Supply Chain Strategy, Performance and Risks: Tools and Techniques Introduction “Our Purpose works to unify us in a common cause and growth strategy. It is powerful because it promotes a simple idea to improve the lives of the world’s consumers every day. P&G grows by touching and improving more consumers’ lives in more parts of the world… more completely.
” – P&G “At P&G, we touch lives in small but meaningful ways. Billions of them. Every day.
” Procter & Gamble Co. is a multinational corporation that manufactures a wide range of consumer goods.Globally it is one of the largest FMCG companies. P&G entered Indian market four decades ago but still lags HUL and other major players whereas its entry in china has been successful and has grown to three times larger than Indian operations. P&G is now focused on becoming more cost efficient globally. In the emerging markets like India can those strategy be implemented considering its positions as smaller player? What it needs to do differently to build an effective supply chain to meet the local specific demand?In December 2008, while the world was cutting down production and halted all expansion plans the P&G announced to build 19 production plants in developing countries like Malaysia, Romania, India and Pakistan.
P&G has now adopted a purpose-inspired growth strategy which is to be cost effective to produce more affordable goods for low-income group consumes. FMCG Industry Goods consumed daily or at a regular interval are considered fast moving consumer goods (FMCG) like soaps, detergent, tooth paste, packaged food etc. FMCG companies are mostly involved with the production, distribution and arketing of these goods. In Indian FMCG is the fourth largest sector with market size greater than US $ 13.
1 Billion and is expected to treble from US$ 11. 6 Billion in 2003 to US$ 33. 4 Billion in 2015.
It is a very competitive sector and is characterized by an extensive distribution network, low operational cost. The FMCG market is set to treble from US$ 11. 6 billion in 2003 to US$ 33. 4 billion in 2015. But in India, Procter and Gamble is way behind of Hindustan Unilever, ITC, Dabur India and Britannia though it is one of the top FMCG Companies in the world.So an effective supply chain model can help P & G to climb to among the tops in India. In India, P & G has mostly targeted the premium market. The shampoo market in India is valued at Rs 4.
5 bn with the penetration level at 13% only. The market is expected to increase due to lower duties and aggressive marketing by players Shampoo is also available in a sachet, which is affordable and makes upto 40% of the total shampoo sale. The Indian shampoo market is characterised by a twin-benefit platform: cosmetic and anti-dandruff.It is basically an upper middle class product, as more than 50% of the consumers use ordinary toilet soap for washing hair.
HUL is the leader with approximately 44% share of this market through its Sunsilk, Clinic Plus, Clinic All Clear and Dove brands. P&G is the second-largest player, with a market share of around 25%. However, while HUL gets 7-8% of its revenues from shampoos, P&G gets 15-17% from the category. Although the per capita consumption of detergents in India (2. kg pa) is comparable to some countries like Indonesia and China (around 2 kg pa), it is lower than in others such as Malaysia, Philippines (3. 7 kg) and the USA (10 kg). The Indian detergent market is expected to grow at 7-9% pa in volume terms. In detergent segment, P & G has 16% market share in India, where as HUL leads with 37% market share and closely followed by Ghari (18% market share).
Whisper cumulatively has a market share of 52 per cent and is the leading brand in its segment and Vicks Vaporub has market share of 33. 5% in India.Market share of Gillete is 40% while that of its nearest competitor, the House of Malhotras, is 14%. Large FMCG companies faced problems in penetrating to the rural markets due to inefficient infrastructure. Many local brands entered the market to bridge the demand-supply gap. Indian consumers’ heterogeneity and geographical variance increases the cost of operation and makes product unaffordable to low income consumers in rural markets. Increasing population, demand by the middle class group and rising aspiration levels are the key drivers for growth in the FMCG sector.
This presents an enormous opportunity for the FMCG companies to develop new products and innovative ways to bring the products to the consumers while maintaining low prices. Suppliers Manufacturers Major players in FMCG sectors are Hindustan unilever ltd. , Procter & Gamble, Godrej consumer products, Dabur, Garnier. All these companies have a unique selling proposition targeting a specific segments. eg. Marico operates only in Hair care products, Dabur in ayurved based products. These players command a very high bargaining power because of their size and scale over their suppliers.Also the suppliers are scattered.
