Heinz Case

[pic] H. J. Heinz Company A Managerial Accounting Perspective Jarrod Brinker Mita Harkness Michelle Panatex Kathy Rodriguez Michel Valbrun Memo 1 DESCRIPTION OF BUSINESS 1. 1 Identification and mapping of processes 2 METHODOLOGY 2. 1 Explanation of Methodology 2. 2 Effort in Methodology Refinement 3 REGRESSION ANALYSIS 3. 1 Predictive Analysis 3. 2 Interpretation of Findings 4 COST-VOLUME-PROFIT ANALYSIS 4. 1 Breakeven Analysis 4. 2 CVP Chart 4. 3 Interpretation of Findings 5 ACTIVITY-BASED COSTING 5. 1 Identification of indirect activities and drivers . 2 Communication and explanation of drivers 6 ANNUAL PROJECTIONS 6. 1 Revenue/expense budget factors 6. 2 Cash planning implications 6. 3 Sensitivity to macroeconomic factors 6. 4 Forecast uncertainty analysis 7 STRATEGY IMPLEMENTATION AND BALANACE SCORECARD 7. 1 Strategy identification 7. 2 Balanced scorecard development 7. 3 Scorecard incentive issues 8 APPENDIX 8. 1 Financial Reports A. 10-K Memo To: William R. Johnson From: Team 13 Date: 03/29/2010 Re: Key Findings Below we explain the implications of the variances that I calculated.

I would enjoy meeting with you to discuss whether we are following the most efficient policies, given these calculations. Please let me know if there is any way to improve my work or my presentation to you. 1. Our batch sizes for both setups and quality inspection were smaller than planned. Even though we were able to reduce the setup and quality inspection time needed for each batch (because of the smaller batch sizes), these gains were more than offset by the increased number of batches. Overall, we ended up substantially below the level of efficiency at which we wished to operate. . The hourly wage for the setup workers went over budget due to the tight labor market in our area for such employees. However, we saved a considerable amount of money because we were able to negotiate reduced wage rates for the quality inspection labor after the expiration of their previous contract. Overall, given our output level of 15,000 eels, we had a moderately favorable variance for quality inspection costs, and a significant unfavorable variance on setups, for the reasons outlined above. Thank you. 1 DESCRIPTION OF BUSINESS H. J.

Heinz Company (which will be referred to as the “Company” or “Heinz”) has been in business for more than 140 years and was founded by Henry J. Heinz. Popular brands within these categories include Heinz Ketchup, Bagel Bites, and Heinz Nurture infant formula. Heinz operates around the globe in five main segments, which are North American Consumer Products, Europe, Asia/Pacific, U. S. Food Service, and The Rest of the World. Although all segments include the company’s operations, the difference between North American Consumer Products and U. S.

Food Service is that the North American Consumer Products segment principally manufactures and markets to grocery channels in the United States of America and includes their Canadian business while the U. S. Food Service segment does so to commercial and non-commercial food outlets and distributors in the United States of America. Even with the recent economic global recession, in Fiscal 2009 Heinz had “record sales of over $10. 1 billion and record high net income of $923 million[1]. ”H. J. Heinz Company is one of the largest global food manufactures.

Despite the fact the Company’s slogan is “57 Varieties”, Heinz Company has been able to produce, market, and sell thousands of products around the world. The Company is most commonly known for its Heinz Ketchup which is sells over 650 million bottles each year. In addition to ketchup, the Company mainly produces condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other processed food products. The Company has many classifications but their primary industry focus is “Sauces & Condiments” Because of the scope of the Company’s business it is in competition with many small and large companies.

Heinz’s top competitors are Del Monte Foods, Kraft Foods, Campbell Soup, ConAgra, Nestle, and ConAgra. 1. Identification and mapping of processes [pic] Heinz’s production process is continuous flow which means the company produces in high volumes and its products are highly standardized. The steps taken by Heinz to get an idea to the final consumer is quite extensive and can take many years to be executed effectively. A process map is presented above and represents a visual representation of the chain of events that take place from the research lab to the sale of the finished goods.

Research and Development Research and Development costs are expensed as incurred and capitalized as inventory. Heinz experiments and develops new recipes and packaging for their products in their research kitchens and laboratories. One strategy of Heinz is to “shift investment in marketing and research and development toward delivering value to consumer[2]. ”  Some possible research and development costs include the cost of supplies and machinery needed in the research kitchens and laboratories, salaries related to research and development employees, and the cost of testing new products and designs.

Heinz has developed a Global Health and Wellness Task Force to research and create new recipes to give health-conscious consumers a healthier option for their products. Some recent developments have been removal of all trans fat from Ore-Ida products, offering no-salt soup, and Ketchup without sugar. Research and development is a major business function for the Company because its findings can significantly impact the Company’s future performance. The industry in which the company operates in is highly competitive.

Consumer’s tastes, demographics, and other factors are highly dynamic and the company cannot continue producing the same type of products for long. It is important for the Company to adapt and predict trends in the market to determine wants and meet needs. Purchasing Once research and development has taken place and the company has been able to determine its target customers and meet their needs they can now begin considering raw materials. “The Company manufactures and contracts for the manufacture of its products from a wide variety of raw foods.

Pre-season contracts are made with farmers for a portion of raw materials such as tomatoes, cucumbers, potatoes, onions and some other fruits and vegetables. ” The industry spends over 50 percents of its costs on the acquisition of raw materials used for production. Fluctuations in the price of commodities inputs the Company manufactures can adversely impact its financial performance. Therefore, the Company invests in hedges to offset these fluctuations. Purchasing raw materials used in production is a value added ctivity because the company will not be able manufactures its finished good without these key ingredients. The fluctuations in the price of commodities if passed on to the customer are a non-value-added cost. The Company must acquire materials that will be used to label and package its goods. Some of the main materials include glass, plastic, metal, paper, and fiberboard. Processing The next step in the value chain is the processing. The company has factories all over the world with its US factory located in Fremont, Ohio.

