#198: Danone and the 4Cs of Supply Chain Excellence

Thank you, Radu, and very glad to be here, of course.

Yeah, I think before going on to inflection points, Radu, what I would really like to share is that I feel I've been privileged in my career. I've been privileged to work in different parts of the world, which has enabled me to get a very good understanding of how to relate to different cultures and how people's minds work in different parts of the world, in a very international sort of a way. And secondly, I've also been privileged that at least for the last 20 years, if not before that, I've always worked in multifunctional business teams as the supply chain person but as part of a multifunctional business team, and that has really enabled me to grasp better as to what is really the role of supply chains in furthering the interest of the business.

And you know, we did that book together which was on Source to Sold, and I think I've talked about it here also about some of the stuff which I have learned. But I think if I just go back to the inflection points you're saying, and I think the first one for me was that I was in the factories. I spent the first 15 years of my career growing up in factories, and my last role over there was as a factory director of multiple factories in a cluster. And as you know, a factory director operates very strongly with a chain-and-command kind of leadership style—it has to, because that is the way a factory is structured. And then suddenly from there I moved to a regional role which was more of a staff role, and there was nobody except me and my laptop to do that job. And then I learned in that—it was very, very uncomfortable in the beginning—moving from a very structured factory setup to understanding how I can deliver value in a staff role. And then I learned over there how you could influence people and how you could get them onboarded with what you want to drive. And of course, the key learning which came out of that was that more than any rank or any chair which you're sitting on, it's the merit of what you say which enables you to get traction in the company. So I think that was the first one which sort of enabled me to influence things in a much more influenced and merit-based manner than authority-based manner.

The second one which I would say is we started a project many years ago on a backward integration project on palm oil derivatives in Indonesia. When I started looking at the project—I was leading procurement for Asia-Africa at that time—I was merely looking at it from the point of view of delivering some savings: how can I backward integrate and do something which will help me capture the supplier's margins and I will save some money. But as I got into that project and as I started consulting more and more people from the business and my colleagues in R&D, then I realized that this is actually a growth project. And the reason it is a growth project is that by backward integrating and getting the technology in-house, it gives my colleagues in R&D the liberty to experiment with the ingredient that that would produce and use that for delivering superior benefits in the finished products to the consumers, which is an angle which I hadn't realized. So that business which I had set up in—when was it now—2011, is a roaring business now. Very, very successful—not in terms of just the cost value which it has delivered, but successful in putting products in the market which are far more differentiated than any competition. Maybe that's something which plays to your question of how do you create business value in the supply chain.

And the third one which I would take is a more recent one in Danone. Over the last two years we have been able to improve our customer service level by 500 basis points and still improving, in terms of our customer fill rate. Immediately does translate, or a part of it translates, into volume growth because essentially you are delivering to the shelf faster and you're delivering it in time. You're not allowing the shelf to run dry, so you're selling more, very simply speaking. Well, it doesn't mean if you improve by 5% it is 8% volume growth because there are stocks in between also. But whatever empirical correlation you can use, all that I would say is that it definitely has contributed to the turnaround in volume growth which Danone has seen over the last two to three years.

Yeah, it's a very vast supply chain, Radu, with in-country presence in 35 countries around the world, and then additional 20 countries where we do business on an offshore basis. There are—out of 100,000 people who are in Danone, half of them are in operations, so 48,000 to be precise work in operations, which of course includes the factories and some part of distribution and so on. We have a huge network of suppliers, which is 50,000 suppliers and key partners all around the world. We have 150 production sites again all around the world, with a concentration in Europe and in the US, but nevertheless also in countries like Indonesia and Mexico. We have got more than 300 distribution centers, usually operated by 3PLs or 4PLs. We serve 1.5 billion customers. We produce and we ship 35 million tons of products every year, branded consumer goods, which in terms of volume would make us one of the largest in the foods industry. And we also operate one of the largest chilled supply chains in the world, basically for our dairy business.

So we operate across three big categories. One is the essential dairy and plant-based—both go together, we put them together because there is a lot of people who are flexitarians. The second one is waters, which is a combination of plain waters like Evian, like Volvic, like Aqua in Indonesia, as also functional waters like Mizone in China. And then the third category, which actually people don't generally associate with Danone but that is nearly a third of the company, is on specialized nutrition, where we operate on infant milk formula, adult nutrition, and medical specialities.

