Operations Management- What are the implications of customer-focused reengineering

Harvard Business School

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Rev. April 26, 1995

Pillsbury: Customer Driven Reengineering

We entered our Customer Driven Reengineering intiative expecting to achieve
significant levels of cost reduction and efficiency. To our delight, we also discovered a
new way to compete.
Paul S Walsh
CEO, The Pillsbury Company

Company
The Pillsbury Company was founded in 1869 as a flour milling firm in Minnesota. Its
milling operations soon extended into branded bakery goods products, and, during the next century,
the company expanded to become one of the leading branded food product companies. In 1989, Grand
Metropolitan (GrandMet), a diversified UK-based consumer goods and retailing corporation,
purchased The Pillsbury Company for $5.8 billion (see Exhibit 1 for a summary of Pillsbury's
financial information prior to its acquisition in 1989). The acquisition was part of GrandMet's new
strategy to become a world leader in branded food and drinks businesses.
In 1994, the annual sales of GrandMet's North American Food operations, now called the
Pillsbury - North America sector, were $4.0 billion. Included in the sector, of course, was the
Pillsbury brand of prepared dough products, baking mixes and flour, a leader in the U.S. market,
with refrigerated dough products achieving a 75 percent market share of the refrigerated dough
category. The Green Giant division was the number one branded vegetable producer in the U.S. and
Canada, producing canned, jarred, frozen and fresh vegetables such as corn, peas, and beans. The
frozen pizza business, with Totino's, Jeno's and Pappalo's brands, held the number one position in its
market segments. Häagen-Dazs was the world's leading maker of superpremium ice cream and
frozen yogurt products. GrandMet Foodservice was a leading provider of flour, dry baking mixes and
frozen unbaked and pre-baked products to in-store, foodservice and wholesale bakery markets.
Pillsbury products were perhaps most identified with two well-known characters—the Jolly Green
Giant and Poppin' Fresh the Pillsbury Doughboy. Pillsbury's strongest competitors included Dean
Foods (Bird's Eye Brands), Del Monte, General Mills and Nestle food companies.
Professor Robert S. Kaplan prepared this case with assistance from Doctoral Student Ken Koga as the basis
for class discussion rather than to illustrate either effective or ineffective handling of an administrative
situation.
Copyright © 1995 by the President and Fellows of Harvard College. To order copies or request permission to
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permission of Harvard Business School. The Financial information contained herein is for illustrative
purposes only.

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GrandMet, with its origins in hotel operations had acquired over the years a diversified
collection of food, beverage, and retailing companies. In the late 1980s, GrandMet began the sale of
billions of dollars of assets, including its original hotel operations, so that it could concentrate on
becoming a leader in the branded food, and drink businesses. Exhibit 2 presents a summary of
GrandMet's recent financial information.
Consistent with Paul Walsh's strategy of focusing on core businesses, Pillsbury itself had
recently sold all of its flour mills, some of whose ownership dated back more than a century. In 1991,
four mills were sold to Cargill with Pillsbury continuing to receive the processed flour output from
these plants through supplier contracts. Two years later, Pillsbury sold its four remaining mills to
Archer-Daniels Midland (ADM), a large grain producer. Pillsbury retained access to the output
from these ADM mills through a long term supply agreement. Tom Debrowski, Senior Vice
President of Operations, explained the rationale for the flour mill sales:
It became apparent that we were not the low cost producer of flour. In a
rapidly consolidating and highly competitive market, we wanted to focus our
assets on the more value-added parts of the bakery business, our branded food
products. The sale of the flour mills enabled us to get large amounts of aging, underutilized assets off our balance sheet, while gaining guaranteed access to a long-term
supply of low-cost, high-quality flour, produced to our specifications.

