Unilever’s Supply Chain

Management Practices

Final Test

Supply Chain Design

By :

Corry Lamria D Hutahaean

29112071

Master of Business Administration

School of Business and Management

Bandung Institute of Technology

Bandung

2013

Unilever’s Supply Chain Management Practices

Introduction

Unilever is one of the world’s most successful international consumer goods

companies, employing 206,000 people in approximately 150 countries worldwide. The

company has over 300 manufacturing sites, producing a diversified portfolio of brands that

are popular across the globe. In late 1933, PT Unilever Indonesia Tbk (the company) was

established as Lever’s Zeepfabrieken N.V. Nowadays, Unilever Indonesia has grown to be a

leading Fast Moving Customer Goods of Home and Personal Care as well as Foods and Ice

Cream products in Indonesia. The Company seeks to manage and grow the business in a

responsible and sustainable manner “Touching the lives of Indonesian consumers &

customers everywhere”.

Unilever Indonesia’s portfolio includes many of the world’s best known and well

loved brands, such as Pepsodent, Pond’s, Lux, Lifebuoy, Dove, Sunsilk, Clear, Rexona,

Vaseline, Rinso, Molto, Sunlight, Wall’s, Blue Band, Royco, Bango and many more.

The Company owns six factories in Jababeka Industrial Estate, Cikarang, Bekasi and

two factories in Rungkut Industrial Estate, Surabaya, East Java, with its head office in

Jakarta. Its products consist of about 43 key brands and 1,000 SKUs which are sold through a

network of about 500 independent distributors covering hundreds of thousands of outlets

throughout Indonesia. Products are distributed through its own central distribution centers-

modern trade and general distributor -, satellite warehouses, depots and other facilities.

Managing The Supply Chain

Company supply chain strategy as fast moving customer goods - especially for home and

personal care, can categorized as functional product - focusing on efficiency, cost reduction

and supply chain planning.

Unilever Indonesia has implemented SAP – Advance Planning Optimizer to manage their

supply chain strategy. By using Accenture as IT consultant to build and start the program in

approximately before 2010 with consider several key notes for the system:

Ability to quantify, understand and manage the true variability of demand and supply

Dynamically determines optimal and visible inventory policies for every item across the

supply chain.

Directly accounts for all the uncertainty in the supply chain by the use of advanced

algorithms

Inventory and Demand Management

The company controls the inventory under Unilever Inventory Management (UIM) team

by using stock dynamic replenishment concept.

UIM team will calculate all the SKUs in order to get the optimal and visible inventory, as

the result translate it into week cover (ZTWC) as target and safety daily inventory – dynamic

target stock. ZTWC needs to be created for all locations (T-lane) including Factory, Vendor,

Customer, Dummy DRP location, Depot and CDC (Central Distribution Center). Week cover

for each SKUs in all location will propose under IPM team based on historical data,

promotion and cost factors.

The ZTWC combines with the cost parameter becomes the input of the optimizer cost.

Under SAP – APO SNP system responsible for maintaining the required safety stock levels

covering demand uncertainties, replenishment lead time, number of different SKUs were

being considered.

The planning process is quantity and period orientated; As a result of SNP processes

Unilever receive information about supply demands on external suppliers, transport

requirements, planned production output as well as stock levels at individual locations in the

logistics network.

5

Demand Data 1

3

2,4,6 2,4,6

1,6 1,6

Supplier Sourcing Unit

Distribution Center Distribution Center

customer customer

Cost factors in SAP APO:

1. Late delivery and non delivery

penalties cost set into optimizer

to deal with the demand from

customer.

2. Safety stock and maximum

stock level cost

3. Production cost

4. Storage cost

5. Procurement costs

6. Transportation cost

Supply Chain Collaboration

In Unilever, supply chain integration as known as supply network collaboration

(SNC). SNC is a better system to collaborate end to end planning – bottom up planning from

area and top down planning from company. SNC system fully integrated with SAP APO.

As a glimpse of collaborative planning in internal Unilever, forecast demand

generated by marketing (SOM MT) and demand planning (DP) as shown figure 3. Forecast

as input for supply planning (SU) , distribution plan (DPG) and stock norm for

replenishment. Stock replenishment separated into two categories is primary sales and

secondary sales. Primary sales based on sales from first tier customers and secondary sales

from baseline and area promo. Forecast by customer divided by demand from modern trade

(MT) and demand from general distributor (GT). MT consists of Carrefour, Hypermart,

Lotte,Giant, Hero, Supermarket and others. GT consists of distributor partner. MSO as

central coordinator in supply chain are have collaboration with SOM as representative of

customer development (sales division).