This factory is used for the production of goods that will be sold in the US and the majority of ketchup the company produces is processed in this factory. The raw materials purchased must be transferred to the Company’s factory for processing. Transferring is a non-value-producing activity and consumers are not willing to pay these costs, especially if the company is in efficient with its location of factories. Before the goods marketed and distributed it is processed in the Company’s factories. Some processing activities in the Company’s factories are freezing, fermentation, drying, and blending.

Processing is a value-add activity because the Company is in the business of processing foods. More specifically, the company must process its raw materials that will satisfy its target customers needs and wants. Absent processing, the company will be classified as agribusiness and would be producers of vegetables. Heinz would incur costs as a result of machine breakdowns, time spent waiting to receive materials in order to process them, and time spent to transfer work-in-process between work stations (assuming each processing activity is taking place at different work stations).

Manufacturing The manufacturing process includes several activities some of which are non-value added. The business in which the company operates is a capital intensive. Capital intensive means that the company it dependent on the machinery and technology to manufacture its goods. Labor workers and supervisors are still visible in the manufacturing process and some of the work they do is a value added activity. For example, a labor worker manufacturing including ingredients or components to the final product that the machine cannot do is a value added activity.

Without the worker being present during the part of the manufacturing process the good cannot be completed and sold. A supervisor or a hired worker assigned to verify if the goods have been produced based on a set of standards would be a non-value activity. Inspecting goods is a major element in the way the Company operates because of it must comply with the Food and Drug Administration (FDA). The FDA is a government agency generally responsible for protecting consumer purchases in foods and some drugs products. Typically if a product is recalled by a company the FDA is most likely responsible for this decision.

The company should implement technology and a process to try to eliminate this activity. Heinz tests the speed at which the ketchup exits the bottle. Testing is non-value producing activity especially for something that many consumers may not notice. Packaging and labeling takes place during the manufacturing process. The 10-K states that packaging and labeling is an automated process. The costs to setup the machines and materials required to begin production such as inputting paper into the machine before the labeling process begins.

These activities add value to the overall product and can influence a consumer’s decision about purchasing the Company’s goods. Some likely costs are rework costs due to defective products (broken cap, damaged container, product label errors, etc. ) and delivery of reworked products, costs due to breakdowns, time taken to check finished goods, waste costs such as when a product is inconsistent with standards. Marketing Advertising costs are expensed in selling, general, and administrative and is a non-value added cost.

Heinz positions its products to be of high quality and taste. Therefore, the Company must spend a lot of time marketing to develop brand loyalty and to increase market share. One way to reach their customers is by providing a website that allows one to customize their own ketchup bottle at myheinz. com. Some of the company’s marketing costs include trade promotions, coupons, and advertising. Possible advertising costs are coupon redemption costs, in-store display advertising costs, product placement costs, and print and media advertisements.

Trade promotions and coupons provide consumers with temporary price reductions and increase their perceived value of the company. Though this is major strategy used by the company and has been increase throughout the past couple of year, marketing does not change the quality of the products that the Company produces and should not be passed on to its consumers. Distribution Distribution of the finished goods processed and manufactured is a big activity that the Company does. Heinz must incur costs to ship its products to mass merchandisers, institutes, grocery stores and many others.

Possible distribution costs include the costs incurred to maintain and use the trucks used in shipment, rent for warehouses and distribution centers used to hold the products before they are shipped, and costs charged by retailers and customers for shipping and handling. Transporting the goods to the different distribution channels is a value added activity. This activity provides consumers a convenience utility because it facilities customer purchases. Distributing “breaks the bulk” and provides additional utility to customers so that they are able to purchase in amounts that meets their needs.

They will be times when the company must wait between value added activities. Waiting is a non-value activity because consumers are not willing to pay extra for a food product because of idle time in the factory. Customer Service Heinz’s ability to retain and increase customers is critical for its success in this market. The Company is conscious of the customers it wants to target and aims to achieve overall customer satisfaction. They provide many customer service options such as a phone number included on the back of every product and a link on their website to provide feedback on their products.

Possible costs for customer service include personnel salaries needed to answer the phones and speak to customers, costs of the call centers, and costs to maintain and update their company website. 2 METHODOLOGY 2. 1 Explanation of Methodology |Cost Categories |Variable |Fixed | |Ketchup and Sauces |. 6672 |- | |Meals and Snacks |. 67166 |- | |Infant/Nutrition |. 64549 |- | |Other |. 725998 |- | |Total COGS (average) |. 6764635 |- | |Selling, General & Administration |. 77375 |- | |Depreciation |. 015131 |98327. 66 | |Amortization (COGS) |. 009397 |- | |Total |. 878367 |98327. 66 | After studying the detailed breakdown of the H. J.

Heinz Company’s value chain our group was led to believe that the company operated on a highly variable level. Based on this knowledge we decided to run a regression using Net Sales and Cost of Products Sold. Our results confirmed our original hypothesis with the R2 returning a value of . 975963. Along with the high R2 number we ascertained, we also received a negative intercept (a= -61978. 20) that was statistically insignificant (p ;. 05). In order to find any outliers affecting our regression we created a scatter plot (appendix) and noticed there were no noticeable outliers.

We took this one step further and used the statistical equation for finding an outlier(DO THIS LATER)…The negative intercept, scatter plot, as well as the insignificant p-value led us to the conclusion that the intercept was outside of the relevant range for this regression. “The H. J. Heinz Company manufactures thousands of food products on six continents” (WIKIPEDIA). The company manufactures and sells over 650 million bottles of ketchup a year alone. This demonstrates the complexity of the company as well as the massive amounts of units the company produces on a yearly basis. As of April of 2009 the H. J.