Distributors Supermarket A number of domestic retailers like Big Bazar, subhiksha, vishal mega mart, reliance fresh, More, Spencer, opened up retail channels in the major urban centres in the last decade. Many foreign retailers like Wal-Mart, Carrefour are exploring options to enter the Indian retail market. Retailers Indian retail industry is characterized by mom and pop stores called kirana stores locally. They operate with 2-3 people in a 100-150 sq foot space in urban and semi-urban areas and kiosk in rural areas.These Kirana stores sell few SKUs of all the major players and local brands.
Customers are generally indifferent about the brand but are more concerned about the size and price of the SKU. So they depend on the Kirana owners to decide the products for them. So Kirana owners have an incentive to stock only high margins products. Individually these Kirana stores do not have any bargaining power with the manufacturers but with their trade union and associations they become strong. About P&G William Procter, a candle maker, and James Gamble, a soap maker, formed the company in 1837.During the American Civil War, the company won contracts to supply the Union Army with soap and candles which led to increased profit and introduced products all over the US. P&G became an international player by acquiring UK based Thomas Hedley Co. , in 1930.
P&G acquired a number of companies to diversify its product portfolio. In January 2005 P&G announced an acquisition of Gillette, forming the largest consumer goods company and placing Unilever into second place P&G is a Fortune 500 company with Revenues of US $ 76,476. Million and profit of US $ 10,340. 0 Million for the financial year ended 2010.
The operations of P&G is categorized into three ‘Global business units’ * Beauty & Grooming * Household Care * Health and Well-Being P&G has in its portfolio billion dollar brands like Tide, Ariel, Vicks, Whisper, Pantene, Head & shoulders, Rejoice, Pampers, Gillette. P&G measures it success based on two moments of truth (Stock availability, Product satisfaction). The first moment of truth happens when the consumers find the desired SKU on the shelf.Because if the desired product is not available then the consumers moves to a different brand. The second moment of truth is when the customer is satisfied with the usage of the products.
In its 2008 annual report P&G reported that over a third of the company sales growth was from developing markets with a profit margin that was comparable to developed markets margins. P&G announced that it would rethink its distribution network, which was implemented when the cost of oil was $10 per barrel. SourcingP&G has more than 16,000 product formulas and uses more than 4000 colors in product labels and plastic packaging. Most of the raw materials that go into production of the P&G products are commodities. P&G maintains key manufacturing and supply arrangements, including sole supplier and sole manufacturing plant arrangements. P&G has over 80,000 suppliers and partners globally.
P&G uses an internal management system to track the performance of these suppliers. Top and consistent performances are awarded ‘Supplier of the year’ and distinction award.P&G also recognizes its minority and women-owned suppliers. “We view our suppliers, agencies and external business partners as an extension of our Company and critical to helping us achieve our Company’s Purpose of touching and improving the lives of the world’s consumers,” – Rick Hughes, chief purchasing officer. “Our external business partners bring ideas, technology, creativity, diversity and innovation to our business. ” – McDonald, P&G’s chairman of the board, president and chief executive officer. Recently P;amp;G has started focusing on building a sustainable supply chain.
It has partnered with World wildlife forum for sustainable sourcing of materials like palm oil, renewable forest products including wood pulp, sugarcane-derived plastic. It is expected to remove PVC from its raw material within next few years. P;amp;G’s GARP (Global Asset Recovery Purchases) turns “garbage into good. ” About 96% of the all waste material is converted into finished products showing higher recyclable raw materials used. In 2010, globally P&G purchased US $ 43. 8 Billion of raw material and services majority of which was purchased locally near the manufacturing sites.
In the past, P&G made suppliers decision through in-person negotiations using expressive languages. But this process of decision making when many and global suppliers are involved made it more complex and time consuming. P&G decided to shift to computerized sourcing where the suppliers will be able to place electronics offers. P&G’s operations research group, known as IT Global Analytics, tried different ways but were not successful. During 2001, a software company, CombineNet approached P;amp;G with an industry independent sourcing optimization solution called REV.REV was able to solve a transportation sourcing problem optimally in 9 seconds which other programs took more than 30 minutes. P;amp;G then started using the REV and jointly developed more specific solutions.
