Final Report:
Hershey’s Chocolate Factory
Yonsei University
School of Business
11 December, 2012
Team # 1
Jo, Yurah
2010112106
Kim, Heeyeon
2010112093
Slijpen, I.A.J.M.
2012284162
Professor: Sung Joo Bae
Table of Contents
I: Introduction ................................................................................................................... 1
Body ......................................................................................................................................
II: ................................................................................................................................... 1
III-1 ................................................................................................................................ 8
III-2 .............................................................................................................................. 10
IV: ................................................................................................................................ 12
V: Conclusion ................................................................................................................... 14
VI: References.................................................................................................................. 15
VII: Appendix .................................................................................................................. 16
I: Introduction
This report concerns the matter of the Hershey Company’s supply chain management. First,
we will discuss the challenges this company has faced by classifying the problems into four big parts;
Corporate Social Responsibility issue related to raw material procurement, inventory management and
logistics problem, inefficiency in the packaging process and lastly, technological failure of Hershey’s
Enterprise Resource Planning (ERP) system. For each we will discuss the solutions that have already
been done by Hershey’s will be described and our team will suggest additional possible methods if
there are any recommendable solutions.
II: Operational Issues—Hershey’s Supply Chain (Raw Material
Procurement)
Hershey seeks to build a strong relationship with its suppliers, which is mutually
beneficial and drives innovation and best practices for their total supply chain. Being a
chocolate factory, Hershey’s supply chain starts with suppliers growing and harvesting the
cacao beans. As you can see in the figure below, figure 1 and table 1 at the appendix, cocoa is
cultivated in more than 50 countries, grows best in the climatic conditions found within
approximately 20 degrees north and south of the equator. Nearly 70% of the world crop is
grown in West Africa.
1
Cocoa production is increased by 131.7% in 30 years, representing a compound annual
growth rate of 2.8%. There are three main varieties of cocoa: Forastero (which is used the
most, 95%), Criollo and Trinitario. Criollo has the highest quality beans, and is considered as
a delicacy.
The immature cocoa pods have a variety of colors but most often are green, red or
purple. As they mature, their color changes to yellow or orange, particularly in their creases.
Harvesting the beans usually occurs over several months and in many countries cocoa can be
harvested at any time of the year due to the hot, rainy tropical areas it grows in. The
harvesting process is much easier than for example fruiting trees because the cocoa pod
grows directly from the trunk or large branch of a tree rather than from the end of a branch.
But the pods do not ripen together so it has to be done one by one. They harvest pods
between 3 ~ 4 times weekly during the season. The ripe and near-ripe pods are harvested
from the trunk and branches of the tree with a curved knife on a long pole. This has to be
done with care to avoid injuring the junction of the stem with the tree, as this is where the
future flowers and pods will emerge. One person can roughly harvest around 650 pods per
day.
After harvesting, the pods are opened with a machete to expose the beans. The pulp
and cocoa seeds are removed and the rind is discarded. The pulp and seeds are then piled in
heap, placed in bins, or laid out on grates for several days. During this time, the seeds and
pulp undergo “sweating”, where the thick pulp liquefies as it ferments. This trickles away,
leaving the cocoa seeds behind to be collected. If the “sweating” is interrupted, the taste of
the cocoa bean can be altered and the cocoa beans can become useless. After “sweating”, the
wet beans transported to a facility so they can be fermented and dried. They are fermented for
4 to 7 days and must be mixed every 2 days. The drying process takes even longer, 5 to 14
days, depending on the climate conditions. Most of the times they are dried with sunlight,
2
which creates a better taste because no extraneous flavors such as smoke or oil are introduced
which might otherwise taint the flavor. After being dried, they are collected in jute bags or in
“mega-bulk” bulk parcels of several thousand tons at a time. Shipping in bulk significantly
reduces handling costs; shipment in bags, however, either in a ship’s hold or in containers are
still commonly found.
As you can read, this is a very labor-intensive process. Hershey has to make sure that
working policies are met, especially because cocoa grows large in undeveloped countries
with harsh circumstances. This directly relates to Hershey’s Corporate Social Responsibility
and to its overall image.
Presently the Hershey Company has developed responsible sourcing programs to
continuously improve their Corporate Social Responsibility (CSR). Building on Milton
Hershey’s legacy of commitments to consumers, community and children, Hershey provides
high quality Hershey products while conducting their business in a socially responsible and
environmentally sustainable manner. To make sure that there is a clear policy; Hershey
created the Hershey’s Supplier code of conduct.
The Hershey Company has a long history of operating with high ethical standards and
integrity. They have been able to sustain this standard by balancing their strong desire for
profitable growth with their commitments to their various stakeholders, including employees,
shareholders, consumers and the communities in which they operate. The manner in which
the employees manage the social, environmental and economic impacts of the business model
is critical to the business success. The stakeholders expect Hershey to uphold high standards
of responsible and ethical behavior in the company’s operations and to encourage a similar
commitment by companies with which Hershey does its business. This code of conduct sets
forth Hershey’s high standards and expectations with respect to key areas of corporate
responsibility. Hershey’s goal is to work with suppliers and vendors to assure compliance
3
with these requirements. (Refer to the appendix, document 1). The following aspects are
handled in the document:

