Monday, February 18, 2013

Hershey's Dilemma

Hershey’s is a name synonymous with candy, at least in the U.S. The now $5 Billion company was responsible for making modern candy for what we know it as. With a portfolio that consists of brands like kisses, Hershey bars, Kit-Kat bars, Reese’s, Twizzlers and Ice breakers, it is a wonder that the company should ever have to worry about consumer demand. However, recent times forced Hershey’s to think about just that. Like Hershey’s, there are many companies out there that have become extremely efficient because of supply chain re-engineering but are faced with flat-to-declining global demand. Hershey’s was faced with the problem of finding/creating demand that can absorb its supplies. This problem occurs when companies fail to keep up with consumers and retailer needs that define the marketplace.

For over a decade Hershey’s continued to introduce new product variations in the market under its various brands, with the assumption that there was a huge demand in the market that was waiting to absorb all that Hershey’s could offer. Hershey’s had become so efficient in supply chain management that these new variations increasingly occupied a huge space on retailers’ shelves. Yet, suddenly, none of their recent initiatives based on the old “push strategy” seemed to generate the desired results.

There were three limiting issues:
1.       Hershey’s supplied to retailers that had undergone major consolidation. They were no longer small stores, but gigantic retail chains that exerted considerable power.
2.       Consumers did not appreciate the new flavor varieties
3.       Competitors that focused on brands were doing better than Hershey’s that was focusing on packaging.    
      Internally, Hershey’s senior management were not aligned in their beliefs and understanding of the changing market place. This had resulted in the expansion of its SKUs which again, was not aligned with retailers’ need for minimal packaging and product complexities, efficient use of shelf space and low inventories.

     The solution: A demand driven approach 
     Hershey’s had to have a careful look at its “demand-chain”. It was immediately evident that the extensive number of products that each of Hershey’s brands had to offer caused confusion in the minds of consumers rather than excite them. For example Hershey’s kisses had many SKUs that included different types of chocolate, different fillings and different flavors. And, each of these came in different types of packaging. Hershey’s had invested significantly in its supply chain for these products that did not give the expected returns.
     The next step was to create a demand landscape that would better help them invest their resources and leverage an efficient supply chain. This landscape would also help them identify consumers that represented the greatest market opportunities. These were pockets of consumers who were willing to pay more for chocolates and presented a high profit demand. This “Demand Profit Pool” or “Engaged Exploring Munchers” was a set of consumers who loved candy and capturing their demand would mean getting a competitive edge. This led them to making a “Mental Model”. This mental model was given to employees across Hershey’s so that they knew exactly what their role was within the company to achieve their goals of catering to the demand profit pool. This has resulted in the entire organization adopting a demand driven approach to supply. Creating a supply chain to satisfy demand, aligned with the retailers and through a collaborative approach, Hershey’s managed to regain its market share and improve profits.
     Question: How do changes in demand affect the success of supply chain management? How would you organize Hershey’s supply chain if you knew the changing demand landscape beforehand?      



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