The AP, via Yahoo News, reports that American chocolate icon Hershey will cut 1,500 jobs
and shift more production to Mexico. The report was a bit confusing. Were these cuts? Shifts to other plants? Outsourcing? So I checked the New York Times and found a report from Bloomberg
saying that the 1,500 jobs represented 12% of the workforce and that the reductions would cost $575 million in before tax costs. AP reported that the company claimed it would save upward of $190 million a year, though notice that could be significantly different from the actual savings.
To hopefully avoid some of the confusion, let's go to the company's own announcement
. It plans to close 1/3 of its product lines to get better utilization of manufacturing facilities, outsource production of low value items, and create a "flexible, cost-effective facility" in Mexico. The report goes on to say some other interesting things: finished products "will be sources from fewer facilities," each facility will be a "center of excellence" specializing in the company's proprietary product technologies, and [i]Increased access to borderless sourcing will further leverage the company's manufacturing scale within a lower overall cost structure." The process will take three years and afterward, it will make 80% of its candy in the US and Canada, down from 90%, according to Bloomberg.
A heck of a Valentine's Day present to the employees. Sometimes harsh measures are necessary to keep a company alive and well. But what's really going on? According to Bloomberg, the announcement came as the company also said that sales fell for the first time in 3.5 years. Obviously the company saw this coming and what has become the pat response in such cases is to look at production and labor. But in general the cost of manufacturing has become a relatively small part of total product costs. For example, in consumer electronics, labor is down to about 5% or possibly even less. How much of the product costs do labor represent? How long before the company will see the savings - whatever they turn out to be and my bet is that they probably wont' get measured let alone reported - that all this promises? It will take a number of years to at least make up the cost of the changes.
I think one of the more cogent observations, reported by AP, came from Wachovia Securities analyst Jonathan P. Feeney: "We are skeptical that pulling capacity out of the system while allocating capital away from the core business accomplishes the critical mission, which is to reinvigorate consumer response to its core chocolate products."
When sales go down, it might be important to tighten belts, but the most important impulse is to figure out what is wrong with a) marketing, b) sales, c) the products. Is anyone talking to customers to see why they are buying less? What metrics are in place to understand the effectiveness of marketing and sales campaigns?
According again to AP, COO David West said, "The long-term benefits will include a significant, sustainable increase in investment behind Hershey's iconic brands and new product innovation, as well as targeted, profitable international expansion." Perhaps, but if you're driving down the wrong road, putting more gas in the car and going faster isn't going to help. When sales are askew, don't blame the employees and don't blame the supply chain. Changing how you manufacture, source, and deliver products is an enormous undertaking, not just in money but managerial time. That attention would be better focused at straightening out the causes of the problem, not trying to be more comfortable with the symptoms. And to wait until the new supply chain is in place - to wait for the savings to invest in where things are going astray - is too big a gamble for any company.