Disciplined Approach to Performance Management at Ferrero
“One thing that I have learnt after all these years, is that the Company should keep investing in a crisis situation. This will ensure that we can come back very strongly after the crisis and are prepared for any new opportunities. Equally importantly, we must manage our risks and their impact, as well as continuously monitor and analyze our performance against benchmark metrics.”
— General Manager, Mr Angelo Giardini
Ferrero was founded by the confectioner Pietro Ferrero in 1946 in Alba, Piedmont, Italy. It is known to customers around the world for its “high quality, crafted precision, product freshness, careful selection of the finest raw materials, as well as respect and consideration for customers.” The Ferrero Group worldwide – now headed by CEO Giovanni Ferrero – includes 38 trading companies, 18 factories and approximately 21,500 employees. For FY2011-2012, the Group finished the operating year with revenue of 7,795 million euros, representing an increase of 8% over the previous year.
One of Ferrero’s fastest-growing markets in the world is China, which it had begun setting foot on back in the early 1990s. In 1994, Ferrero established official distributorships to bring its premium products to the Chinese market. Representative offices were subsequently opened between 1998 and 2000. Finally, Ferrero Trading (Shanghai) Company Limited (the “Company” or “Ferrero China”) was officially set up in 2007 to import and distribute chocolate products manufactured in Europe and other plants around the world here. The imported products are re-packed locally and sold through distributors via various sales channels.
Since the launch of Ferrero in China, the Company has seen double-digit growth every year. According to the management forecast, the Company is expected to see continued sales growth in the next four years.
Investing in a “Measurement-Managed” Culture
Despite the anticipated slowdown in the macro-economic environment, Ferrero China is forecasted to outperform the market. This confidence in the Company’s performance comes from years of management wisdom, strategic clarity and a disciplined approach to operations. As Mr. Angelo Giardini, General Manager of the Company, described it: “One thing that I have learnt after all these years, is that the Company should keep investing in a crisis situation. This will ensure that we can come back very strongly after the crisis and are prepared for any new opportunities. Equally importantly, we must manage our risks and their impact, as well as continuously monitor and analyze our performance against benchmark metrics.”
Mr. Giardini believes that in order to be successful in this industry, the Company must build a “measurement-managed” culture. The Ferrero Group has a sound history of implementing a corporate performance management system. Accordingly, the Company executes its strategy in a disciplined, rigorous and repeatable manner, balancing the sometimes conflicting imperatives of growth, innovation and risk. In the process of doing so, transparency, compliance and accountability must be maintained. He said: “We should be organized in the unorganized environment such that the management knows the risks and manages them properly.”
Ferrero China always aims to perform at the top of its peers as an industry leader, in terms of both financial results as well as the ability to adapt to unique local culture or operational situations. Under its Corporate Performance Management (“CPM”) framework, the Company developed a localized set of key metrics to monitor the progress of its strategy execution. These key metrics, or indicators, effectively translate the strategy into measurable performance expectations for the respective management functions. “All management functions are equally important in contributing to the success of the Company’s performance management”, Mr Giardini and Antonio Dolgetta, the Chief Financial Officer of Ferrero China highlighted. The Company is organized along the key management functions: Sales, Marketing, Supply Chain, Human Resource, and Finance.
Even though CPM has been implemented by Ferrero in other parts of the world, Mr. Giardini believes that the unique circumstances of China warrant a baseline approach, using a set of tailored performance drivers as the starting point. In early 2011, the Company held meetings with managers of various functional departments to define the key drivers. This process brought the leaders of the Company together to agree on an optimal approach to execute the organizational strategy. Key indicators were then developed based on the following common understandings:
- Understanding the country: The Company needs to recognize the local market complexity, geographical diversity and customer behavioral pattern.
- Understanding the competitors: It is almost axiomatic that understanding of one’s competitors enables one to better differentiate itself. By understanding competitive products and business models, the Company was able to obtain useful insights in defining its position in the marketplace, thereby developing effective strategies, corporate communications and distribution channels to sell its products to the target consumers. This also gave the management of the Company clear visibility of the opportunities and threats ahead.
- Understanding own company’s operations: As Mr. Giardini commented: “Numbers do not only show the financial results of the Company for the past periods, they help the managers understand the Company in managing the future as well.” Knowing the Company’s own organizational strengths, culture and limitations enables the management team to develop pragmatic and achievable plans.
Designing Function-specific Key Performance Indicators
The Company designed Key Performance Indicators ( “ KPI ” ) specifically for the five key management functions. This provides a benchmark against which performance can be monitored, measured and analyzed periodically. Monthly meetings are held with managers of these functional departments to review their performance, as well as to coordinate action plans.
The data collected were analyzed and consolidated into a management dashboard. The root causes for any deviation from targets are discussed during the meeting. Sometimes, changes may be made to the KPIs to reflect the reality of operations. Since the launch of this program in 2011, the Company has progressively built up a database to track these historical KPIs. This forms the cumulative experience for future planning and benchmarking.
The KPIs that are designed for the sales function seek to align sales execution with the strategy developed. Critical sales data generated and provided to the management and sales team allows them to have a multi-dimensional view of how the sales strategy is being executed, and for them to make quick and informed decisions. The KPIs that Ferrero China uses to guide sales performance include: sales volume, sell-through %, inventory level, distribution and brand activation.
The management team needs to optimize the inter-play of all these key indicators and strike a balance. For example, freshness of products is very important in this industry, hence, a minimal level of inventory should be maintained vis-a-vis the projected sales. On the other hand, if the level of inventory is too low, demands from customers may not be met. A right formula would be attained, and continuously improved upon, after monitoring these indicators over time.