Heinz Company either owned or leased seventy-nine factories throughout the world. Due to the thousands of products manufactured the variable costs take up the majority of total costs. Based on this information we are led to believe that fixed costs associated with these plants and proportionally insignificant. 2. 2 Effort in Methodology Refinement After we ran the initial regression of Net Sales vs. Cost of Products Sold our group decided to look into the company’s quarterly and annual financial statements in order to improve upon our regression analysis. In the 10-K filed April of 2009 the Heinz Company wrote: Seasonal factors inherent in the business have always influenced the quarterly sales, operating income and cash flows of the Company. Consequently, comparisons between quarters have always been more meaningful when made between the same quarters of prior years. ” This statement influenced our methodology. We took this principle to run regressions based on Net Sales by quarter and Cost of Products Sold by quarter. In our analysis we noticed that the R2 values for three of the four periods exceeded the 97% correlation we attained from the regression on Total Net Sales vs.

Cost of Products Sold. Quarter one (Q1) had the highest correlation (R2 = . 987054) out of our quarterly analysis. According to the H. J. Heinz Company website the first quarter falls in the summer and subsequently is the period with the most sales (www. heinz. com). We believe that the correlation is so high in this period because the fixed costs are allocated over more products. The only quarter that had a lower R2 than the original regression was quarter two (Q2). We believe that this could be due to any number or possible expenses included in Cost of Products Sold.

According to the 10-Q filed August 20, 2009 the H. J. Heinz Company includes portions of divestitures & impairment charges as well as customer incentives and hedging activities. We believe that there may have been an uncharacteristically large amount of these expenses included in one or two data points in our Q2 analysis. Another possible explanation for the difference in this quarter versus the others is the lack of data points used in our analysis. Due to time constraints as well as lack of relevant data our group was only able to run the quarterly analysis regression on the past six years.

Our group noted that in H. J. Heinz Company’s 10-K’s they included revenues based on the following segments: Ketchups and Sauces, Meals and Snacks, Infant/Nutrition, and Other. Unfortunately the financial statements only included revenues for these operating segments. Our group used the knowledge we ascertained prior to running our quarterly regressions to allocate Cost of Products Sold to the segments. Since we know that total Net Sales vs. Cost of Products Sold was relevant to within 97% we allocated Cost of Products Sold to each operating segment based on percentage of total revenues.

We then used this information to run regressions on Net Sales for each segment and Cost of Products Sold for each segment. All of our R2 values for these segments were within 93% to 98%. Once again the intercepts for each of these revenues turned out to be insignificant because they are outside the relevant range for the H. J. Heinz Company. This analysis could be faulty because the different operating segments could have drastically different prices and contribution margins and therefore the Cost of Products Sold analysis could be entirely wrong.

Using the information available to us, our group decided to use the Cost of Products Sold allocation to assign costs appropriately to each of the operating segments mentioned in the annual financial statements. In order to predict total costs for the H. J. Heinz Company we looked at their Income Statement and pulled out all relevant costs associated with the company. Heinz includes a large amount of their costs as part of Selling, General, and Administrative. We used the Statement of Cash Flows to obtain the numbers for Depreciation Expense and Amortization Expense and then pulled these values out of Selling, General, and Administrative.

We then used regression analysis to analyze the new Selling, General, and Administration numbers, Depreciation Expense numbers, and Amortization Expense numbers. Our regression output for the Selling, General, and Administrative Expense when we ran it against Net Sales had an adjusted R2 value of . 83727. The only statistically significant part of the regression was the variable cost per dollar of Net Sales. Depreciation, however, returned an adjusted R2 value of 91% and had both a variable and a fixed cost associated with the expense.

When we ran amortization expense against Net Sales it returned an adjusted R2 value of 69%, but both the variable and fixed cost components were insignificant. We decided that amortization expense would be more likely to be correlated with Cost of Products Sold instead of Net Sales. When we ran Cost of Products Sold vs. Amortization Expense we obtained an adjusted R2 of . 777725 with a statistically significant variable cost. Other costs we considered were Income Expense, Interest Expense, and Advertising Expense. We intentionally left out Income Expense in our analysis because we were using pretax Sales numbers to predict our costs.

We did not believe that Income Expense was necessary to contribute to our total costs for our actual period. Interest Expense had no real correlation with Net Sales or Cost of Products Sold and in our analysis we were unable to determine 3 REGRESSION ANALYSIS 3. 1 Predictive Analysis We used the following cost equation to predict the Cost of Products Sold for the year ended April 29, 2009. All numbers presented below are in thousands. Y= . 6672(XK) + . 667166(XM) + . 64549(XI) + . 725998(XO) + 0 Our cost equation for H. J. Heinz Company is broken down in to the operating sections that the company uses to classify each of its products.

The Y represents total costs for the year, or in this case, Cost of Products Sold. The XK represents revenues generated from Ketchups and Sauces, the XM represents revenues generated from Meals and Snacks, the XI represents revenues generated from Infant/Nutrition, and the XO represents revenues generated from “Other” sales. Using the most recent 10-k filed April 29, 2009 by the H. J. Heinz Company we see that the revenues for Ketchups and Sauces, Meals and Snacks, Infant/Nutrition, and Other are $4,251,583, $4,361,878, $1,105,313, and $429,308, respectively. Using this information in our cost equation we get $6,771,898. 1 as our Cost of Products Sold. The equation our group determined was appropriate for predicting depreciation in our actual year is the only equation where we got a significant fixed cost. Y=. 015131(XD) + 98,327. 66 The XD in our depreciation equation represents total Net Sales for our actual year. The 98,327. 66 represents the fixed costs associated with assets held by the H. J. Heinz Company. Actual Net Sales for April 29, 2009 are $10,148,082. Using this number to predict 2009 depreciation expense we get $251,878. 29. Our cost equation for Selling, General, and Administrative and Amortizations Expense are both strictly variable.

The equation for Selling, General, and Administrative is presented below: Y=. 177375(XSGA) The X represents total Net Sales for the year ended April 29, 2009. Actual Net Sales for this period are $10,148,082. Using this number for Net Sales we get a prediction of $1,800,016. 45. The equation we have for Amortization Expense is based off of Cost of Goods Sold for the period ended April 29, 2009. Using the rest of the data we found using our regression analysis we can add the Cost of Products Sold equation to the other variables in the table to figure out total costs for H. J. Heinz Company.