Legal Compliance and Business integrity

Social and Working conditions

Environment and Sustainability

Food Safety and Quality

Verification and Compliance

Supplier’s Certifications of Compliance
Broadly speaking, Hershey’s Corporate Social Responsibility strategy is: 1) through
engagement with stakeholders, understand out performance in the global context in which we
operate. 2) Set goals and targets for our engagement priorities and other important issues. 3)
Measure and monitor our performance against these goals and targets. 4) Communicate to our
stakeholders our performance on key issues and seek feedback from them regarding our
performance. 5) Periodically reassess our goals and targets to ensure continuous improvement
and performance in line with stakeholder expectations. The following table shows Hershey’s
CSR framework.
4
Market place: Our dedication to drive integrity across our entire value chain shapes how we
engage with our various stakeholder groups, including cocoa farming facilities, our business
partners, our consumers and investors. In particular, we are focused on product quality and
safety, consumer health and well-being and community programs in West Africa that
modernize cocoa farming and improve social conditions to create a better future for children.
Environment: Reducing environmental impact across our value chain is central to building a
sustainable business, and enhances our competitiveness through innovation, cost reduction,
reputation and brand equity. We have committed to minimizing the environmental impacts of
our operations, from sourcing raw materials, to manufacturing our products, to delivering
them to market, while maintaining the high quality and value customers and consumers
expect from the Hershey brands.
Workplace: Attracting and retaining the best talent is critical to our ability to grow and
innovate, so we strive to provide a dynamic and challenging workplace that is rich with
opportunity for employees. We see diversity and inclusion as levers to accelerate progress
and results, and ultimately, contribute to a high-performance culture that is committed to a
shared set of values and actively engaged with the priorities that face our company and world.
Community: For more than a century, we have maintained a strong focus on improving the
places where we live and work, thanks to the vision instilled by our founder, Milton S.
Hershey. At the heart of our community efforts is the well being of children, especially those
at risk. Our commitment to communities begins with partnerships that support social and
economic development, and our employees display that Hershey Values by seeking to benefit
communities through direct giving and volunteering.
It looks as if they are aware of many issues concerning Social Responsibility and want
to implement them in a correct way. They constantly try to find new goals to improve their
5
Supply Chain and CSR. However, it is well know that in the cocoa harvest industry, child
labor is very common, as stated in an article of CNNs Samuel Burke:
“The CNN Freedom Project sent correspondent David McKenzie into the
heart of the Ivory Coast - the world’s largest cocoa producer - to investigate
what's happening to children working in the fields.
His work has resulted in a shocking, eye-opening documentary showing
that despite all the promises the global chocolate industry made a decade ago,
much of the trade remains unchanged. There are still child slaves harvesting
cocoa, even though some have never even tasted chocolate and some don't even
know what the word "chocolate" means.
In the documentary "Chocolate’s Child Slaves," CNN discovers a human
trafficking network and farmers using child labor for an industry offering low prices
and little more than broken promises. Watch an excerpt above about Abdul, 10, who
has been working in the fields for three years.”
For the chocolate industry child labor concerning cocoa harvesting is a big problem.
In the case of Hershey, they have been sued early this year abusing child labor in the West
Coast. Even more, Hershey has been accused by many student organizations of exploiting its
migrant workers in its domestic plants. So far, Hershey has announced to make a $10 million
dollar investment on the West coast in order to prosper their economy and end child labor.
However, Hershey must take actions that are more firm in order to fix their brand equity by
making its work environment more transparent and visible for the consumers to check. If not,
this would lead to a loss of many consumers, which will critically damage the whole supply
chain.
6
The second main ingredient of chocolate is milk. This is the reason why its first
factory is located in the heart of Pennsylvania’s dairy country, where Hershey’s founder,
Milton S. Hershey, even had his own dairy farm to create the best circumstances for the cows
and produce the best milk for manufacturing Hershey’s chocolate. Eventually they sold the
farm, but this shows how important milk is as an ingredient for Hershey’s chocolate. Until
now, Hershey will only buy milk from the best dairy farms. Most of the farms make their
own food for the cows, typically including corn and hay. This is directly fed to the cows and
during winter season, it is stored in silages. They also raise their own calves and sell their
male calves because they don’t produce any milk. They do not milk the cows by hand but use
automatic machines for it. It is one kind of mass production. So it seems to be a perfect
process, but there are also downsides. These days the dairy farms are huge product factories
with many cows.
There are many concerns like animal waste, use of hormones and animal welfare.
When a farm has a lot of cattle it creates a major environmental issue associated with manure
handling and disposal, which requires substantial areas of cropland for manure spreading and
dispersion, or several-acre methane digesters. Air pollution from methane gas associated with
