While current headlines about product shortages and empty shelves have highlighted the importance of the supply chain, that process began in early 2020. Companies that had labored to create a lean global supply chain needed to scramble to adjust to the effects of the pandemic. Beyond that, sustainability has also become a top priority on the CEO agenda, making the supply chain an integral part of managing an organization’s carbon footprint. Consider, finally, the imperative to incorporate digital technologies, and one could argue that managing the supply chain in the current landscape is one of the most complex roles in an organization.
Henkel’s Dirk Holbach has an ideal vantage point to weigh in on all of these issues and more. As the chief supply-chain officer for the Laundry & Home Care business unit at Henkel, a global consumer-goods company based in Germany, he manages an operation that spans 125 countries. In his two decades with Henkel, Holbach has helped to guide the business unit’s supply-chain function through both expansion and disruption. McKinsey senior partner Frank Sänger sat down with Holbach to talk about how the organization responded to the challenges presented by the pandemic, how to build resilience into the supply chain in a shifting environment, and how Holbach has taken the lead on sustainability and diversity.
McKinsey: In your two-decade career at Henkel, how have you seen the company’s operations evolve? What factors have shaped Henkel’s supply chain the most over this period?
Dirk Holbach: During the past 20 years, the supply chain has gone from being regarded as a must-have cost center to a more purpose-led, agile, sustainable function. It has become more intelligent, digital, and resilient. We have invested in setting up the right organization, rebuilt our footprint, implemented digital, and developed sustainability capabilities. We are increasingly becoming a mission-critical growth driver and engine for our business.
A key part of this effort was to empower our teams. Over the past several years, we have invested heavily in talent and the tools to support them in their roles. Without the right investment in people development, you can have the greatest system, the greatest footprint, or even the greatest digital technology—but at the end of the day, it will not yield the expected benefits over time.
McKinsey: COVID-19 has led to major reforms in supply chains all over the world but has also brought disruption along the way. What strategies have you implemented in the past two years that helped the company to stay ahead of the competition in such difficult times?
Dirk Holbach: We have taken a systematic approach to managing resilience in the supply chain. During the crisis, it was a steep ramp-up of measures. In many countries, we were fortunate to have not only well-prepared and well-organized teams but also robust processes and systems in place.
Being able to adjust our capabilities and processes is ingrained in the organization, and this was a muscle that helped us a lot during the pandemic. For instance, in April of last year, when the first demand shocks hit our system, we introduced a new element in our S&OP [sales and operations planning] process in just a few days—basically a daily management of capacity and demand by country supported by some digital capabilities using our existing analytics platform.
Certain elements proved more effective in the short term to manage the crisis. Since then, we have assessed our organization and strategy and identified gaps where we had not been prepared well enough. We then embedded these findings into our latest resilience framework, which we are institutionalizing now.
We have now dedicated resources in the central team to look at all the different components of that framework and are making sure the organization is pulling the right levers at the right locations in order to strengthen our supply-chain capability.
McKinsey: How has the pandemic changed the way your organization views supply-chain risk and resilience?
Dirk Holbach: Our framework isn’t super complicated. From the system and process angle, we look at three different enablers: people and visibility, redundancy, and flexibility. And here we really have defined systematically the areas in which we are purposefully investing.
For people, it’s about the mindset and ability of everyone to quickly sense and react, learn and adjust, and encourage and empower the teams to do so despite being a multinational company. Many things are, of course, defined, regulated, and standardized in processes. In certain situations, you need to think beyond. This mental approach is extremely important. We enable that thinking by aiming to have all relevant data available on the spot, ideally—and if relevant—in real time to support effective decision making.
When it comes to redundancy, for instance, one principle is that we manufacture a certain product technology in two locations so that we have a backup. If one location goes down, at least I can manage the supply for a couple of weeks. We cannot replicate capacity ad infinitum, but that is one very simple principle.
The other strategic lever is flexibility. Talking about product platforms, exchangeability and formula flexibility are important. We are continuously working on that lever because materials are pretty short at the moment. We focused on building the ability to react and adjust formulations in a way that we can fulfill our consumer and customer requirements but still continue to manufacture.
At the end of the day, it’s always about trade-offs. Of course, you can build redundancy in your system, but that is not for free. It costs money. This is a kind of insurance premium: you are either willing to pay or not.
McKinsey: We have spoken about the challenges created by the pandemic. Do you also see opportunities that have been created?