Pillsbury Capabilities
Competitive pressures, technology advances, and demanding consumer preferences were
causing all companies in the food industry to reexamine their operations and attempt to eliminate
waste and inefficiency throughout the food chain. The Efficient Consumer Response (ECR) effort
was a multi-industry project, involving food processors, manufacturers, distributors, wholesalers,
brokers, and retailers. ECR's goals were to reduce costs and drive inventory levels down throughout
the system, while simultaneously enhancing capabilities to meet the needs of diverse consumer
market segments. Pillsbury executives were unsure whether their company was prepared for the
new ECR environment. Larry McWilliams, Vice President, Frozen Sales, identified the current
challenge for Pillsbury:
When I came to the company 18 months ago, I encountered a company with
strong brands but with little prospect for volume growth. Customers perceived us as
an average company, not the best, not the worst, and without much innovation.
John Mann, Senior Vice President and General Sales Manager, and another newcomer to the
Pillsbury senior management team, concurred with McWilliams' assessment: "We were viewed as a
laid-back Midwestern company, one that found it difficult to create a sense of urgency."
McWilliams felt that Pillsbury had to become a different company if it was to change the
perception of customers.
The company's strategy has been to create strong brands that could be
marketed directly to the consumer and it was very successful with this strategy. By
attracting consumers to purchase the products, the company didn't have to be overly
concerned with its relationships with the retailers who bought and stocked the
branded products.
The new food marketing environment, however, was much more fragmented. Network
television ads were reaching a smaller share of consumers, and marketing methods—using cable TV,
direct mail, and billboards—could be targeted to much more specific market segments. Even more
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important, brand images were becoming less important in consumers' purchasing decisions. Current
market research indicated that more than 50% of consumers' purchasing decisions were made in the
store, where shelf availability and price could outweigh brand image in the consumer's choice.
McWilliams anticipated how Pillsbury must react to this new environment:
We must learn to market to the consumer in alliance with our customers.
Competitive success will come from fact-based marketing, exploiting our
information systems that tell us about the demographics of the consumers around an
individual store, including what and how they purchase. If we can forge alliances
with our customers, we can micro-market at the individual store level.
Mann concurred by pointing out that retailers were facing their own competitive pressures:
Food retailing had also been a sleepy industry. Competition from new
formats [such as warehouse and discount stores] has forced the industry to recognize
that it must change. The change must include help from manufacturers to develop
effective collaborative strategies.
This pressure on food retailers offered manufacturers the potential to transform what had
been an arms-length adversarial relationship into a competitive advantage. Mann believed that
those companies who could demonstrate their value to retailers would earn the right to manage a
product category in partnership with the retailer.
The executives perceived that Pillsbury lacked several critical capabilities to win in this
new environment. First, the company was still organized according to traditional functional lines:
purchasing, operations, distribution, finance, and marketing and sales. This organization led to
local excellence and optimization of the individual functions but not necessarily to the
optimization of the entire value chain. Second, the company's financial measurements and
performance measurement system reinforced local optimization. The measures encouraged, for
example, cost minimization at an individual plant but not across the entire value chain, or, as
another example, sales expansion and SKU proliferation but without regard to the profitability of
the incremental sales and SKU introductions to either Pillsbury or its customers (see Exhibit 3).

