Shifting Strategy

5 May 2011 Pier Luigi Sigismondi

To fully energise a company's supply chain, the function has to be about more than streamlining and savings. Unilever's Pier Luigi Sigismondi talks to Phin Foster about making the transition from cutting costs to creating value, and why full boardroom buy-in is integral to success.

The trend of supply chain management being an executive-level concern has gathered pace in recent years, with business leaders recognising the financial benefits an efficiently run pipeline can bring.

A report published last year by Cranfield School of Management in the UK found that the function was represented on more than two-thirds of company boards, a development the report's researchers cited as having only come into play over the past decade. While this may be indicative of a change in strategy regarding how the supply chain is viewed and managed by those at the very top, the other key finding demonstrated a less dramatic shift: cost reduction remained the overwhelming factor driving its operation, dictating behaviour and, in many cases, acting as the sole metric for gauging success and failure.

Adding value

A cursory glance at Unilever's latest set of results might suggest that the consumer goods giant has embarked on a similar route; improved supply chain processes saw €800m shaved from procurement costs and contributed to overall savings of some €1.4bn in 2010. Delve beyond these impressive figures, however, and a quite different picture emerges. Unilever has set itself the challenge of doubling in size while simultaneously reducing its environmental footprint, and supply chain is considered a key driver in realising that goal, necessitating a radical shift from cost-cutting to ‘value creation'.

In May 2009, Paul Polman, installed as Unilever CEO the previous September, announced the appointment of Pier Luigi Sigismondi as chief supply chain officer. This, he claimed, constituted a major stepping stone in the company's ambition to transform its supply chain into a "customer-focused operation", underlining its fundamental importance to overall business strategy. Within 12 months of that announcement, the function had been transformed into a globally led supply chain organisation with executive buying authority under Sigismondi's stewardship.

"Supply chain is considered a key driver, necessitating a radical shift from cost-cutting to 'value creation'."

"I frankly believe that many companies only put supply chain at the top table because they're looking to be more cost-competitive," reveals the Italian, sitting in his London office. "Many large corporates say they are now simplifying their structures and driving their teams more globally. That's great and necessary, but it's also business as usual. We see the supply chain as a fundamental enabler in fulfilling our growth plans and that demands a lot more than a sole focus on cost."

Nevertheless, Sigismondi acknowledges that such a growth-driven agenda would not be possible were it not for the momentum generated by a major savings programme prior to his appointment. The One Unilever programme dates back to 2006; it is an initiative that has sought to streamline and simplify the business. The lessons learnt and savings made from this process will not be thrown aside in the pursuit of growth at all costs, but a more nuanced approach has evolved.

"Capital expenditure over the past two years has been at levels not witnessed in the preceding two decades," Sigismondi explains. "The savings programme is still at the heart of that agenda. We work with several units, R&D, the brand teams and across supply chain and procurement. We're looking at where the areas of waste lie in the company, but also what we require in terms of new investment in order to increase capacity and capability."

One need only look at what happened to the €1.4bn generated in savings last year to see this approach in action. Sigismondi claims that this money could have delivered "more than 15 basis points of growth margin improvements", but it was instead reinvested into competitive pricing, advertising and brand development.

"We are energised by a growth agenda," he explains. "It comes down to finding the sweet spot across the three areas of excellence we call supply chain: end-to-end costs, customer service and improved quality of products. The conventional view is more linked to reliability of service, reliability of products and cost competitiveness. These things are required, but they're not enough to drive an ambitious growth plan."

Value-driven results

Extensive investment and a renewed focus on the customer and product quality have already produced marked results. Over the past 18 months, on-shelf availability has been improved by more than 480 basis points. Consumer complaints are down by some 10% and product incidents such as recalls reduced by over 50%.

"We're service-oriented and the customer lies at the heart of our strategy in supply chain," says Sigismondi. "At the same time, we've been reinvesting €100m to improve the perceived quality of our products. This may seem counter-intuitive at a time when you want to take costs out of your brands and maintain margins, but you can invest in quality while still generating savings.

