4-Case Study-Procter_and_gamble and Wallmart

7/29/2019 4-Case Study-Procter_and_gamble and Wallmart

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Re-inventing the supply chain wheel Procter & Gamble

Procter & Gamble has a long history of innovation courage and an ability to make smartbusiness decisions even in difficult times. When the company was established inCincinnati, Ohio in 1837, the United States was gripped by financial panic. Hundreds of

banks were closing among widespread concern that the country was headed for economicdisaster. Forging ahead, P&G launched its new enterprise more focused on competingwith the 14 other U.S. soap and candle makers than with the economic turmoil shakingthe country. Its calm in the midst of that storm reflected a forward looking approach thathas become the hallmark of this 165- year-old company. Today, P&G marketsapproximately 250 brands, including Pampers disposable diapers, Pantene hair careproducts, and Tide laundry detergent to nearly fivebillion consumers in more than 130countries. With operation in more than 80 countries, its 106,000 employees deliveredrevenues of US$ 39.2 'billion in fiscal year 2001. P&G's global success has led to tophonours for the company, for achievements ranging from environmental protection andanimal testing alternatives to superior product quality and marketing expertise. Fortune

magazine has included P&G in its 'World's Most Admired Companies' list from 1985 to2001 and Ziff-Davis Smart Business editors included Procter & Gamble in their "2001list of Top 50 Net savvy US organizations.

Says Steve David, CIO and Business-to-Business Officer. 'The retailers love it, they feelthey're getting better service, and the costs are a tenth or a hundredth ofwhat they were.Our visions to move from the two to three per cent of busin ess we're doing today on Weborder management to the majority of our transactionsbeing Web-based two to three yearsfrom now. It has huge productivity implications for us and, even more importantly, itoffers better service to our customers'. 'We're changing our overall approach to supplychain management to become even more consumercentric,' said Mike Power, President,

Global Business Services. 'When consumers walk into a retail environment, they want theright product at the right time at the right place. They don't want to find it out-of-stock.That's a disappointment to them and a lost sale for us. That differs from our supply chainstrategy ofthepast in two significant ways: It puts the consumer first, and it envisions anetwork rather than a chain.

All the work we've done until now to improve our supply chain focused on the supplierfirst-which means we've been applying a cost mentality to the problem. Now, we'reputting the emphasis on serving the consumer. And whereas a chain connotes handoffsand time delays, the consumer-driven network will operate with real-time data and allnetwork participants working to add value for the consumer.'

The P&G supply network has five keyparts. It starts with real-time demandinformationthat replaces point-of-sale data with electronic product code (EPC) data. There are morethan 100 radiofrequency identification (RFID)protocols worldwide; EPC is the standardbeing developed by the Auto-ID centre, a collaborative effort of 103 end-user andtechnology companies to create an open and global standard.


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The second part is collaborativeplanning. Basically, this comes down to communication-via e-mail, fax, or live-with their retail partners about their merchandising plans, toreduce the number of surprises and keep thebrands in stock. It is less complex and easierto implement than collaborativeplanning, forecastingand replenishment (CPFR) in anenvironment, where data requirements differ greatly from customer to customer and

supplier to supplier.

The third part is aproduce-to-demand manufacturing system. The company used to thinkthat producing long runs of the same product would improve theirefficiency,but insteadfound that it built an inventory of items the company did not need, without making itpossible to reschedule production to items that were nearly out of stock. Two years ago,the company had the capability to produce every item once a month; now the goal is toproduce every item P&G makes everyday. P&G is not there yet, but it claims it canproduce every item every week.

