The Supply Chain Evolution in the Era of Disruption

The Supply Chain Evolution in the Era of Disruption

Supply chains have adjusted significantly over the past few decades as consumers and the shopper journey have evolved, particularly in the fast-moving consumer goods (FMCG) industry. The COVID-19 pandemic hasted those changes. Still, maintaining quality is paramount.

Marc Engel, former chief supply chain officer for multinational consumer goods giant Unilever, held a (virtual) fireside chat to discuss this supply chain evolution and a host of other topics with Harvard Business School’s Willy C. Shih

Shih kicked off the discussion by asking Engel how the world of supply chain management has changed.

Watch Marc Engel and Willy Shih’s full conversation A Master Class in Supplier  Collaboration.

The Shift to a Hyper-Segmented Market

Over the past decade, companies such as Unilever have gone from a model of mass production, mass distribution, and mass communication to hyper-personalization, offering products designed for specific needs and tastes. In addition, consumers are expecting more from companies and brands when it comes to the issues they care about, such as social inequality and the climate crisis.

Compounding that is what Engel described as the “Fourth Industrial Revolution,” where artificial intelligence, robots, data fluency and more are becoming a differentiating edge. And of course, because of COVID-19, businesses are operating in an atmosphere of volatility, uncertainty, complexity, and ambiguity.

“You're seeing shortages of everything, volatility in commodities, price hikes, and supply chains having to respond with a lot of agility and resilience much more than before,” Engel said. “But there are also things that stay the same for us in Unilever - the importance of continued investment in partnerships, in talent, and in building capabilities. These areas are always a factor of stability in times of instability, in times of flux, and in times of crisis.”

Supply Chain Disruptions During the Pandemic

One of the most immediate impacts of the pandemic was a shift in demand accompanied by massive disruption in supply chains, which in turn caused global product shortages of both labor and materials. Demand for Unilever’s restaurant and out-of-home products, for example, declined to near zero as those businesses shut down, while at the same time demand for hygiene products, hand sanitizer, and home cleaning supplies skyrocketed as a result of quarantines.

On top of that, there was a significant, sudden channel shift from physical shopping to e-commerce. 

Unilever’s Supply Chain Challenges and Response 

To adapt to the changes brought about by the pandemic and Unilever’s supply chain challenges, early in the crisis the company established five priorities:

1. Safety of Employees

The most important priority to address was the safety of its people. How can people come to work and do their jobs safely? Unilever met that challenge by designing a safety tier system.

“We created housing, we created special PPE protective equipment, we built hospitals around Africa with wards, we bought ventilators, we bought tests, and so forth,” Engel said. “The safety of our people was a big theme.”

2. Protecting Livelihoods

Additional steps included donating $500 million in products such as soap, sanitizer, bleach, and food.

“We also used our balance sheet to give our customers and smaller suppliers $500 million of cash flow relief,” Engel said. “And we protected our workers by guaranteeing everybody for three months that they would not have any drops in pay.”

3. Operational Agility 

Unilever operates in 190 countries around the world and designed a “real-time democratized information system” to assist in converting factories to make essential products such as hand sanitizer. The company’s agility allowed it to prioritize those products.

4. Adjusting to New Patterns and Demand Changes

Changing shopping patterns and changes in product demands also emerged as a result of the pandemic, prompting Unilever to shorten the time spent on sales and operations planning. Time spent in the kitchen, for example, had been on the decline over the past 20 years but increased in 2020 as people rediscovered the joys of cooking and eating with the family because of quarantines and restaurant shutdowns. Making the shift required agility in planning.

5. Managing Cash

Last but not least was the importance of managing cash during the crisis; making sure the company had products to sell and making sure Unilever was paid for those products.

Watch Marc Engel and Willy Shih’s full conversation A Master Class in Supplier  Collaboration.

The Era of Structural Disruption: The Shortage Crisis 

Although the jury is still out as to whether COVID-19 is behind us, Engel believes many of the challenges of the COVID crisis are still to come

“It is going to be an era of structural disruption,” Engel said. “There's a shortage of everything. There's a shortage of logistics, shortage of truck drivers, a shortage of certain commodities - wood, steel, microchips. You see a lot of flights being canceled because there's not enough staff. There are energy shutdowns because of dependencies from one country to another in their energy supply.”

Supply chain shortages and other issues are likely to get worse before they get better, Engel said, and last much longer than many people think.

The New Meaning of Agility

Although businesses of all types are finding it necessary to adapt to changes in the marketplace, one of the first things Unilever discovered in the evolution of logistics and supply chain management was that the term e-commerce was a gross generalization.

In fact, there are many ways to accomplish e-commerce. There are pure-play operators such as Amazon, brick-and-mortar operators with an online component, direct-to-consumer models, and a host of other models. Over the past few years, the percentage of Unilever’s business that fell under the e-commerce umbrella went from 1-2% to as much as 15%, making agility in its response critical.

