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Keeping in Check

European Supply Chain Management

January 5, 2010

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In these volatile times, it is paramount that Unilever responds quickly to shifts in consumer preferences as well as control costs, and it has found just the solution to ensure improved forecast accuracy.

Every day, 160 million people choose Unilever brands to feed their families and to clean themselves and their homes with well-known trademarked brand names in categories like spreads (I Can’t Believe It’s Not Butter), sauces (Ragu), dressings (Hellmann’s and Wish-Bone), beverages (Lipton teas), ice cream (Good Humor and Breyers), frozen food (Bertolli dinners) and personal care products (Dove, Suave and Axe). Unilever’s annual sales are over 40.5 billion euros in the Americas, Europe, Asia and Africa.

Paul Polman, CEO of Unilever, has stated that supply chain is a top priority for the company. In an article dated 12th February 2009 he wrote: “It is absolutely crucial that we strengthen our supply chain capabilities to win in market.” Paul stated that Unilever’s top priorities in 2009 are to reignite volume growth and protect cash flow and margin. An efficient and responsive supply chain is essential to these goals and can provide a competitive advantage in difficult economic times.

In the last 18 months, consumer products companies have faced new challenges as consumers and retailers reacted to a challenging economy. Prices of raw materials, energy and fuel increased, forcing manufacturers to pass these costs on to consumers through price increases while finding new ways to cut costs and improve efficiency. Consumers have become more cost conscious, seeking lower prices and turning to discount retailers and club stores in greater numbers. They have become more aggressive about making purchases on deal. In some food categories more than 60 per cent of every product sold is on deal, negating some of the financial benefit of any price increase. In a further effort to decrease expenses, consumers are beginning to trade down to private label and value brands. Retailers, facing cost
pressures as well, have responded by expecting manufacturers to hold more inventory and be more responsive, lowering costs for the retailers while forcing manufacturers to replenish shelves quickly and efficiently or risk losing sales.

These factors have made predicting sales considerably more difficult at a time when accuracy has become even more important. Companies like Unilever have had to explore new ways to forecast demand because traditional forecasting solutions, based on historical demand patterns, do not apply when consumer purchasing habits and retailer ordering procedures are changing.

Doug Sloan, director of supply chain operations for Unilever US, said: “Unilever selected Terra Technology’s demand sensing to gain supply chain visibility and improve manufacturing planning. In these volatile times, it is important to respond quickly to shifts in consumer preferences and control costs. Improving forecast accuracy enables Unilever to produce the right product mix, decrease costs and better serve our customers.”

Demand sensing uses pattern recognition mathematics to decipher daily demand signals and generate a more accurate forecast. By analysing multiple daily demand signals, the software determines true shifts in demand based on real world events in near real time. Each night the forecast is updated to reflect events that have occurred that day. The software enables Unilever to more accurately predict retailer requirements. It piloted the software in 2006 in its US Personal Care business for several months and reduced forecast error by more than 25 per cent for a four week horizon in the pilot.

How demand sensing works:
Demand sensing software provides near-term forecasting and is innovative because the software generally cuts short-term forecast error by 30 per cent or more. The forecast predicts shifts in demand before they occur, not weeks or months later. Because the software is designed to analyse the types of data that retailers and manufacturers have access to rather than just modeling historical sales, it increases the accuracy of planning significantly, up to 50 per cent for some manufacturers. Demand sensing uses pattern recognition mathematics to determine which inputs are predictive of actual shifts in demand. This intelligence in the software is extremely important because the amount of information provided daily is enormous, and not all of this information actually signals a true shift in demand. Demand sensing analyses all this information to use the relevant data to create an updated forecast.

For example, if Unilever is running a promotion on Dove at Tesco this week, shipments of Dove to Tesco will increase in advance of the promotion. Assuming that those increased shipments actually predict a trend of increased future demand is a mistake that a typical demand planning system would make. Once consumers have purchased their promoted soap they are done with that purchase for a while, so no new shipments are needed. Sales are more likely to be lower over the following week because consumers purchased in advance of demand due to the promotion.

Unilever
Unilever’s mission is to add vitality to life. The company meets everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life. Unilever is one of the world’s leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe. Its portfolio includes some of the world’s best known and most loved brands including Knorr, Lipton, Dove, Lux, Pond’s and Persil.

www.unilever.com

Terra Technology
Terra Technology is the leading provider of demand sensing and inventory optimisation software for consumer goods companies. Terra’s solutions incorporate demand signals from throughout the supply chain and reduce forecast error by as much as 50 per cent and safety stock as much as 20 per cent. More accurate forecasts and inventory targets improve customer service, lower inventory investment, decrease unplanned changeovers and reduce costs. Terra’s customers include Campbell Soup, Procter & Gamble, Unilever and Ventura Foods.

www.terratechnology.com