When we combine all elements of table 1-A the cost equation looks like the following: Y= . 6672(XK) + . 667166(XM) + . 64549(XI) + . 725998(XO) + . 015131(XD) + .. + 98,327. 66 3. 2 Interpretation of Findings According to the April 29, 2009 Statement of Consolidated Income the Cost of Products Sold for the 2009 year ended is $6,564,447. The difference between the numbers we obtained and the actual Cost of Products Sold number can be attributed to any number of factors. Our allocation of the Cost of Products Sold based on the percentage of revenues each segment has over total revenues is undoubtedly the cause for some error.

The lack of information provided about units sold and the breakdown of all costs led our group to consider more creative alternatives that are much less precise. 4 COST-VOLUME-PROFIT ANALYSIS Cost-volume-profit (CVP) analysis………………………………………… CVP analysis aids in decision making, evaluating performance and is facilitates learning. The contribution margin is the difference between selling price (or revenues) and variable cost per unit (total variable costs). The contribution margin is the amount that contributes to covering fixed costs. The contribution margin can be expressed as a percentage.

This percentage is useful tool for breakeven analysis and many other CVP analyses. 4. 1 Breakeven Analysis The breakeven point is the where total revenues equal total costs. The breakeven point can be expressed as units or as sales dollars. To determine the breakeven point in sales dollars you must divide fixed costs by the contribution margin ratio. The steps used to determine the breakeven revenues are listed below. 1. Contribution Margin Ratio (CMR) = 1 – Variable Ratio CMR = 1 – . 878367[1] = CMR = . 2163 2. Breakeven Point in Sales Dollars (BEP $) = Fixed Costs / Contribution Margin Ratio BEP $ = $98,327. 66 / . 121633 = BEP $ = $ 808,396. 25[2] The margin of safety is another useful tool that is used in sensitivity analysis. The margin of safety is the excess amount of budgeted (or actual) revenue over breakeven revenues. This excess amount will help managers determine how much can revenues fall below the budgeted revenues before the breakpoint is reached.

The margin of safety for Heinz is presented below. 1. Total Sales[3] – Breakeven Sales = Margin of Safety $2,273,099,290 – $ 808,396. 25 = $2,272,290,893. 75 Assuming output numbers are as is 4. 2 CVP Chart The CVP chart is a visual representation of the breakeven points for a company and is helpful for decision making. The CVP chart is an simplified version of the relations of cost and revenues assuming that they increase and decrease at the same rate across all units. We went through a systematic proceed to try to come up with a estimated breakeven point in units. 1.

Heinz Company sells about 650 million bottles of ketchup each year. 2. “Ketchup and sauces” revenue account for about 47 percent of the Company’s total revenues. Assuming that all products are sold at the same price we divided 650 million by 57 percent (or . 57). 3. We calculated this amount to be 1,140,350,878[4] which we used as our estimated total unit sales for the Company. 4. We then divided our breakeven revenues by average total sales which we calculated to be . 000355636. 5. We multiplied this amount number by the estimated total unit sales for the fiscal year and came up with 405,550 units as our total breakeven units. pic] 4. 3 Interpretation of Findings from sections 2 through 4 5 ACTIVITY-BASED COSTING 5. 1 Identification of indirect activities and drivers [pic] Hello, Above is cost levels, consider all of Heinz activities and costs place them in the categories (this will take care of all the ideas we omitted). Use the book as a starting point. You may divide these sections up amongst your group members. At least 5 sentence each. I don’t have time to write this section up, so make me proud ( Output level- Batch-level- Product-sustaining – Facility-level – 2. Communication and explanation of drivers Indirect Activities |Drivers | |Setup |Number of setups | |Processing |Machine hours | |Inspection |Number of inspections | |Packaging |Number of packages | |Distribution |Number of deliveries | Activity-based costing (ABC) refines a costing system by identifying individual activities as fundamental cost objects.

Heinz’s production process is categorized as a continuous flow because it produces in high volumes, and its products are highly standardized. This manufacturing process is largely automated; therefore, the company incurs less direct labor costs than an assembly line. Because Heinz’s manufacturing process is designed this way the company accumulates a great amount of indirect costs. If Heinz were to use a simple costing method, product-cost cross subsidization would most likely occur. Some of Heinz’s products would be undercosted, while others would be overcosted.

This is because the company’s product mix is so diverse. The products require different sets of processes before becoming finished goods. In addition, the industry in which Heinz operates competes heavily in price; therefore, it is vital that the company have accurate cost assignments. We have concluded that activity based costing would be the most accurate and beneficial way for Heinz to allocate their indirect costs. Setup Machines must be setup in an efficient way to be ready for production. Since the company produces at a very high volume, it is likely that they will have many machines to setup.

Some associated costs with this activity are deprecation on the machines and the cost of the workers preparing this activity. Also included in this category, would be the time used to clean these machines. It would be unsanitary to reuse the machines without proper cleaning. By doing this, illnesses could be avoided along with other health risks. The company may use the same machine to produce different products in its portfolio and similar products sold as store brands. This activity would take place before and after the production process and potentially be highly correlated with the number of setups.

Inspection Due to the nature of the work environment, Heinz spends a significant amount of time inspecting the products it manufactures. For example, Heinz Ketchup bottles must come out of the bottles at a certain speed for it to be deemed acceptable. If this speed exceeds the maximum amount then the product will be reworked. Also, the company must comply with certain restrictions imposed by the Food and Drug Administration. Certain guidelines provided by this agency include correct labeling and a certain amount of foreign substance allowed for each product.

Heinz positions its product as one of high quality and taste, which also emphasizes quality control. (Heinz emphasizes this??? )We believe that number of inspections would be an appropriate cost driver because as the number of inspections increase, the more costs the company incurs. Processing Processing is another significant component of the production process because of the various activities that take place. The 10-K lists some specific activities within processing the goods from raw materials into the finished product. Some activities include sterilization, blending, fermentation, pasteurization, as well as many more.