manure management also is a major concern. On the other side, when properly managed,
dairy and other livestock waste, due to its nutrient content, makes an excellent fertilizer
promoting crop growth, increasing soil organic matter and improving overall fertility and
filth characteristics.
Some farmers inject their cows with growth hormones to maintain higher milk
production. This is controversial due to its effects on animal and possible human health. The
EU, Japan, Australia, New Zealand and Canada have banned its uses due to these concerns,
but it is legal in the USA to use them.
7
Lastly, animal welfare is also a problem. This has been criticized by animal rights
activities. Some of the ethical reasons regarding dairy production cited include how often the
dairy cattle must remain pregnant, the separation of calves for their mothers, how dairy cattle
are housed and environmental concerns regarding dairy production.
Hershey has to be very cautious about this and has to make sure that every supplier is
using a rightful regulation and supplier code of conduct in a proper way.
III-1: Operational Problem— Inventory Management and Logistics
In 1990s, the Hershey Company continuously kept increasing their volume of the
company and showed steady internal growth, adding new items. However, an operational
issue came up after Hershey purchased Leaf Candy Co. in 1996. They bought $450 million of
Leaf business and added product lines of 1300 SKUs, but Hershey’s maintained their existing
distribution network without any changes to manufacture and distribute Leaf products, which
brought about internal operational complexities.
While Leaf Company mainly used outbound shipment in 2300 to 3000 pounds range,
Hershey’s’ shipment relied on utilizing smaller truckload lots, which meant that Hershey’s
could not efficiently distribute them. Thus, extra products, which were not shipped, occupied
much space of the warehouse and required system capacity as well. Nevertheless, Hershey’s
did not expand the room of inventory storage and just kept running only small distribution
centers that were already closely packed. Consequently, their distribution was not flexible at
that time and could not support all the consumers’ needs, which led to the problem of
customer service failure. Hershey has lost a quarter of their customers and stock prices also
collapsed.
8
In response to this situation, Hershey has decided to open Eastern Distribution Center
III (EDC III) in addition to existing EDC I and EDC II, combined logistics and distribution
functions together in 1998 and started to plan a comprehensive supply-chain strategy. First,
they tried to look all around carefully if there was anything that should be changed including
cycle time, logistics, flexibility and SKU and predicted what their customers expected from
Hershey’s. They gathered much information data from big supermarkets such as Target, WalMart and CVS and put efforts to supply products whenever their customers needed.
Furthermore, they took much care about “co-packing” because that was also a critical issue as
a marketing and logistics strategy to help their customers buy Hershey’s product in a timely
manner with flexible operations of manufacturing and shipping.
Thanks to the new supply-chain strategy and EDCIII that debuted in 2000, Hershey
obtained several advantages as follows: first, since the company expanded its distribution
center, they closed some warehouses that they no longer needed. They saved a lot of money
from the reduction of several warehouses and invested those funds to raise the flexibility
more and more by establishing better network of distribution. Secondly, expansion of
distribution center and establishment of additional center in Southern California and the
Midwest increased efficiency as well. Moreover, their cycle time was reduced and they could
conduct “on-time performance” and consequently, they could save a huge amount of fee
coming from late and incomplete delivery.
9
III-2: Operational Issues— Hershey’s Kisses Packaging Process
The video showed an overview of the Hershey Kisses manufacturing system and our
team was doubtful of their packaging process. After the condensed chocolate has been
liquefied with pasteurized sweetened milk, it all went into a plate with cavities in order to
harden to its typical bell-shape of Hershey’s Kisses. After, the plates were turned upside
down and are “hammered” in order to take them out of the cavities. All those chocolates then
went through a long conveyer belt across the factory where the large amount of these molds
was placed on to a single line. Now this line only accepted Kisses that were in the upright
position for packaging with aluminum foil and the typical Kisses wrapping strip of paper. All
the others were knocked off to the bottom conveyer belt where they were transported back to
the beginning of the line. In this whole process, our team has spotted several problems that
could cause inefficiency in its operational process.
1) Without any mechanisms to align the Hershey’s in the first place, all the
chocolates that are out of the cavity plate are dumped to the single line. In this
process, most of the Hershey’s due to its unique shape cannot be easily set to its
upright position for them to be processed to the next stage.
2) By knocking off the chocolates out of the line if they are not in the right shape, it
could damage these otherwise perfectly manufactured chocolates. This would
increase the number of defects in the company, which would later increase the
cost. Furthermore, this packaging process as a whole requires more iteration of
the process than needed, which again creates a huge inefficiency for the company.
Since Hershey’s company is facing demand satisfaction problems due to its shortages in
the inventory, our team suggests Hershey to devise a new packaging process for efficiency.
Our team suggests the following:
10

