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Outsourcing Improves Unilever's Distribution, Gives Logistics Provider A Foothold in Brazil

December 1, 2000

The global consumer-packaged-goods manufacturer Unilever has a long and well-established presence in Brazil, where four factories produce a variety of brand name home and personal care items under the corporate name Gessy Lever. For many years, a decentralized distribution system with numerous warehouse facilities served this market well. In 1997, however, Gessy Lever began to notice the impact of supply-chain improvements being adopted by its customers.

"Our key accounts were beginning to ask for different services and delivery alternatives," says Alejandre Eboli, solutions development manager. "For example, the French retailer Carrefour was starting to route all of its deliveries through a central warehouse, so that we delivered to the warehouse instead of to each of their stores. This meant that a good part of our volume that was positioned in cities far from our plants would now be moving to a single, different location and requiring specialized service."

Another example he cites is a local retail chain that began requiring Lever to re-palletize all the product it shipped. "And there were many other examples, such as customers wanting scheduled deliveries during specified windows, EDI transaction capability and so on."

In addition, customers were expressing dissatisfaction with Gessy Lever's order fulfillment rate. With Lever's 26 warehouses being stocked based on sales forecasts that often were at variance with actual sales, the company too often had product in the wrong place, Eboli says.

These issues, he says, "drove us to look for some new logistics models and different distribution solutions."

During this evaluation, one of the first decisions taken was to combine the previously separate distribution networks of Gessy Lever's two business units: home care products and personal care products. The two had been separated in the early 1990s, Eboli explains, because their product and business profiles were quite different, with home care having very high, fast-moving volume and personal care having low, slower-moving volume but with rapid growth. After separation, the two units had developed completely different distribution networks with separate DCs and management. Gessy Lever believed that by re-joining the two distribution efforts the company could gain efficiencies and improve service.

At approximately the same time, Gessy Lever decided to outsource its combined home and personal care (HPC) distribution in a project that would include a total network redesign. Its goal was a solution that would significantly improve operations in the short term while ensuring continuous improvement in coming years.

Exel Logistics was tapped as the outsource partner for this job after a selection process that involved several competing proposals. In its favor, Exel already had a longstanding relationship with Unilever in the U.S. and Europe and, more recently, in Mexico. It did not, however, have any operations in Brazil.

While this clearly created challenges, Exel saw a tremendous opportunity in an area the company had targeted for growth - southern South America. "We generally have our sights on Argentina, Brazil and Chile, and this gave us a really great entry into Brazil, which could be the jewel in the crown," says Joe Puelo, Exel's vice president, operations, Americas. "Brazil is by far and away the largest economy in South America and the largest consumer country, so this not only represented an opportunity with a big customer, it represented an opportunity with a big customer in a key marketplace."

Having no existing facilities or experience in Brazil added to the difficulties of start-up, however. "It is a long plane ride between Brazil and our base of operations [in Columbus, Ohio], so there were some difficulties just because of sheer distance," says Puelo.

"This not only represented an opportunity with a big customer, it represented an opportunity with a big customer in a key marketplace." - Joe Puelo of Excel


And in the beginning, language and cultural differences created some roadblocks. Both Eboli and Puelo recall a meeting early in the process in which the Brazilian team expressed "disappointment" with Exel's performance. "Here in Brazil, 'disappoint' is not such a hard word," says Eboli, but the Exel people took it to mean Unilever was not happy with the way things were going. "What they were really saying is that what we were doing was not exactly what they wanted," Puelo says. "There were a few instances like this but the Brazilians' English is very good and we pretty quickly worked out our communications issues."

Working out some of the commercial issues was more trying. In addition to having no practical experience in Brazil, "this was a very large and complex project," says Puelo. "What we were talking about was completely redesigning the network, combining two companies into a single supply chain, constructing a large facility with some features that I think are unique to the Brazilian marketplace, and bringing in a new system with new functionality to manage the whole thing."

The bottom line is that Exel had a lot to learn relative to the legal aspects of doing business in Brazil, he says. "The whole commercial and contractual issues were far more complicated than I think any of us would have initially suspected."