Activity-Based Costing at Pillsbury
In 1991, Dan Crowley as Controller of Green Giant, had launched an activity-based cost
(ABC) initiative to examine the group's high cost structure. This initiative eventually led to ABC
models being developed for 20 Green Giant plants in the U.S. and Mexico. The study revealed
startling plant-to-plant variations in costs for essentially the same process, large dispersion of
actual costs from the company's standard cost per case across different vegetable groups and between
canned and frozen products, and large amounts of excess capacity, particularly in the plants that
processed vegetables in the peak period during and immediately after harvesting crops. For
example, Exhibit 4 shows the plant-to-plant variation in finance costs, and Exhibit 5 shows how
volume and complexity affected unit case costs for bean products. The traditional cost system had
indicated the same cost per case for the five bean products shown in Exhibit 5.
Based on the insights from the ABC analysis, Green Giant management closed about a halfdozen plants and consolidated operations more efficiently in the remaining plants. Crowley then
took on a broader finance role within Pillsbury as Operations Controller and extended the ABC
analysis to many of the dough manufacturing plants. The traditional cost system in these plants
(like in the Green Giant plants) had been reporting a constant labor and overhead cost per case
across all the cake mixes produced in a plant (see Exhibit 6). The ABC analysis (see Exhibit 7)
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indicated a more than 3:1 cost variation in the various cake mixes. At the high end were the lowvolume complex cake mixes, some of which required hand-insertion of a pouch of special
ingredients. At the low cost end were the high-volume standard cake mixes that could be produced
efficiently on the plant's machinery (see Exhibit 8).
Jerry Young, ABC director at Pillsbury, saw an immediate impact from the analysis:
The ABC information really seemed to energize people. They could now
look at the relationship between gross margin and volume by individual product
lines. Particularly surprising was one type of cake mix that was high volume but
was unprofitable even after the ABC analysis because it required special colors and
package inserts.
The project team prepared the classic ABC "whale curve" (see Exhibit 9) which showed a
few product lines producing all the profits, with the remaining SKUs either breaking-even or losing
money. The message from the ABC analysis was reinforced when Young lined up consumer
complaints with the profitability analysis (see Exhibit 10). Few complaints had been received for
the high-volume profitable products. Most of the complaints were concentrated in the breakeven or
loss product-lines. These products were both more complex to produce and produced in standard
batch sizes that greatly exceeded near-term demand. As a consequence, the low-volume products
stayed in inventory for a long time and their shelf aging led to a poor-tasting final product. Thus
many of the product lines were not only losing money, they were also hurting the brand image.
The ABC approach received even greater visibility when Debrowski was handed, from
Marketing, a directive to add more than 100 new SKUs to the production line-up at a time when
Debrowski was under pressure from corporate management to reduce significantly his production
costs. The sales mentality in the company was that new items generated additional sales without
adding to operating expenses. Debrowski requested and received from the ABC team, an estimate of
the large increase in the so-called fixed costs that would be caused by the introduction of the more
than 100 new products. A much greater awareness in the company had now been created on the cost
impact of volume, product complexity (such as color, and special pouches and inserts), and SKU
proliferation. As a result of this work, an SKU rationalization program was initiated, which
eventually became part of the reengineering effort.
Dan Crowley's responsibility, however, remained within the manufacturing organization:
We now had good insights about the cost drivers for our cost of goods sold.
The weak link was developing comparable information for our warehouse, sales,
marketing, and promotion expenses. We had no ability to trace these expenses to our
customers so that we could produce individual customer P&L's.

Marketing and Sales Performance Measurement
During the 1980s, Robert Slocumb, then Director, Technical Services, had been a leading
advocate for applying Total Quality Management principles in the company. TQM at Pillsbury
during the 1980s had, as its principal accomplishment, the establishment of Statistical Quality
Control programs in manufacturing.
In April 1992, Rob Hawthorne, President of Pillsbury's Baked Goods Division, appointed
Slocumb to a corporate position as Vice President of Continuous Improvement. Slocumb was tasked
with developing measures for marketing and sales that would drive improvement efforts.
Hawthorne had been a proponent of TQM/continuous improvement in his previous position as
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President of the ALPO pet food division and he wanted to disseminate these ideas more broadly
within Pillsbury.
Executive management, however, remained skeptical that TQM was delivering its
promised benefits to the P&L bottom line within a reasonable time frame. For example, an internal
study compared companies known to have adopted TQM principles with a control sample of "nonTQM" companies. The study found no discernible difference in financial performance between the
two sets of companies. If TQM was to become part of Pillsbury's culture, it would have to be
positioned as an effective management strategy, capable of significantly impacting the P&L. He
quoted Gandhi as he described his approach: "If you want to change a culture, you must first adopt
its value system."
Slocumb realized that he would have to:
1.

Develop a sound business case for the initiatives using the values of the
organization.

2.