Dirk Holbach: I always like to say that in every catastrophe you will find at least one opportunity—and usually more. We learned quite a lot during the past two years. And we leveraged capabilities in a much faster and different way than we ever had expected.
People tend to see the issues and the problems. But I think it’s very important that you turn quickly to a forward-looking mode and ask yourself, “What are we doing now, and how can we do even better afterward?”
For instance, we used digital technologies to run remote installations of new filling lines site tests, even without the OEMs or vendors on site. We used HoloLens and other tools. We took these steps because, due to safety measures and travel restrictions, we had no other choice. That’s why new capabilities and mindsets are so important: what is possible now, compared with two years ago, is very different.
You must be able to keep up with the competition. When you have moving targets and a relevant standard of performance, that makes it difficult to measure and follow. But it continuously gives you new opportunities to perform in a dynamic marketplace.
For the next few years, we have to take a different approach to these just-in-time global supply chains. We have to be smarter. You may run into a cost and benefit discussion on the business side, but I perceive a readiness to invest in resilience.
McKinsey: Do you have any specific advice to other organizations to minimize their exposure to supply-chain disruptions, which have become increasingly frequent and severe?
Dirk Holbach: I would mention several things. First, invest in visibility. Visibility means understanding at any point in time what’s going on in your extended supply chain. That is definitely a must, because without it you won’t know what to do.
The second element is people. Again, continuing to set up the business to be more centrally standardized and organized, adding to strong regional and local teams empowered to make fast decisions within a given framework. We might never get back to a prepandemic level of supply-chain stability, so it’s critical to take everyone along and to help teams to be mentally ready—things we are constantly working on. In my point of view, it is crucial to find ways of operating in such an environment, to learn from mistakes, and to do better the next time.
Last would be to review your product sourcing. This item is a bit linked to the two other buckets. I discussed the redundancy piece and also the flexibility. But let’s say that you then look at the components. Do you have dual, multiple sources and setups at that end?
In general, people, industries, and players tend to forget relatively quickly, especially in the FMCG [fast-moving consumer-goods] context. That, for me, is a big “watch out” so that we don’t fall too quickly back into normal. Even after COVID-19, we will have other things that affect and disrupt our supply chains.
McKinsey: Let’s transition to the topic of digital. Henkel has been at the forefront of digital innovation in the industry, establishing industry-leading lighthouses and covering those at the World Economic Forum. How do you prioritize Industry 4.0 technologies for Henkel?
Dirk Holbach: We started that journey eight years ago. We wanted to do something good for the environment and measure the energy consumption of our factories in a global and standardized way.
Over time, we learned that a couple of elements help us to drive that effort. I elevated the role responsible for digital transformation onto my leadership team and committed the necessary resources. We started to systematically review technology areas that we believe could benefit our organization and settled on four areas: automation, robotics, analytics, and visualization, as well as the connectivity between these areas and the application and use cases.
We defined a dynamic road map, a funnel with a portfolio of application cases, and different maturity stages. It’s important for companies to clearly define focus areas and build a road map. Try not to do everything at the same time. We manage fewer than 25 different application cases in different maturity stages at a time, excluding the ones that are running and implemented.
Usually, we try to learn and try out applications relatively fast and then scale up quickly. If we see that a certain application use case delivers value for us, we use it wherever it makes sense on the global scale. That approach—to avoid focusing on big, complex business and benefit cases—helps to secure the funding for these initiatives because initially you will usually look at a pretty specific and well-defined area of benefits and activities. It’s easier to determine what you need to invest and what you get out of it. Then, you secure funding and build your success stories internally over time to be able to scale up the solutions.
A strong connection between the global and local team is also very important. We use a top-down, bottom-up approach to identify ideas that fit into our framework and strategic focus areas. Last, you cannot undertake this effort without a decent underlying IT infrastructure. You need to have not only a strong central IT department but also focused IT-related capabilities within the supply-chain operations. The ability to define requirements and demands through an operations lens and translate that to IT solutions is critical. Having this deep business understanding paired with Industry 4.0–related knowledge within my team accelerates progress significantly.
McKinsey: You mentioned the digital journey started with the focus on sustainability. Henkel has been included in the list of the world’s 100 most sustainable companies presented at the World Economic Forum. What can industry do to become more sustainable, especially in supply-chain logistics?