Manufacturing P;amp;G has more than 130 manufacturing facilities in over 40 countries. P;amp;G also uses contract manufacturers before determining whether they should invest in the plant or not. This helps them in determining the production requirement and also achieves cost effectiveness. At present 10-15% of all total manufacturing volume is by contract manufacturers.In India P;amp;G has manufacturing facilities at Bhiwadi for Blades ;amp; Razors, Bhopal and Solan for Fabric care and Goa for Feminine care. Other products are outsourced. Logistics Recently P;amp;G contracted Ryder System, Inc.
to manage a part of its U. S/Mexico logistics network, including cross-border transportation operations. Ryder systems developed an exciting ‘Control Tower’ service a centralized holistic approach based logistics optimization program to control the materials and products flow. P;amp;G has been able to optimize efficiency by eliminating inefficiencies such as loading and unloading delays, dead legs (empty trucks) etc.It has improved the inbound logistics reliability by 58 % in Egypt and 68 % improvement in finished products inbound operations in Turkey. Emphasis on greater use of rail transportation than road led to reduced CO2 emission and better energy savings. ‘Control Tower’ is now being expanded into Europe and Africa.
Distribution P;amp;G’s products are sold in more than 180 countries through mass merchandisers, grocery stores, membership club stores, drug stores, high-frequency stores, neighborhood stores and are expanding in department stores, perfumers, pharmacies, salons and e-commerce. Inventory ManagementP&G is using ‘Intelligent Daily Forecasting’, a solution developed by Terra Technology, to improve the product delivery and availability to customers. P&G has been able to reduce its inventory by 10% and free human resource from transactional tasks to focus on demand-shaping opportunities. When P&G acquired Gillette, it faced a problem of integrating the two supply chain. More than 1000 supply chain processes were broken down and built back up to meet the needs of the combined entity. By 2008, P&G has gained more than $1. 2 Billion in savings through these synergies.
Swot AnalysisWith revenues of $79,029 million, P&G is the world’s largest consumer products manufacturer, with its products reaching 4 billion people worldwide. In addition, P;amp;G has the largest lineup of leading brands in its industry, with 23 brands with over $1 billion in annual sales, and another 20 brands generating about $500 million or more in annual sales. Leading market position and strong brand portfolio provides P;amp;G with significant competitive advantage as well as stabilizes the company’s financial growth. However, fluctuations in commodity costs and foreign currency rates would affect P&G’s profitability. StrengthsLeading market position garnered on a strong brand portfolio With revenues of $79,029 million, P;amp;G is the world’s largest consumer products manufacturer, with its products reaching 4 billion people worldwide. P&G is the 20th largest company in sales and the 9th largest company in profit among the Fortune 500 companies. The company’s market capitalization in 2009 was roughly $150 billion, making it one of the 10 most valuable companies in the US. In addition, P&G holds leading global market shares in a variety of categories, including baby care (33%), blades and razors (70%), feminine protection (37%), and fabric care (33%).
The company’s leadership position is built on its strong brand portfolio. P&G has the largest lineup of leading brands in its industry, with 23 brands with over $1 billion in annual sales, and another 20 brands generating about $500 million or more in annual sales. Twelve of the billion-dollar brands are the global market share leaders of their categories.
These 43 brands have delivered a 9-year compound average sales growth rate of approximately 10%—double the growth rate of the balance of P&G’s brand portfolio.Strong brand portfolio enables the company to achieve economies of scale in distribution and retain a strong bargaining position with retailers. Furthermore, leading market position provides P&G with significant competitive advantage as well as stabilizes the company’s financial growth. Significant R;amp;D and marketing investments Being a consumer products company, P;amp;G relies heavily on innovation and continued marketing investments in order to establish a significant competitive advantage.
As a result, the company has made significant investments in R;amp;D and marketing. Over the last decade, P;amp;G has invested more than $2 billion in consumer and market research (nearly twice that of its closest competitor, Unilever; and equal to the combined total of its other major competitors—Avon, Clorox Company, Colgate-Palmolive Company, Energizer Holdings, Henkel, Kimberly-Clark, L’Oreal, and Reckitt Benckiser). Virtually, all the organic sales growth delivered by P&G in the past nine years has come from new brands and new or improved product innovation.The company interacts with more than five million consumers each year in nearly 60 countries around the world. P&G conducts over 15,000 research studies every year and invests more than $350 million a year in studies focused on consumer understanding. Additionally, P&G also involves external innovation partners to boost its internal innovative capability, an approach it calls ‘Connect and Develop. ‘ Currently, more than half of all product innovation coming from P&G includes at least one major component from an external partner.
