4 - Kellogg Planning System

Kellogg Planning System
KPS in Action
Serial Market in US and Korea

Cereal "Processed grains for human consumption" .
(Breakfast Cereals and How They Are Made (Robert B. Fast and Elwood F. Caldwell, 1987)
7 5 and relatively flat.

1,400 1,200 1,000 800 600 400 200 0
Increm Base 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 62 77 89 99 160 214 244 270 298 275 281 305 306 321 314 296 966 978 969 988 972 981 980 948 908 927 884 831 770 727 714 697
1,500 and gradually increasing. ( 1/50 )

25,000 20,000 15,000 10,000 5,000 0 56.0% 54.0% 52.0% 50.0% 48.0% 46.0% 44.0% 42.0%
2003 Total
2004 Post(M/S)
2005
2006 Kellogg's(M/S)
ISSUES : H&W 2000 (), 2004 () , . H&W , . 2

All Rights Reserved YSMBA Team 4 2007, November
Cereal Market Structure of USA

Sweet segment
Segment Share $ vs. PY 47.9 -3.7%
Balanced Segment
22.2 +7.5%
Unsweetened Segment
29.6 -2.8%
Sweet Treat
Wholesome Sweet
Tasty Balanced
Healthy Balanced
Routine Unsweet
Healthy Unsweet
Driving Motivators
Fun to Eat Fun to Eat (Kid-directed) (Mom-directed) Brands
Pebbles Post Golden Crisp Honeycomb Post Frost SW Froot Loop s Kel Frost Flakes Cinn Toast Crunch Post HBO Post SW Special K GM Cheerios Post GNTMC Kraft SBD Post Selects Kel Smart Start Post Rsn Bran Post SW Biscuit Chex Special K Post Grapenuts Post 100% Bran Kel All Bran
Taste then Health
Health then Taste
Routine
Healthful
Company Share
15% Post 33% Kelloggs 10.8 27.5 2.9 38.4 28.1 42.6 32.5 16.5 18.4 38.2 9.7 8.4 36.4 41.9 27.2 35.0 14.6 3
30% General Mills 35.8
Serial Market in US and Korea Usage occasion
In-Home Breakfast In-Home Snack In-Home Dinner In-Home Lunch Carried From Home
3 2 2 1 91
44 54 0 2 0
In-Home Breakfast In-Home Snack In-Home Dinner In-Home Lunch
Pastries 3% Bars 1% Yogurt 2% Donuts 2% Toaster Pastries 2% Breakfast Sandw iches 2% Bacon & Sausage 6% Hot Cereal 6% Pancakes/Waffles/F T 6%
Morning Breakfast Foods (Share of Eatings)

All Other 15%
Carried From Home
+4 pts
/, 1.0% , 7.5% , 0.2% , 6.0% , 7.4%
RTE Cereal 24%
Toast 10% Bagels 2% Fruit 10%
, 77.9%
Eggs/Omelettes 2 9%Years of Data Ending May 2005
Source: National Eating Trends, NPD
Cereal U&A(2007 9)
. 4 , .
Flaked product
(Cooking)
(Tempering)
(Drying)
(Flaking)
(Toasting)
(Drying)
(Coating)
(Packaging)
5
Non-flaked product
(Blending)
(Extrusion)
6
Kellogg History
Kellogg Company was formed when production of Kelloggs Corn Flakes began at W.K. Kelloggs newly formed Battle Creek Toasted Corn Flakes Company in 1906. The ready-to-eat cereal innovation would change the way people eat breakfast worldwide. W.K. Kelloggs product innovation and drive for market expansion influences the Kellogg Company and the food industry around the world today. W.K. Kellogg began worldwide expansion of the company in 1914. By 1938, Kellogg had build plants in England and Australia. After W.K. Kellogg's death in 1951, Kellogg continued to expand its operations, building plants in Latin America and Asia. In 1958 Tony the Tiger won a contest over Katy the Kangaroo to become the sole spokes-character for Kellogg's Frosted Flakes and a mainstay in American culture.
7
Kellogg History Contd

