As one of the world’s largest suppliers of food, home and personal care products, Unilever has felt the full force of commodity price fluctuations. Add in the impact of the global recession and a commensurate focus on growth, cost and cash considerations, it has been a difficult time.
So when the central procurement function was launched just two years ago, it came when it was needed most.
Marc Engel, the company’s first CPO, says the results to date have been impressive: in its most recent annual results, published in February, the business reported savings of €1.4 billion which helped contribute to a 2009 net profit of €831 million.
The procurement department’s remit is not confined to reducing costs, however. It also encourages innovation both within the business and from suppliers, and helps to shape a sustainability strategy for which the company is renowned.
CPO Agenda spoke to Engel about the issues of the past two years, how the function has developed under his stewardship and the challenges as the global economy begins to recover.
The past couple of years have been difficult for every organisation. How has the global recession had an impact on your department?
In many different ways. We have a significant
exposure to food soft commodities so the boom-and-bust cycle had a significant impact. In our 2008 results, we had seen a €2.7 billion increase in commodity prices so when the recession took effect, the hunt to reverse that was a very important task for our team.
We have had a much more important role to play than in the past because previously you might see swings in crude oil of $3 or $4 in a year, and here it went from $70 to $147 and then back to $40 within 12 months.
During the recession, the pressure was on getting the cost down and the cash up. We decided at the end of 2008 and beginning of 2009 to shelve a number of capabilities and longer-term projects so that we could focus on growing our business competitively.
How did you go about the move from a regional to a global buying function?
We started it in the middle of 2008. Unilever launched an external study about how we should organise supply management and the outcome was that we could derive significant value if we set up a global procurement structure.
I was appointed in May 2008 as Unilever’s first CPO. We had around €15 billion of direct and about €11 billion of indirect spend so we started with the direct spend areas. We looked at all the material and spend categories and asked where we could derive more value from our scale or better alignment. As an example, we could have had a situation where on the same day we could be going short on a certain commodity in Europe while in Asia we could be going long.
We undertook an organisational redesign, creating a 10-strong senior leadership team with all new people. We changed about 10-15 per cent of the people at director level, where we had about 90 people, and almost two-thirds of those switched jobs. We really designed jobs around where we could derive value through scale, scope or speed.
How did you go about reducing cost and implementing a tighter focus on cash?
It was about aligning the market insight around commodities, so having one market view for Unilever globally and making use of our global scale for the key chemicals, food ingredients and packaging.
On cash, we looked at our peer group in early 2009 and discovered that we were only in the middle pack when it came to payment days. We set a clear target saying that we wanted to be in the top third and launched a two-year programme to achieve this. This had never been very much on the radar for Unilever so we’ve made good improvements. In 2009 we achieved an advance in trade payables of 10 days. We’re halfway through the programme and will continue to drive this until we are in the top league of our peers.
How have you balanced that approach with the issue of supplier health?
We looked very carefully at where we could push very hard and where we needed to go slow. If you have suppliers with high people, rent and energy costs that they need to pay on a monthly basis, then asking them for 90 days will affect their health. We’ve been very much focused on doing it in a way where the supplier could push back the payment terms up the value chain.
Unilever was one of the first to go into supply chain finance (SCF) in a very big way. We currently have one of the largest spends in the business under SCF with suppliers. We’ve been pushing this very hard because it’s a way to get payment terms up without affecting the balance sheet of your supplier. We’ve had fewer than five suppliers getting into trouble so we’ve had good monitoring and response schemes in place throughout the crisis.
Have you used supply chain finance as a lever to bring down prices as well?
For suppliers, the cost of capital is important so we’ve looked at the total package but the leading driver has been the payment terms extension. We’ve not offered it everywhere; we started by saying where we thought the payment terms should be and looking at what the average payment terms were, then we entered into negotiations.
