Unilever Faces Tough Decisions as It Seeks to Streamline Its Supply Chain

For several years running, Unilever (NYSE: UL)has conducted a global rationalization of its many brands and products under the general assumption that reducing complexity can boost profits.

In this segment from Industry Focus: ConsumerGoods, Motley Fool analyst Vincent Shen is joined by senior Fool.com contributor Asit Sharma to discuss what this undertaking looks like on the manufacturing side and the impact SKU reduction can have on the supply chain.

A full transcript follows the video.

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This podcast was recorded on Oct. 12, 2016.

Asit Sharma: One of the ways that Unilever and other companies benefit once they trim those SKUs is that their manufacturing setups become more profitable. So again, some learning today -- companies have what are called manufacturing lines. That is, when you go into a plant you can imagine that not every product has its own manufacturing line, else we would have factories taking up most of the square footage on Earth. But similar products lines and manufacturing setup is a process of preparing several products to run through lines either individually or ganged up together. So if you can take, to use an example, a package of cereal and reduce the sizes of those boxes or the numbers of sizes that you offer, that is, then you can make that one manufacturing setup, which is there to produce those boxes, more profitable.

And those of you who are familiar with manufacturing will understand that the company itself may have part of the manufacturing process, but every multinational conglomerate has to work with a series of smaller suppliers and they have their own manufacturing setups to produce one product. So you can see this trimming of SKUs reducing the complexity of the operation, and this is a big thing that industry people talk about. It's not just shrinking or reduction, it's the reduction of complexity, and Unilever is really bent on doing that.

Vincent Shen: Yeah, I think ... let me just jump in there really quick. The thing that really surprised me is when they talk about this project, the fact that the amount of work that they had to do with their partners. It wasn't just this internal process that the right managers in departments could implement unilaterally. They had to work with their marketing teams that had previously invested resources and time into certain projects, excuse me, and products and SKUs. And then also their retailers, for example, you know the companies that they distribute their products to are concerned about making sure their shelf space is the way they want it to be. And that the products that Unilever is providing them -- you know a huge supplier, I'm sure, for a lot of these retailers -- that basically they can still optimize their shelf space, what they keep in stock, in their stores based on these changes. And some of them very radical that Unilever was making.

Sharma: That's an excellent point. We're going to talk about our second company, Procter & Gamble, in a moment, but P&G's CEO recently made that point on an analyst call, and he said that when they talk with their retail partners, that's one of the major things that CEOs of their retail partners are telling them is, "Hey, reduce this complexity."

And you know, we're in a political season. Elections are coming up next month, and one of the things we can extrapolate from what you just said, Vince, is that this can be a really political process. You can imagine if a marketing team has worked two years on an innovation and another management part of the company looks at this product that marketing team has pushed forth and realizes that logistically it's very hard to produce, and you have teams tussling over whether a product stays or goes. And the companies which are successful at SKU rationalization understand that they, at the end of the line, are responsible to shareholders, to earnings per share. So they have to make some tough decisions, and this often means reducing suppliers.

I'm going to give you another eye-opening statistic. We talked about Unilever reducing SKU count by as much as 20% as a multiyear goal. The company also wants to reduce the number of its suppliers by 35%. And these two goals are related; it may be a little scary to have a revenue concentration with a huge corporation like Unilever or a smaller sub-manufacturer and understand they are looking, not just to trim the SKUs, but to trim the number of people they work with. But again, this serves shareholders' interests, it reduces complexity, and reducing complexity reduces costs, which boosts net income at the end of the day.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.