Document the benefits that would flow from the initiatives.

Slocumb and Crowley soon discovered that even though they came from different parts of
the organization (Crowley from Operations, Slocumb from Marketing & Sales), they shared
common values and had a common mission. Slocumb reflected:
Dan brought a process mind-set from his work with activity-based costing.
My process mind-set was imbedded from more than a decade of total quality
management initiatives. Dan had already imbedded ABC thinking into much of
the manufacturing organization but could not get past the organizational wall to
incorporate the marketing, sales, and distribution organizations. I had
responsibility for improving marketing and sales performance, but the TQM lesson
was that significant P&L benefit could only come from optimizing the broader
customer value chain. We decided to combine, as a two-person team, to see if we
could launch an effort that would bring substantial bottom-line benefits to the
entire organization.

Launching the Reengineering Program
In August 1993, Crowley and Slocumb took a proposal to CEO, Paul Walsh's, Strategy and
Policy Group, which comprised the division presidents of Pillsbury's major business units and the
top functional department heads.
The proposal identified a process which would complement Pillsbury's existing strategic
plan to achieve top quartile financial performance amongst its strategic peers. The vision was
contained in a diagram (see Exhibit 11) from a McKinsey study that would soon be published in the
1
Harvard Business Review. Based on an analysis of 20 reengineering projects, this study claimed that
most of the companies used only narrow TQM-type process improvements. For these companies, the
effort produced substantial cost savings in isolated processes, but negligible benefits relative to
total business-unit operating expenses. For six of the 20 companies, however, the reengineering

1

Gene Hall, Jim Rosenthal, and Judy Wade, "How to Make Reengineering R eally Work," H arvard Business
Review (November-December 1993), pp. 120.
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effort had produced dramatic, 13-22%, cost savings for the entire business-unit. Those companies
that had produced these remarkable success stories had two features in common:
(1) the projects encompassed one or more processes that contained most of the
critical activities in the business unit; and,
(2) the projects restructured not just one but several of the key drivers of
individual and organizational behavior: roles and responsibilities,
measurements and incentives, organizational structure, information
technology, shared values, and skills.
Crowley and Slocumb's vision of a potential for 15% cost improvement (about $300 million)
in a staid and mature food processing company was met with some understandable skepticism and
disbelief. Despite that, Walsh and his management team provided to Crowley and Slocumb a
modest budget and 90 days to develop a business case to determine whether a $300 million cost
reduction was possible. Crowley was appointed to a new position, Vice President for Customer
Driven Reengineering, and Slocumb became Vice President for Business Process Reengineering. The
business case was to focus on cost and margin improvements in three major divisions: Pillsbury
branded products, the Green Giant products, and the frozen pizza businesses. These businesses had
$2.5 billion of sales in Fiscal Year 1994.

Reengineering: Phase I
The Pillsbury team selected a consulting firm to work with them to help build the business
case. Three months of analysis led to identifying three core business processes that offered targets
for improvement:
•

Customer Supply Chain

•

Brand Management

•

New Product Commercialization

This list represented the cross-functional organizational processes, from suppliers through
customers and consumers, where reengineering offered the opportunity for substantial cost reduction
and margin improvement. The study soon focused on the first item in the list, the Customer Supply
Chain since this process accounted for more than 85% of operating expenses (see Exhibit 12). The
Customer Supply Chain (CSC) was decomposed into three sub-processes:
•

Total Customer Development (see Exhibit 13)

•

Fast Flow Demand Replenishment (see Exhibit 14)

•

Value Based Sourcing and Supply

The team then proceeded to identify the opportunities for process improvement within
each of the three CSC sub-processes.