That's where the depth of the partnership came into play. "We really worked as a two-company team," says Eboli. "Exel provided a lot of expertise and really drove us, but the people at Gessy Lever helped a lot in providing local knowledge and information about the rules of the game here in Brazil. I think that one of the key learnings that we are taking from this process is that there is a kind of two-way knowledge growth that occurs. When we called on Exel to be our partner, we were looking for a lot of expertise, but we could never forget that there are a lot of local points and a lot of specifics on the Brazilian market that we had to add to Exel's knowledge. And this sharing of knowledge, I think, created the right kind of environment for sustainable long-term growth."

Puelo strongly agrees. "I've got to tell you, this got really difficult and we had some very tough times," he says. "But at no point in time did anybody from Exel ever have the slightest concern or suspicion that Unilever was absolutely and completely dedicated to both this project and to Exel as a partner. So even through the toughest of times we knew we had an honest-to-goodness partner and we continued to work in a team-based way to overcome every hurdle that came along, and sometimes it seemed like there was nothing but hurdles."

One illustration of both these points came during the designing and optimizing of network product flow. Exel initially failed to take into consideration customer preferences that were based on the peculiarities of certain tax laws. These laws make it advantageous for a customer in one Brazilian state to have the products it receives originate in another state. "Exel had done a great job but we had to ask them to go back and make changes to meet customer expectations due to these taxation issues," says Eboli.

Phase One
The first phase of the project focuses on the central region of Brazil, an area that covers approximately 500 kilometers around Sao Paulo, Brazil's largest city. This region includes Gessy Lever's four plants and 80 percent of its sales volume.

At the heart of the central network is an 800,000-square-foot Master Logistics Center (MLC) in Louveira, located northwest of Sao Paulo and near the plants. Exel managed the site selection and acquisition for this facility through its real estate services group. The company also provided construction management services, leasing back the facility from the developer after construction was complete. The MLC began operating in October.

In addition, the network includes three merge- or cross-dock facilities (in Rio de Janeiro, Marilia and Curatiba), three integrated distribution centers and one regional distribution center, all of which will be managed by Exel.

Each facility plays a specific role in the network. The MLC receives slow-moving products from Gessy Lever's four plants, products manufactured by third parties, and all imported products. It also has the additional role of serving as the DC for Sao Paulo City.

Fast-moving products are forward deployed to the three merge-dock facilities direct from the plants, generally via full truckload shipments. Slow-moving SKUs are transferred overnight from the MLC only when an order requiring them is received. The merge-dock is designed to efficiently combine the fast- and slow-moving products into a single order for delivery.

The integrated distribution centers will distribute full, palletized truckloads of fast-moving product directly to customers. They also will replenish the MLC, the merge-docks and regional distribution centers outside the network.

Puelo declines to name the software being used to run the network, but says that it is RF-based and will manage activity at the MLC, the merge-docks "and the interaction of product flow in between." The MLC is not highly automated, however. "The profile of our operations does not require a lot of bells and whistles," says Eboli, noting that most movements are of full pallets. He adds, however, that Exel has introduced new processes inside the facility "that already have contributed a lot" to improving operations.

When the MLC opened, Gessy Lever closed its largest warehouse and five satellite warehouses. Other closings will occur as the new network continues to be implemented.

"The best feedback we have from the implementation that began Sept. 20 is that everything has continued to run OK," says Eboli. "This is very important because in addition to all the innovation we are bringing, the business must continue to run and we have to keep shipping." Full implementation is expected to be completed in December 2001.

It is too early to have any measurable results from the network redesign, but Eboli says he fully expects to realize stock reductions and improvements in order fulfillment. "By centralizing product at a single point close to our plants, close to our biggest consumption area of Sao Paulo and close to the merge-docks, our fulfillment rate will increase significantly, which addresses the most relevant feedback we were receiving from customers."

In addition, he says, "we already have in place a transportation strategy that uses a dedicated hauler to make runs between our plants and the MLC in a broken loop system, which is working very efficiently." A second hauler delivers to Sao Paulo City and that system also is working well, he adds.

