The world in a carton

Recalibrating the supply chain

Changes to product formulation may call for new approaches to how the nodes of supply chains are distributed.

“If your input is straw instead of oil, that changes who you buy from and where you build factories,” says Professor Shah. “If you make more concentrated products, that improves the efficiency of transporting products. It’s all connected, and supply chains need to be recalibrated to deliver against these changes.”

This can be a complex calculus. If the source of the ingredients changes from an oil well in the Middle East to a field in Brazil, there may be value in moving your factory closer to the source, or closer to consumers, or somewhere in-between with cost-effective labour. And there is unlikely to be a single ingredient at stake – there are often multiple options for making a product, with varying chemical routes depending on availability of different ingredients.

There is a balance to be made between cost of labour, transportation, and infrastructure. The Imperial College Business School has done much work modelling these supply chain decisions, allowing comparisons of low cost vs local, manufacturing cost vs product miles.

One project explored how new products formulations would work under different supply chain scenarios in East Asia, evaluating three strategies ranging from highly centralised to very decentralised. The exact formulation, and how close you are to those ingredients impact total costs, so the optimum balance of formulation and supply chain management needed to be reached.

Using sophisticated modelling techniques, researchers developed a framework to determine the optimal locations and capacities of plants, warehouses, and distribution centres. It looked at all relevant factors to minimise the total cost, including raw material, packaging, inventory, transportation, and depreciation.

In this case, the team showed that manufacturing the products at a centralised location, resulted in large economic supply chain benefits. This same modelling approach could be applied elsewhere, and may have different results depending on the variables. As products are reformulated and supply chains change, such modelling can help cut through this complexity to identify optimal location for facilities.

The circular economy

So far, this feature has looked at supply chains as they are now – linear entities that take raw materials from the ground (or sea), process them, manufacture them, deliver them to store shelves, to customers, and finally into waste facilities.

But as sustainability rises up the agenda, supply chains are increasingly looking more circular, as products reaching end of life are reused or recycled back into the supply chain, replacing much of the need for virgin resources. 

Dr Marco Aurisicchio, a Reader in the Dyson School of Design Engineering, is helping FMCG businesses redesign processes to harness the circular economy. This means rethinking the nature of supply chains, from how to capture products at end of life, convert them into useful materials, and feed them back into the supply chain.

“There are plenty of recyclable materials,” he says, “but this is rarely as good as it sounds.” Many products still end up in landfill, either because their parts cannot be easily separated (e.g. razors), a necessary step for current recycling facilities, or because people don’t put them in recycling bins in the first place. This is particularly problematic in countries without developed recycling infrastructure. Even when they are recycled, they are usually turned into lower value products rather that re-entering the same supply chain.

Dr Aurisicchio wants to help companies create a truly circular economy, where products are reused.

“Product design needs to think beyond the customer, to how to design economic, social and technical systems that source, transform and distribute materials in more sustainable ways,” he says. “This means considering the business case, the way people use products, and the technology to extract, manufacture and reclaim materials.”

He points to schemes like Loop, which in the UK partners with Tesco to deliver products in reusable packaging. Once they are used, the customer returns them, and Loop cleans them for reuse. “It’s not dissimilar to the way we once delivered milk,” he says.

Broadly, there are two such models. The Loop model uses ‘sequential reuse’ where the product container is constantly recirculated through shops and consumers.

The other is ‘exclusive reuse’, where the consumer buys and owns the container and refills it. Cleaning product manufacturer, Ecover, operates a scheme where users can refill their containers in supermarkets, while rival Splosh sends concentrated products direct to the consumer, who can mix it with water to refill their container.

These models need different thinking, says Dr Aurisicchio. “Waste prevention needs to be considered within product design and given equal importance to visual appeal and functionality. There needs to be a shift from just delighting customers, to also considering performance of product and resources across the lifecycle.”

That is a big change. Products will need to be designed to be easy to collect, reuse, recycle. Materials will likely shift from disposable plastics to durable steel or glass. The parts of supply chains that constantly source new virgin materials will ultimately need to be scaled down, and whole new systems developed to manage distribution, cleaning, and collection at a local level, usually involving collaboration with shops and delivery companies.

To support this, his team at Imperial are developing tools to help FMCG companies understand the opportunities to rethink product design.

One is the Flow Mapper tool. This easy-to-use tool, hosted in a virtual workspace, helps designers to map the lifecycle of a product, and explore where it falls out of circulation and what changes can be made to create a closed loop flow of resources.

It is designed to be a collaborative tool which brings together experts in engineering, design manufacturing, and recycling, to map out new approaches, then think through what such a product would look like.

“In large FMCG supply chains, no one owns the whole system,” concludes Dr Aurisicchio. The challenge is getting all stakeholders together and getting them to tackle the problem in a constructive way – this tool is designed to support that process in a way that is intuitive and collaborative”.

Better contracts

Supply chains don’t just feed into FMCG companies' products, but stretch beyond them. Optimising relationships with the vendors who sell their products – such as supermarkets – is equally important.

Eddie Anderson, Professor of Analytics and Operations Management at Imperial Business School, has been looking at optimal approaches across supply chains.

“The nature of supply chains,” he says, “is that everyone in them is looking at ways to maximise their own profit in a competitive environment. But this often leads to an outcome that is sub-optimal for everyone.”

He uses game theory to look at contract structures that would allow retailers and suppliers to both do better. In particular, his work explores complex sales environments with multiple competing products from different suppliers, such as a supermarket.

The conclusion of an upcoming paper is that, in many cases, the optimal contract model involves a fixed ‘franchise fee’ which the retailer pays to the supplier. This leads to products being purchased at a ‘cost plus’ price, where the retailer buys the products based on cost plus a fixed mark-up.

This is not a common structure. But Professor Anderson’s research suggests it works better than usual models, where there is an agreed price per unit with discounts for higher volumes.

Professor Anderson explains: “Take a supermarket. They have lots of different competing products. For each one they have to decide the optimal price point to maximise profit, balancing margin and sales volume. But each product’s pricing affects others. In some cases that is zero sum, for example, a toothpaste discount may redirect spending from one brand to another. In other cases a promotion – for example, of sun cream in summer - may lift a whole product category. Add to this, unpredictable events that affect buying habits, such as weather, competitor promotions, and we have a very complex network of decisions.”

“Now, imagine the retailer made all the brands they sell. This would allow them oversight of the entire supply chain and they could then set the ideal price point.”

The franchise approach Professor Anderson proposes allows them to recapture those same kinds of choices, since pricing follows real production cost, rather than wholesale price. While the reasons for this are complex, his work shows that this leads to marginal decisions being dealt with more efficiently.

“That maximises profit for both. The retailer can maximise margins, and the supplier makes money from the franchise fee, then everything else follows cost structures.”

In complex FMCG supply chains, there are so many components that it’s easy to focus on the value of each contract and lose sight of how they all interact. But in these complex environments, it turns out to be in everyone’s interest to structure contracts in this way. Professor Anderson is now keen to help FMCG companies use these findings to improve their contract decisions.

Imperial carries out world-leading research with applications to FMCG supply chains, and supports many leading companies. 

This feature was commissioned for the Imperial Business Partners (IBP) programme, part of Imperial's Enterprise Division. IBP provides curated access to the best of Imperial’s expertise, technologies and startups and give members practical, actionable insights to help shape the future of their businesses.