The fourth part is dynamic replenishment and distribution. This would reduce

replenishment time to customers and improve in-stocks for consumers. The goal is todeliver tomorrow what the retailer orders today. And fifth, the consumer-driven supplynetwork begins and ends with superior retail execution. P&G wants to help their retailpartners develop the-right tools to become more successful in reducing out-of-stocks.P&G have been testing these five parts and will begin integrating them soon. They canbuild revenue by reducing out-of-stocks, which today average 11-15 per cent..',..Procter and Gamble Reinvents Its Supply Chain

Dramatic changes for industry, most recently demonstrated in the huge stock market slideFriday and Monday, has consumer goods giant P&G looking to 'reinvent its supply chaintogether with its partners. Procter and Gamble CIO Steve David offered an inside look atsome of his company's goals for SCM at AMR Research's Retail and Consumer GoodsExecutive Conference recently.

By 2005, P&G planned to put in place Web-enabled alliances with partners and acustomer- and consumer-driven supply chain.

Previous work reduced the company's supply chain cycle from 140-plus days in the1950s through the 1980s to 130 days in the 1990s. Through an initiative the companycalls efficient consumer response II (ECR II), P&G is looking to reduce the cycle timefurther to 65 days. But the company has its work cut out for it.

Currently P&G has 4000 internal websites, 25,000 organizational nodes, 70,000materials, 2,00,090 products, 5,00,000 customers and 1 million parts. 'We have to cleanup our act', admits David.

The impact of supply chain inefficiencies is nothing to be trifled with. For example,retailers lose 11 per cent of sales due to out -of-stock items. Customers who experiencean out of stock event are more likely to spend their money at another store or not at all.


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And same brand substitutions recover less than 25 per cent of lost sales formanufacturers.

Rather than choosing either a private or public exchange, companies can use exchangesto help prevent forecasting and planning discrepancies, reduce manual redundant

processes, and improve their capability to operate on a global scale. Exchanges can alsohelp speed time to market, which improves total shareholder return by 50-100 per cent.

However, some business-to-business exchanges will fail in the coming months and years.But those failures will be caused more by poor business plans and models;underestimated costs of customer acquisition, and buying into vendor pitches of amazingresults.

By employing exchanges and improving the supply chain, companies can improveconsumer value, business results, and reduce their working capital requirements. Forexample, supply chain-driven reductions in working capital can normally reduce

inventories by 50 per cent.

Supply Chain Innovation at Procter & Gamble

Jake Barr is in charge of 'supply chain innovation' at P&G. He is supposed to figure outhow to get the consumer products giant's detergents, soaps, and personal care productsinto the hands of 5 billion customers in 170 countries more efficiently. His goal? Tocreate the equivalent of a 14th billion-dollar brand-by stocking shelves in stores aroundthe globe more accurately by responding better to what people want. And getting 5000retailers and 30,000 suppliers to participate in a system that would immediately signalproducts favoured by customers.

'If you can't drive sales and deliver product at the point of purchase, you lose,' says Barr.Some 60 per cent of P&G's sales now come from what Barr calls 'events'. These arepromotions that the supermarket, convenience store, or other retailers execute with pricecuts or other incentives; or they take the form of discount coupons and price promotionsmailed out,put on the Internet or distributed in a store by P&G itself. Promotions for gift-with-purchase were rolled out on the Pampers.com andBaby Universe. com sites. Thesepull marketing events are designed to drive consumers to retail stores and maintaincustomerloyalty.

In the past, P&G used a push system of moving products out of the store door.Independent of what retailers were doing, P&G would forecast sales forTide detergent,Crest toothpaste, or other products. Then, it would tweak sales through the year withcoupons and other incentives designed to entice enough customers to buy, movingproducts off store shelves.

But with the majority of sales now coming from promotional events, Barrand his GlobalProduct Supply team studied the pull systems of efficient distributors ofconsumer and


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industrial products such as personal-computer maker Dell. The idea cut out piles ofinventory and produce only those products that consumers are actually buying.

