According to a recent article from MarketWatch, the Dutch brewing company Heineken experienced first-half profit gains of 35%. While some of this success has been attributed to Heineken’s involvement with Carlsberg in the joint acquisition of the British brewery Scottish & Newcastle, Heineken’s “Fit 2 Fight” cost-reduction program has also been cited as a driving force toward success. To find out more about the program, I got a hold of a copy of the actual Power Point presentation Executive Board Member Rene Hooft Graafland delivered at the 2006 Heineken N.V. Financial Markets Conference in Miami. The presentation is titled “Maintaining Momentum in Cost Reduction”.

Graafland’s presentation explains that the acceleration of top line growth, efficiency improvements, and speed of implementation are three of the four priorities for action. The fourth is the selection of acquisition opportunities. In order to identify ways to address these areas, Heineken breaks its spend out into six categories. These categories include Input Costs, Transport and Energy, Good for Resale, Marketing and Selling, Fixed Costs, and Others. Fixed and Input costs accounted for more than 60% of the company’s total spend.

The Fit 2 Fight program was designed to run from 2006 to 2008 and target 450 million Euros in fixed cost savings. The program is backed and monitored by head offices and executed by regional operations that are motivated by incentives for meeting F2F targets. Many of these targets involve the improvement of efficiency of existing breweries, increasing economies of scale of production, and decreasing losses by implementing total process management.

Heineken also focused on improving margins by reducing its sales force by 20%, rationalizing and consolidating its distribution network, and eliminating 11 of its legal entities. These measures helped to leverage volumes, improve sales force productivity, and centralize the transactional process.

The presentation also highlights Heineken’s application of the F2F program within its warehouse operations. Through warehouse management optimization and cross docking concepts, the brewery was able to significantly reduce the amount of warehouse space needed to conduct business.

Savings were also accomplished in the areas of support services through the standardization of processes, improvement of functional ownership, benchmarking, and shared service centers. The presentation describes this shift as moving from “complete is better” to “less is more”. As part of the program Heineken also implemented application hosting and outsourced network, telecom, and global workplace functions to produce a savings of well over 10 million Euros.

The Fit 2 Fight program also produced a 5% savings in 2006 by centralizing the purchase of 70% of its variable costs. The presentation points out the purchasing centralization of agricultural inputs, production materials, packaging, and labels.

Finally, the program proactively hedged the prices and quantities for bottles, cans, and malt for all of 2007. This action was taken after Heineken’s February forecast predicted an 8% rise in packaging and raw materials costs by the end of the year.

After all this, the big question is, “Was it worth it?” Was it worth all the research, planning, execution, and implementation? With permanently improved processes, cost savings, and a 35% gain in first-half 2008 profits, Heineken’s managers can happily answer this question with a resounding “Yes.”
Share To:

Steve Tatum

Post A Comment:

0 comments so far,add yours