General Mills Adds More Outsourcing Partners to Meet Demand for Packaged Foods

General Mills Inc.. relies more than ever on third-party manufacturers to meet increased demand for its products, although asking others comes at a significant cost to the cereal and soup maker.

Boxes of General Mills Honey Nut Cheerios. (Justin Sullivan/Getty Images)

packaged food companies are scrambling to keep grocery store shelves stocked during the coronavirus pandemic as consumers continue to eat more meals at home. The disturbances in the supply chain have made it difficult for manufacturers such as Minneapolis-based General Mills to restock stores with Progresso soups and Betty Crocker cake mixes, despite its factories operating at full capacity.

To bolster its supply chain, General Mills has entered into several new partnerships with contract manufacturers and raw material suppliers — and expanded existing ones — since March, when demand began to soar, the chief operating officer said. finance, Kofi Bruce.

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General Mills will increase the number of partners by up to 20% on top of the 200 it had before the pandemic, said John Church, head of supply chain and global business solutions at General Mills. The packaged food giant expects these third parties to be part of its supply chain until at least next summer, executives said.

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The company has worked with manufacturing partners for decades in the United States and Europe, helping manufacture about 30% of General Mills’ North American products, Church said.

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The company’s existing relationships made it easy to find partners willing to resume production. But these services come at a higher price due to increased competition, said chief financial officer Mr Bruce.

“It will cost us more to operate in this environment,” Bruce said. “But those are the things that are needed for us to be nimble and nimble and ready for a longer period of higher and sustained demand.”

Mr Bruce declined to name the cost of increased outsourcing, but described it as ‘a cost several tens of percentage points higher than an in-house manufacturing cost’.

Yet General Mills sees it as an obvious alternative to building new mills, in part because of the time it would take. The company operates 47 food production facilities worldwide, including 24 in the United States

General Mills also plans to significantly increase capital spending to support its operations. It assesses how well it can streamline production to make improvements such as adding factory lines or removing bottlenecks from existing lines, Bruce said.

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“What’s unknowable right now is how long you’ll need the extra capacity, which is the benefit of looking at an external supply chain capacity solution,” Bruce said. , who joined the company in 2009 and became chief financial officer in February 2009. this year. “You’re not stuck with the cost of those assets if the demand evaporates or disappears fast enough.”

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Typically, these other manufacturers were making part of a product type — ranging from dinner kits to granola bars — or testing a new product. “If you need a place to sleep for the night, you can build a house or you can rent a room in an already built hotel,” Mr Church said.

The company can only partially offset this cost by running its in-house factories at full capacity and spreading the fixed costs over as many units as possible. The company is also trying to offset higher operating costs by managing margins in manufacturing, logistics and sourcing efficiencies in an effort to hedge against cost inflation, Mr. Bruce.

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General Mills must accept lower profit margins on outsourced products to maintain its position against rivals, said Wells Fargo & Co analyst John Baumgartner. longer term if your competitors are willing to accept this drop in profitability,” Baumgartner said.

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The company reported a 16% increase in comparable sales for the last quarter ended May 31. Its U.S. grain sales, which were rebounding even before the pandemic, soared 26% in the quarter.

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