In 2019, Dean Foods announced they had filed for Chapter 11 bankruptcy. Many were quick to blame the growing alternative milk market for the bankruptcy of Dean Foods, but there’s another likely culprit: high operating costs.
Evidence suggests that cow’s milk consumption has declined over the past few decades while nut, plant, and lactose-free milk alternatives have grown in popularity and availability. That doesn’t mean the market for cow’s milk is dead. The playing field is simply expanding as new competitors continue to enter the market.
So how can a company like Dean Foods stay afloat in this changing market? Strategic, consistent cost cutting.
In 2017, Walmart figured out how to produce milk at a lower cost than Dean Foods, so Walmart cut ties with Dean. You would think a company that specializes in producing and selling milk would have the process down to a science and operate at the lowest possible cost. But in this case, Walmart did it better and Dean lost one of their top customers.
In Dean Foods’ 2018 Annual Report, the company discussed plans to reduce their existing cost structure and execute a cost productivity plan. Did they wait too long?
Unfortunately, the best laid cost reduction plans often go awry when companies fail to do the following:
Executive leadership tends to adopt a wait-and-see attitude toward cost cutting, particularly following a large acquisition. Management wants to get things working as quickly as possible so costs will fall into place with natural attrition. Leadership banks on the notion that people will leave the organization during the transition and they won’t be replaced. Unfortunately, this rarely happens as quickly as needed. Middle management has no incentive to leave a job open for fear they will have to spread more work over fewer people. Instead, executive management should reward the organization for eliminating unnecessary work.
Most organizations can measure profitability across each of their operating business units, sales organizations, or divisions. However, they rarely take time to understand what it costs to acquire, serve, and support every customer. For example, a consumer products company might know the cost of manufacturing each product. However, they might not understand the cost of acquiring and supporting a high-maintenance vs. low-maintenance customer. A high-maintenance customer might require a full-time support team, but the additional cost is not reflected in the pricing. At the same time, a low-maintenance customer might feel neglected and become easily wooed by a competitor. Organizations should annually review customer costs that include acquisition and support costs. That way, customer service expectations can be set without disruption.
Organizations are filled with strong-willed middle managers who are not willing to give up their fiefdoms. Anytime they are challenged during budget season, they will claim, “If you cut our budget, the company will come to a screeching halt.” This comment is usually followed by technical jargon and stories of mass destruction, mob riots, and pirate attacks. During budgeting rounds, executive leadership often avoids challenging the hordes of doomsday middle managers and they walk away with their budget in tack. Instead, executive leadership should look to peer companies to see how they are addressing the challenges. Benchmarking organizational activities usually requires an outside perspective.
