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UFPC Business and Supply Chain Update

UFPC Business and Supply Chain Update. Upper Midwest / Great Lakes / Southwest Regional Conference Scottsdale, Arizona October 11, 2011. Agenda. Commodities Update Cost of Goods Update PRTM (PWC) Update Financing Update Resource Services Other. Commodity Update.

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UFPC Business and Supply Chain Update

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  1. UFPCBusiness and Supply Chain Update Upper Midwest / Great Lakes / Southwest Regional Conference Scottsdale, Arizona October 11, 2011

  2. Agenda • Commodities Update • Cost of Goods Update • PRTM (PWC) Update • Financing Update • Resource Services • Other

  3. Commodity Update

  4. Low Corn Yields are Expected • Hot temperatures impact pollination. Corn does not fill to the end of the ear due to pollination problems. • Example: Indiana corn • While overall corn yields will be low, some farmers will experience large corn yields. • Example: Nebraska corn Hot temperatures during July across the Midwest has led to deteriorating corn production prospects. 2010 and 2011 will mark the first time since 1944 and 1945 where corn yields were 5 percent below trend (normal) levels in consecutive years. Conditions are variable from state to state and field to field.

  5. Corn Prices are Extremely Volatile • Corn prices have recently declined due to slowing economic fears, but prices remain historically elevated. Corn Prices (Cents per Bushel) Corn prices reach record highs due to poor crop yields and historically low corn inventories.

  6. Demand Rationing is Occurring Chicken Producers are Cutting Production.

  7. But Ethanol Margins Remain Favorable Despite corn prices doubling, ethanol margins remain elevated. Source: The LaSalle Group

  8. Commodity Outlook Market Price Expectations • Corn • Demand cutbacks are occurring and likely will become the focus of the market this fall. • Because of low corn yields, the prospects for lower corn price opportunities are limited until Q3 2012. • Soybean meal • Soybean meal prices are expected to trade in a sideways range unless soybean yields are above expectations. • Soybean oil • The USDA projects biodiesel demand will increase by 63 percent in 2012 due to a larger government mandate. • This is expected to lead to tighter soybean oil inventories next year. • Wheat • Record drought conditions in the Plain states has contributed to lower than expected production. • Global wheat inventories, however, are at normal levels. This should limit wheat inflation risk. Note: price arrows reflect market price changes from the same period of the year prior (example: Q3-Q4 2012 arrows reflect market price changes from Q3-Q4 2011.

  9. Key Variables • Federal Reserve Policies • Another Quantitative Easing program will spur inflation. • Movement of the U.S. Dollar • Elevated money supply leads to a weaker U.S. dollar and stronger commodity exports. • Ethanol and Biodiesel Subsidies • The ethanol and biodiesel tax credits are scheduled to terminate at the end of 2011. • This should lead to slowing ethanol production growth unless Congress extends these supports. • General Economic Conditions • Consumer confidence is eroding • Gasoline demand is declining • Manufacturing is slowing • All of these indicators point to slowing economic growth or a recession. • It is unlikely that strong commodity demand (and historically high prices) can persists in this environment.

  10. Results The KFC commodity committee and UFPC have mitigated cost below levels that would have existed in absence of risk management. As of October 6, realized and unrealized cost mitigation has totaled: $17.1 million dollars

  11. Cost of Goods Update

  12. KFC Concept2011 Cost of Goods (COGS) Q4 Forecast Tim Mueller

  13. 2011 COGS Forecast vs. PlanKey Item Detail (as of P9) • Key items driving inflation include Oil, Biscuits, Fresh Chicken, (COB), packaging, Flour, Breading, Potato Wedges

  14. 2011 COGs Forecast by Category; by Quarter (as of P9)

  15. 2011 COGS ForecastBy Period (as of P9)

  16. KFC COGS inflation is projected at 3.2% on increased fresh poultry, packaging (reusable containers), potato and oil costs. Milk & egg mix reformulation to extend hold time adds $2.0MM. 2012 COGS Plan KFC Concept Summary (Round 2 of 3)

  17. Restaurant Margin ImprovementPwC (PRTM) Update

  18. Program Objectives Overall Objective: Rapidly Deliver Savings to the KFC System and Establish Processes for Ongoing Margin Management While Maintaining Or Improving The Consumer Experience Phase Two Objectives Phase One Objectives Margin Improvement & Process Customization Target Setting & Prioritization • Drive rapid savings on Wave 1 categories with PRTM resources/expertise • Fast track sourcing process for near term opportunities • Train/coach KFC organization through launch of Wave 2 categories • Position KFC to achieve remaining savings opportunities • Define/implement margin focused modifications to KFC development/LTO processes and system incentives • Customize sourcing process governance to fit KFC • Identify and quantify major savings opportunities • Define principles for customization of processes for KFC • Set category priorities based on size of opportunity and timeline to savings • Build plan and align resources for Phase Two