What really inspires me about working in Danone is how we link business performance with an external responsibility. Corporations have a dual purpose—they have a purpose for economic growth, but they also have a purpose for being good to the environment and being good to the society and doing things which help people become healthier, doing things which make the planet a better place to live in. And that is why it is also embedded in our motto, which just says very simply, One Planet, One Health. And that is really what inspires us, which drives all of us, not just me, into putting out products over there which make people healthier and which come at a minimum impact on the environment from the resources that we draw from it.

Yeah, so first of all, any strategy that we prepare which we have in operations has to be intrinsically linked to the company strategy or the business strategy. And our guiding principle over there is the Renew Danone strategy which Antoine launched soon after he had taken this over as the CEO. And it's actually very simple—it's about winning where we are and then expanding ourselves into areas where we have a right to win. It's about managing a portfolio, and it's basically a very, very simple growth-oriented strategy. So moving from there, we have the operations strategy which is closely linked onto that.

So what is our goal? Our goal is really to drive greater impact on the business through the supply chain, drive excellence, drive efficiency, and make ourselves more sustainable throughout our end-to-end supply chain—not alone but with our ecosystem of partners. So this has led to a relentless focus on customer service. We have made strategic investments on capacity creation. We have stepped up our cost productivity level to where I believe that we are in the top 10 percentile of the industry. We used to be, till two, three years ago, let's call it the bottom 50 percentile. So that's really enabled us to generate more fuel of growth. We have improved the gross margins, enabling more investment behind the brands, which in turn generates more volume growth, which in turn reduces your fixed cost base. So we've been able to catalyze that virtuous circle of growth as people often refer to it—you reduce your cost structure, you expand your gross margins, you put more money in your P&A, you grow the brands, you get the benefit in terms of volume growth, and then the whole circle keeps repeating itself virtuously. So I do believe that we have been critical catalysts in putting the company into that virtuous cycle of growth.

And how have we done it? I think first and foremost is what I call the four C's. The first C is about cost competitiveness—both words are important, cost and competitiveness. Second one is around cash. The third one is around customer service—I'll talk about customer service a bit later again. And the fourth one is around carbon. So: customer service, cost, cash, and carbon. Now, if you ask any of my peers in the industry, anybody who is in an equivalent position in the supply chain, probably they will all talk about the same thing in slightly different words. Maybe there'll be somebody who will talk about 3 C's, somebody will talk about 5 C's or 5 S's. It doesn't matter—it's essentially the same things that all of us are working towards in operations, in supply chain. The trick is how widely and how deeply and how quickly do you deploy it in the organization, and that is where I believe that we have had a contribution to make in terms of impact. Two, two and a half years, 10 quarters, is not a very long time in the lifespan of a supply chain which is so vast. So where I really feel good about and proud of my team is how they have in such a short period of time been able to deploy these four Cs with a completely discontinuous performance benefit coming in across all of them.

Yeah, I think what you decide to do in the supply chain, at least in the short term, has to be very aligned to where the business is facing a challenge in the short term. So specifically in the context of Danone, when I joined, 2022 was a year of very high inflation, and the world was also just coming out of COVID, and there were multiple disruptions like the war in Ukraine and the sea freight crisis and so on. So it was having two effects: one, very high inflation; second, disruption in supplies. That is why in the short term we said, okay, forget about everything else for now—let's give ourselves one year to just fix these two. Because if we don't fix these two, we will never earn for ourselves the license to invest for ourselves for the future. And that is why in that year, in 2022 itself, with inflation being at an all-time high, especially in Europe, we also went to an all-time high on cost productivity. We also went from a huge benefit on customer service, which was not just about making sure that there is a customer order and you supply to it in a more agile manner, but it was quite structural, because we started going into tier 2 and tier 3 suppliers to ensure that we safeguard our supplies much more upstream than from our own factory alone.