“It has been a journey of fast response and a journey of experimentation,” Engel said. “We were trying at Unilever to make sure that we have open communication lines between the different markets that we serve so that we don't have to keep reinventing the wheel.”

The Future of the Supply Chain Post-Pandemic 

Unilever also realized that the supply chain is no longer linear. Instead, it is more akin to a circle of ecosystems, starting with product development, product design, and sourcing optionality. And now, with a variety of fulfillment options, how do you ensure products get to where they need to be?

“Do you ship to the consumer's home?” Engel asked. “Do you ship to somebody's marketplace? Do you dock into someone else's distribution network?”

Supply Chain Tiers 

One of the issues that emerged for manufacturers during the pandemic has been a lot of tiers in supply chains. Unexpected impacts somewhere out in those ecosystems can affect the entire chain.

To be able to manage those tiers effectively, Unilever is employing disruptive technologies enabling supply chain evolution and implementing digital tools to assure effective quality management.

“When you have that foundation in your operation, it can give you the predictive and prescriptive analytics that lead to automated decision making,” Engel said. “Because at the end of the day, very often the humans are the limiting factor in agility and fast response.”

One example Engle gave was its “virtual ocean control tower” that gave it real-time visibility into product and material shipments.

“We have about 12,000 containers at any time on about 1500 ships with raw impact material and finished goods,” Engel said.

“Getting that visibility rather than just traditionally waiting and having an estimated arrival time has massively allowed us to mitigate issues as they arrive,” he said.  “Digital tools are really helping us get more visibility around our tiers - not just for continuity, but also for sustainability and compliance.”

Sustainability Plays an Ever-Increasing Role

Unilever is an outspoken advocate on the frontier of corporate sustainability, infusing the concept into its corporate culture. At the same time, the company buys many products that play a critical role when it comes to sustainability efforts, such as palm oil. That can create a delicate balancing act.

Palm oil production has been blamed for environmental impacts such as deforestation.

“On some of these commodities, you have a moral responsibility to not only make sure that your own house is in order, but also that you help drive industry change,” Engel said. “You can only do that where you have a significant position, and we've really looked at that around the world, and which commodities could Unilever play that role.” 

With palm oil, for example, Unilever was a founding member of the Roundtable on Sustainable Palm Oil (RSPO), which works to transform markets to make sustainable palm oil the norm. The company was one of the largest buyers of palm oil green palm certificates when they were first launched to support the industry. Unilever helped set up the Tropical Forest Alliance and was a participant in the New York Declaration on Forests, a voluntary and non-legally binding political declaration with the goal of reducing deforestation. The company has duplicated many of those efforts for soybean production.

“Of course, you need to sort out your own house but you also need to realize that whatever action you take alone to sort out your own house is not going to change the system,” Engel said. “Our philosophy is that to play your role in trying to change the system, you need to work with industry, to work with key governments, to work with civil society, and to work with academia, to really try to think about what are the changes that are required to change the system.”

Watch Marc Engel and Willy Shih’s full conversation A Master Class in Supplier  Collaboration.

Agility Trumps Forecasting

Although forecasting has its place, Unilever quickly learned that agility is critical. The company found that its investment in agility probably had a return 10x that of its investments in scenario planning.

“It's hard enough when you don't have a lot of these disruptions because you can't forecast the weather and you can't forecast consumer behaviors and promotions of yourself and other people and what that does to demand on a good day,” Engel said. “But where we are now, we're seeing the whole vision of synchronization and agility. You need to be producing tomorrow what you sold yesterday.”

An example of that agility in action stems from Unilever’s work with one of its key grocery customers. That customer provided access to its point-of-sale scanning data. The company quickly realized that if one of its core products hadn’t been over the scanner for four hours, odds are that it wasn’t on the store shelf. 

“Every time that happens, we assume they're out of stock, so we automatically ship,” Engel said. 

“It's those kind of things that really drive change, but you need digital fluency in your organization,” he said. “What we found is that the line between white-collar and blue-collar is very rapidly blurring. We're looking at our networks and configuring our supply chains for agility, and we're looking at multisource approaches rather than localization.”

Product Compliance in a Consumer-Oriented World 

At the end of the day, Unilever’s focus is on consumer delight, consumer trust, and consumer assurance - these need to translate into policies that it can use to run its business.

“Compliance is the translation of what we need to do in our business because the consumer will never get excited about whether your product is compliant,” Engel said. “You either delight a consumer or you disappoint them.”

There are expectations when a consumer buys your product and there is a level of assurance that you need to provide, he said.

“Two and a half billion people use our brands every day,” Engel said. That’s a lot of consumers we need to delight.”

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