Procter & Gamble: Delivering GoodsBy Tom Steinert-Threlkeld | Posted 2004-07-01 Email Print
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Procter & Gamble has streamlined its supply chain to put more of its products on store shelves when customers are ready to buy.
Jake Barr is in charge of "supply chain innovation" at The Procter & Gamble Co. He is supposed to figure out how to get the consumer products giant's detergents, soaps and personal care products into the hands of 5 billion customers in 170 countries more efficiently.
This is a $50 billion company that already boasts 13 brands generating more than $1 billion of revenue each year. His goal? To create the equivalent of a 14th billion-dollar brandby stocking shelves in stores around the globe more accurately by responding better to what people want. And getting 5,000 retailers and 30,000 suppliers to participate in a system that would immediately signal products favored by customers.
"If you can't drive sales and deliver product at the point of purchase, you lose," Barr says.
In the past decade, P&G 's business has changed radically, even if its systems for timing the delivery of products to stores have not. Just like cars, clothes, music and even prime-time television, the sales of mass-produced products for the home have become hit-driven. Or, better put, promotion-driven.
Some 60% of P&G 's sales now come from what Barr calls "events." These are promotions that the supermarket, convenience store or other retailer executes with price cuts or other incentives; or they take the form of discount coupons and price promotions mailed out or distributed in a store by P&G itself.
Some events are initiated on the Internet, such as a "Max the Stack" promotion for the company's Pringles brand of potato chips. Teenagers got decoder cards at theme parks and SFX concerts. Then, they went online to see whether they had won a cash prize of between $3 and $50.
Similar promotions for gift-with-purchase were rolled out on the Pampers.com and BabyUniverse.com sites. These "pull" marketing events are designed to drive consumers to retail stores and maintain customer loyalty.
In the past, P&G used a "push" system of moving products out the store door. Independent of what retailers were doing, P&G would forecast sales for Tide detergent, Crest toothpaste or other products. Then, it would tweak sales through the year with coupons and other incentives designed to entice enough customers to buy, moving products off store shelves.
But with the majority of sales now coming from promotional events, Barr and his Global Product Supply team studied the pull systems of efficient distributors of consumer and industrial products such as personal-computer maker Dell. The idea: Cut out piles of inventory and produce only those products that consumers are actually buying.
If they could do this, Barr's team could create that 14th billion-dollar brand. How? By reducing the frequency with which P&G products were not on shelves when customers wanted them.
To a retailer, being out of stock on a product that consumers want is no small matter. A retailer whose shelf is bare of a product in demand loses the sale 41% of the time, according to Consumer Insight magazine, an industry trade publication.
The typical response is to find the product at another store. But even P&G loses. Approximately 28% of the time, Barr says, the customer simply picks another competing product.
"It's a very tricky balancing act," Barr says.
Barr's goal about 18 months ago was to get to a "nearly 100% demand-driven" system of supplying products to supermarkets and other stores around the globe. In his preferred analogy, he wanted P&G's planners and forecasters to be "looking through the windshield and not the rearview mirror" at what was happening in the marketplace.
But P&G is not like Dell. It doesn't field calls from consumers. It can't wait until after consumers decide what they want before it puts products onto store shelves. It can't wait to find out what customizations the consumer wants when the call comes in. "I have to put all seven smells [of a soap] out on the shelf" at all times and in the right quantities, Barr says.
In effect, P&G has to manage out-of-stock conditions on 50,000 different products worldwide, every day.
When Barr's team started to tackle the problem of shifting from a push system to a pull system, nine times out of 10 consumers were finding the P&G product they wanted in the store.
Barr aimed to cut the rate of out-of-stock items from 10% to 5%. That is not so easy, he says: "For a company our size, [that's like] trying to turn a large cruise ship vessel on a dime."
His goal was to take the chaos out of the delivery system by bringing retailers and suppliers into the planning and delivery process. The "signals" of consumer demand would come from the stores; "responses" would come from P&G manufacturing managers, supply chain managers and suppliers, who would key production of new products to sales reports coming from the stores.
For example, P&G now gets dates and locations for all events with its retail partners, such as a cluster of Wal-Mart stores in south Florida, and prepares for predictable increases in demand. If these stores are going to do a "buy-two, get-one- free" promotion on their Pampers diapers, P&G can better coordinate its production and distribution in that region.
As Barr puts it, "In the past, we'd only know that these stores wanted an extra 100 or 200 cases of the product and we'd send it in one large delivery. Sometimes, it'd be several weeks early. Once in a while, it would be late.
"One of our fatal flaws," Barr adds, "was that our [supply chain] network was not really well integrated."
The company has 5,000 key retailers and more than 30,000 key suppliers. "I had data [coming] from many sources, but it was not synchronized," Barr says. Some sales data might come in daily, some weekly. Some might come by item or product category. Consistent information, received daily or more frequently, would mean getting retailers and suppliers to adhere to common conventions in feeding and drawing information out of P&G 's SAP supply chain management system.