Therefore, processing must be included when implementing ABC. Processing the goods does not require much direct labor and is done primarily by the machines in the factory. Processing requires a whole new set of accounting evaluations to allocate costs because units are not easily traceable to each product if it is not completed. Machine hours should correlate well with processing because the more time it takes to process a product, the more indirect costs the company can expect. Packaging Packaging for Heinz Company can have many interpretations and can serve several purposes when implementing ABC.

One common use of packaging as an activity in ABC is its relation to sales orders. As the number of purchase orders increase, the costs associated with these will produce the same effect. For our company, we decided that it was important to separate the production process into processing and packaging the goods. Since Heinz’s production volume is so large, the time used to package the goods into their final form would require a great amount of time. We believe that having this activity for ABC would help break down indirect costs more accurately.

The 10-K explains that once goods are processed, they are placed into bottles, plastic, fiberglass, or cardboard depending on the product. This is a completely different process in and of itself in which the company should expect to incur a considerable amount of costs. The annual report goes on to explain that this process is done by automated machinery, which places the recipe into its package. Despite the fact that the machine is used to handle this activity, we believe it would be best if the company uses number of packages as its cost driver. (Add why machine hours are not as good of a cost driver as # of packages)

Distribution Distribution for Heinz is a major component of its process to the end consumer because its products are sold in several outlets. Some of its major outlets include convenience stores, mass merchandisers, restaurants, and institutions. Number of deliveries or number of packages could potentially drive this activity, but we believe number of deliveries would show a stronger correlation between this activity due to transportations costs. The company must incur a significant amount of transportation costs to deliver these goods and the change in the number of packages would be negligible to the total cost. Change in??? ) 6 ANNUAL PROJECTIONS [pic] 6. 1 Revenue/expense budget factors Budgeting revenues and expenses provides the most value to companies when it coincides with their strategy. Heinz’s 10-K states that revenues and cash flows should be compared by quarters instead of annual amounts. Although the company produces goods throughout the year, there are seasonal factors that affect its quarterly performance. Because H. J. Heinz is a multinational company, their budgeting goals will help managers learn to adapt to changing factors.

Several factors must be taken into consideration when determining the expected revenues and expenses for the year. The pie graph above can help Heinz estimate revenues for the year. When taking a look at revenues by major categories, Heinz can make budgeting decisions, such as determining which category to increase production. By using a time series analysis, Heinz can compare different years. Generally, an analysis of past sales, industry trends, pricing policies, macroeconomic factors, and uncertainties in the business will yield the most accurate projections.

We took these underlying principles, market research studies, and new articles to evaluate and determine what major factors affect budgets for Heinz Company. Past sales levels [pic] Heinz sells 650 million bottles of its iconic Ketchup every year. [5] The company operates in 200 countries and has many subsidiaries. In 2009, Heinz CEO, William R. Johnson, announced that the company would experience a sales growth of four to six percent. Heinz’s five-year sales growth has been 5. 88 percent while the industry’s growth has been 7. 23 percent.

Many factors will contribute to this sales growth and the company’s ability to achieve this target. H. J. Heinz Company’s primary industry focus is “Canned Fruit & Vegetable Processing in the US. ” The company has recently been experiencing some steady growth in total sales since 2004. Over the past year, the company has experienced a 0. 77 percent growth in revenues while the total industry revenue growth has been 3. 6 percent. Using total revenues for both Heinz and its industry over the past four years, we calculated that Heinz Company, on average, yields 28. 66 percent of the total industry revenues.

According to IBISWORLD, “the total industry growth will decline to . 7 percent. H. J. Heinz Company’s 2009 total revenues were $10,148,082. ” [6] If they maintain this same average of total industry sales, we predict that total revenues will be $10,351,672. 82. In the past, H. J. Heinz Company has been able to increase sales growth primarily through innovation and marketing. “We now expect to increase consumer marketing by almost $60 million this year,” Johnson said. “This represents a more than 20% increase from last year and is well above our original commitment.

We also expect to maintain our recent trend of double-digit increases in research and development spending. “[7] Industry trends The “Canned Fruit & Vegetable Processing in the US” industry segment is currently and prospectively undergoing some significant trends that will have a major influence on total sales and costs. There has been a significant trend towards the importance of shelf life of products in this market. Consumers have began paying extra attention to the expiration dates of packaged goods and recent studies have found that consumers are willing to a pay a premium to obtain these goods.

This trend will lead to growth in this industry and increase total revenues. A current trend is Biotechnology, used by many companies in this industry specifically by ConAgra. Biotechnology is used by food processors to engineer and make tomatoes used for ketchup. Because this technology is relatively fresh, there is much uncertainty about the positive and negative aspects of its use. As society becomes more health conscious, more of these types of regulations may be implemented in the future, creating additional costs for companies in these industries. The company has introduced Heinz Reduced Sugar Ketchup, Ore-Ida Steam n’ Mash Potatoes, Weight Watchers Smart Ones Morning Express breakfast options and has dedicated a portion of its website encouraging a healthy lifestyle. ”[8] Government legislation has recently made a significant impact on the industry. Products entering interstate commerce on or after January 1, 2006 must be labeled with trans fat. [9] In addition, we will most likely see an increase in the demand for healthy food and there have also been reports of schools implementing healthy lunch options.

If consumer purchasing power increases, there will be more opportunities to purchase healthier food. Heinz should continue to direct its focus on health conscious products. This trend is expected to last for many years and if Heinz can effectively exploit it, they will see an increase in revenues and growth in market share. [pic] Source: IBISWORLD Planned marketing, product promotion, and other costs The cost structure of the “Canned Fruit & Vegetable Processing in the US” industry is shown above and is broken down into eight major components.

This break down can help us estimate some costs that are embedded in cost of goods sold and selling, general and administrative expenses. Purchases make up a significant portion of total costs for this industry. Companies in this industry have low sensitivity to price changes in commodity prices but still engage in hedges to offset fluctuations. “The cost of food marketing has become more expensive over the years, mainly because of rising costs for labor, transportation, food packaging materials, and other inputs. ”[10] In regards to Heinz, “the Company promotes its products with advertising, consumer incentives and trade promotions.

Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. Advertising costs are expensed as incurred. ”[11] Using the 10-K data, we determined that advertising costs for the company accounted for only approximately 3. 79 percent of total operating expenses. The marketing used by Heinz will allow the company to grow consumer brand loyalty of its product mix. This is important because it is generally more expensive to gain customers than to retain them.

Therefore, marketing is a critical component to the company’s success because it facilitates repurchases which in turn will provide long-term success. A recent article states, “the company said it would build on that growth in emerging markets and increase its spending on marketing in 2010 to help drive business. ”[12] The increase in marketing efforts has proven to be quite successful for Heinz as they have been doing so in the past couple of years. The same article mentions the company’s plan to incur incremental cost savings of one billion dollars over the next five years.

It should be noted that labor costs incurred by the company are capitalized as inventory (??? ). The average wage rate for a worker processing these types of goods is $25 per hour. Product costs may vary due to hourly rates and worker’s salary. The trend that we are experiencing now with manufacturing and processing businesses is that they are becoming more capital intensive than labor intensive. This trend will become more prevalent as companies move from labor to automation thus leading to higher fixed costs. 6. 2 Cash planning implications [pic]

Heinz operates in highly competitive and is exposed to much uncertainty that can adversely impact their financial performance. The company must be able to liquidate its assets and have a healthy stream of cash flows throughout the year. There are also many debt covenants the company is responsible for and must have a minimum cash balance or they will be at risk of facing penalties. Quarterly revenues have been pretty consistent and while the cash flows are rather volatile without any real pattern. We took a look at the Company’s Statement of Cash Flows to determine if there were any seasonal fluctuations with cash inflows.

The annual net changes in cash for fiscal years of 2009, 2008, 2007 were -244. 5, -35. 2, and 207. 5 respectively. This did not reveal too much information other than the fact that 2009 had the greatest cash decrease. Therefore, we took the quarterly data from the Statement of Cash Flows for the fiscal years of 2009, 2008, and 2007 and graph the net cash changes. This added another dimension of complexity and we have concluded their cash inflows and outflows are hard to accurately predict. This is probably the case because the Company makes cash decisions on a ongoing basis depending on their financial needs.

The most practical approach to this would be to have even cash amounts on hand and try to accumulate cash in periods when they may a big acquisition or debt extinguishment. [pic] Operating Activities The Company’s 10-K states, “The Company’s cash conversion cycle increased 7 days, to 56 days in Fiscal 2009, 5 days of which was due to payables and 2 days from receivables. ” This is good news for the Heinz because they will be able to have more cash on hand and be able to invest and earn interest on it. According to ADVFN, Heinz’s receivables turnover is 8. 7. 13] Receivable turnover sometimes referred as to “trade receivables turnover” is a measure used to assess a company’s ability to collect its debt from credit sales. The formula used to calculate receivable turnover is annual credit sales/accounts receivable. The higher the number is the better their collection of sales is. In comparison, ConAgra’s receivable turnover ratio is 15. 6 and its average collection period is 24 days. This about half the time that Heinz has been able to collect its receivables. The current and quick ratios are used to measures the company’s ability to pay its creditors over the next 12 months.

The formula for these ratios is current assets/current liabilities and current assets-inventory/current liabilities. The quick ratio is a good indicator of the company’s liquidity because inventory is not highly liquid but perhaps in the case of Heinz’s it may be because the company sells food products with a limited shelf life. The Company has been able to maintain a higher ratio than the industry indicating though they may have some lead time between when they sell and receive cash for its products it has been able to pay off it debtors in a timely manner.

Investing Activities “Cash used for investing activities totaled $761 million compared to $554 million last year. ”[14] This is a clear example of how the company experiences volatility in its cash outflows. The company has had a history of acquiring many different companies and this strategic decision may take many years but once acquired it would significant differences in cash outflows compared to other periods. Return on assets does not necessarily indicate a company’s liquidity but instead it is used to assess their profitability.

More specifically, return on assets is used to measure how effective the asset the company invests in is able to generate profits. The formula used to measure this ratio is net income/total assets. This ratio does have some cash implications that should be considered when budgeting for the year. Heinz may realize that it has been making some poor investing decision and thus reduce the amount of capital they acquire. The Company also is involved in divestitures can increase the volatility of its cash changes.

Naturally, this translates to the Company using less cash in the future or possibly one big cash outflow for only one period. Financing Activities Heinz is a global company and like many other companies this size they must use debt to finance its operations. The Company has debt covenants to its creditors that it must adhere to. Debt covenants, also called banking covenants or financial covenants, are agreements between a company and its creditors that the company should operate within certain limits. 15] This will affect the Company’s cash requirements for operations, including capital spending, debt maturities, acquisitions, share repurchases and dividends to shareholders. [16] The Company’s debt to equity and return on equity ratios are about double compared to the industry average. The formulas for these ratios are total debt/total assets and total debt/total equity respectively. Both of these formulas measure financial leverage and can be used for cash planning implementations. Generally, companies that are capital-intensive have ratios over 2 but compared to Heinz’s counterparts this is not the case.

The Company uses more debt than equity which can be good or bad. IN this case the use of debt would mean that the Company will have to pay more interest and this payment would create cash outflows in the period. 6. 3 Sensitivity to macroeconomic factors As with many companies, Heinz is significantly influenced by macroeconomic factors. It is important for any company to observe the economic landscape and hedge against any risks due to uncertainties. Without this knowledge, Heinz could potentially miss out on some opportunities to grow the business and compete in the market.

Some major macroeconomic factors that have and will affect Heinz are the economic environment, actions by competitors, and pricing. General economic trend The current economic turmoil has affected Heinz Company in different ways. Historically, times of economic downturn have led to increases in at home food consumption. This creates an opportunity for Heinz to surpass some competitors due to the majority of its revenues coming from goods in this market. Surprisingly, other Heinz competitors experience an increase in revenues as well. But such increases in revenues are not due to an increase in sales price but an increase in unit sales.

