Spurred by heightened supply chain risk from disasters and covid-19, organisations are trading complexity for sustainability and sophistication

Kraft Heinz is changing its structure with the aim to save $2bn in five years. This ambitious plan seeks to bring together disparate supply chain functions under a new operating model that integrates procurement, production and distribution as well as marketing and R&D. It will drive continuous improvement by creating end-to-end flexibility and agility in response to consumer needs.

CEO Miguel Patricio, who took the reins in July 2019, has blamed the supply chain for the company’s diminished profitability in recent years and called for better visibility and a shift in focus to “competencies for the future with the mentality of ‘make it better every day’”.

Kraft Heinz is not alone in its quest to simplify its systems. Covid-19 has accelerated these trends. Fast-moving consumer goods (FMCGs) have faced serious supply chain challenges because of the pandemic, ranging from factory closures and shutdown stores to the explosive growth of online shopping and, in some cases, switching production to hand sanitiser and other protective equipment.

Under pressure

Many companies had already fortified their supply chains in response to disasters such as Hurricane Katrina or the Fukushima tsunami, notes Yossi Sheffi, a professor at the Massachusetts Institute of Technology (MIT) and director of the MIT Center for Transportation and Logistics.

Geopolitical tensions further fuelled their efforts to improve flexibility and reduce risk and complexity. In an overhaul of its procurement and operations Nestle has reduced its supplier count by 10% and closed 24 production facilities over the past four years.

“FMCGs got used to working with a lot of companies,” observes Johanna Hainz, global head of retail at Maersk. Some use as many as 30 different freight forwarders for their logistics arrangements, she adds.

These numbers have been shrinking as FMCG makers look to streamline supply chains. Ms Hainz says they are more receptive to Maersk’s non-vessel offerings as the company is transforming itself into a global provider of integrated transport and container logistics. “There’s a lot of interest in our integrator strategy. Covid-19 has shown there is a lot of value in an asset provider combined with logistics, because we control all of it,” Ms Hainz says.

The challenge for organisations lies in simplifying large-scale supply chains while maintaining the ability to customise, which offers value for the consumer. “This agility that we aim for can coexist with the scale that we have,” says Gustavo Burger, head of operations, international zone, at Kraft Heinz. “Scale is our strength. Agility and flexibility can be complementary to that and they can coexist.”

New approaches

Two key elements to bridge this gap are technology and the development of supply chain ecosystems. The former ranges from the use of AI for demand forecasting to the establishment of a touchless operation. This has very flexible planning capabilities that can address daily cycles and variations in the supply chain.

Supply chain ecosystems bring in the elements that Kraft Heinz itself does not have, such as flexible last-mile capabilities and the ability to personalise products. In the UK, consumers can get ketchup bottles with their names on. The customisation happens at the end of the supply chain. This way the company can leverage its scale up to that point and then customise based on demand.

These ecosystems are built on partnerships with supply chain services providers that involve an element of risk sharing. Key to this is the understanding that the relationship is complementary, Mr Burger says.

Supply chain visibility and efficient data flows are essential. Ms Hainz points to a study of 30 FMCGs that identified visibility and synchronicity as the biggest pain points. Real-time visibility is still not very accessible and end-to-end visibility from the store all the way back to the first raw material supplier exists almost nowhere, she says.

Often, the flow of information is hampered by organisational constraints that limit personnel to give only information they are responsible for or have access to, she notes.

Mr Sheffi notes that silos exist inside companies that are opposed to more open data flows and an omnichannel strategy as they have historically been in competition with each other. These silos are now breaking under the pressure of the shift in retail that the pandemic has accelerated, he says.

Change for the better

Mr Sheffi is concerned that companies, bent on resilience and risk management are concentrating on revenue and cost while sustainability is slipping on the agenda.

At Kraft Heinz, Mr Burger explains how they are working hard to avoid this: “We are evolving our ESG [environmental, social and corporate governance] agenda as an integral part of our purpose in everything we do,” he says. “If what we’re doing isn’t helping the community, the planet, we’re out of the game. Sustainability is an investment, not a cost.”

Ms Hainz observes that although sustainability is a high priority for many FMCGs, carbon emissions are not always included in value calculations. Yet questions about the carbon footprint and sustainability efforts of logistics providers are increasingly becoming part of bids. To ensure customers have the option to reduce their footprint, Maersk offers a carbon-neutral ocean service that uses biofuel.

Scale is our strength. Agility and flexibility can be complementary to that and they can coexist.

Gustavo Burger
Head of operations, international zone, at Kraft Heinz

Disclaimer:

Produced by (E) BrandConnect, a commercial division of The Economist Group, which operates separately from the editorial staffs of The Economist and The Economist Intelligence Unit. Neither (E) BrandConnect nor its affiliates accept any responsibility or liability for reliance by any party on this content.

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