Total Customer Development
Three improvement initiatives were identified within the Total Customer Development
process:

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GROSS MARGIN IMPROVEMENT
($ Million)
Total Customer Development Initiative
Reengineer trade planning and analysis; Target promotional spending
to eliminate trade spending inefficiencies.
Develop planned customer segmentation strategies to define
capability requirements and drive cross-functional resource
deployment
Reengineer customer relationships: fact-based selling, better focus
of resource teams across customers, deliver value to key strategic
customers to build stronger trade relationships
TOTAL

Revenue
---

Cost
$24-30

---

---

$11-19

$ 6-11

$11-19

$30-41

Fast Flow Demand Replenishment
The analysis of the Fast Flow Demand Replenishment sub-process identified the savings
that could be realized by better matching Pillsbury's purchasing, manufacturing, and distribution
operations to consumers' purchases. The cost of not having a synchronized supply chain were
readily apparent. Exhibit 15 shows enormous bulges and fluctuations in Pillsbury's inventory to
supply a relatively constant rate of consumer purchases. The inventory bulges were especially
severe in low volume SKUs (see Exhibit 16). The inventory accumulation could be causally related
to excessive costs in manufacturing, warehousing, and financing, plus the risk of stale products when
they were eventually purchased and (even later) consumed. The team identified more than $30
million of potential savings from reengineering the physical supply chain:

Fast Flow Demand Replenishment Initiatives
Inbound/Outbound Transportation: Manage the transportation of
purchased materials as part of the total logistics network
General & Administrative: Reduced transactions processing in a
reengineered supply chain will reduce demands for G&A resources
Finished Goods Inventory: Increase flexibility of manufacturing
processes and effectiveness of production planning process
Unsaleables: Expand continuous replenishment to reduce
obsolescence and stale product
Distribution Center: Streamline warehouse and distribution
management; flexible operations to serve a wide variety of customer
types
Other miscellaneous initiatives (including revenue enhancements)
TOTAL SAVINGS

Margin
Improvement

Inventory

$ 8.0
7.0
1.0

$10

10.6
2.0

$6.4
$37.0

___
$10.0

Value Based Sourcing and Supply
The third CSC sub-process, Value Based Sourcing and Supply, focused on Pillsbury's
extremely complex system of vendors and sourcing arrangements for its more than $500 million of
raw material purchases. The system encompassed:

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1200+ different material specifications (recently reduced from more than
1900)
260 vendors (recently reduced from more than 400)
Complex recipes and ingredient specifications
Arm's-length, price-sensitive relationships with vendors; virtually no
technology or information integration with vendors
Historically, Pillsbury had reduced its material costs by exerting price pressure on its
suppliers. Further gains from such price pressure were considered limited. The project team believed
that more flexible and robust ingredient specification would allow them to select more efficient
vendors, and that additional gains could be realized by leveraging vendor resources and knowledge.
To gain these benefits, however, vendors would have to become partners with Pillsbury in a total
cost reduction process. Cost savings from Value Based Sourcing and Supply were estimated at about
$40 million (around 8% of purchases), plus savings in working capital reduction of about $14
million.
By the end of the 90 day Phase I effort, the Pillsbury project team and consultants had
developed a business plan that promised margin improvements through cost reductions and revenue
enhancements of more than $100 million, plus reductions in working capital of about $25 million.

Reengineering: Phase II
Phase II was launched in January 1994 to determine whether the business case developed in
Phase I was feasible and realistic. About 25 Pillsbury employees, supported by the external
consultants, spent four months analyzing customer data bases on more than 100 top accounts,
conducting in-depth interviews with key customers and suppliers, and mapping and assessing the
state of all existing internal business processes in the customer supply chain. The study of internal
processes revealed highly complex, time-consuming processes with dozens of handoffs, and
multiple recycling of requests for decisions and resource authorizations. The customer interviews
revealed that important food retailers, wholesalers, and brokers were moving aggressively
forward with plans for category management. Category management promised to give retailers far
more effective management capabilities over their store shelf space allocations, SKU
2
rationalization, and demographic marketing plans.
The Phase II studies confirmed the vision established at the end of Phase I (see Exhibit 17)
that reengineering the customer supply chain could provide upwards of $100 million in benefits.
About half would come from working more closely with customers—adopting a more