Breakthrough Kellogg food innovations include breakfast convenience foods like Pop-Tarts toaster pastries, Eggo frozen waffles, and NutriGrain bars. Kellogg has established itself as an industry leader with health-conscious, innovative breakfast choices like Special K, All Bran and Product 19 cereals. Kellogg continued to expand its operations and innovate by acquiring the vegetarian-based food group Worthington Foods in 1999 and the organicbased food group Kashi Company in 2000. Kellogg also acquired snack leader Keebler Foods Company in 2001. A multi-year global relationship with Kellogg and Disney was formed in 2002 to introduce several new cereal and snack food products to the market.
8

Since 1906, people just like you have come to know Kellogg as a company they can rely on for great-tasting, high-quality foods. With 2006 sales of almost $11 billion, Kellogg Company is the worlds leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles and meat alternatives. The Company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Club, Nutri-Grain, Rice Krispies, All-Bran, Special K, Mini-Wheats, Chips Deluxe, Sandies, Morningstar Farms, Famous Amos and Kashi. Kellogg products are manufactured in 17 countries and marketed in more than 180 countries around the world. Kellogg icons such as Tony the TigerTM, Snap! Crackle! Pop!TM, Toucan SamTM and Ernie KeeblerTM are among the most recognized characters in advertising.
9

Consumers around the world are enjoying Kellogg products, one of which Kelloggs Corn Flakes has been part of a healthy, delicious morning for a century. The company that makes breakfast and snacks for millions began with only 44 employees in Battle Creek, Michigan, in 1906. Today, Kellogg Company employs more than 26,000 people, manufactures in 17 countries and sells its products in more than 180 countries.
10
Why Kellogg introduced KPS?
The Kellogg Company had long used spreadsheets and special software for materials requirements planning
(MRP) and distribution resource planning (DRP). But by

1987 Kellogg realized that its expanding product line and geographically dispersed production facilities required some means of systematic, global coordination and optimization. KPS was the result.
11
How complex in Kelloggs operations?

- 5 Plants (Battle Creek, Omaha, Lancaster, Memphis, London) in USA and Canada
Variety Pak can be packed only at Battle Creek.
- 7 core Distribution Centers (California, Florida, Georgia, Maryland, Virginia, Pennsylvania, South Carolina) - 15 co-packers
- 90 production lines for 80 products/600 SKUs

- 180 Packaging lines
Needs to seek for the optimal solutions to save the costs against the complexity of the above conditions
- 100,000 contstraints/700,000 variables/4 million nonzero coefficients
12
5 Plants / 7 DCs - Location
London
BC DC OM DC MP DC DC LC DC DC
DC
13
Kellogg Distribution Center
Can handle 200 trucks 903,000 sf Warehouse space
6,000 sf office element

14
Kellogg Planning System (KPS)
KPS
Kellogg Planning System
Operational KPS
Tactical KPS
15
Summary of KPS (Kellogg Planning System) Two different versions of KPS

(1) Operational KPS: At a weekly level of detail, helps determine where products are produced and how finished products and in-process products are shipped between plants and distribution centers. Operational KPS reduced production, inventory, and distribution costs by an estimated $4.5 million in 1995.
(2) Tactical KPS:

At a monthly level of detail, helps to establish plant budgets and make capacityexpansion and consolidation decisions. Tactical KPS recently guided a consolidation of production capacity with a projected savings of $35 to $40 million per year.
For over a decade, the Kellogg Company has used its planning system (KPS), a largescale, multi-period linear program, to guide production and distribution decisions for its cereal and convenience foods business.
16
KPS - The Basic Operational Linear Program