Rather than clustering and dumping all these chocolates to the lines at once,
Hershey’s could devise a simple automated machine that could line all these
chocolates in the upright position beforehand so it could all be lined into the next
wrapping process. If this is too capital intensive, Hershey could restructure the
conveyer belt so it could come in line rather than a large lump of chocolates just
falling off.

Hershey factory should also reconsider rebuilding its plant in Pennsylvania for its
pipeline that carries the hammered chocolate to the packaging area is too far away. In
the video, after when the chocolates were hammered, they had to be carried across to
the other side of the factory. We believe that this could create a lag in the lead-time,
which results in wastefulness. Since Hershey’s Company is confronting a soaring
demand in its product, it would be a wiser choice for them to invest in building a
newer and larger plant where they could change the layout so that the packaging
process directly follows the manufacturing of chocolate molds.
In 2006, Hershey’s plant have actually expanded its factory in PA, which is now
equipped with sufficient technological support as well as well organized plant to meet the
surging demands of Hershey’s chocolate.
11
IV: Technological Failure: ERP in the Hershey’s Company
Hershey’s had faced technological issues concerning the Enterprise Resource
Planning (ERP) system in which they have failed to successfully implement this costly ($112million IT systems) yet beneficial system within its company because they overlooked the
whole testing period before their actual operation. With this failure, Hershey saw a 19% drop
in their quarterly profits and an 8% decline in its stock price.
As a result, Hershey could not integrate their systems in the supply chain with its
data, which affected the whole process in manufacturing products. In case of ERP, though it
is improves a company’s efficiency through integration of all its resources, it is costly at the
same time. Thus, it needs to go through carefully planned and extensive period of testing in
order to be fully implemented without faults. However, the Hershey Company decided to
implement this state-of-the-art technology when their demands skyrocketed unexpectedly due
to Halloween and Christmas Seasons. Because of this increase in demand, they had to cut
their testing process as a whole and implemented the SAP ERP system in 30 months when
the suggested amount of time indicated 48 months. As a result, Hershey has failed to process
$100 million worth of Kisses and other products even though they were all set in their
inventories.
If Hershey had carefully planned in the implementation of ERP rather than utilizing
it instantly, they could have reduced the amount of loss in their cost for using this system. As
a suggestion, Hershey must go through pilot simulations in order to test out its ERP system.
First, the key users of this system could go through the new ERP system for all departments,
testing out each function of the ERP system is well coordinated. If this phase passes, the next
phase could be trying it out on other workers with more realistic work conditions where they
could actually simulate it through. If all these two phases are done, then the workers could
pre-implement the system in a real life one day operation at the firm, trying out for the last
12
time if there are no last minute glitches that hampers integration of the company’s crucial
resources.
Hershey’s Company must keep in mind that with such complex technology, even for