The IRI Pacesetters study tracks and ranks the most successful new consumer products introduced in the US. Over the past 14 years, P&G has had 114 top 25 Pacesetters—more than its six largest competitors combined. In the last year alone, P&G had five of the top 10 new product launches in the US and 10 of the top 25. P&G’s strong R&D capabilities and a marketing-driven understanding of consumer needs are backed by significant marketing investments. The company invests more than $7 billion in advertising annually, consistently making P&G one of the world’s largest advertisers.
Strong focus on research and development allows P&G to renew its product line at regular intervals, which boosts customer loyalty and revenue growth. Significant marketing investments to support its brands and a broad product portfolio help P&G to remain at forefront in a competitive market. Robust cash productivity P&G’s cash productivity—the percentage of earnings converted into cash—has averaged over 100% since 2001, consistently among the very best in the industry. This is primarily due to P&G’s strong focus on productivity, working-capital management and cost reduction.For example, P&G is the receivables leader of the industry, operating more efficiently with fewer days of receivables outstanding than any consumer products competitor. Furthermore, P&G is equally rigorous about managing costs.
The company has reduced overhead costs as a percentage of sales by more than 300 basis points since 2001. In addition to reducing costs, P&G has also focused on increasing productivity. Weaknesses Increasing instances of product recalls P&G has been registering increasing instance of product recalls recently.For instance, in November 2009, the company voluntarily recalled three lots of its Vicks Sinex nasal spray in the US, Germany and the UK. The recall was a precautionary step after finding the bacteria B cepacia in a small amount of product made at its plant in Gross Gerau, Germany. In the following month, P&G voluntarily recalled its Vicks DayQuil Cold & Flu 24-Count LiquiCaps Bonus Pack in the US. The product was recalled as it did not contain a child-resistant backing for the blister packs in the box, despite label statements that the product is in child-resistant packaging.
Later in March 2010, P&G voluntarily recalled its Pringles Restaurant Cravers Cheeseburger potato crisps and Pringles Family Faves Taco Night potato crisps in response to a recommendation from the Food & Drug Administration (FDA) to the food industry to protect consumers from potential Salmonella exposure. Most recently in June 2010, P&G voluntarily recalled a small percentage of 1-liter bottles of Scope Original Mint and Scope Peppermint mouthwash with malfunctioning child-resistant caps in the US and Canada.During the same month, P&G recalled its 4-Hour Decongestant Nasal Spray distributed in the US. The product was recalled as the product formulation did not meet the expiration dates on the package. Furthermore, the company recalled specific lots of its Iams canned cat food in North America as the diagnostic testing indicated that the product contained insufficient levels of thiamine (Vitamin B1).
Recurrent product recalls could affect the brand image of the company, which would lead to low customer loyalty and brand equity. Excessive dependent on Wal-MartP&G is heavily dependent on Wal-Mart Stores (Wal-Mart) and its affiliates for generating major part of its revenue. Sales to Wal-Mart and its affiliates represented approximately 15% of its total revenue since 2006. High dependence upon a Wal-Mart reduces the bargaining power of the company.
Also, Wal-Mart could use its bargaining power to impose unfavourable terms on the company. Any decrease in revenue from Wal-Mart could have a negative impact on the company’s businesses. Hence, the loss of this customer will lead to a sharp decline in P;amp;G’s revenues and also a loss of its market share.Higher product prices translated into sales volume decline and market share loss P&G increased prices to recover higher commodity costs and foreign exchange transaction impacts. The higher prices pushed through on its products to offset input cost inflation of $2 billion and negative foreign currency exchange of $4 billion in FY2009 translated to uncompetitive pricing on store shelves in the midst of the economic downturn.
Sales volumes declined, and P&G lost market share in some categories. The higher prices also affected consumption in some more-discretionary categories.Although higher product prices would maintain P&G’s investment grade financial health, the company will be challenged to maintain market share and sales volume, given the face of declines in consumer spending.
