directors report and accounts 2006 - Our strategy in action: Productivity


 Our strategy in action: Productivity

Savings generated by our productivity initiatives are ahead of plan. The substantial efficiencies made in the supply chain, supported by savings through our overheads and indirects programmes, are releasing funds for reinvestment in research, product innovation and growth, as well as being a significant driver of operating profit growth.

Supply chain savings
Our focus on primary supply chain efficiencies has delivered benefits of £148 million in 2006, bringing the annual savings for the four years of the programme up to £374 million. These savings are predominantly the result of efficiencies within our manufacturing and logistics operations and initiatives surrounding the specification, purchase and usage of packaging and leaf materials.

There has been further rationalisation of our manufacturing capacity, with 12 factories closed in the year, including Guelph in Canada and Southampton in the UK, and cigarette manufacture in Bologna in Italy has ceased. In addition, a further four factory closures were announced, including Zevenaar in the Netherlands, and a number of downsizing exercises have been completed. These initiatives, together with the Group’s ‘Bullseye’ best practice audits have increased overall productivity by nearly 10 per cent in the year. We have also redeployed 650 individual machinery assets around the Group.

The job losses resulting from closures and downsizings have been addressed with care and responsibility. Mitigation activities have included fair redundancy packages, extensive outplacement support and, where appropriate, community wide initiatives aimed at new job creation. The Company’s Mitigation-Plus programme in response to the Darlington factory closure in the north east of England is one of those to have received recognition, a best practice award in 2006 from the UK-based Management Consultants Association.

The Product Complexity Reduction programme targets the elimination of irrelevant complexity across our brand portfolio. Working together, our Operations and Marketing teams have defined standards covering all the key attributes of our brands, from packaging design through to product specifications and leaf blends. As a result, we have been able to rationalise and simplify the number of combinations and specifications we use in our supply chain by more than 30 per cent. We have also reduced the number of stock keeping units we sell by 24 per cent, leaving a more focused, consumer-relevant portfolio.

The productivity, complexity and capacity optimisation programmes will continue over the next few years and will realise significant savings.

In addition, we will establish new capabilities for driving growth through consumer relevant innovations, delivered through an effective and efficient, integrated supply chain. Improvements in global supply chain operations to date were recognised by a European Supply Chain Excellence Award, presented by the magazine ‘Supply Chain Standard’ in November 2006.

Overheads and Indirects
The Overheads and Indirects cost reduction programme ended its fourth year and delivered savings of £99 million. Since its inception in 2003, annualised savings have reached £355 million and are well on the way to reach the £400 million target by 2007.

Savings are, in part, being driven by the adoption of smarter procurement processes around the Group, with procurement specialists working with key business managers to find mutual benefits. The amount of indirect expenditure (those items that are not involved in cigarette production) that is channelled through procurement has increased to a level that now covers most areas of the business and the processes established are being embedded within the business for sustainable benefit.

The move to shared services in both IT and Finance is gaining momentum and is now delivering real value.