Typically, the companies that will experience increased unit sales are cost leaders that have an economic advantage in cost and are able to lower prices. This leads to a cycle of fierce price competition, which poses a serious threat to Heinz because their products are usually priced higher than its competitors. Expected actions of competitors Heinz Company operates in as many as 200 countries and has the top leading brand in over 50 of those countries. Its revenues are separated into four categories, which include Ketchup and sauces, U. S. Food Service, Infant/Nutrition Products and Other.

Naturally, due to the scope of products the company has in so many industries, it will respectively have many competitors. Some of Heinz’s top competitors include but not limited to Del Monte Foods, Kraft Foods, Campbell Soup, Nestle, and ConAgra which makes Hunt’s Ketchup. It is important for the company to know the expected actions of its competitors because it will allow them to plan more effectively in the short and long run. Expected actions of Heinz’s competitors include factors such as the competitors strategy, predicted sales, expenses, pricing and new products.

ConAgra’s current strategy has been primarily focused on developing and strengthening its core brands. The company has sold off its agricultural segments and a number of non-core brands in order to concentrate on branded and value-added packaged foods. [17] This means ConAgra has the opportunity to become a stronger competitor by focusing more on their products. Two ways ConAgra can improve their product mix is through production efficiency and marketing. If they are more focused on these aspects they will be able to eliminate non-value added costs and increase brand awareness respectively.

Heinz Company should consider taking a similar approach in order to avoid the risk of losing market share in some of these markets. The use of biotechnology by Heinz’s competitors can positively or negatively affect the company in the future depending on consumer perceptions. Biotechnology is the use of engineering to “make” vegetables instead of growing them as they naturally would. This technology has allowed Heinz’s competitors to lower their costs through engineering their own tomatoes and other ingredients. Heinz has taken a strong stand against using biotechnology because of its possible health implications (such as?? . For this reason, Heinz Company has developed a way to make their own tomato seeds. The “HeinzSeed” is the used by farmers to grow Heinz tomatoes. The company markets its products with the term “Grown, Not Made” and has made an effort to include this on its ketchup bottle labels along with an image of tomatoes growing on a vine. There are mixed feelings about the use of this agricultural technology and it currently allowed by the FDA. (??? Is or isn’t) This advancement may be a good thing or bad thing; it will be interesting to see how this plays out for companies on either side of the pectrum. Pricing analysis Pricing decisions are generally influenced by three specific factors: costs, customers and competitors. The economic environment has a significant influence on how these factors react and should be considered as well when determining price. In regards to costs, Heinz Company uses “price-based costing” generally referred to as the “target-based cost” approach in determining costs. This costing approach has been in use since the 1990s when CEO, William R. Johnson, took over Star-Kist Pet Food. This was an uncommon practice for businesses at the time.

Target-based costing takes the customer’s willingness to pay and determines costs to achieve a desired profit. Since the company uses this pricing policy it is too considered the economic environment and determine how much disposal income consumers have. (??? ) Consumer Product Index |Item and group |Annual average 2008 |Annual average 2009 | Percent change from 2008-2009 | |All items |215. 303 |214. 537 |-0. | |Food |214. 106 |217. 955 |1. 8 | |Food at home |214. 125 |215. 124 |0. 5 | |Food away from home |215. 769 |223. 272 |3. 5 | Source: Bureau of Labor Statistics

A useful tool many companies use is the Consumer Price Index (CPI). “A consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same city (or in the Nation). ”[18] We constructed a table to highlight some of the key groups the company must consider when using such information. This can be used to gauge trends in pricing decisions and allows Heinz to construct costs around this index. Price-based costing is helpful because it forces managers to consider the entire economic chain and eliminate non-value added activities.

Heinz will need to assess its current cost structure and coordinate with its departments to find efficient ways to produce. Companies in this industry heavily compete on prices, especially with the store brands. Store brands are able to purchase and sell condiments and other products at a relatively low price. Recently, store brands have experienced consistent growth in unit sales and have placed significant pressure on national brand leaders. Mass distributors such as Wal-Mart are able to operate and sell its store brand at a low profit margin because of the traffic of customers that enter the store.

Heinz uses a price point that provides more profitability than store brands but allows it to effectively compete. Heinz’s biggest competitive strategy is trying to differentiate their brand so consumers will still be willing to purchase its products. Heinz differentiation focus includes quality, nutrition, innovation, convenience and value in order for customers to perceive its brands as superior to store brands and justify its price premium. Therefore, product quality and consumer values are important areas of competition. There are many indications that Heinz is a more value oriented than premium oriented business. Prices consumers paid for processed fruits and vegetables, including both canned and frozen, increased more than 1 percent during the same time period. ”[19] 6. 4 Forecast uncertainty analysis H. J. Heinz Company is susceptible to many uncertainties that can adversely affect its bottom line and future wellbeing of its business. Heinz faces more uncertainties than other companies in five major ways: political and legal environment, commodity price, customer relations, currency translations, and strategy implementation. The company must determine these ncertainties and create ways to hedge against their risks. These specific uncertainties add difficulty in budgeting revenues and expenses and can be difficult to estimate. Political and legal environment The political and legal environment in which Heinz operates can have negative and positive effects on its revenues and expenses. Currently, the Food and Drug Administration have strict guidelines that food manufacturers must adhere to. Previously, the industry had to include labels that clearly specified if their products included trans fat.

Ever since this change, companies have had to look for alternative ways to manufacture their goods as foods with trans fat. Trans fat gives consumers a negative perception about the product. Trans fat is linked to many cardiovascular and other health diseases although widely used in the past because of its low cost. Companies were forced to look at other solutions that ended up being more expensive. The legal environment in which the company operates in has affected the company through the years. Recalls and litigations that companies deal with can create a big liability and expense in the current period in which it occurs.

Government regulations imposed on companies to facilitate competition has increased costs for many companies. Monopolistic competition is heavily regulated in the US and there are certain measures used to assess a company’s monopolistic power. A common tool used is a HHI, used to measure a company’s market power and depending on the amount on which it increases, a merger and acquisition (M) may be illegal. Recently, Heinz went through a legal battle for its merger with an infant food company. The court believed that if Heinz acquired this company that it would give them an unfair competitive advantage……………………………..