The operational version of KPS makes production,
packaging, inventory, and distribution decisions at a weekly level of detail.
HOLDt = HOLDt-1 + MAKEt Demandt

for all time periods (weeks) t, Where HOLDt is the inventory for a single product
at the end of period t (a decision variable), MAKEt is

the production of the product during time period t (a decision variable) and Demand, is the exogenous demand for the product during period t (data)
17
KPS - The Tactical Linear Program
The tactical model is identical to the operational one except that; (1) time periods consists of four-week blocks called months, (2) transportation is typically treated as instantaneous, and (3) a special time-cascade solution technique helps deal with the limited product shelf lives.
18
KPS Objective Function
Objective
Minimize production costs + packing costs + inventory costs + shipping costs + penalties for processing line capacity violations, packaging line capacity violations, unmet demand, and unmet safety stock requirements.
19
KPS Decision Variables

MAKEhpt klbs of product f(h) produced using process h at plant p during time period t. PACKkmpt klbs of sku k packed on line m at plant p during time period t. HOLDkpt klbs of sku k in inventory at plant p at the end of time period t. SHIPkppt klbs of sku k shipped from plant p to plant p at the beginning of time period t (nominally arriving in period t + 1).
20
KPS Indices & Data
21
KPS - Constraints
Within a plant, basic constrains for each week require that the system:
(C1) Does not exceed processing line capacities;

(C2) Does not exceed packaging line capacities; (C3) Packages all products produced in a week into skus during that week (these are flow-balance constraints between processing and packaging); (C4) For each sku, balances inventory from the previous week plus current packaging plus incoming shipments with outgoing shipments, plus consumption in assemblies if this is a constituent sku, plus exogenous demand assigned to the plant; (C5) Satisfies safety stock requirements with in inventory of each sku at each plant; (C6) Coordinates processing lines and packaging lines as needed during each time period.
22
A commercially available ERP SAP
23
APO Planning Process in SAP bonus slides example Production costs
Only variable costs are considered
Storage costs
When storage costs are not considered, deliveries are made to the requesting node within the network (decentralized approach) Costs of the solutions are not affected You can use storage cost scaling to carry out desired storage policy
Transportation costs Costs for additional capacities
For non-delivery and late delivery
Penalty costs
24
Q&A
Thank You for your attention!
25

4 - Kellogg Planning System

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What is the cereal market like in the US and Korea?

What is the cereal market like in the US and Korea?

What are some of the issues facing the cereal market?

What are some of the issues facing the cereal market?

Kellogg Planning System

Serial Market in US and Korea

7 5 and relatively flat.

1,500 and gradually increasing. ( 1/50 )

ISSUES : H&W 2000 (), 2004 () , . H&W , . 2

Cereal Market Structure of USA

Taste then Health

Health then Taste

30% General Mills 35.8

All Rights Reserved YSMBA Team 4 2007, November

Serial Market in US and Korea Usage occasion

In-Home Breakfast In-Home Snack In-Home Dinner In-Home Lunch

Morning Breakfast Foods (Share of Eatings)

Carried From Home

/, 1.0% , 7.5% , 0.2% , 6.0% , 7.4%

RTE Cereal 24%

Toast 10% Bagels 2% Fruit 10%

Eggs/Omelettes 2 9%Years of Data Ending May 2005

Source: National Eating Trends, NPD

Kellogg History Contd

Kellogg History Contd

Kellogg History Contd

Why Kellogg introduced KPS?

(MRP) and distribution resource planning (DRP). But by

How complex in Kelloggs operations?

- 90 production lines for 80 products/600 SKUs

5 Plants / 7 DCs - Location

Kellogg Distribution Center

Can handle 200 trucks 903,000 sf Warehouse space

6,000 sf office element

Kellogg Planning System (KPS)

Summary of KPS (Kellogg Planning System) Two different versions of KPS

(2) Tactical KPS:

KPS - The Basic Operational Linear Program

HOLDt = HOLDt-1 + MAKEt Demandt

at the end of period t (a decision variable), MAKEt is

KPS - The Tactical Linear Program

KPS Objective Function

KPS Decision Variables

KPS Indices & Data

(C1) Does not exceed processing line capacities;

A commercially available ERP SAP

APO Planning Process in SAP bonus slides example Production costs

Only variable costs are considered

Transportation costs Costs for additional capacities

For non-delivery and late delivery

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