Source: Unilever Supply Chain Division, 2013

Unilever using hybrid of push and pull strategies. The production stage are done in

push manner based on aggregate customer demand forecast so the uncertainty is reduced so

safety stock inventory is lower, cost minimization and effective resource utilization (see stock

strategy figure 3) . The next stage for distribution are done in a pull manner for replenishment

needed by distributor, by using sophisticated IT and customer relationship management under

CD area that they already have.

Retail - Supplier Relationship

In this paper, author is going to elaborate the external relationship between Unilever

(as supplier of retailer) with their distributor (retailer), GT and MT. Under collaborative

planning company control the hand stock of distributor by using system known as Scylla. The

Scylla as part of SNC has purpose synchronized data exchange with SAP APO. Since SAP

APO get the data from Scylla, system will trigger supply that needed to replenish the stock

and order split – SAP also consider in transit stock. Currently, CD teams split the order and

upload manually.

To accommodate lean production, Unilever implement continuous replenishment

logic/ strategy that capping the sales order for 1st replenishment run at 80% from baseline of

forecast by customer. Unilever prepare shipments at previously agreed-upon intervals to

maintain specific levels of inventory. As the result, company may gradually decrease

inventory levels at the retail store or distribution center as long as service levels are met.

Moreover, due to the nature of the business in Indonesia (related with festive season), the

cover days in Distributor will dynamically changes according to a pre-defined festive season

plan

# Channel Hyper RTM Minis & Specialty Supermarket # Profile National Chain National Chain National Chain Local Chain

        Nat Chain # Order placing -Electronic Electronic -Electronic -Manual  -Manual   -Manual -Electronic  -VMI      # Order frequency

Daily Daily Daily 1-3 x/week

# Contribution 36% (60bio) 13% (21 bio) 37% (62 bio) 14% (22 bio) # Customer Carrefour Lottemart-wholesale Alfamart Ramayana  Hypermart Indogrosir Indomaret Tip Top  Giant   Watson Naga  Hero   Lionsuperindo Yogya

Sourcing Unit

Central Distribut

ion Center(CDC)

Depo (DC)

PUSH

KEEP

PULL

Stock Strategy

Storage Cost

Highes

t

Lowest

Medium

      Alfamidi Diamond

Vendor Managed Inventory

VMI model has implemented for Hypermart as MT ditributor’s Unilever. Unilever

manages inventory in Hypermart stores everywhere in Indonesia. Unilever recently sent

analysts to Hypermart office and stores. Hence, company will implement the same standard

to other MT Customers in future. Files are sent to Hypermart for their information and

confirmation. Files consist of forecast demand that already translate it into plan order in cases

per SKUs. Unilever decides on the appropriate inventory levels and the appropriate inventory

policies to maintain these levels.

In order to make it more efficient the collaboration is connected through EDII as third

party. Files converted to Hypermart data format and send to local folder using EDII. On the

other hand, Unilever receives inventory report from Hypermart to the basis for replenishment

calculation. After calculation, VMI planners will manually adjusted the order when big

variance detected

Criteria →Type ↓ Decision maker Inventory

OwnershipNew skills employed

by Unilever

Continuous replenishment

Contractually agreed-to levels Either party Forecasting and

inventory control

VMI Unilever Hypermart Retail management

Procurement Strategies

Unilever Indonesia has developed sophisticated methods for managing supplier

relationships. This includes the Suppliers Quality Management and Assessment Programme

(SQMP), launched in 2000 as part of our international drive to build a world-class supply

chain. It measures suppliers' ability to achieve consistent quality in meeting company

specifications: on time and in-full delivery; cost competitiveness; reliability and flexibility.

These suppliers basically supply Unilever with all that company need to make

products from chemicals to food ingredients and from commodities to packaging

Unilever found it essential to have suppliers close to its eight factories in Indonesia

because the insufficiency of raw materials would bind Unilever from sprinting to meet the

future spurt in market demand.

Based on the Kraljic’s supply matrix, the raw material as a supply in Unilever’s

products commonly have low profit impact and supply risk as as at bottom left quadran - the

non critical items. Unilever need to simplify and automate the procurement process as much

as possible.