companies with the most optimized implementation programs, it takes quite a time for their
workers to understand and use this technology. In other words, the workers have a steep
learning curve that could cause mistakes and errors in the system.
After the failure in implementation, Hershey took its time to use an ERP system
called SAP. In the case of Hershey, integration happened along the logistics of the whole
operation system through these steps:
1) Through the EDI (Electronic Data Interchange), Hershey receives information about
their customers and the sorts of products that are in need. They also examine whether
the payment transactions have been accurately done. Then they book the orders,
inventories, and delivery information for other departments.
2) The delivery data is sent to the transportation management (TM) in the process where
they process the shipment of their products to retailers and end users. With the
customer information ERP system provides, the TM attempts to cluster those with
similar demand and delivery needs in order to make it more efficient. TM also
provides the needed transportation means for the product ordered.
3) When transportation is settled, all the data goes back to the SAP system, which
delivers them to the Warehouse Management System (WMS), which goes through the
whole process of picking up the needed products from the inventory and diligently
delivering it to the TM. All the picking up and delivering process is again recorded in
the SAP system for other departments to refer to as well for the company to use as
data for future use.
13
The Hershey Company with an improved ERP system can efficiently integrate all other
departments in the operation system to maneuver effectively of its products within the firm
and to the retailers and end-users. This would in turn lead to customer satisfaction where the
customer’s demands are met at the right time.
V: Conclusion
The Hershey’s Company, one of North America’s largest chocolate producer, has
dominated the U.S chocolate market with a 42.5% of market share. They have been a very
powerful company in this market to the extent that they sell Hershey products in about 50
countries under 60 brand names. Even if they have encountered several challenges arising in
their supply chain, they have dealt with those problems wisely and efficiently until now as we
already mentioned in our discussion above. However, there is still an important matter that
the company has to solve—the social responsibility of the cooperation. They have to be
careful when treating ethical matters especially related to child labor because their customers
will no longer buy their chocolate if they know Hershey products are produced based on child
exploitation no matter how good their chocolate tastes. Therefore, for the company to
maintain their image and market share as the No.1 Company now and forever, they must take
a step forward to improve their brand equity by reorganizing their work environment, which
would surely lead Hershey’s to be the most powerful company in the chocolate market in
both aspects of quality and morality.
14
VI: References:

http://www.thehersheycompany.com/assets/pdfs/hersheycompany/Hershey_2011_CS
R_Report_Executive_Summary.pdf

http://www.thehersheycompany.com

http://en.wikipedia.org/wiki/Cocoa_bean

http://en.wikipedia.org/wiki/Dairy_farming

http://www.supplychainbrain.com/content/industry-verticals/food-beverage/singlearticle-page/article/hershey-kisses-its-supply-chain-inefficiency-good-bye/

http://www.wikinvest.com/stock/Hershey_Foods_(HSY)
15
VII: Appendix:
Document 1: Hershey’s Supplier Code of Conduct.