This caused immeasurable problems. When P&G is spending $80 million to advertise new flavors of fluoride anti-cavity toothpaste such as Cinnamon Rush and Extreme Herbal Mint, it needs to know which ones are selling and which aren't.
Without detailed reports, boxes of Extreme Herbal Mint can be collecting dust in the storage rooms while there isn't enough Cinnamon Rush on the shelves to meet demand.
Barr's aim: to replace the movement of boxes of goods with a better flow of information.
That meant a big change at P&G's factories. In the old build-to-forecast days, the plants would simply run big lots, move them to warehouses and let marketing work down the stacks of unsold product. "Changeovers of manufacturing lines were anathema," says Barr, a former factory manager, because the belief was that long product runs cut down per-unit costs.
But what actually happens is per-unit costs rise if you're making products consumers don't buy, says Barr. Now P&G plans plenty of changeovers on its production lines every day. The principle: Manage by exception, for products that are moving fast off shelves.
That keeps costs down. "We've tried to improve every aspect of how we deliver product to our customers at the lowest cost," says Tom Walker, vice president of logistics for Costco Wholesale Corp., which sells $41.7 billion worth of consumer goods a year through its 397 retail warehouses. "The software, along with common sense, has improved [P&G's] ability to get accurate shipments to our stores in a timely manner.
"The fact that our sales of P&G products are up 15% in the past year tells you how effective this system is."
In its 2003 Power Rankings of the nation's largest manufacturers, Cannondale Associates, a marketing and consulting firm in Evanston, Ill., said retailers ranked P&G as the top manufacturing partner, ahead of Kraft Foods.
Twelve months into the new pull system, the company is close to its original goal of cutting out-of-stock conditions in half. Now 93% of outlets working under the new system are experiencing no more than 5% out-of-stock rates. That represents a yearly savings of $50 million to $100 million.
More precise management of the quantities and brands available on store shelves has had a direct impact on virtually every financial metric at P&G.
Sales increased from $40.2 billion in fiscal 2002 to $43.4 billion in fiscal 2003, up 7.8%. Net profits, which P&G expected to improve 10%, jumped from $4.35 billion to $5.19 billion, a 19% gain.
In fiscal 2001, P&G generated $1.5 billion of cash from operations. In fiscal 2003, P&G generated $4.9 billion, largely because of the supply chain improvements-and increased sales resulting from the coordination with events.
Working capital, the amount of money the company has on hand to run its day-to-day business, jumped from a mere $700 million in fiscal 2001 to more than $1.7 billion in fiscal 2003.
"To me, working capital is the best barometer of how efficient an organization is," says Bill Steele, an analyst at Banc of America Securities in San Francisco. "P&G is making life very difficult for competitors like Unilever, Kimberly-Clark and Colgate-Palmolive. It has consistently outperformed all of these guys, mainly as a result of its systems and its management."
Colgate-Palmolive is also in the process of implementing an SAP-based trade promotions management system to keep pace. The program has already been implemented in Mexico with plans to bring it to the U.S. by early next year.
Barr can't be sure whether the sales gains can be attributed to repeat purchases from increasingly satisfied customers. But in his drive to build that next billion-dollar brand by "out-operating" other household goods rivals, there's no question what his next goal is: to cut that out-of-stock rate in half again, to 2.5%.
Barr also doesn't have to worry as much about failing. He can fail more, and still succeed. Because he's responding to demandnot a forecast
P&G Key Performance Indicators
1. Shelf-Level Out of Stocks: The percentage of products that are out of stock on retailers' shelves at any given time. P&G has cut this to 5%, from 10%.
2. Total Supply Chain Response Time: The time from when a cash register records the sale of a product to the purchase of raw materials to produce its replacement. P&G wants to chop this in half, from 100 days.
3. Total Supply Chain Inventory: The hard count of all products flowing through the supply chain at any given moment, whether on store shelves, in back of the store, at warehouses, in trucks or wherever. P&G wants a daily count, rather than weekly or monthly.
4. Shelf-Level Quality: The percentage of packages damaged or otherwise unappealing when a customer sees them on a store shelf. The goal: zero.
5. Pricing-Design From the Shelf Back: Determining an acceptable price point for an item and then working it back through manufacturing and distribution to see if that product can be delivered at a price acceptable to consumers and a profit acceptable to P&G.
Procter & Gamble Base Case
The Procter & Gamble Co.
1 Procter & Gamble Plaza,
Cincinnati, OH 45202
The country's leading manufacturer of household products. Its 35 manufacturing plants crank out an extensive mix of products in five major categories: fabric and home care; beauty care; baby and family care; health care; and snacks and beverages.
Associate Director for Supply Network Innovation:
$5.2 billion profit in 2003 on sales of $43.4 billion.
Install SAP's supply-chain management software to better react to demand created by event-driven promotions.
- Create the equivalent of the company's 14th billion-dollar-a-year brand, through more efficient stocking of retail shelves.
- Reduce out-of-stock items to 1 in 40 by next year, from 1 in 10 a year ago.
- Grow overall annual sales at least 6% in 2004, from $43.4 billion in 2003.
- Improve annual profits at least 10% in 2004, from $5.2 billion in 2003.