Take one example to give explanation about procurement as raw material of Unilever

product such as Dove. About 65 percent of palm oil bought by Unilever worldwide comes

from Indonesia. In 2009, Unilever announced it was suspending purchases of palm oil from a

major Indonesian supplier - SMART, following allegations by environmentalists the

company was engaged in widespread illegal deforestation. This case had shown the low

dependency with their supplier and commit with their commitment to sustainability

environment. At that time, Unilever only suspended the SMART but continuous the palm oil

supplies from local company in Indonesia.

Outsourcing Strategy

Since Unilever has independency with knowledge and capacity and their product as integral

product, thus company keeps production internal. The opportunity to reduce cost through

packaging has done outsource with other company since it’s not their competitive advantage.

Third Party Logistics

Unilever use DHL as 3PL provider to take over a company’s logistic function. With

this alliances company can focus on its core competencies and have the capability to fulfill

demand customer across Indonesia by using flexibility in geographic locations.

Unilever encourage their international suppliers by using Cikarang Dry Port services

for their import and export product. Unilever Indonesia views this approach as necessary to

strengthen its supply chain activities to increase company’s productivity. Unilever Indonesia

has several manufacturing plants within Jababeka industrial estate and has been using

Cikarang Dry Port for their shipment since CDP early operation dates.

Network Management

Network management based on SAP help the company to (1) find the right balance

between inventory, transportation and manufacturing costs, (2) match supply and demand

under uncertainty by positioning and managing inventory effectively and (3) uutilize

resources effectively by sourcing products from the most appropriate manufacturing facility

Based on figure below, we can see the circumstances of Unilever network. Company

provide the distribution plan by using the T-lane as line transportation, forecast split, ZTWC,

lead time and priority. All the variable as input into SAP Advance Planning Optimizer with

the result deploy stock to all point and ensure the availability stock at the right quantity, at the

right place and ther right time.

Source: Unilever Supply Chain Division, 2013

The SAP calculate the optimization by using mathematical model lead to structured

poblems such as linear programming, mixed interger linear programming problems and

solved with considering variable as follows :

MED

PKB

BMS JKT

MKS

PON PLB

DPS

MDO

PAD

SMD

SBY

Central Distribution Center (CDC) or Back of Factory

(BOF)

Depo/DC

SUMATERA

KALIMANTAN

IRIAN JAYA

JAVA

SULAWESI

• Network design

– Number, locations and size of manufacturing plants and warehouses

– Assignment of retail outlets to warehouses

– Major sourcing decisions

– Planning horizon 26 weeks

• Inventory positioning:

– Identifying target and safety stocks

– Selecting facilities that will produce to stock and thus keep inventory

– Facilities that will produce to order and hence keep no inventory

– Related to the inventory management strategies

• Resource allocation:

Global Logistics - International Supply Chain

International distribution systems

Manufacturing still occurs domestically, but distribution and typically some marketing take

place overseas. Unilever export their product 32 customer from South East Asia, North Asia,

South Asia, Africa and Europe. One example of export product is ice cream to Africa. The

product already customized base on market conditions and usually the name of product will

be different across the countries although the composition might be same.

International suppliers

Example for raw materials are produce by foreign suppliers is magnum, Unilever supplies

their chocolate from belgia’s supplier.

Fully integrated global supply chain

In Univeler products are supplied, manufactured, and distributed from various facilities

located throughout the world. The sourcing unit for import product comes from America,

Europe, South East Asia area, and south Asia. One example for import product is Rexona

lotus which is manufactured in Unilever’s Australia.

Global Products

The heart logo of ice cream product is common worldwide, each country retained the local

brand name so as to keep the familiarity built over the years. Unilever generally manufactures

the same ice-cream with the same names, with rare occasions of regional availability, under

different brands. Some of these ice-creams include Cornetto, Magnum, Twister and

Viennetta.

Managing Global Risks

Unilever supply chain network is exposed to potentially adverse events such as

physical disruptions, environmental and industrial accidents, or bankruptcy of a key supplier

which could impact company ability to deliver orders to customers. The quality and safety of

products are importance for brands and reputation. The cost of products can be significantly

affected by the cost of the underlying commodities and materials from which they are made.

Fluctuations in these costs cannot always be passed on to the consumer through pricing.

Contingency plans designed to enable company to secure alternative key material

supplies at short notice, to transfer or share production between manufacturing sites and to

use substitute materials in product formulations and recipes. These contingency plans also

extend to an ability to intervene directly to support a key supplier should it for any reason

find itself in difficulty or be at risk of negatively affecting a Unilever product.

Commodity price risk is actively managed through forward-buying of traded

commodities and other hedging mechanisms. Trends are monitored and modelled regularly

and integrated into forecasting process.