Opportunities Future growth plans—increasing concentration on its core attractive businesses and enhancing its customer base In order to grow in a highly competitive environment, P&G is pursuing a clearly drafted strategy with focus on two areas: increasing concentration on its core attractive businesses and enhancing its customer base.The company is sharply focusing on its core attractive businesses (the beauty and health market segments and several household care categories) as these are fast-growing businesses. For instance, the global market for personal care products has annual sales of over $39.
5 billion and is growing at a rate of around 5% annually. In addition, the global household care market is valued at $200 billion and is growing at a steady pace. In addition, P&G intends to increase its customer base by acquiring under served and unserved consumers.In line with this, the company is targeting developing markets; extending its distribution systems; and expanding its brand and product portfolio.
Developing and emerging (D&E) economies are expected to account for 90% of the world’s population by 2010, and this is expected to drive demand for fast moving consumer goods (FMCG). For instance, the Indian FMCG sector is expected to grow fourfold from $25 billion sales in 2008 to $95 billion by 2018. Similarly, the Chinese FMCG market is also expected to growth at a rate of 15% a year in the next five year period (2009-13).On an aggregate basis, P;amp;G has a 19% share in developing markets and is growing steadily by about half a share point a year. Furthermore, in order to tap new customers, P;amp;G is also extending its distribution systems in four priority areas: drug, pharmacy and perfumery; high frequency stores; export operations; and e-commerce. In addition, the company expanded its portfolio both vertically—to serve more consumers at more price points—and horizontally into adjacent categories.For instance, the company expanded its Tide (the leading laundry detergent brand in the US) and Ariel (the leading laundry detergent brand in Western Europe) brands horizontally into the laundry additives segment with the introduction of Tide Stain Release and Ariel Professional.
P;amp;G also expanded its portfolio into the value priced segment by introducing a new line of diapers in Germany called Pampers Simply Dry, priced about 15% below the Pampers Baby Dry. This strategy will put P;amp;G in a stronger position and will drive the company’s profitability in the long term.Increased investment in manufacturing capacity in developing countries P;amp;G is planning the biggest increase in its manufacturing capacity in order to expand into categories and countries where it doesn’t have a brand presence.
The company is investing 4% of sales in capital spending, including funding for new manufacturing capacity to support future growth. Over the next five years, P&G will add 20 new manufacturing facilities. Almost all of these facilities are in developing markets, and almost all will be multi-product category facilities.By focusing on developing markets, the company would reduce the cost of serving these markets while also being closer to regions with the greatest long-term growth potential. Acquisitions to expand portfolio P&G has made significant acquisitions in the recent past. For instance, in June 2009, the company acquired the Zirh skincare brand. Zirh is a leading super-premium, male grooming brand available in high-end department stores, specialty outlets and online. Zirh enjoys unique positioning as a high-end “male only” brand and has one of the most comprehensive skin and shave care lines in the male grooming market.
Later in May 2010, P&G entered into an agreement to acquire Natura Pet Products, a privately-held pet food business. Natura’s brands include Innova, Evo, California Natural, Healthwise, Mother Nature and Karma. These brands are sold in a limited number of pet specialty stores and through veterinarians, mainly in the US and Canada. Most recently, in July 2010, the company completed its acquisition of the Ambi Pur Brand from Sara Lee Corporation. Ambi Pur is a leading global air care brand with presence in 80 countries, and also has several toilet care products, with strong presence in Western Europe and Asia.
Acquisitions such as these will strengthen P;amp;G’s presence across various categories and in turn enhance its top line and bottom-line. Threats Counterfeit goods Trade of counterfeits and pass-offs products is negatively affecting the growth of FMCG companies like P;amp;G. The top two brands within any category be it cosmetics, detergents, or soaps are effected the most by counterfeiting and pass-offs. It is estimated that the loss due to counterfeit products convert into around E6 billion ($8.
5 billion).Furthermore, with the advent of digital channels there has been a surge in the sale of counterfeit products and online sales of these products increased by 9% in 2009. In November 2009, the US Immigration and Customs Enforcement (ICE) agents seized more than 17,000 counterfeit items worth an estimated $643,000 from 21 businesses in the Minneapolis-Saint Paul twin cities region in the US and the consignment included 3,524 bottles of perfume. Besides revenue losses, counterfeits and pass-offs also affect the company’s brand as they are unsafe. Low quality counterfeits reduce consumer confidence in branded products.Also, what differentiates the offerings of companies such as P&G from its competitors is exclusivity; widespread counterfeits reduce this exclusivity.