To a retailer, being out of stock on a product that consumers want is no small matter. Aretailer whose shelf is bare of a product in demand loses the sale 41 percent of the time,

according to Consumer Insight magazine; an industry trade publication. The typicalresponse is to find the product at another store: But even P&G loses. Approximately 28per cent of the time, Barr says, the customer simply picks another competing product.Barr's goal about 18 months ago was to get to a nearly 100 per cent demand-drivensystem of supplying products to supermarkets and other stores around the globe. In hispreferred analogy, he wanted P&G's planners and forecasters to be 'looking through thewindshield and not the rearview mirror' at what was happening in the marketplace.

But P&G is not like Dell. It does not field calls from consumers. It cannot wait until afterconsumers decide what they want, before it puts products onto store shelves. It cannotwait to find out what customizations the consumer wants when the call comes in. 'I have

to put all seven smells (of 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 differentproducts worldwide, every day. When Barr's team started to tackle the problem ofshifting from a push system to a pull system, nine times out of 10 consumers werefinding the P&G product they wanted in the store. Barr aimed to cut the rate of out-of-stock items from 10 per cent to 5per cent which is not so easy. He says, 'For a companyour 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 andsuppliers into the planning and deliveryprocess. Thesignals of consumer demand wouldcome from the stores; responses would come from P&G manufacturing managers, supplychain managers and suppliers, who would key production of new products to salesreports coming from the stores.

Forexample, P&G now gets dates and locations for all events with its retail partners, andprepares for predictable increases in demand. If some stores are going to do a buy-two,get-one-free' promotion on their Pampers diapers, P&G can better coordinate itsproduction and distribution in that region. As Barr puts it, 'In thepast, we'd only knowthat these stores wanted an extra 100 or 200 cases of the product and we'd send it in onelarge delivery. Sometimes, it'd be several weeks early. Once in a while, it would be late.'

'One of our fatal flaws,' Barradds, 'was that our (supply chain) network was not reallywell integrated.' The company has 5000 key retailers and more than 30,000 key suppliers.'I had data coming from many sources, but it was not synchronized,' Barr says. Somesales data might come in daily, some weekly. Some might come by item or productcategory. Consistent information, received daily or more- frequently, would mean gettingretailers and suppliers to adhere to common conventions in feeding and drawinginformation out of P&G's SAP supply chain management system.


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This caused immeasurable problems. When P&G is spending $80 million to advertisenew flavors of fluoride anti-cavity toothpaste such as Cinnamon Rush and ExtremeHerbal Mint, it needs to know which ones are selling and which are not. Without detailedreports,boxes of Extreme Herbal Mint can be collecting dust in the storage rooms whilethere is not 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 abig change at P&G's factories. In the old build-to-forecast days, theplants would simplyrun big lots, move them to warehouses, and let marketing work down the stacks ofunsoldproduct. 'Changeovers of manufacturing lines were anathema,' says Barr, a former factorymanager, because the belief was that long product runs cut down per-unit costs. 'Butwhat actually happens is per-unit costs rise if you're making products consumers don'tbuy,' 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 offshelves. Thatkeeps costs down. 'We've tried to improve every aspect of how we deliverproduct to ourcustomers at the lowest cost,' says Tom Walker, Vice President of logistics for CostcoWholesale Corp., which sells $41.7 billion worth of consumergoods a year through its

397 retail warehouses. 'The software, along with common sense, has improved P&G'sability to get accurate shipments to our stores in a timely manner. The fact that our salesof P&G products are up by 15per cent in the past year tells you how effective this systemis.'

Cannondale Associates, a marketing and consulting firm said retailers ranked P&G as thetop manufacturing partner, ahead of Kraft Foods. After implementing the new pullsystem, the company is close to its original goal of cutting out-of-stockconditions in half.Now, 93 percent of outlets working under the new system are experiencing no more than5per cent out-of-stock rates. That represents a yearly savings of $50-$100 million.

Benefits

The benefits reaped by P&G from supply chain innovation initiatives are the following.

(i) Sales increased by 7. 8 per cent.Net profits, which P&G expected to improveby 10per cent, jumped up by 19 per cent in fiscal 2003.