  19. Phase One – Target Setting & Prioritization Phase Objective: Define the value proposition/savings targets and prioritize the approach Analysis & Solution Development Data Gathering Interviews Category Workshops Sourcing Category Profiles Value Proposition Benchmark Comparisons Document Reviews + BOH Observations Cost in Use Analysis Where And How To Achieve Spend Analysis Process/Incentive Review Competitive Research

  20. Overall Program Timeline Phase One – Target Setting and Prioritization Phase Two – Category Margin Improvement and Process Customization Spend Analysis Category Margin Management - Wave 1 Categories (PRTM Led, Training KFC) Stakeholder Interviews Kick Off Ideation Workshops Define Item Strategy Testing and Market Validation (If Necessary) Store Visits & Product Training Feasibility Assessment Sourcing Process Map Cost in Use Category Platform Plan Transition Build Category Spend Profiles Category Margin Management - Wave 2 Categories (KFCl Led, PRTM Coaching) Kick Off Ideation Workshops Item Strategy Testing & Market Validation (If Necessary) Cross Functional Workshops Feasibility Assessment Sourcing Process Initial Savings Estimates Category Platform Plan Process Customization Principles Process Customization/Sustainability Incentives, Sourcing, Category Margin Management and Development/LTO Processes Integrated Program Plan

  21. Program Leadership & Roles/Responsibilities Steering Committee Roles/Responsibilities John Cywinski Dave Evans Doug Hasselo Jim Metevier Tim Mueller Jim Olson Trip Vornholt Dan Woodside • Decision Making Body • Ensure Resource Availability • Remove Barriers/Roadblocks Enrique Ramirez Core Team Pat Murtha Scott Haner* Dave Evans Tim Mueller* Mike Ledford • Day To Day Program Guidance (Issue Resolution, Resource Allocation, etc.) • Recommend Solutions To Steer Comm • Provide Facts/Trade-offs For Steer Comm To Make Decisions Jud Bell Fred Bauer Teresa Crawford Sandy Chastain-Brough Category Teams Process Customization • Develop Optimal Cross-Functional Solutions • Support Solutions With Facts • Define Sustainable Processes Marketing Finance R&D OperationsFranchise UFPC Marketing Finance R&D OperationsFranchise UFPC Phase 2 ** UFPC/KFC Program Leads

  22. Financing Programs Update

  23. Financing secured for two separate programs Complete Review financing program with operators Complete Financing program approved by Concept & UFPC Boards Complete Pre-qualification process Complete Complete cabinet & timer negotiations October 14 Mail financing & equipment order packets October 17 Launch on line equipment reservation system October 17 AIP/supplier commitment for cabinets October 17 Financing window Oct 17 – Nov 30 MERIT supplier summit October 26 Complete MERIT negotiations November 4 Cabinet production & installations** Mar 2012 – Mar 2013 MERIT/Drive Thru Timer production & installations Mar 2012 – Mar 2015 Financing Fee applied to mashed potatoes & biscuits Sept 2012 – Sept 2016 * Assumes approval of NCAC/KFC operator agreement ** Cabinet installations target one year ; however operator agreement states compliance by 2015. Operators responsible for scoping and permitting MERIT/Drive Thru Timer, Holding Cabinets Program Milestones*

  24. Resource Services

  25. Resource Services • Resource Services: Started at UFPC in 2002: Programs selected based on 3 criteria • Large returns, Low barriers to entry & growth and Effective implementation and mgmt • Primary programs include: Cell phones, Parcel, Debit cards, CO2, Pest services, Gift cards and Employee discount programs (see latest Fall 2011 Directory) • Program funded by small fee – pay to play • Fees set up to offset development and mgmt costs; Avg. fee less than 1% • Energy • Deregulated areas represent 30% of KFC’s total system spend of $205MM – (about $70M) • Realized > $95MM in Yum! system energy savings since starting program in 2002 • Average annual savings for a participating KFC location = $2,000 per store • 2011 Energy focus: Develop programs to target $145MM spend in regulated markets • Ameresco: 3rd party outsourcing of utility bills (> 7,000 stores represented in testing) • Cost of $2.50/store per month per utility invoice • Real Win Win: rebate outsourcing to a national rebate partner (>5,000 stores on board) • No fee unless rebate granted (RealWinWin receives 25% of rebate) • Gift Cards • Timeline to participate in 2011 Holiday season: • Return signed participation agreement to Andrew Now • Software download to stores Oct 31 • UFPC ships materials to franchisee office Nov 7 • Restaurants should train, install POP and merchandiser Nov 14

  26. Other

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