ANNUAL REPORT 2015 MANAGEMENT REVIEW/OUR FINANCIAL REVIEW 23 Strengthen delivery of efficiency and Net Working Capital programmes As a part of Arla’s short-term strategy for 2015, we have focused on strengthening delivery of both our efficiency and Net Working Capital programmes. We have concentrated on three measures to achieve this essential priority in 2015 and have delivered a solid performance on all of them. EFFICIENCY PROGRAMMES Continue implementation of LEAN, Total Cost of Ownership, Design to Value and structural plans to deliver cost efficiency gains of EUR 330 million by the end of 2015 compared to 2012. Status in 2015 As a result of our cost agenda, Arla has achieved its target of EUR 330 million savings in 2015 compared to 2012. This is achieved with the implementation of LEAN, Design to Value and Total Cost of Ownership. LEAN In 2015 we continued to implement LEAN, which is an enabler of continuous improvement within all functions across the organisation. Today, LEAN is implemented at more than 60 dairies and in a number of supply chain administrative functions. We have also begun the first LEAN implementation in other administrative areas Going forward, LEAN will play a major part in delivering target cost savings of EUR 400 million from 2016 towards 2020 Design to Value The purpose of Design to Value is to optimise products and packaging for improved competitiveness and quality, which means doing it better, at less cost and without losing focus on the customer experience In 2015, Design to Value has delivered cost savings of EUR 41 million compared to 2012, which is EUR 7 million above the initial target During the process, savings and standardisation complement one another. For example, the custom-made packaging for Puck® cream cheese spread has been replaced by standard jars reducing cost Tumblers to jars: Changing from a custom-made Arla designed glass to standard screw lid jars. Total Cost of Ownership Total Cost of Ownership projects achieve savings by optimising products and service specifications, standardising and rationalising materials and ensuring more alignment across product categories and business groups. For example, standardisation of product flavours across Arla Going forward, we expect savings from Total Cost of Ownership of EUR 65 million in 2016 Target towards 2020 To improve performance further, we have set a new target of delivering an additional EUR 400 million in cost reductions, mainly in supply chain, from 2016 towards 2020 of which EUR 100 million should be delivered in 2016. The task of achieving this will be the responsibility of the entire organisation. COST FREEZE Freeze capacity costs outside supply chain across Arla with the exception of growth markets. The capacity cost freeze is part of Arla’s cost agenda as we need to demonstrate to our owners that we control our cost base and, in particular, in challenging times are able to reduce it even further. Almost all functions and business groups across Arla have, in 2015, been obliged to adhere to the capacity cost freeze. The exceptions are supply chain, which has its on-going efficiency programmes and selected markets within Consumer International, where maintaining growth momentum is crucial and in line with Arla’s strategy. The capacity cost freeze is one of Arla’s initiatives to mitigate the challenges of the volatile global milk market during the year. The measures used to freeze capacity costs involved reduced travelling and training, restructuring and redundancies. In 2016, our short-term priorities will contribute further to this agenda. NET WORKING CAPITAL Develop and implement Net Working Capital plan to deliver EUR 130 million cash release in 2015. For our business to remain successful it is important that as little cash as possible is tied in to running our operations. One way to release cash is by reducing net working capital. These ambitions are ongoing and supported by Programme Zero, which has been running effectively since 2011. During 2015, pressure was put on our net working capital due to the increasing milk volumes and as a result of the increased level of inventory. In order to achieve the target for 2015 we have focused on: Reducing the rate of overdue payments from customers by optimising the money collection processes Improvement of payment terms with suppliers and customers Optimisation of inventories globally The target for 2015 was to release approximately EUR 130 million - and we succeeded by releasing EUR 151 million.
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