Dirk Holbach: Sustainability is part of Henkel’s DNA; it goes back even to the company’s founder. We have been tracking our sustainable performance for more than 30 years and reporting on it. On Scope 1 and Scope 2 emissions, we have decreased our CO2 footprint in our Laundry & Home Care business by 65 percent over the past 15 years. The rest we will manage over the years to come. It’s well under control and manageable.
COP26 in Glasgow illustrated the size of the challenge: despite all the great things we have done in the past, we must be much faster. In German, we say, “It’s five before noon.” We clearly have to accelerate.
When you take a deep dive in the supply-chain area, looking into the area of logistics, this is the first bigger challenge. Like many others in the industry, we partner with other companies to operate our own logistics fleet. So we have to engage with our partners in the right way, and we need to be clear on our expectations. It starts with how we contract those services and what we specify as relevant performance. It’s not only operational performance but also costs and CO2 emissions.
On the other hand, if we take the laundry and home-care industry, just 2 percent of the upstream CO2 footprint comes from our own production facilities. The remaining 98 percent is outside the total life cycle. The majority comes from packaging and raw-material creation, as well as from the use and reuse of the materials. It’s super important that we partner with our suppliers of these raw materials in the right way to drive progress. A few weeks back, we invited all of our key raw-material suppliers to a virtual session and shared our vision for how we want to drive the transformation of our material sourcing over the next years. The conversation covered what we have done, what we expect, and what we can do by working together.
On the downstream side, we have seen a decrease in the amount of materials used for washing. Twenty years ago, we were at 150 grams of laundry detergent per wash load. Now, our most compact version uses 15 to 17 grams—a factor of ten. In our dishwashing detergent, we are using smart chemistry to clean products in a way that doesn’t require heating the water to 50 degrees or 60 degrees Celsius. However, we still need to further educate consumers when it comes to washing, water usage, and temperature. We need to continuously develop and create smarter products, addressing exactly these critical fields.
McKinsey: And how is digitizing the supply chain helping you to achieve your sustainability goals?
Dirk Holbach: In 2013, we started our digital journey precisely to measure energy consumption at our factories on a real-time basis. Creating that transparency along the way helped us to significantly use technology for a purpose—to drive sustainability performance and reduce our footprint. We are going beyond that. We are using machine-learning algorithms to optimize some of our energy-intensive processes, such as laundry-powder production.
Across the upstream and downstream value chain, digital capabilities will further increase the visibility and traceability of products—for instance, raw materials. Our consumers and customers are more and more interested in sustainability—and for good reasons. When I buy a product, I ask myself where it is coming from and where it has been produced. We are building capabilities that will help us answer those questions in a much better way.
McKinsey: Before we close, let’s discuss diversity, which I know is a focus area for both Henkel and you personally. Henkel was recently listed by Forbes as one of the best companies to work for in terms of diversity. Is the level of diversity in the supply-chain function where you want it to be, and what are you doing to improve it?
Dirk Holbach: I’m a great believer in diversity across many dimensions—not just gender but also personal and cultural background. Especially in times of uncertainty, a diverse team will bring you a higher likelihood of different and maybe disruptive ideas and ways to handle a crisis.
At Henkel, diversity and inclusion is a very prominent topic. We have made great progress in our supply chain over the past ten years. Although Henkel is based in Germany, we employ people from more than 125 nations. More than 85 percent of our people work outside of Germany.
I have personally been driving this topic since 2011. For instance, when it comes to gender, we more than doubled our percentage of women in management positions in the supply chain during this period. But we are not where I personally want us to be.
We have been building up the bench, and we have made great progress in the supply chain already, but we need to further drive this transformation.
McKinsey: Any other advice that you have for other supply-chain leaders?
Dirk Holbach: Don’t believe what brought you here today will help you achieve targets in the future. Past experiences and legacy practices are great; don’t throw them away. Build them into your future strategies. But do not expect that they will work as a plug-and-play model in the future, because circumstances will be changing continuously. So be ready and learn. Be open. Try to integrate new findings into your experiences. Be prepared to develop at a different speed than you did in the past.
With the supply chain, you’re talking about big organizations and operations. But supply chain is a people business. Despite all the technology, processes, and standards, it’s super critical that we have the right people at the right spot. We take care of them because they are our most precious resource.
Over the past two years, supply-chain terminology has gained a completely different prominence in mainstream media and companies—really moving from this perception as a cost center to a solution provider and growth engine for many businesses. And hopefully that will attract more talent to supply chain and operations. It’s a cool place to work if you like challenges.