The problem which was happening in 2022, it's not—so for example, if there is a packaging supplier, he's not able to supply packaging not because he doesn't have the capacity, but he's not getting the aluminium foil which goes into that packaging. Why is the aluminium foil supplier not being able to supply? Well, he's not getting the aluminium ingots. Why is he not getting the aluminium ingots? So like that we had to trace it back and say where really is the pinch point to bring it back. So I think that's my answer to the first part of your question on short term. But at the same time, if you just keep managing the short term all the time, because supply chains will always have some disruption somewhere or the other—sometimes it's here, sometimes it's there. We deal with a world which is becoming increasingly VUCA. We deal with economic policies by countries being changed every other day. So at the same time, we took stock of the situation and started investing in long-term initiatives such as digitalization of operations, which is something which we are quite advanced with now. We started late—we started this two years ago—but I think we have managed to get the benefit of all the learnings in the industry and leapfrog many things by doing that. We started understanding on decarbonization of the supply chain. So like that, not just managing the immediate, we started putting capacities which stimulate growth, and I'll come back to that in a bit of time. So we were therefore not just rising up to the business challenge, but at the same time we were also investing in our future. If we stop doing that, then year to year you will just continue fighting what you see are the adverse challenges developing in a macroeconomic environment.

Yeah, I think firstly, it is—it's a very simple thing about just making sure that you respond to the customer as the end-to-end supply chain. You're able to work with the customers collaboratively to forecast the demand better, you're able to plan your inventories to that forecast, and you're able to plan your production to that inventory, and you're able to plan your suppliers into materials to that production schedule. So I think it's first of all about making the whole end-to-end supply chain sync together in a synchronized way. I mean, it may sound simplistic, but a number of times when this does get broken, it takes a lot of time to start fixing it.

Secondly, it is to understand that it is not just enough to be delivering to customer orders, and people talk about 90% customer fill rate, 95%, and all that. That's great, and that is the fundamental foundation that you must get it into the high 90s. But more than that is the responsiveness—what is the flexibility that you are giving the customer to be able to supply in a more agile manner? So if I'm a customer and if I find that I need to change the order which I gave you yesterday, today, to something else—am I enabling that or am I blocking that? So that is what I would call responsiveness to demand, because a number of times the retailer also has a challenge in being able to predict the demand, because demand is from the consumer and from the shopper. So therefore being able to respond to that and respond to that with speed—I think if you just take customer centricity in that sense, it is much bigger than just case fill rate. It is about understanding the business of your customer and enabling them where it matters the most.

The second one which I talked about is the cost advantage. One is about—and this is about really being able to manage the cost of goods sold, or COGS, in a dynamic way, being able to forecast that in an ongoing rolling basis. That is important because let's say if there is an inflation in commodities, then that hits everybody—it's not Danone alone who will be hit by that, it hits everybody. But it is the agility and the dynamism with which you manage the impact of that into the business—if required by taking pricing decisions in time, if required by managing your mix to maximize the margins. So I think that is one dimension which is about overall COGS management. Now, within that comes the role of cost savings or productivity, which is basically to say that have I been able to offset the impact of inflation more than anybody else has. And that's why the cost competitiveness plays such a big role, because that is what drives the competitiveness in the whole COGS equation.

The third one is about cash, and cash, of course, as all of us know, fuels our growth. And to strengthen our short-term financial performance, we in operations are focused around three or four things which is where we have a major impact on the company's cash. First is, of course, the profitability where we have a role by way of managing the COGS very effectively. Second is the working capital, particularly the inventory that we are managing—making sure that we don't have less inventory or more inventory, but we have the right inventory. Third one is around making sure that the accounts payable to our suppliers are balanced in a way that we are paying them in a way that it matches their cash flow—it's neither under nor over. So resetting the payables to a level whereby there is equilibrium between us and our suppliers on this. And the fourth one, of course, is investing lean and investing in high-efficiency assets to meet the growth of the business—capex, namely, and capex is cash, as you know.

I think if I come to the last one, then carbon reduction—this is about pioneering sustainability through a very closely defined set of KPIs which we embodied in what we call the Danone Impact Journey. And that is really a muscle which we believe we have developed very well. It's more in the last one year that that has taken shape, but I think that we have a very, very good understanding on how to decarbonize the supply chain, not just in scope 1 and 2, which is our own factories, which everybody does, but also on scope 3, particularly on regenerative agriculture with our farmers.

Yeah, certainly, Radu, and I think if I'll build on that—I do believe, and we do it all the time, that our offering to the customer is not just a commercial proposition that I give you this product and I give you this margin and then off we go and we sign a deal. I think it has to be enlarged into a more value-based offering. It is not just the commercial agreement, but it is also what I can deliver to you in terms of service, it is also how I can help you reduce your inventory, it is also how I can help you reduce your distribution and logistics cost. So really, I look at it as something which has to be given to the customer as a full value offering rather than just a commercial proposition.