In some cases, we then offered supply chain finance. But if you’re on 30-day terms supply chain finance is not very helpful: you can’t advance much as you need time to approve your invoice, which in our company takes around 20 days. You need the base terms to be around 60 days to make it attractive for the supplier.
How has the role of the procurement department within the business changed since the downturn hit?
There have been a number of events. Paul Polman, our CEO [appointed in October 2008], takes a big interest in the supply chain as a whole. He’s appointed Pier Luigi Sigismondi as chief supply chain officer, who I report to, at board level, which has raised the profile of the supply chain and procurement.
The other big change has been the financial crisis and that’s opened a lot of doors, particularly in the indirect areas, which we really started to address in the middle of last year. In many areas – such as media buying, marketing services, IT/telecoms, logistics – we’ve been able to make huge progress because of the cost pressures that people were facing and the opportunities in the market.
Our indirect spend reach has moved from 50 per cent to almost 90 per cent in six months, which you’d never achieve in the normal development of any company. Rather than us pushing an initiative, a lot of the functional leaders are coming to us about which projects can be advanced and where we can derive value.
You’ve outsourced most of your indirect spend to IBM. How has that relationship worked over the past year?
It’s been a good year and the relationship has delivered significant benefits. In the past, we have had different contracts and set-ups in different regions with IBM but now we’re taking the relationship to a global level, both in terms of resources and contract structure.
We are in the process of transforming our indirect procurement to one global team with 100 per cent spend reach. This will drive value through sourcing professionalism and rigour, global leverage and compliance. The team will drive an increasing amount of sourcing initiatives and savings on a global level, so the IBM model needs to reflect that future vision and strategy.
Aligning our sourcing strategy and organisation to the nature of supply markets, combined with proactive stakeholder engagement, will bring us incremental savings and efficiencies.
In this outsourcing relationship, Unilever is still in charge of all the strategic sourcing decisions. Our outsourcing contract is basically for procurement operations, so one of IBM’s focus areas is to create product and service catalogues for us and manage 80 per cent of the transactions that account for 20 per cent of the total value. We have strategic sourcing directors in Unilever who manage different spend areas either globally or regionally and are accountable for sourcing strategy and execution. IBM is an extension of these sourcing teams and responsible for sourcing activities, transactions and compliance management within strategy execution.
Essentially our relationship is a hybrid between strategic sourcing and transactional outsourcing, and it’s worked very well for us.
Which are the major categories for you and what has been your strategy up to now in these areas?
Our biggest direct commodities are oils and fats. We buy about two-and-a-half million tonnes a year. Everyone was caught out by the bust cycle in late 2008 but since then we’ve done very well to risk manage the price.
The second biggest commodity is dairy and then you have sugar and cocoa and a number of indirect commodities such as chemicals and plastics that are crude-oil dependent. We also use a lot of diesel in our transport operations and have about 400 facilities worldwide that use electricity and gas. We now have a commodity risk management and price hedging strategy in place for most of our exposures.
Sustainability is a huge area for Unilever. How is the procurement department helping to shape strategy?
We’ve set ourselves a very ambitious target in our environmental footprint as a whole and, within that, for sustainable sourcing. Typically, 5 per cent of our footprint sits in our own manufacturing and distribution operations, 20 per cent in our suppliers and 75 per cent in the consumer use of our products. One of Unilever’s biggest contributions to sustainability has actually been to help consumers reduce the temperature of washing at home from 60 to 30 degrees. So the design of our products in how they are used in the homes plays a big role.
Turning to the 20 per cent in our suppliers, it’s our ambition to do all sourcing sustainably. This means different things for agricultural resources and natural resources such as crude oil-based items. We aim to source agricultural products sustainably, preferably with certification standards such as Rainforest Alliance for tea, Roundtable on Sustainable Palm Oil (RSPO) certification for palm oil, and FSC/PEFC certification for paper. We have made a number of public commitments on this and are moving fast. The nature of most of our petrochemicals and packaging requires more focus on using less, through reduction or recycling of waste and using less water in producing them. We realise that most of our environmental footprint is outside of our own operations.
