every business unit's needs are met, not just the ones with the most volume," Matthews says.
Reporting and communication received special attention. Among the top priorities during the design phase, Pratt says, was building a communication and reporting framework that would be "comfortable" for the regional business units, give the central organization a clear picture of regional activities, and prevent duplication of efforts or conflicting directions. One aspect of the approach that ultimately was adopted was the management of the key commodities. Although managed by a centralized team, McCormick ensures engagement and connectivity with each business unit through the physical presence of regional procurement directors in its principal regions: the Americas, Asia-Pacific, China, and Europe, Middle East, and Africa (EMEA).
People were carefully matched with jobs. For the new team to function well, McCormick needed a different mix of individual skill sets and aspirations than in the past—from the very ambitious to those who are good at maintaining the status quo, as well as people who thrive in high-energy, high-ambiguity environments. The ability to work together was a must-have at every level. Between 70 and 80 percent of the employees working in procurement today are in different positions than they were three or four years ago, Matthews says. Some were hired from outside the company, while others transferred to different functional areas or roles within McCormick that were better suited to their skill sets.
Education was considered a worthwhile investment. "Early on we decided that skills development would be key to the success of the transformation," so the company invested in developing a "procurement academy," with the goal of achieving consistency in skills and knowledge, Matthews says. Team members around the world take Web-enabled training courses, some of which are offered in multiple languages. The early training is designed to bring procurement staff up to a specified level of knowledge and to provide everyone with a common business language. More advanced training focuses on areas like category management and negotiations.
From buyers to business partners
McCormick's new global procurement strategy was introduced over the past three years, and the full transformation has only been in place since late 2016. Yet the initiative's accomplishments have already exceeded expectations.
On the "hard metrics" side, Matthews says, the most prominent achievement is in cost improvement, which has increased by 250 percent over what procurement typically achieved in previous years. So far, the new approach has freed up over US$100 million in cash, primarily through extended payment terms with vendors and suppliers, he says. Another example is greater success in dealing with the extreme volatility of agricultural ingredients, ensuring consistent access to supply.
Among the most important outcomes of the initiative, in Matthews' view, are the global implementations of effective processes, especially for category management and sustainability, and of enabling technology. He also sees the reorganized team of capable professionals—at corporate headquarters, within the business units, and wherever the company sources its products and ingredients—as fundamental to the company's future success. "We've given people reason to believe [in procurement's mission], and through skills development, the tools to do the type of transformational work that the business values. That makes them great leaders and productive professionals" who can take those capabilities into other areas of the business, he observes.
The procurement organization's leadership role seems assured. Now, Pratt says, procurement is "at the table," working with management on setting long-term strategic budgets, addressing profit and loss, enhancing customer engagement, and collaborating on new-product development. "We've gone from being procurement professionals to being business partners," he says.
While the hard work of a years-long effort to bring an ambitious plan to fruition is largely complete, McCormick's procurement team is determined the keep the momentum going. Currently, $1.2 billion out of an annual spend of approximately US$3 billion is managed through the new global category management process. The goal is to have 70 percent of McCormick's spend managed globally and with best-in-class category management, Matthews says. Another area that will receive further attention is digitization of supply chain information and processes, as well as gaining greater access to data and predictive analytics.
Pushing for change and becoming more agile and responsive during a period of relative calm for the business, it turns out, was a wise move. In July, McCormick announced that it would acquire French's Food Group for US$4.2 billion, adding high-volume products such as French's mustard and Frank's Red Hot hot sauce to its portfolio. At this writing, McCormick's procurement team does not yet know exactly what role it will play. But Matthews is confident that thanks to the procurement transformation, the team has built a solid foundation for enabling and supporting additional growth.
"The pace of change in the food industry is faster than ever," Matthews says. "That pace of change will continue to drive how we build a procurement organization for a high-growth future. I'm confident we can build new capabilities faster than our world is changing around us."
Perhaps no product exemplifies the idea of global trade better than spices. In fact, it's not a stretch to say that spice hunters invented global trade. Many hundreds of years ago, the search for pepper, cinnamon, cloves, and other seasonings brought buyers and sellers from across Europe, Asia, Africa, and the Middle East into regular contact, profoundly changing the world's economic, cultural, and political history.
While the spice trade no longer depends on sailing ships, desert caravans, or years-long treks across continents, buyers around the globe still source spices and natural flavorings like vanilla from growers in developing economies and remote areas. The growers are often family farmers who face an array of economic and environmental pressures, and McCormick & Company Inc. has taken a number of steps to assist them. For example, the company has hired an agronomist who helps growers apply modern farming techniques in an environmentally sustainable way. In some areas, McCormick is applying mobile technology, such as using smartphones to capture information like soil analyses and weather data at the point of origin, to advise farmers.
One of McCormick's objectives, of course, is to improve end-to-end control of its key agricultural ingredients in order to ensure continuity and quality of supply. But its "Power of People" philosophy means that its motivations extend beyond its own interests. "We believe that the sourcing sustainability strategy we have developed drives meaningful improvements back to the community level," says Brant Matthews, vice president of global strategic procurement.
Indeed, adds Donald Pratt, managing director, McCormick Global Ingredients, at the same time that McCormick is "looking at the long-term implications of sustainability of our iconic herbs and spices and other agricultural products, we're also looking at the livelihoods of people we are buying from." In Madagascar, for example, the company is teaching vanilla farmers, who may only get paid once a year for their seasonal crop, how to manage their finances. McCormick is also helping them to make ongoing improvements in the yield and quality of their product. That will help growers not only improve their livelihoods and provide sustainable benefits for their communities, Matthews says, but it will also result in better-quality ingredients for consumers.
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