In order to achieve that, it's not therefore just the remit of the sales people in the organization to be doing that. The supply chain person, the customer service part of the supply chain, has to be there into those discussions, just to make sure that the totality of what you're offering is being appreciated. And the whole end-to-end piece, to my mind, starts from there. A consumer goods industry is about pull, it's not about push. So when you have that customer relationship, then you know what you need to produce and how you need to produce and where and in what quantity. So it all starts from that front end being the pull. But then it's easier said than done, because then you have to manage the agility in the factory production—you will get swings where the factory may be 100% utilized in a particular month and it may drop down to 40% utilization. So those are all things that you have to optimize as you model the supply chain.

But again, staying on the topic a little bit more on that—is that if I expand the definition of customer service beyond just delivering the product to them, we in operations are also responsible of making sure that we land any innovations right first time with our consumers, with our customers. And to my mind, that is also customer service. It's a customer service that if a normal innovation was going to take two years to land on the shelf, you have been able to get it right first time and in one year's time, for example. To my mind, that's also customer service because then the customer has a new product on the shelf, it attracts the consumers, the consumers buy more, and everybody gets economic benefit out of that.

And the third one which I will say is about creating capacity in a way that you're not necessarily just following demand, which is what most of us do in the supply chain—we see what is the demand forecast and we plan our capacities to that. But I always like to put a slightly different dimension on that: how can capacity creation stimulate demand? So if you have got a country somewhere in Africa which is currently importing the products from Europe and it takes order to deliver, let's say, four months—in that case, and if I go onshore over there and create the capacity, apart from cost savings, it should also trigger off top-line growth, because now you don't have to plan your business four to six months in advance, you can do whatever you want instantly in a matter of weeks. So I think looking at capacity creation not just as a purely demand-supply equation but also as a top-line growth enabler is a very different dimension when you start thinking of that.

Yeah, I think firstly, it's about scope 1 and 2. And if I look at the scope 1 and 2 emissions, which is basically coming from our own factory, we have been able to cut them by 21% over the last three or four years, and 72% of our electricity is now coming from renewable sources. So that's the first thing on minding your own house. And usually that's the easier one, because things are in your control—you decide that you need to invest some capex to be more energy efficient or more opex or whatever be the case, and you're able to get it. But I think for us, what has been important—these are big numbers, you know, getting a 21% reduction in carbon—what that has meant is that we have had to roll out a program we call it a REFUEL program, on a global scale across all our major sites, and then just go through the grind of that in making sure you carry energy audits and you become more efficient at what you're consuming first of all, and then you look at the source of that energy.

The second one I'll then come to scope 3 FLAG, as it is called—forest, lands, and agriculture—which is where our initiatives on regenerative agriculture, which I talked about earlier, they come into play. And for us, the principal area of activity over there is around milk farmers. How do we make milk more sustainable? We were the first company to announce that we will reduce the methane emissions coming from the milk supply chain by 30% by 2030. And we could have the confidence to take such a bold commitment because we know how to do it. We know how to manage the productivity of the cows through the right genome in terms of the cattle hybrids. We know how to manage it better through a balanced feed. We know how to manage it through better soil management, manure management, and so on. So it's really a 360-degree approach. And you mentioned a farm in Spain, which is the first B Corp-certified farm in Europe, and it is 100% dedicated to us. That's an excellent example of how we have been able to bring both the economic benefit to that farm as well as the carbon benefit. It's—besides being a B Corp-certified farm, it is a farm with one of the lowest footprint of carbon per ton of milk in the world.

So that's the second one, on scope 3 FLAG. And the last one is on scope 3 non-FLAG, as it is called, where comes in things like packaging and logistics. And what we do see is that the biggest contribution which can come in logistics is by efficiency—higher truck fill rate, less kilometers. The normal stuff which all of us do in logistics optimization—that is the one which may sound simple but offers the biggest potential. And the beauty about this one is that you're not reducing carbon by spending money, you're reducing carbon by saving money. So you know, a lot of arguments go around saying that reducing carbon is going to cost money—which is correct. It is correct in the case of scope 3, but it is not entirely correct in the case of scope 1 and 2, or in scope 3 logistics. And the last one is around packaging, particularly plastics, where we've got big initiatives for greater use of recycled plastics.