(ii) In fiscal 2003, P&G generated $4.9 billion, largely because of the supply chainimprovements and increased sales resulting from the coordination with events.

(iii) Working capital, the amount of money the company has on hand to run its day-to-daybusiness, jumped to more than $1. 7 billion in fiscal 2003. 'To me, working capital isthe best barometer of how efficient an organization is,' says Bill Steele, an analyst atBanc of America Securities in San Francisco, 'P&G is making life very difficult forcompetitors, such as Unilever, Kimberly-Clark, and Colgate- Palmolive. It hasconsistently outperformed all of these companies, mainly as a result of its systems and itsmanagement.'

P&G Key Performance Indicators


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The key supply chain performance indicators by P&G are the following.

Shelf-level out of stocks- The percentage of products that are out of stockon retailers'shelves at any given time. P&G has cut this to 5per cent, from 10 percent and wants it

further reduced to 2.57 per cent.Total supply chain response time- The time from when a cash register records the saleof a product to the purchase of raw materials to produce its replacement. P&G wants tochop this in half, from 100 days.

Total supply chain inventory- The hard count of all products flowing through thesupply chain at any given moment, whether on store shelves, in back of the store, atwarehouses, in trucks or wherever. P&G wants a daily count, rather than weekly ormonthly.

Shelf-level quality- The percentage of packages damaged or otherwise unappealing

when a customer sees them on a store shelf. The goal is to have zero damaged orunappealing packages.

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 at that productcan be delivered at a price acceptable to consumers, and a profit acceptable to P&G.

Distribution Center Concept and Structure of Wal-Mart

As mentioned frequently in this book, US-based Wal-Mart Stores has pioneered thedevelopment of modern retail warehousing. As Wal-Mart founder Sam Walton decided to

have Wal-Mart stores especially in those cities and villages that no competitor hadchosen, he had to invest to create a powerful centralized distribution system. BeforeWal-Mart's entry, these locations were not having the best logistical infrastructure. Forexample, they did not have good connection to highways.Today, Wal-Mart operates more than 40 regional distribution .centers with an averagesize of more than 90,000 sq m. In each distribution center, over five miles of conveyorbelts have been installed that guarantee a steady goods flow and 24/7 operations. Eachdistribution center serves 75 to 100 stores within a 2S0-mile radius. A commonimportant feature of these stores is that they are all of the same size and have the sameassortment so that the centralization effects can be optimally utilized.Due to the different product categories offered, Wal-Mart also runs specialized

distribution centers, for example for grocery, pharmacy or apparel/shoes, so that thecentralization effects can be exploited.All distribution centers are cross-docking centers where two-thirds of the terminal area ispure cross-docking area and the rest is operated for continuous replenishment. Theaverage turn of these centers is about 500,000 cases a day.Suppliers are asked to stamp all incoming goods with bar-code labels so that automatedprocesses can be applied, Within the distribution center, many break bulk andconsolidation activities are performed automatically. Besides the conveyor belts, high-


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performance scanners allow fast sorting, and pick-to-light technology allows paperlesspicking.Since 1978, Wal-Mart has been using IT in its distribution system. It is estimated that till1990, the company has invested around US-$700 million into itsIT- driven distribution.In the late 1990sWal-Mart officials reported that the company was able to reduce its net

working capital by US-$ 2.6.billion due to distribution and SCM.From a warehousing point of view, Wal-Mart increased the inventory turns from 12 to 24per year and reduced handling costs for damaged goods by 20%.Recently Wal-Mart has also emerged as a driving force in RFID implementation fortagging all men apparels in theirover 3,000 stores.Questions for Discussion

1. How is the centralization effect used by Wal-Mart warehouse management?2. How has Wal-Mart integrated technology usage for business operations relevant towarehouse management?

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4-Case Study-Procter_and_gamble and Wallmart