{"id":21548,"date":"2017-11-12T17:39:32","date_gmt":"2017-11-12T22:39:32","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/unilever-and-brexit-how-isolationist-political-movements-impact-supply-chain-decisions\/"},"modified":"2017-11-12T17:39:32","modified_gmt":"2017-11-12T22:39:32","slug":"unilever-and-brexit-how-isolationist-political-movements-impact-supply-chain-decisions","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/unilever-and-brexit-how-isolationist-political-movements-impact-supply-chain-decisions\/","title":{"rendered":"Unilever and Brexit: How isolationist political movements impact supply chain decisions"},"content":{"rendered":"<p>&nbsp;<\/p>\n<p><strong>Unilever and Brexit: How isolationist political movements impact supply chain decisions. <\/strong><\/p>\n<p>On 23<sup>rd<\/sup> June 2016, the citizens of the United Kingdom voted to leave the European Union. The GBP slumped over 10% against the USD on the day<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a>. The UK had been a part of the European Community (EC, or the common market) since 1973. A reversal of over 4 decades worth of globalization and trade integration could have a significant impact on the supply chain of multi-national businesses such a Unilever.<\/p>\n<p>Unilever is one of the world\u2019s best-known consumer goods companies, which operations in over 100 countries and sells products in over 190 countries, serving over 2.5 billion people in the world<a href=\"#_ftn2\" name=\"_ftnref2\">[2]<\/a>. Annual turnover from the UK is nearly EUR 2bn<a href=\"#_ftn3\" name=\"_ftnref3\">[3]<\/a>, against a global turnover of EUR 52bn (EUR 13bn of which is from Europe). A brief look at Unilever\u2019s current business model is shown in the figure below:<\/p>\n<p><a href=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/unilever-1.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-21551\" src=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/unilever-1-300x106.png\" alt=\"\" width=\"436\" height=\"154\" srcset=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/unilever-1-300x106.png 300w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/unilever-1-768x271.png 768w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/unilever-1-1024x361.png 1024w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/unilever-1-600x212.png 600w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/unilever-1.png 2000w\" sizes=\"auto, (max-width: 436px) 100vw, 436px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<p>With respect to its UK operations, the \u201cSourcing\u201d and \u201cmanufacturing\u201d parts of the supply chain are subject to the largest volatility following the Brexit decision.<\/p>\n<ul>\n<li><strong>Sourcing<\/strong>: <em>A sharp rise in input costs has an immediate impact on the profitability of products and Unilever responded with an increase in prices (where possible) in the short-term<\/em>. For a net commodity importer such as the U.K., a rise in input costs of wheat and oil in GBP terms immediately put pressure on the cost of Unilever products such as Marmite<a href=\"#_ftn4\" name=\"_ftnref4\">[4]<\/a>. In the immediate aftermath of Brexit, Unilever chose to raise prices on some of its products in the UK, notably Marmite and PG Tips by 10%. This immediately triggered a widely publicized conflict with Britain\u2019s largest supermarket Tesco which refused to pay the higher cost. The \u201cMarmite Wars\u201d, as it came to be known, was ultimately short-lived as Tesco relented. While price elasticity and bargaining power favored Unilever in this case, they almost certainly will contribute to decreased profitability in Unilever\u2019s lesser known, price-inelastic products. For these products, Unilever will rely more heavily on currency hedging to mitigate the impact on its profitability.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li><strong>Manufacturing: <\/strong><em>In the medium term, Unilever will face pressure to further \u201clocalize\u201d its manufacturing base.\u00a0<\/em>Given its global footprint, Unilever does diversify its manufacturing operations and tries to localize it production as far as possible. From the most recent annual report<a href=\"#_ftn5\" name=\"_ftnref5\">[5]<\/a>, Unilever operates 306 factories in 69 countries. Still, when compared to its overall footprint in 190 countries, there is a mismatch between its revenue footprint and cost footprint (most likely because of favorable labor arbitrage conditions). Specifically, in the context of European operations, the lack of trade barriers over four decades would have \u201cglobalized\u201d the supply chain even more within Europe. Unilever management now faces key decisions on where it will make future growth investments and even where it will choose to headquarter<a href=\"#_ftn6\" name=\"_ftnref6\">[6]<\/a><a href=\"#_ftn7\" name=\"_ftnref7\">[7]<\/a>.