Yeah, I think when you are—and particularly today as we sit on an era where we are seeing revolution on many fronts—revolution on consumer awareness around sustainability, about artificial intelligence, machine learning, and so on—it is absolutely necessary to continue investing in your people through training programs and taking them to this next stage of realization. We call that the Danone Skills Program, which covers many dimensions. It covers leadership training, but it also covers skill training in areas like AI, digitalization in operations. We are just in the middle of creating a global center for digital manufacturing acceleration—not for executives, but more for line people, where they can come and see what is the thing. So when we talk of training, sometimes we tend to concentrate on the leadership levels in the supply chain, but really when I talk of the 48,000 people in Danone, most of them are sitting in the factories. So you have to create that as a grassroots movement by getting the people in the factories up to the next level of training.

Now, you need to do it not just to equip them better for running your business better, but you also need to do it for managing change—change management. If you do not invest in that, you will automatically find a rejection coming at the shop floor level of any new initiative such as digitalization that you're launching. So I think that is super important. We invest a lot behind that. We invest a lot in training not just our own people but even our farmers on leading-edge farming techniques. We send them around to leading farmers, like the one in Spain and a couple of them in the USA, to see how have they been able to improve the farm economics. So I think that is one area.

The second one is that apart from developing your own people, I believe that you do continuously have to refresh the talent pipeline by bringing in some level of externality also. You need to bring people who are able to look at what you are doing with a different pair of eyes, who are able to benchmark you with the external world better. If you don't do that, then you have the risk of creating a very inside-looking organization—people improve on a year-to-year basis, but they improve against themselves, they don't necessarily improve against the competition. And that is why bringing in people from outside is also equally important. Of course, there's a balance—you can't go too much this way or too much that way—but as a talent strategy, that is always something that you need to manage in a responsible way.

The only other thing which I will add is that we are creating what should be the Danone brand of leadership. And we want people who are joining us to be in sync with what we want in the Danone brand of leadership. We have used amply in creating that framework the concept of ambidexterity—is that people who we would want to be in the business in operations are people who are ambidextrous. What does that mean? It means that you have the ability to manage things which are seemingly contradictory at the same time. How can you be caring and demanding at the same time? How can you be doing performance but still do it in a responsible manner for your business, that you don't damage the long term to achieve short-term results? How do you manage growth on one hand and sustainability on the other hand? How do you have a very driven mindset but at the same time you're well-informed and fact-based—you're not driving just on emotion, you're driving based on facts. So I think these are the sort of things which we look at—that when we induct or develop a leader in the organization, the ability to manage these seemingly contradictory thoughts in an ambidextrous manner is very important to us.

Yeah, I think maybe some of this will be repetitive to you, Radu, because I've talked in the book on Source to Sold. First of all, always see how you're creating business value rather than just supply chain value. A supply chain which works for itself is going to fail, and a supply chain which works in order to generate business value—like some of the examples that we have talked about—is the one which will succeed. So never get yourself—don't fall into a silo on this. Work with other functions, because when you talk about generating business value, we can't do it alone in the supply chain. We need to have a very strong working relationship with marketing, with sales, with R&D, and so on. And we do it together, we do it collectively. A number of times I have seen—in fact, I myself can relate back to many, many years ago—where I felt I was falling into a silo of supply chain excellence rather than business excellence. I think that is one thing which all supply chain professionals—I would really call on them to understand that whatever actions you're doing, how is it going to add business value. Ultimately, a business is about three simple things: top-line growth, profitability growth, and cash generation. And you have to be very clear which one of these three am I impacting through the actions that I'm doing.

The second one is around leadership, and you mentioned about authentic leadership earlier in our conversation, and I would really emphasize that. And the reason I emphasize that—in the supply chain, usually the maximum number of people in a company will be sitting in the supply chain, as in our case, because of the factories, because of agriculture, and so on. So I think the leadership role that we all have in operations is super important and crucial to how we are able to achieve our results in performance relative to any other function in a company like ours. So if you have 50,000 people, it is extremely important for the leader to be able—and leader doesn't mean just somebody in my position, but it goes down the line. Anybody who is managing people, it may even be a line supervisor in a factory—is how do you establish your brand of leadership with your people so that you inspire rather than push. It's very often, you know, when people talk about leadership they talk about senior executives and what is their philosophy and all that, but in operations it's something which goes down to grassroots level. So your ability as a supply chain professional to deploy that leadership brilliance deep down in the organization is ultimately what creates success.

Thank you, Radu.