History of Kellogg Company and the Internal Analysis of Its Environment

Kelloggs Company, a leader in the breakfast foods and cereal industry is a globally sustainable and lean company that has been in existence for a long time. This case study analyses the company’s history and climb in the cereal industry, the company’s financials from 2017, industry analysis of their customer and competitor base and based on the research carried out there is a complete quality improvement strategy.

Kelloggs company in 2008 embarked on a K-Lean program to reduce waste, the program although effective in reducing costs lead to the downward spiral of Kellogg company plant facilities which in turn lead to the rapid decline in sales.

The K-Lean system was not the only thing that lead to the decrease in Kellogg sales. Changing consumer tastes indicate that people are shying away from processed foods such as the types of products Kelloggs Company generally produce and consumers now prefer health conscious options and are interested in being Vegan.

Kelloggs company has failed to produce products that are health conscious as most of their products include grains and starch. Kelloggs company needs to invest more in developing a new healthy Vegan Snack division in order to increase sales and change their image.

Company’s History

Kellogg Company, the dominant American Manufacturer of various edible products and ready-to-eat cereals. Corn Flakes made by Kelloggs was amongst the earliest and is still one of the foremost standard breakfast cereals within the United States of America.

Kellogg company was created in 1606 and integrated in Delaware in 1922 by W. K. Kellogg and his sibling, Dr John Harvey who discovered the delicious recipe for Kelloggs corn flakes by flaking corn. According to britannica.com, Kelloggs was initially founded as 'Battle Creek Toasted Corn Flake company” (The editors of encyclopedia Britannica). The main Headquarters are in Battle Creek, Mich. With the use of inventive advertising techniques and quality improvement of their products the company prospered. The name “Kelloggs” was adopted when the company began creating cereals apart from corn flakes.

In 1914, the company began to expand. Kelloggs Corn Flakes spread to Canada and later to Australia, England, Mexico, Japan and more. By 1915 Kelloggs introduced the first ever high fiber cereal “Bran Flakes” followed by “Kelloggs All Bran” a year later. Today, Kellogg produces cereal in over 180 countries globally.

Company’s Financials

Interpretive Analysis

Liquidity

Liquidity is one of Kelloggs basic strengths. Liquidity can be defined as a businesses ability to turn assets into money to satisfy all of its payment obligations. Kelloggs accomplished an increase in liquidity from 2017 to 2018. In 2018, based on the current ratio Kelloggs has a liquidity of 0.7 and.67 in 2017 (numbers are found on annual report). Meaning, for every dollar that Kellogg has in it’s current liabilities, Kelloggs gathered $0.7of current assets in 2018 and $0.67 in 2017.

By taking out loans for major projects and transactions, Kelloggs uses that as their original source of liquidity. This will leave room for investment in the company either in employees or facilities and machinery. This also gives the company access to new capital and the opportunity to manage labor capital requirements to increase cash flow.

Return of Assets

Return on Assets depicts what proportion financial gain an organization produces for each dollar invested in assets. Kellogg’s accomplished a rise in return of Assets from 2017 to 2018. In 2018, Kellogg’s return on assets shows 7.5% compare to 2017, 5.11%.

The rise in return on assets depict that Kelloggs is utilizing their assets effectively than in the previous year. For example, the operation costs of 2018 is less than that of 2017 and the cash (sales) of 2018 are higher than 2017.

Internal Analysis

Principal Products

Kelloggs most important merchandise are snacks, such as crackers, cookies, savory snacks, toaster pastries, cereal bars, granola bars and bites, fruit-flavored snacks; and convenience foods, such as, ready-to-eat cereals, frozen waffles, veggie ingredients and noodles. These merchandise were, as of February 25, 2019, manufactured by Kelloggs in 21 international locations and marketed in greater than 180 countries. Kellogg products are sold to retailers through direct sales, the retailers resell to the final consumers. Kelloggs company uses broker and distribution arrangements for certain products for example, less developed market areas. Most Kelloggs products are marketed under brand names like Kellogg’s, Keebler, Famous Amos, Pringles and so on.

