Annual Report 2009 - British American Tobacco

Efficient production
The consolidation of manufacturing around
the Group means that more of our factories
are now serving a larger number of markets.
PRODUCTIVITY CONTINUED
Productivity savings
Savings in supply chain, overheads and
indirect costs amounted to £239 million in
2009 at constant rates of exchange. We are
firmly on track to achieve our £800 million
savings target by 2012.
Supply chain
Most of the productivity improvements in
2009 resulted from our continuous focus on
primary supply chain efficiencies. These were
largely as a result of further standardisation
of our processes and simplification of our
portfolio. The supply chain is increasingly
being managed above market, driving further
efficiencies through smarter planning and
resource allocation.
We have reduced product costs every year
from 2003 to 2008. In 2009, product costs
rose due to transactional foreign exchange
costs and a significant increase in the price
of many inputs. However, our productivity
improvements enabled us to mitigate this,
meaning the overall increase in costs of key
items, such as internationally traded tobacco
leaf, were contained to less than half of what
they would have been.
Since 2000, the number of cigarette factories
within the Group has been reduced from
83 to 50, including acquisitions. Both the
Riga factory in Latvia and the Tokat factory
in Turkey ceased production in 2008, while
further factories were added with the acquisition
of Bentoel in Indonesia and the beginning of
manufacture in Oran for the Algerian domestic
market. In 2009, we announced the closure
of our factory in Soeborg, Denmark, and
the rationalisation of our Vranje factory in
Serbia. We also commenced the consultation
process for the downsizing of our factory in
Pagewood, Australia.
The consolidation of factories around the
Group has been undertaken responsibly
and with care for affected employees and
local communities. It has removed much of
our previous excess capacity and means that
more of our factories are now serving a larger
number of markets.
Taking advantage of this new model means
we have had to become more effective and
efficient at above-market planning. This is
crucial for ensuring we meet demand on
time and in full, roll-out innovations more
quickly and take better advantage of the
benefits of scale.
Globally and regionally we continue to
achieve considerable savings by consolidating
purchases of materials and services, reducing
duplication and standardising data and
processes.
Moving to an above-market planning model
is also enabling us to rationalise our machine
technology by targeting capital expenditure
and establishing a more cost-effective
operational base for the future.
Global operations
In 2009, we started managing our Eastern
and Western European supply chains centrally.
This delivered greater alignment of systems and
processes and has improved global transparency
of supply and demand, facilitating more
productive investment and sourcing decisions.
To further advance the development of
our supply chain, we signed a Framework
Partnership Agreement with Cranfield
University for collaborative research
and development.
We continue to build a consumer-led,
customer-focused, high-performing, globallyintegrated
supply chain, dedicated to winning
in the markets where we operate. This is a
key aspect of the Group’s strategy and we
will see more areas of our supply chain being
managed at a global level where it will deliver
greater benefits.
Overheads and indirects
The process of moving procurement abovemarket
continued to allow us to streamline
our processes and reduce overheads. In 2009,
the geographic spread of Agrega – our joint
venture with the brewer AB InBev – was
expanded to include offices in London to
cover Western Europe and to coordinate
global activities, and in Moscow to cover
Eastern Europe.
20 British American Tobacco Annual Report 2009 Directors’ report: Business review