Legal Compliance and Business integrity: Suppliers must comply with all
applicable laws and regulations in their country of operation. Also, suppliers must not
directly nor indirectly give nor receive improper business advantage via the giving or
receiving anything of value on exchange for preferential treatment.

Social and Working conditions:
o Child labor: Hershey is committed to the elimination of the ‘worst forms of
child labor,’ as defined by ILO Convention 182, from its supply chain.
Hershey expects their suppliers to support and participate in industry efforts
aimed at the elimination of such practices wherever they exists in the supply
chain.
o Forced/ Prison labor: Suppliers must not utilize or benefit in any way from
forces or compulsory labor, nor utilize factories or subcontractors that force
unpaid labor. The use of official prison rehabilitation programs is not a breach
of the Code.
o Working hours and wages: Suppliers should provide wages at least equal to
the applicable legal minimum wages and any associated benefits. If there is no
legal minimum wage, suppliers must ensure that wages are at least comparable
to those at similar companies in the local area or to prevailing industry norms.
Working hours should reflect applicable legal normal and overtime hours
should be paid at the legally mandated premium or at least at the same rate as
regular hours worked of there is no mandated premium.
16
o Freedom of association: Suppliers should respect employees’ right to freedom
of association including the right to collectively bargain, consistent with local
laws and ensure that all employee relationships are of a voluntary nature.
o Non-discrimination: Hiring and employment decisions, including those
relating to compensation, benefits, promotion, training and development,
discipline and termination are made solely on the basis of the skill, ability and
the performance of workers. Discrimination is not permitted on the basis of
race, religion, gender, political opinion, nations extraction or social origin
(ILO Conventions 100 and 111)
o Health and safety: The supplier must provide employees whit a safe and
healthy working environment for all employees that include appropriate
controls, safety procedures, preventative maintenance and protective
equipment. Practices must comply with all relevant local and national laws,
codes and regulation

Environment and Sustainability: environmental impact is a key part of the Hersey
Company’s business practices and the company is committed to supporting
sustainable operational and agricultural production practices. At a minimum, suppliers
must fully comply with all local environmental laws and regulations and should strive
to conduct their operations in a way that conserves natural resources.
o Pollution prevention and Resource reduction: Suppliers should reduce waste
and usage of all types by implementing appropriate conservation measures in
their operations. Improvement plans for waste reduction, recycling, energy
conservation and greenhouse gas mitigation policies should be in place, along
with demonstrable evidence of implementation.
17
o Environmental Permits and reporting: Suppliers must obtain, maintain and
keep current all required environmental permits (e.g. discharge monitoring)
and registration and any operational and reporting requirements shall be
followed.
o Wastewater and solid waste: Wastewater and solid waste ate to be monitored,
controlled and treated as required prior to discharge or disposal and records of
effluent monitoring shall be maintained
o Air emissions: Air emissions generated form operations are to be
characterized, monitored, controlled and treated as required prior to discharge
and records of air monitoring shall be maintained.

Food Safety and Quality: Hershey is dedicated to providing safe high-quality
products and its suppliers must deliver products and services that meet food safety
and quality standards required by applicable law- and The Hershey Company quality
standards.

Verification and Compliance: Suppliers should have adequate monitoring and
record keeping systems to ensure compliance with the code. The Hershey Company
reserves the right to monitor, review and verify compliance with the Code.

Supplier’s Certifications of Compliance: By tis acceptance of any purchase order
from the Hershey Company, the Supplier acknowledges it acceptance of the Code and
intention to comply with tis requirements.
18
Figure 1:
Global distribution of cocoa bean output in 2005 as a percentage of the top producer
(Cote d’Ivoire – 1,286,330 tonnes)
Table 1:
19