Compliance to financial reporting such as General Accepted Accounting Principles (GAAP) has created a burden on many companies. As rules change, there may be changes in the company’s estimates and the company may have to issue a restatement. A restatement can lower shareholders’ confidence and may influence a decision to divest the company. Commodity Prices A significant portion of costs go to transportation of the products to Heinz’s distribution market. The 10-K mentions the fact the fluctuations in gas prices can adversely affect the company’s profit.

Heinz should consider the cost of gas prices, as these changes would influence transportation costs. The Energy Information Administration (EIA) expects WTI prices to average above $80 per barrel this spring, rising to an average of about $82 per barrel by the end of the year and to $85 per barrel by the end of 2011. [20] Depending on the volume the company sells, they can expect an increase in total costs considering this prediction is accurate. Due to the nature of this industry, companies must determine if they should pass these costs on to customers or absorb the costs themselves.

Commodity prices for key ingredients in Heinz’s products such as tomatoes and corn will have an effect on the cost of goods. Heinz’s Ketchup is made of 10% high-fructose corn syrup, and currently corn is going for about $374. 50 per bushel (bu). Research shows, “the price per ton of tomatoes has gone up from about $50 per ton from 2001-2005 to $63 per ton for the 2007 summer crop. ”[21] Ultimately, these increases will continue to adversely affect the company and shrink its profit margins. Fluctuations in commodity input prices are typically influenced by the macroeconomic factors but natural disasters play a major role as well.

Natural disasters such as severe climate changes can devastate an entire farm. Vegetables typically have a short life cycle(shelf life? ) and are susceptible to bacteria. There could also be a major shortage and producers would have no other option than to increase price. In the 1970s, there was a great tomato shortage and Heinz was left with some very difficult decisions to make. (Specify) Customer Relations As in any company, Heinz cannot completely predict consumer trends and if their product is not positioned correctly, they can risk losing a lot of market share.

The ability to accurately identify and anticipate consumer trends would clearly benefit the company but if the company makes any wrong assumptions it can be difficult for them to return such a loss. The company’s ability to maintain its customer relationships will affect the company’s profitability. The company prevalence in the U. S. Foodservice industry has been quite strong over the past years. One issue the company had was with McDonalds which impaired the company’s future performance. There was a tomato shortage in the 1970s, which forced Heinz to defer its ketchup distribution to McDonalds for use of its hamburgers and fries.

McDonalds did not take this decision lightly and because of this Heinz’s lost a key customer. McDonalds uses about 250 million pounds of ketchup each year, this currently would amount to over 10% of Heinz’s global revenues. Heinz currently receives 10% of its income from sales at the mass merchandiser Wal-Mart. If Heinz loses its relationship with this distributor it will greatly affect its financial performance. It is important for Heinz to pay close attention and continue favorable relationships with all key players in the entire economic chain to protect its financial health.

Heinz must assess the credit risk of their customers so they will know if they can recover credit sales. Currency Translations The fluctuations of currency translation have always been an issue for the company since it operates overseas. The depreciation and the appreciation of the US dollar can have significant effects on revenues and other components of the company’s financial reports due to inflation. According to Heinz’s 10-K, “foreign exchange translation rates reduced sales by 6. 6 percent, reflecting the impact of a strengthening U. S. dollar on sales generated in international markets. [22] Because the company is more capital intensive, it must incur a lot of debt to be able to continue to invest in long term assets such as facilities and equipments. The changes in interest rates will affect the company’s expenses and cash planning. Changes in interest rates also affect the company’s derivatives investments. If the company’s derivatives deem to be ineffective this will affect the company’s profit in that period. “The ability to further penetrate and grow and the risk of doing business in international markets, economic or political instability in those markets, particularly in Venezuela, and the erformance of business in hyperinflationary environments”[23] Strategy The company must constantly analyze its current product mix and make decisions on how profitable each product is. If Heinz invested a significant amount of money in developing its portfolio and a competitor takes away some of its market share, the company is also at risk. Heinz performs in a highly competitive market and if they make a pricing decision to lower prices, consumers will expect these prices to stay relatively constant. Therefore, they must carefully make decisions as it could affect their brand loyalty.

There is uncertainty in Heinz’s research and development efforts as many customers may not be interested in the product that they may be developing. Heinz must analyze the effectiveness of advertising, marketing, and promotional programs. Because the company heavily invests in marketing efforts, they are at risk of having an unsuccessful marketing strategy. In the past, companies have lost customers because of poorly executed marketing strategies. Heinz must accurately estimate peak seasons and work with distributors on ways to market their products.

Floor and end cap displays are two ways that companies in this industry promote their products at the store. Marketing does not stop at the end user. Heinz also spends its marketing efforts on acquiring new distributors and retailers. 7 BUSINESS STRATEGIES 7. 1 Strategy Identification H. J. Heinz Company makes it quite clear throughout their annual report and website what their missions, goals, and the strategies that will use to accomplish these things. We used Heinz’s mission statement, values and their “Four Key Strategies” table to identify their strategy.

It is important we used all these perspectives to determine a consistent and overall approach to develop a balance scorecard (discussed later). Heinz’s mission statement is “As the trusted leader in nutrition and wellness, Heinz – the original Pure Food Company – is dedicated to the sustainable health of people, the planet and our Company. ” Heinz values the following: 1. Team Building & Collaboration – “We embrace great ideas from everywhere and everyone and respect all individuals. ” 2. Innovation – “We spot consumer and customer needs and meet them with simple, creative solutions. 3. Vision – “We define a compelling, sustainable future and create the path to achieve it. ” 4. Results – “We deliver on commitments, take accountability and balance the short- and long-term. ” 5. Integrity – “We always tell the truth, act with the highest ethical standards and ensure that our products are of the highest quality. ” We took a look at Heinz’s 2009 Corporate Social Responsibility Report for more informa