From Exel's perspective, Puelo says there were many lessons that the company may apply to other accounts and other geographies. "I think we developed a pretty neat way of dealing with the issue of sourcing capital assets in Brazil that may have application in other parts of the world," he says. On the Gessy Lever project, he explains, Exel worked with a third-party financial organization to arrange funding for the purchase of capital assets in such a way that neither Exel nor Unilever had to declare those assets on their respective balance sheets. "The proof will be in the pudding, but we are working that angle right now" with another account, he says.

Exel also hopes to leverage its foothold in Brazil with other clients, most likely by applying a campus strategy that will enable similar manufacturers to share warehouse and transportation resources. "Through our increased presence in Brazil we are able to create opportunities for other manufacturers who want to penetrate this market," says Puelo. "Brazil represents a major opportunity for consumer products manufacturers."

Exel CEO John Allan Talks About Merger With Ocean Group

When the merger of Exel and Ocean Group, two U.K.-based global logistics providers, was announced earlier this year, John Allan was tapped as chief executive officer of the new company, which kept the name Exel. He previously was CEO of Ocean Group, the parent of MSAS Global Logistics and Mark VII Transportation, among other companies. Allan recently talked with Global Logistics & Supply Chain Strategies about the new $5.8bn company.

GL&SCS: How is the job of putting these two companies together going?
JA: The task is very well advanced now. This situation was different in that it was a merger of equals rather than one party taking over the other party. That meant that we devoted quite a lot of effort to sitting down and working out how we could bring these companies together in a balanced and fair way. The first stage was putting a management team together and we did that by drawing virtually equally from the old Exel and the old MSAS. It was decided that I would take the CEO slot, but the chief financial officer came from the other side of the house, and so on. We have, of course, been applying merit tests to all of the appointments we have made, which now total about 500.

Secondly, it was important to get an organizational structure that would work as far as customers were concerned. The vast majority of customers I talked to in the run-up to the merger thought it was a great idea in theory, but they said, 'just don't mess up our business in the process.' So we were very keen to derive our structure from the customer end, which is why we have organized around industry sectors. Doing that meant, by and large, that people who were managing customers were undisturbed. I don't think there is a single major customer who has seen key people departing from the management of its business in a way that would cause them concern. On the contrary, what we have seen is other people arriving and strengthening the team to enable us to offer a lot more.

The third thing was just determining to get on with affecting the merger very rapidly. We announced on Feb. 21 or 22 of this year and the merger was actually legally completed May 4. Within two days of the merger taking effect we had announced the senior management team, so there was not a period of uncertainly where people did not know how things were going to be run. We moved very quickly with systems integration and a common e-mail system. The major thing was to resolve to get on and make it happen very quickly so that people were preoccupied with internal issues for the shortest possible time and could get back to focusing on customers. For me, one of the most pleasing statistics so far is that through the first half of this year, when we were going through the announcement, clearance and finally completion of the merger, our business grew organically by nearly 15 percent. If customers had not been properly looked after, or if they had doubts about the wisdom of the merger, they could easily have withheld additional business from us, even if they hadn't chosen to take current business away. In fact, over that period we had almost no customer losses and a very strong show of customer gains and that has continued into the third quarter of this year as well. Customers seem to be voting with their feet and saying, this combination actually gives them the sort of things they want.

GL&SCS: What do you think customers see as the greatest advantage to the merger?
JA: I think we have been able to combine MSAS's ability to offer effective global coverage with Exel's ability to develop and implement complex solutions for clients. So we now have solutions capability, which Exel certainly had in much greater depth than the old MSAS, together with an ability to deploy almost anywhere in the world. Certainly the ability to meet customers' needs wherever they have those needs is a vital part of our value proposition.

GL&SCS: Can you give us a profile of your typical global customer?
JA: Most of our global customers are U.S. multinationals and a small number of European multinationals like Nokia and Ericcson, in technology, telecommunications, automotive, and to a lesser extent, consumer products.

