Summary
Highlights
Unilever's Supply Management Leadership Team (SMLT) convened in Zurich to address skyrocketing commodity prices, tasks with devising innovative commodity procurement approaches. The goal was to understand Unilever's market exposure and mitigate risks without compromising buying performance or supply reliability.
Operating in 150 countries with 206,000 employees and a 2005 turnover of 39.7 billion EUR, Unilever boasts global brands like Lipton, Knorr, Lux, and Omo. CEO Patrick Cescau's 'One Unilever' vision aimed for underlying sales growth of 3-5% and over 15% operating margin by 2010, highlighting the company's commitment to sustainable growth a competitive global market.
Unilever's Supply Management (SM) handles a diverse range of commodities, including food ingredients (sugar, milk powder, cocoa, oils), chemical products (caustic soda, alcohol sulfates), packaging materials (plastics, aluminum, cardboard), and energy (electricity, natural gas). With an annual expenditure reaching billions of euros, SM's role is critical for profitability, especially with recent commodity price volatility.
The SMLT initiated a pilot project focusing on plastics procurement to revolutionize risk management. Plastics, integral to Unilever's packaging, saw significant price volatility. Unilever's 2006 spending on plastics was 400 million EUR, with price volatility reaching 25% within the year.
Unilever's SMLT faced the complex decision of whether to engage in risk hedging for plastic resins, potentially involving crude oil positions. Analysis suggested that a modest 1% allocation of total HDPE spend could significantly reduce maximum expenditures. Key questions included the suitability of a financial hedging approach for SM, its extension to other resins, decision-making responsibility (SMLT vs. Unilever Treasury), establishing robust controls to prevent speculative endeavors, and leveraging hedging insights to enhance buying performance and contracting.
Unilever's strategic approach is built on a resilience framework: (1) Strategic material selection focusing on high-demand, volatile materials, (2) Monthly check-ins for proactive risk identification (financial, compliance, natural disasters, geopolitical, cyber threats), (3) Composite risk scoring for a clear risk landscape, (4) Strategic negotiation contracts leveraging hedging insights, (5) Financial resilience through hedging (e.g., 1% HDPE spend reducing maximum expenditures), (6) Hedging as a performance booster for overall procurement, and (7) Informed decision-making based on a structured hedging strategy.