Counterfeits not only deprive revenues for P&G but also dilute its brand image. Changing global retail scenario and rise of private labels P&G’s products are sold in a highly competitive global marketplace which is experiencing an increased trade concentration and the growing presence of large-format retailers and discounters. With the growing trend toward retail trade consolidation, it is increasingly dependent on key retailers.Some of these retailers have a greater bargaining strength than P&G. They may use this leverage to demand higher trade discounts, allowances or slotting fees, which could lead to reduced sales or profitability.
P&G may also be negatively affected by changes in the policies of its retail trade customers, such as inventory de-stocking, limitations on access to shelf space, delisting of products and other conditions. In addition, many retailers have pushed their own higher margin private label brands in competition with P&G.In the past decade, P&G has faced stiff competition from private label brands or “store brands” of large retailers such as Wal-Mart, Target, and other supermarket chains. For example, Wal-Mart offers 5,500 products through its “Great Value” brand, which has increasingly sold as consumers feel the recession squeeze on their disposable income. Large retailers are close to the consumers, have the point of sale data on consumer behaviour and are in better position to understand consumer behaviour. These strengths contribute to better private label product development, which directly compete with P&G products.
Changing global retail scenario and rise of private labels may adversely affect P&G’s business. Commodity cost and currency exchange rate Commodity cost and currency exchange rate volatility places tremendous pressure on P&G’s business. Although P&G is based in the US, it earns revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the US dollar. As a result, increases or decreases in the value of the US dollar against other major currencies will affect the company’s net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies.The unfavourable impact of currency fluctuations decreased revenues by about four percentage points, or approximately $4 billion, and profit by more than $1 billion. The unfavourable impact was primarily due to a stronger US dollar compared to most foreign currencies.
In addition, unexpected and dramatic devaluations of currencies in developing or emerging markets, such as the recent devaluation of the Venezuelan Bolivar, could negatively affect the value of the company’s earnings from, and of the assets located in, those markets.In addition as a diversified consumer products manufacturer, P&G depends heavily on a wide basket of global commodities for manufacturing its goods, the prices for which have risen nearly 50% since 2002. Nearly half of the company’s cost of goods is directly related to commodity goods. P;amp;G incurred roughly $2 billion in net commodity and energy costs in FY2009, in addition to the $1 billion in the prior year. Fluctuation in commodity costs and foreign currency rates would affect P;amp;G’s profitability. P&G Supply Chain Issues – 1) To achieve higher customer satisfaction ) To have higher profitability and garner the market share 3) To make the supply chain capabilities the core of the business model 4) Account selection, In-customer operations and the channel strategy Innovations At P&G 1) Partnered with Wal-Mart to establish the continuous replenishment system 2) P&G replaces the Wal-Mart’s facilities without the purchase orders based on the retailer’s product movement data 3) Evolving their supply chain focus from marketing to the production, inventories and logistics in response to change in business environments.Supply Model – This is made by the Agent – based computer model developed by the Bios group Inc in Mexico which covers 5 billion customers in over 140 countries. Problems in Supply Chain The business situation in 1988 between P&G and Wal-Mart was broken.
The business itself was $375 million and growing. In spite of this, the business relationship between the two companies was poor. P & G had organized itself into12 different internal product divisions. Each division had different sales managers that would separately and independently call on Wal-Mart.These individuals were accountable for the sales results of each division and never came together to represent P&G as a whole. At that time, the relationship between P&G and Wal-Mart was characterized as anything but collaborative.
As a matter of fact, their relationship was adversarial, obsessed by day-to-day transactions. Furthermore, their business relationship was conducted through fragmented processes. The details of these problems are summarized by the following characteristics:- (1) Adversarial relationship – Wal-Mart did not like doing business with P&G.P&G organizations were too complicated and inflexible. (2) Transactional focus – P&G were obsessed by day by day selling, in which success was that you got the order today – failure was that you did not. Efforts were made to push for sales irrespective of what the customer needed, or was rewarded for.
There was no testing or long term planning. (3) Fragmented processes – Relationship and activities were managed by the buying and selling function only. The selling function within P&G was responsible for all customer activity.They were responsible for selling at the customer. The role that information systems played in the relationship was non-existent.