Marketing’s impact on the operations of the business is not as immediate as compared to the sales function. To assess the performance of the marketing function, the Company needs to monitor indicators, both qualitative and quantitative, that measure the results of marketing efforts. In Ferrero China, these indicators cover many aspects, including brand growth, brand strength, brand equity, brand awareness and customer satisfaction.
The Company imports chocolates manufactured in Europe and other plants around the world and sell them in China through distributors. Under this business model, the key focus of the Company is around distribution and inventory management. Hence, the KPIs, built around these two areas using the baseline approach include average lead time, inventory level, number of orders processed in distribution center per day/FTE, and inventory turnover.
Similarly, the management needs to perform a balancing act among these key factors, with close collaboration between the sales and supply chain functions. On the one hand, the Company should keep sufficient inventories to meet all customer orders on time and keep them satisfied. On the other hand, it is necessary to shorten the lead time for delivery, lower the cost of inventory ordering and holding, and maintain the freshness of the products. Thus, good quality of data and an efficient platform for coordination are factors that can improve operation success.
People is a very critical component of business success. Ferrero China depends greatly on the industry experience and dedication of its staff to execute its strategy effectively. A well-defined, well-managed set of KPIs for each function can drive corporate performance phenomenally by encouraging cooperation and collaboration of people in various functions.
On the other hand, high growth means that the Company is also evolving. This requires its people to have an open and adaptive mindset in an environment that constantly changes. Proper training and effective communications provide assurance that the Company’s staff can keep up with the knowledge of the Company’s progress and hence, meet their performance requirements. To the human resource team, the performance indicators used are staff turnover rate, competency of staff, and quality and frequency of trainings.
Like any other businesses around the world, the finance function summarizes business performance and operating results that would be presented to the Ferrero family. However, both Mr. Giardini and Mr. Dolgetta believe that the finance function should play the role of a business partner in managing operations, and not just a number cruncher. Currently, operating results is the main dimension on which the management of Ferrero China is evaluated. However, this is not adequate in understanding the performance of the Company. The numbers reflected in the financial statements should not only summarize the results, but also help the management read deeper into the intricacies of the business operations.
Mr. Dolgetta shared with us the KPIs for the finance function in China, which are divided into 2 categories: “Leading KPIs” and the supplementary “Qualifying KPIs”. Leading KPIs cover net sales, operating results, and cash flows, prepared on a monthly basis. Each of these indicators commands a different weighting of importance. The Company then applies a statistical methodology to analyze these figures against the target benchmark. The closer the indicators match or exceed the target, the more scores the finance function will be awarded.
Qualifying KPIs, which include gross margin, freshness of product, market share and governance & compliance, require a lot more judgment call. These indicators provide more information for which the operations can be analyzed. Extra scores on qualifying KPIs are awarded in addition to the leading KPIs to reward achievement of attributes that the management believes would be beneficial for the Company.
Challenges for Performance Management
One of the challenges faced by the Company when implementing CPM is the availability and accuracy of data. At present, various groups of data are being captured by different business functions and consolidated to a dashboard for the management. There is no single complete source of information. Furthermore, market data collected by the sales team takes time to gather and summarize. Thus, there may be inaccuracies and outdated information when the management reviews the performance results.
In order to overcome this challenge, the Company looked to technology solutions to capture dispersed silos of data and to shorten the delay in processing. For example, the use of Personal Digital Assistants (“PDA”) was rolled out to allow the sales team to enter market data on a real-time basis and upload onto a central database system. In addition, a new ERP system has also been implemented. Historical operations data are re-organized under new data architecture, which is also the model for capturing future data. Effectively, this gives the Company a single version of “the truth”. With quality data being available, the Company is able to build more sophisticated benchmarks from past performance. Headquarters’ expectations and the unique factors of the China market can also be embedded into these benchmarks.
At the same time, “given the current market volatility, Ferrero China needs to be prepared for the Perfect Storm”, Mr. Giardini said. The Company has also developed contingency plans, such that if “Perfect Storm” does come, the management team will be prepared to re-adjust their plans and targets swiftly. The management’s basic philosophy is to continue to invest wisely during a crisis, because this will make the Company stronger as it emerges for the doldrums of the macro-economic situation.
Overall, the build-up of quality historical performance data will continue to refine and sharpen the management’s acumen of doing business in China, and to better prepare them in managing risks. On the same note, the CPM program at Ferrero China will continue to evolve in its level of sophistication over time.
Role of the Internal Audit
As Ferrero China moves to a higher level of maturity, competitive pressures will drive the Company to constantly re-invent its way of doing business. The Internal Audit (“IA”) function, which reports directly to the CFO, is also instrumental in the Company’s innovation efforts.
Currently, the IA function is still young, thus, its role is more skewed towards supporting the management in 2 areas: commercial compliance audit and GRC. Its main responsibilities are to help the Company monitor the operating effectiveness of policies and procedures, compliance with the relevant laws and regulations, as well as mitigation of risks. Any deficiencies in its operations would be discovered promptly by the IA team and remediated.
Mr. Dolgetta hopes that as the IA function matures over time, it will increasingly focus its work scope on performance improvement. In addition to carrying out compliance audits and identifying problems, the IA function is expected to gradually shift its focus towards more value-driven performance improvement audits, recommending ways to improve the Company’s existing business practices. In short, the IA function will become more of a management advisor in the future.