<\/li>\n<\/ul>\n<p>In terms of further addressing these concerns, Unilever will have to take further step to \u201clocalize\u201d its supply chain in Europe, and will most likely relocate manufacturing to EU countries where the labor arbitrage gap is still sizable such as Poland, Hungary and Romania.\u00a0 Of course, this will be to the detriment of the U.K, where long-term investment in the country will fall and consumers will be left to deal with rising inflationary pressures. At a global strategy level, Unilever will also need to continue to diversify away from Europe (where demand is flat\/falling) and further into emerging markets in search of higher growth and profitability.<\/p>\n<p>An open question facing Unilever as we look ahead is the exact form that Brexit will take following the negotiations between the UK and the EU government. At the heart of the uncertainty is where the UK will undergo a \u2018soft\u2019 Brexit or a \u2018hard\u201d one. In the \u2018soft\u2019 Brexit outcome, the trade frictions between the EU and UK will be minimal as free movement of production input (labor and capital) and output (goods and services) will be maintained, leaving Unilever to deal with just pricing decisions to maintain profitability. On the other hand, a \u2018hard\u2019 Brexit outcome where trade barriers and tariffs are re-introduced would necessitate wholesale changes to its supply chain setup as they run up against a limit on the actual price rises they can impose without a corresponding decline in market share.<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> <a href=\"https:\/\/www.theguardian.com\/business\/2016\/jun\/23\/british-pound-given-boost-by-projected-remain-win-in-eu-referendum\">https:\/\/www.theguardian.com\/business\/2016\/jun\/23\/british-pound-given-boost-by-projected-remain-win-in-eu-referendum<\/a><\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> <a href=\"https:\/\/www.unilever.com\/Images\/unilever-annual-report-and-accounts-2016_tcm244-498880_en.pdf\">https:\/\/www.unilever.com\/Images\/unilever-annual-report-and-accounts-2016_tcm244-498880_en.pdf<\/a><\/p>\n<p><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a> <a href=\"https:\/\/www.unilever.co.uk\/about\/who-we-are\/introduction-to-unilever\/unilever-in-the-uk\/\">https:\/\/www.unilever.co.uk\/about\/who-we-are\/introduction-to-unilever\/unilever-in-the-uk\/<\/a><\/p>\n<p><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> <a href=\"https:\/\/www.ft.com\/content\/1cbb6d34-9d29-11e6-8324-be63473ce146\">https:\/\/www.ft.com\/content\/1cbb6d34-9d29-11e6-8324-be63473ce146<\/a><\/p>\n<p><a href=\"#_ftnref5\" name=\"_ftn5\">[5]<\/a> https:\/\/www.unilever.com\/Images\/unilever-annual-report-and-accounts-2016_tcm244-498880_en.pdf<\/p>\n<p><a href=\"#_ftnref6\" name=\"_ftn6\">[6]<\/a> http:\/\/www.bbc.com\/news\/business-36544875<\/p>\n<p><a href=\"#_ftnref7\" name=\"_ftn7\">[7]<\/a> https:\/\/www.bloomberg.com\/news\/articles\/2017-04-07\/london-or-rotterdam-unilever-set-to-test-may-s-brexit-strategy<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Brexit introduced much uncertainty into Unilever&#039;s supply chain, and is already impacting strategic decisions. The extent of the impact hinges on the ultimate form that Brexit will take. <\/p>\n","protected":false},"author":10144,"featured_media":0,"comment_status":"open","ping_status":"closed","template":"","categories":[3230,1699,3319,17,360,1102],"class_list":["post-21548","hck-submission","type-hck-submission","status-publish","hentry","category-brexit","category-london","category-marmite-wars","category-supply-chain","category-tesco","category-unilever","hck-taxonomy-organization-unilever","hck-taxonomy-industry-consumer-products","hck-taxonomy-country-united-kingdom"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Unilever and Brexit: How isolationist political movements impact supply chain decisions - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/unilever-and-brexit-how-isolationist-political-movements-impact-supply-chain-decisions\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Unilever and Brexit: How isolationist political movements impact supply chain decisions - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"Brexit introduced much uncertainty into Unilever&#039;s supply chain, and is already impacting strategic decisions. 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