Mumbai: Hindustan Unilever Ltd (HUL) is reacting faster to competition and market trends to avoid being caught unawares by events such as the volatility in raw material prices in 2008, even as it plans aggressive expansion.
India’s largest consumer goods maker by revenue has adopted a strategy to defend and raise market share by increasing production capacities, reducing inventory levels and improving the percentage of orders satisfied from stock at hand, resulting in better service and volume growth.
“We have taken a number of steps organizationally,” said Pradeep Banerjee, supply chain director, HUL, and one of the executives at the centre of the change process.
Given the increased number of new launches and promotions, business teams across functions from planning to production and sales are involved in the introductory exercise, Banerjee said. Such moves reduce the amount of old inventory lying with retailers and get new innovations to market faster.
For instance, its Silvassa detergents factory turned a single assembly line into a twin track last year, doubling output, after some modification of the machines. The process has been replicated on two more lines in the unit and follows the principles of kaizen, the Japanese management philosophy of constant improvement based on a common-sense approach and the use of cost-effective techniques.
The effects have been dramatic: HUL has seen overall machine production levels improve from 75% in 2009 to 92% in 2010; a reduction in defects per 1,000 pieces by 50% and a drop in wrapper wastage by 70%.
The twin-line innovation has helped meet demand “without the need for investing in newer machines”, said a company spokesperson. The installation of new capacities follows an increase in sales in the last six-eight months.
HUL works “on volumes and their competition is regional and national”, said Shirish Pardeshi, industry specialist, institutional equities, Anand Rathi Financial Services Ltd. “Smaller batch sizes and flexibility in production help it to respond faster to volatility and competition.”
The changes mark a new aggressive phase at the company, which has been in India for over 75 years.
While sales volume rose in the March quarter, according to market researcher The Nielsen Co., HUL lost market share on a year-on-year basis in most categories—except shampoos—in the first two months of the fiscal. Banerjee, though, is planning ahead for the next 18-24 months, adding capacity.
“Will we sell 1 million tonnes of laundry? Yes, we will. Will we sell 2,000 tonnes of tea? Of course, we will,” Banerjee said. “These are all indicative numbers, but they indicate a change from the past and indicate substantially more than what we have got at present.”
HUL sells 2 million tonnes of products a year through a primary distribution network of 2,600 distributors. It has a portfolio of 1,500 stock-keeping units, or different-sized packs in 61 formats. The maker of Surf and Rin detergents and Sunsilk services one million retailers directly and reaches six million indirectly.
The 2008 collapse in the price of crude oil, a key input, to $40 from $140 a barrel led to HUL being stuck with high levels of old inventory, while rivals were quick to take advantage and launch cheaper products. The company lost some 5 percentage points of market share as low-end, cheaper detergents were launched on the back of the commodities market volatility that year.
Volume growth fell 4% in the quarter ended March 2009, having risen 10% in the year-earlier quarter. Volumes have since recovered to 11% growth in the quarter ended March 2010 because of price cuts in key categories such as laundry, soaps and shampoos, besides a 39% increase in spending on advertising in the quarter.
HUL has also improved its customer order fill rate—a measure of an inventory’s ability to meet demand—and speed to market.
“We have reduced the finished goods and raw materials in the chain dramatically by 30-40%, which means lesser working capital, faster response and better service,” said Banerjee. This effectively means that the number of days that stock is held has dropped to 60 days from close to 90 days.
The delivery of orders “has improved from 75-76% to 90% over the last 12-18 months,” Banerjee said.
Additionally, if it earlier took the company 70 days to land a product in the market, it can now do so in 35 days. “In the last five-six months, we have reduced the time by 50% in half of our networks, and we are looking at further halving this,” Banerjee said.
Over the last year, HUL has relaunched 80% of its portfolio, making sure that prices reflect market trends.
HUL has also sought to improve its fill rate, a measure of stock availability with distributors.
“At any given time, the stock we have is not older than one-two months and, with full range availability, it improves sales pick-up,” said Suleman Hussain, proprietor, Sunshine Agency, an HUL stockist in Mumbai.
Traditional retailers account for 90% of overall business, while modern formats account for the rest. At the end of 2009, the company started expanding its distribution reach. “We expect to triple rural coverage and improve urban coverage by 15%,” it said in its annual general report released last week.
Brokerage Sharekhan Ltd said in its quarterly preview report that it expects the firm to post growth of 9.2% in revenue and 5.6% in net profit in the April-June quarter. Higher raw material costs and advertisement spending coupled with lower sales realization in the soap and detergent categories will affect overall profitability, it said.
Food inflation and higher input costs will hit growth and profit at consumer goods companies in the three months ended June, Mint reported on Monday, based on a survey of four brokerages. Earnings will, however, be shored up by rural markets, thanks to welfare schemes and higher incomes from rising commodity prices.