In around 10 years’ time, we want to have moved a long way towards achieving full sustainable sourcing in all of our agricultural and renewable materials. We buy 3 per cent of the world’s palm oil but last year we bought 80 per cent of the world’s sustainable palm oil that was sold, and 15 per cent of our palm oil supply is already bought in a sustainable way through the RSPO certificate scheme.
This year we’ll double that to 30 per cent and the year after we’ll double that again to 60 per cent. We’ve made a public commitment that by 2015 we’ll only use sustainable palm oil.
We’re also looking at other oils such as sunflower, rapeseed and soya bean oil. We’ve recently helped the start-up of the Roundtable on Responsible Soy Association and we’re talking to large suppliers about piloting schemes on sustainability in sunflower and rape oil.
You recently had to stop working with a palm oil supplier that didn’t meet your expectations. Can you tell us about that?
We’re a big supporter of the RSPO. Its members are required to make public commitments to sustainable palm oil, and sharing plans to get there. Currently many plantations are being certified for sustainable production and we’ve been following very closely how suppliers have been getting on.
We launched an audit with five of our key suppliers early last year to understand how sustainable they really were and out of that came some issues. Four of the five suppliers have started to resolve these issues but one supplier was not really prepared to do much about it and, late last year, there was a report from Greenpeace with allegations against this supplier. We looked at the report and were of the opinion that the allegations were very credible and very serious. We decided to suspend all business with the supplier until it could prove to us with verifiable evidence that these allegations were incorrect. So far this has not taken place.
We went public with this suspension as we want to send out a clear signal that Unilever is committed to sustainable palm oil and that we will bring more business to those suppliers who show real commitment, and move business away from those who do not.
Innovation is another critical issue for you. What role does procurement play in helping to work with key suppliers and research and development (R&D)?
We have open innovation partnerships with strategic suppliers in food ingredients and chemicals where we look at what developments they can bring. We also have an open innovation group in R&D with which we translate the needs of the organisation into where to get it from, with dedicated scouting resources.
Last year we were fully focused on getting through the crisis with continued growth, which we achieved. But 2010 is the year where we’re coming out of the crisis. We now have not only cost and cash targets but targets in growth, delivery of innovation and leveraging of the supplier R&D base for new innovation and growth. It’s high on our agenda and we’re very much at the forefront of it. We have about 90 procurement directors worldwide and about 15 of them are involved almost full-time in this area. It’s not a Friday afternoon job.
What do you see as the main opportunities and challenges associated with an upturn?
One of the challenges is to get price protection. This is possible as long as you have the opportunity to cover and hedge long. But once that runs out we face an upturn in prices. One of the key skills for our function will be to link very closely with the rest of the business around price forecasting and what’s happening in the markets so we can tell where and when costs are coming through.
When volumes start to grow again you also need to think about supplier health. In 2009 this was very much about suppliers going into insolvency. The key issue this year will be the supplier’s lack of cash or borrowing power to invest in growth due to the de-leveraging that has taken place.
Would you step in with that in certain circumstances?
We do that in exceptional cases but only if not doing so would seriously hinder our growth. For example, if we wanted to develop tomatoes from India much quicker than we are doing today and one of the bottlenecks was processing capacity, we could either incentivise suppliers to invest or invest in this capacity ourselves. It’s not necessarily something we’d want to do but if it was of very high strategic importance for us then we would certainly consider doing it.
What is your staffing strategy?
We didn’t cut headcount during the downturn because we said we needed to do more with the same rather than the same with less. At the moment we are even slightly increasing headcount to service the volume growth targets the company has set.
We need to secure capacity, capability and look at the supplier base because Unilever grows faster in developing markets than in developed ones, so there will be a continued shift in importance towards suppliers in Asia, Africa and Latin America and other developing markets.