GL&SCS: Those areas represent the industry verticals you have organized around?
JA: We have used a combination of industry verticals and geography. Automotive decisions are largely being taken globally so automotive is one of our divisions. With technology and telecommunications, you are again dealing with global customers, but because we have so much business in this sector in Asia, we actually have subdivided that in two so that we have an Americas/Europe piece and an Asian piece and they work very closely together. In that same division we also have included the old MSAS freight management business because so many companies we work with there have combined the logistics and freight management pieces. Another division is consumer/retail and a much smaller but fast growing healthcare business. We have split that in two as well, because although we are dealing with global customers, we are typically taking solutions on a continent-by-continent or even country-by-country basis. So we have a consumer, retail and healthcare division for the Americas and one for Europe.

That's the five: two for technology and global freight management, two for consumer/retail and healthcare, and the automotive business, which is purely global.

GL&SCS: Did Exel and MSAS have many customers in common?
JA: Very few where we were doing the same thing in the same geography. I can think of one or two cases in the U.K. where we had common customers, but mostly we were either providing different services - MSAS providing freight forwarding services in Asia and Exel providing logistics in North America, for instance - or we were providing the same services in different geographies-Exel working with Procter & Gamble in the U.S. and Mexico and MSAS working with P&G in Spain. We don't think there was a single customer who got uncomfortable because we might now have so much of their business. The reality is, we have a very powerful set of relationships with customers-we work with about 70 percent of the world's top 250 non-financial corporations-but in many cases we have very modest shares of their logistics spend. So, if we are good enough to deserve it there is a lot of headroom for us to grow and that is going to be our prime focus-on doing more business with companies where we already have relationships rather than finding brand new customers. Obviously we are not going to turn any new customers away, but we will mostly be focusing on existing customers.

GL&SCS: In what sector do you see the greatest growth potential for the new company?
JA: I think it will be in the technology space. We work with a number of very fast growing customers, companies like Nokia that are growing at up to 60 percent or more per annum, and we are doing more and more for those customers. We really have two avenues for growth - to grow along with them and to grow by providing a greater share of the logistics support that they need and I think it's likely that our fastest growth will come from the latter. Encouragingly, there are growth opportunities in all of our divisions. At the moment, our automotive business is growing very fast and that is not because the automotive business worldwide is particularly buoyant. It's because we have a particularly competitive offering which is enabling us to win more business.

We believe that companies will increasingly rely on outsourcing, not just in North America but on a global basis. This is happening on two levels. You have companies that are going global for the first time and that go straight to the outsource model. And in other cases companies that have long been established internationally are switching to outsourcing. Unilever in Brazil is a good example of that. (See accompanying report.) Unilever does about $2.4bn in Brazil and has been there for more than 50 years. But we were invited to contribute a solution and manage that solution. It was a very interesting project because it meant taking a completely fresh look at their whole distribution system, and it was flattering that they entrusted it to Exel, which at that stage had no operating presence in Brazil. That is the sort of complex business solution, in one of the more difficult geographies, that I think the new Exel is particularly well set up to provide.

GL&SCS: Do you expect to see similar type mergers among other competitors?
JA: I think it is happening. Customers are sending all of us very straightforward and very simple messages about providing a global service so we all have the same sort of imperatives. I think there are others who will be seeking to achieve global coverage and they are going to find it difficult to do without some process of consolidation.

I think it's fairly obvious where some of the players are emerging. Deutsche Post is certainly one, but I think it's equally obvious that they are going to have to add some more pieces to be truly global in terms of logistics. They don't have a strong logistics presence in North America, so you don't need to be too smart to recognize they will be out looking for a U.S. firm at some stage. TPG, the Dutch Post Office, just bought CTI. That's a good business and makes TPG a much more serious player in North America. I'm sure there are folks in other firms who are on the same track, and my guess is that customers are going to want to see several strong global players, so I think the market will stay competitive. That's good because it keeps us all on our toes and means we have to keep improving.

So I guess what we anticipate is that three to five serious global players will emerge over the next few years. We're determined to be one of them.