In an effort to create a more efficient, cost-effective and flexible global supply chain, Hershey has announced a comprehensive three-year supply chain overhaul, which will result in the loss of 1,500 jobs across the company. 

The programme will be implemented in stages over the next three years. It includes measures to increase manufacturing capacity utilisation by cutting the number of production lines by more than one-third, outsource production of low value-added products and construct a new facility in Monterrey, Mexico, to meet the needs of the Mexican market. Approximately 80% of the company's output will be produced in the US and Canada when the initiative is completed.

Once the reorganisation is complete, Hershey said finished products will be sourced from fewer facilities. Increased access to borderless sourcing will leverage the company's scale to cut costs, the company added.

The company said its plans would enhance its manufacturing, sourcing and customer service capabilities. It is also hoped that the initiative will generate significant savings, which will be used to fund Hershey's growth plans - such as accelerated US marketplace momentum, core brand growth, new product development and disciplined global expansion.

"This supply chain programme," said David J. West, EVP, COO, "was developed following an extensive assessment of Hershey's manufacturing capabilities, future growth expectations, and the investment needed to achieve these expectations… The long-term benefits will include a significant, sustainable increase in investment behind Hershey's iconic brands and new product innovation, as well as targeted, profitable international expansion."

The company estimated that it will incur pre-tax charges and non-recurring project implementation costs of between US$525m and $575m over the course of the three-year period. This includes $475m-525m in pre-tax business realignment charges and approximately $50m in project implementation costs. These charges will be incurred primarily in 2007 and 2008, with approximately $300m expected in 2007.

Hershey said that the move is expected to "significantly" improve its gross margin, with ongoing annual savings of $170m-190m projected by 2010.

Announcing the move, Richard H. Lenny, chairman, president CEO, said: "In order for Hershey to remain competitive, we are implementing a comprehensive strategic agenda focused on increasing our North American marketplace leadership and developing a truly global footprint for Hershey's iconic brands.

"We recognise this will involve considerable change over the next three years, and intend to make this transformation of our supply chain as smooth as possible for our employees and customers. We will work closely with those affected by the program to assist them with the transition," Lenny continued.

Hershey reaffirmed its long-term goals of sales growth of 3-4% and EPS growth of 9-11%. The company said that the level of investment necessary in 2007 mean that while it anticipates sales growth of 3-4%, EPS growth is likely to fall in a 7-9% range.

Hershey shares were slightly up after the announcement yesterday (15 February) rising from an opening value of $51.55 to close at $52.10 on the New York Stock Exchange.