"Growth can also drive competitiveness; it does not always have to be the other way round. That's my responsibility, very much endorsed by the rest of the board and our CEO, going end-to-end so we can see what sorts of opportunities exist across the company to make it possible."

Unilever has been ranked as the number-one strategic supplier worldwide by a number of its leading clients, including Walmart and Tesco, and is working in close collaboration with these companies, in many cases developing joint business plans and formulating solutions in the supply chain that will allow both parties to be more competitive.

"Growth can also drive competitiveness; it does not always have to be the other way round."

Many of these relationships are well on their way to maturity, but an area of somewhat newer focus is how Unilever formulates sustainable relationships with its vast array of suppliers.

"The way those relationships worked in the past was often quite opportunistic, looking for parties who could come in at the last minute and offer the best deal," Sigismondi acknowledges. "This is quite an easy way to do business when you've got the advantages of scale as a company. What we feel we need to do now, however, is to engage these groups in our growth and sustainability plans, get them to invest in these programmes as well and come back to us with ideas about how to get more value out of our products.

"If you take the total R&D spend of our supplier base, it outstrips what we do as a company. Not taking advantage of that would be a real opportunity missed. Seeing our suppliers as an integral part of our strategic agenda requires a shift in mindset and we still need to be ruthless in the way we operate as a procurement organisation, pursuing cost improvements every day. But the chance is there for both parties to commit to one another in the longer term and see investments made into new assets and technology so that we can't just dump a supplier after a year of service. This is about genuine, long-term business partnering."

Initiatives such as the ‘Partner to Win' event held in London the week prior to our interview are testament to such an approach. More than 130 Unilever suppliers attended what Sigismondi refers to as "a fantastic chance to recognise some outstanding examples of true excellence in our partners". A number of awards were presented, including prizes for sustainability, innovation and integration, and the opportunity taken to proffer further explanation of the "Unilever vision".

The chief supply chain officer is happy with buy-in so far, but candid enough to admit that plenty of progress still needs to be made. "We are at the very start of the journey," he says. "We can do better and, frankly, believe that there are other companies out there who are well ahead of us right now. You need to have the confidence and determination in place to make this work and I am totally optimistic that we're on the right track.

"It is no longer enough for the supply chain to merely have a seat in the boardroom; the function must lie at the heart of corporate strategy."

"Attendees at our London event have already come back to me with ideas regarding how we can both grow and be cost competitive – and the programme is being turbocharged. Savings and value for our brands are already being delivered."

Acknowledgement of other companies' performance levels in this space is indicative of exhaustive benchmarking against best practice. This is certainly not unique among large corporates, but where Sigismondi believes some organisations miss a trick is by not looking beyond their immediate sector.

"If you want to operate the best supply chain in the industry, you need to look at an array of business models," he says. "It is great to see how best practice in innovation across the electronics and automotive sectors is achieved, for example, where one is working with much shorter life cycles. Benchmarking against your competitors and reverse engineering is business as usual and won't take you to the very top. In order to get there you need to look outside the box."

New ideas

When organisations decide upon the need for fresh insights, their first port of call is often external consultants. There is no denying the potential value of bringing in a new pair of eyes and Sigismondi, a former consultant himself with AT Kearney, admits that such input can be useful. In order to drive such an ambitious programme throughout an organisation, however, the value of in-house development and total ownership cannot be understated.

"In a funny way, consultants are like drugs," observes the chief supply chain officer. "The more you use them, the more you need them. You must ask yourself numerous times prior to entering into an agreement with external partners, is this something you can do yourself? The value of the lessons learnt from going down that road and getting things done yourself makes for a much stronger organisation in the end."

Embarking on that journey requires buy-in from across the enterprise. The energising effect that an emphasis on value creation, rather than cost cutting, has on the supply chain function is a theme Sigismondi returns to time and again. With the backing of a CEO who shares both the belief that rapid growth, an ambitious sustainability agenda and substantial cost-savings are not mutually exclusive pursuits and that supply chain management can be a key driver in their realisation, successes to date are a clear indication of how a mature, nuanced approach to the function can have transformative powers.

Perhaps it is no longer enough for the supply chain to merely have a seat in the boardroom; the function must lie at the heart of corporate strategy.