We’re also looking at excellence in execution, customer service, vendor-managed inventory, securing growth and capability, technology, open innovation and supplier relationship management (SRM). All of those projects are being brought back so it’s a much more balanced agenda in 2010.
How does SRM form part of the future strategy?
SRM is something that Unilever is pretty good at in pockets. We’ve realised now that it’s something that we need to make a step change on so we’ve started to make a global differentiation of suppliers, differentiating those that are more about funding growth from those that are more about driving growth. We now have targeted relationship management around the top of the pyramid of suppliers with senior Unilever executives involved. The innovation partnerships are an example of that.
Looking further ahead, what do you see as the biggest issues for procurement? How will the function have to evolve in order to meet these challenges?
There are three key themes for me. The first is business engagement. When you create one procurement function there’s a risk that you become siloed as an organisation. Ultimately, we sell branded products to consumers, so the whole integration of the end-to-end supply chain – buying, manufacturing, distribution, sales, the go-to-market – in close co-operation with brand development and R&D is very important.
The second is the role of analytics in collaborative optimisation. As tenders are becoming more complex, there’s a huge place for this in managing deal structures, and the old Excel sheet that most people work with is not going to cut it. The use of analytics – and the professionalisation of it – in procurement will be a key challenge as we look further forward and our organisation has to get ready to lead there.
The third is around using different horizons. Companies need to have a longer-term outlook and strategy rather than just managing the next quarter. Take crude oil, which is a big price driver for us. When you look further ahead, there is only one place for crude oil to go and that is up because stock is running out. The question is by how much and when. Food supply security is another big deal for us: how do we keep feeding a growing planet, how do we make sure we have enough acreage for agricultural growth to sustain this, and what do we need to do to secure our agricultural needs in a sustainable way?
Your own career has seen you work all over the globe, largely for Unilever. How does having that in-depth understanding of the business help you in your current role?
I’m a firm believer that you need to have a broad-based career to do this role very well. I’ve not done a lot of buying in my previous career and I see my role as making the organisation work and deliver, and identifying where the opportunities are from a strategic point of view. I’ve been managing director of ice-cream businesses in Latin America so I’ve seen the sales side and the marketing side. I’ve worked in the corporate strategy group in London. I’ve worked in factories so I know how quality and reliability of materials supply is key.
I’ve been very fortunate that Unilever and Shell – but mainly Unilever – have sent me around the world to different places and in different kinds of job. When I talk about the importance of engagement with the supply chain, the go-to-market or R&D teams, I say that because I have been on the other end.
How has the procurement function evolved since you’ve been involved?
We have a much higher profile in the company now. We have access to Unilever’s board, and there’s a lot of attention, support and recognition within the business for what we’re trying to do. There are lots of challenges as well. We’re a more integrated function now; we’re engaging better rather than being very professional but acting like a bit of a black hole. I think we’ve really put procurement on the agenda at Unilever.
Factfile
Unilever at a glance
• Founded in 1885 when William and James Lever launched Sunlight, the world’s first branded and packaged laundry soap
• CEO: Paul Polman (appointed 2008)
• Employs 179,000 people in 100 countries
• Boasts over 400 brands globally, including Dove, Knorr, Cif, Persil, Bertolli, Wall’s and Ben & Jerry’s ice cream
• Currently waiting for the regulatory approval to finalise its acquisition of Sara Lee Corp., which will add Sanex and Radox to the company’s range of soaps
• Invests €1 billion every year on research and development
• Has achieved a 39 per cent reduction in CO2 emissions from factories since 1995
• Has more than 20,000 registered patents and patent applications worldwide
• Contributed €91 million to communities around the world in 2008
• Has been the sector leader in the Dow Jones Sustainability Indexes for the past 11 years
Nick Martindale (nick.martindale@redactive.co.uk) is a freelance business journalist