Raw Materials

According to Kelloggs 2018 Annual report, rural commodities including corn, wheat, potato flakes, vegetable oils, sugar and cocoa, are the main raw materials used in Kelloggs products. Carton board, corrugate, and plastic are main packaging materials used by Kelloggs. Kelloggs continuously watches the world prices and supply of these materials and government trade policies. The cost of materials may fluctuate broadly due to government policy and regulation, climate conditions, local weather change or different unexpected circumstances. Continuous efforts are made to keep and improve the quality of such commodities for functions of Kelloggs momentary and long-term requirements.

Kelloggs company enter into long-term contracts for the substances described in this section and purchase these objects on the open market, relying on their view of feasible market price fluctuations and their relative negotiating power. While the cost of some of these materials might also continue to enlarge over time, Kelloggs believe that they will be capable to buy a sufficient grant of these items as needed. Raw substances and packaging for international operations are available adequately and are sourced both locally and imported from other countries.

Customer Analysis

According to Kellogg Company’s Annual Report for 2018, their biggest customer is Wal-Mart Stores, Inc. and its affiliates, which accounted for approximately 19% of consolidated net sales during 2018, comprised mainly of income within the United States. No other client accounted for larger than 10% of net income in 2018. During 2018, Kelloggs top 5 customers, collectively, inclusive of Wal-Mart, accounted for about 33% of our consolidated net income and about 49% of U.S. net sales. There has been extensive global consolidation in the grocery enterprise and the growth trend is likely to continue.

Kelloggs Company sell mainly to business to customer and business to business.

Competitor’s analysis

Kelloggs Company have experienced, and anticipate to continue to experience, extreme competition for sales in all of their main products and main product segments, globally. Kellogg’s merchandise compete with advertised and branded merchandise of a comparable nature as well as unadvertised and private label products, which are generally disbursed at lower prices. The main competitors are General Mills- a global producer of branded consumer goods, Kraft Heinz, Quaker Oats Company, Nestle and so on. Principal techniques and factors of competition encompass new product introductions, product quality, taste, convenience, dietary value, price, marketing and promotion.

This Chart compares the 5 year Net Income Growth of General Mills and Kellogg Company. From the chart you can tell that General Mills has a more stable income over the past 5 years with little rises and dips. While Kelloggs company has been unstable with a high spike in income in 2014 and a low dip in 2015.

Process Design Analysis

According to Operations Management in the supply chain, operations management “focuses on decisions for the production and delivery of the firms product and services” (Schroeder & Goldstein). Operations Management has a big role in all stages starting from, the client order to the manufacturing and delivery of the product and achieving customer satisfaction.

Kelloggs Marketing team carries out extensive research to decipher potential customers needs. This helps Kelloggs to create an extensive product list that satisfies their clients. Research to aid and grow the utility of Kellogg Company’s existing products and the development of new products is carried on at the W. K. Kellogg Institute for Food and Nutrition Research in Battle Creek, Michigan, and at other locations, globally. Kelloggs expenditures for research and development according to Kellogg Company’s annual report were approximately (in millions): 2018-$154; 2017-$148; 2016-$182.

The operations Management team analyzes the research done by the marketing team based on the customers needs in order to design the best product for the customer. Designing new products can be time consuming and costly thus Kelloggs operations management team focuses on extensions of existing products which is more budget friendly compared to new product development.

After the development of prototypes of Kellogg product extensions and the packaging design, the company’s marketing team conducts another research to anticipate the satisfaction levels of customers. This research helps the finance department to decide on an appropriate budget. The Operations management team also use this information to decide on a strategy and supply chain process. After a strategy is agreed upon, the supply chain management team decides on a process and schedules the production.

Process at Kellogg’s

The process of producing cereal at Kelloggs company follow strict quality standards. There are strict quality control processes set in place from the raw materials to every stage of the production process till the end product is manufactured. Kelloggs ensures their packaging will keep the cereal product fresh till it reaches it’s final consumer by using control charts to ensure all stages of the production process are in control. Kelloggs also create newer technology to certify the quality Waxtite wrappers to ensure the cereals remain fresh for long. Kellogg utilizes large scale machinery and automated technologies in the manufacturing process. This is very helpful in reducing production costs.

Supply Chain Management

Creating the right supply chain management mix ensures that company’s have the right product, in the right place and at the right time. Kelloggs has a well organized and efficient transport and storage systems to make sure products reach their final consumers in great quality. They utilize the lean production system which according to Operations Management in the supply chain is the *. Kelloggs uses lean production system to streamline process and reduce wastage.

Kellogg company also possess the Kellogg Planning System (KPS), according Clara Lu at trade gecko KPS, is a wide scale linear program used for operations, production, inventory and distribution system (Lu, 2014). KPS ensures the company remains optimized on production and inventory costs. Kelloggs strategy on cost effective systems make sure their prices remain competitive. Kelloggs also utilizes just in time system to manage inventory. Just in time indicates that enough products are made to fulfill orders and limited stock is held.

Kelloggs company also partnered with TDG, a logistics specialist to store and transport pallets of Kellogg’s cereal. Partnering with TDG reduces transportation costs and gives time for the company to focus on other aspects of production. Kelloggs further reduce their costs by sharing transportation with another manufacturer, Kimberly Clark. This reduces costs, saves time and road miles.

Product Improvement

Kellogg company have dominated the cereal market for over a century. Although Kellogg’s spends over 1 billion dollars a year on research and advertising it’s hold on the cereal market is undeniably decreasing.

According to Consumer Edge Research, 19 of Kellogg’s top 25 products have declined in sales since 2015. February 2016 Kellogg company quarter report indicates a 2% decline in the snack division sales. This puts more pressure on the company to resuscitate this division and increase sales.

Kelloggs problems are mainly due to the changing tastes of their customers. Consumers buy less processed foods and are more interested in health conscious brands. Kelloggs has to do something new and different in order to stand out and gain the attention of their customers.

Past experience have shown that cutting down cost alone will not bring the results that Kelloggs company is looking for. In 2008, Kelloggs embarked on a billion dollar K-Lean program that reduces waste to cut down costs. The company went overboard with the cuts and ended up loosing most of their experienced workers which lead to the downward spiral of their plant facilities.

In an effort to redeem their company Kelloggs CEO, Bryant bought “Pringles”, a potato chip brand from Procter and Gamble. Pringles increased the company’s sales from 1 Billion in 2012 to 14 Billion, the same year.

Although the acquisition of Pringles generated revenue, it is an example of the type of processed foods Kelloggs customers are shying from. Kelloggs needs to focus on developing a new snack product that is vegan and healthy. The company has spent so much money and research on cutting down costs, developing a new vegan snack division will not only be lucrative but will also be trendy.

Process Design

Kelloggs Marketing team carries out extensive research on the vegan market and industry. After research they find out the top trending vegan snack are smoothie bowls. Kelloggs decide to make ready to eat Acai Vegan Smoothie Bowls as the new addition to their snack division.

Acai is a Brazilian dish that consists of frozen mashed palm fruits served as a smoothie in a bowl and topped with granola and dried assorted fruits. The Operations Management team decides on a great design and creates a prototype of the smoothie bowl. The Marketing team takes the prototype for testing with real life customers. The team tests the satisfaction levels of customers with different flavors, the convenience of the product, and the packaging. Once satisfied with results, the operation team decides on a process and begins production.

Quality Control & Improvement

According to Operations in the supply chain, the goal of quality control is to stabilize and maintain the transformation process to produce consistent output. (Shroeder & Goldstein). Kelloggs Company can use control charts to monitor quality during the production process. After ensuring that all raw materials needed for production meet the specifications by sampling or using a certified supplier. Attribute measurement can be used to maintain statistical control and count the fraction of defects.

The strength of the Acai smoothie can be tested and the number of dried fruit or volume of granola is also tested using control chart. The strength of the bowls, the number of fruits and the volume of the bowls are computed for each bowl made. 10 samples are collected to ensure that at least one defect is found. The process is repeated until statistical control is achieved. Control chart quality can be measured by the product features offered.

Kelloggs Company can use the requirement statement check sheet to determine the best specifications to use during the production process based on customers comments during surveys and research. The company can use the information gathered to improve the quality of the product. For example, if the smoothie is too sweet Kelloggs company can use control charts to ensure that only 10 palm fruits are being blended into the smoothie mixture. They can also use the information to decide on the perfect temperature to store the smoothie.