The IT group typically got involved only after phone calls down the chain informed us that a technology project such as Electronic Data Interchange (EDI) was requested by the customer. Use of Information technology in Supply Chain Integration (P&G and Wal-Mart) Problem Resolution P&G began to re-think the way it approached its customers about the same time. P&G had an extremely overcomplicated and inflexible sales organization.If P&G thought of Wal-Mart stores as an extension of the P&G company, P&G would treat Wal-Mart differently.
This challenge became the rallying cry for the two companies. Great strides have been made since the 1988 start-up of the P&G dedicated Wal-Mart team. Moreover, P&G and Wal-Mart have improved the profitability of both companies by using multifunctional resources to drive out costs and improve sales.
The two organizations use joint scorecards to review the joint business and make annual plans to drive category growth for both companies.Together they use technology as a method to drive out costs, and openly share data to better understand our joint customer – the consumers. To emphasize the strong commitment to develop a mutually beneficial partnership, the P&G and Wal-Mart team developed a mission statement, which reads: “The mission of the Wal-Mart/P&G Business team is to achieve the long-term business objectives of both companies by building a total system partnership that leads our respective companies and industries to better serve our mutual customer – the consumer. ”Technology has played a key role with Wal-Mart in three areas: 1. Joint scorecards and measurements 2. Driving out costs through automation 3. Sharing data to better understand the consumer and drive sales P&G’s Corporate Reporting System was developed based on the market and geographic structure used by the 12 product divisions. All sales reports were designed so P&G could track the amount of product (e.
g. , laundry detergent) sold in the Western part of the country. However, they did not have a system capable of reporting total product sales by customer.A system needed to be developed to track sales by customers. Once this system was developed tracking sales by customers was possible.
Information Sharing and Continuous Replenishment An important strategy for managing integrated supply chains is to share information among supply-chain partners. One of the main benefits of sharing information is the reduced need for inventory. As a result, the supply chain achieves better performance in terms of financial returns, service level, and turn-around times.
With information shared among the manufacturer and the retailer, the manufacturer can use the information about the inventory level of the retailer to manage the frequency, quantity, and timing of the shipments– instead of waiting for the retailer to place orders. This practice, referred to as continuous replenishment process (CRP), enables the manufacturer to reduce the inventory necessary and to plan the shipments effectively. P&G replenished Wal-Mart’s inventory based on inventory data received from Wal-Mart’s distribution center (DC).This data allowed P&G to manage the inventory levels to insure that P&G products were in stock at all times. P&G used their information data highway to fundamentally change the replenishment process by linking Wal-Mart’s inventory data at their distribution centers and P&G’s replenished inventory based on movement of product through their Distribution centers. For the same POS data, when CRP was implemented by sharing the demand data with the manufacturer, i. e.
, P&G, the performance is greatly improved.Instead of the highly fluctuating inventory level used by the warehouse, the warehouse inventory is much reduced. Moreover, the inventory level for the retailer is also reduced. This is due to the reduced uncertainties and shorter lead-times when CRP is used. P&G executes continuous replenishment by three pieces of information: (1) Actual warehouse on-hand quantity, (2) Actual warehouse on-order quantity, and (3) Projected sales demand from the stores. Continuous Replenishment has become a common practice in the retailing industry Wal-Mart, for example, has demanded it suppliers to implement CRP.However, underlying the implementation of CRP as well as sharing information is the mutual trust among the partners.
Also involved in the equation of information partnership is the bargaining power. Because of the possession of demand data and the customer information, the retailers increasingly have the bargaining power. As a result, they can demand their suppliers to implement CRP, thereby freeing them from having to place orders. Other than sharing the demand information, supply chain partners have started to share other types of information as well.The leveraging of information technology and the successful improvement of channel process efficiency has enabled Wal-Mart to reach higher financial goals. Now Wal-Mart is aiming to sell its goods so quickly that they are out of the store before Wal-Mart must pay its suppliers. That is primarily made possible by sharing information and executing CRP.
The typical item from P&G currently spends less than 8 hours in a Wal-Mart warehouse. These products shipped to Wal-Mart are the retailer’s shelf within 4 hours, and are usually sold within24 hours.This ability to receive payments from customers for its products before having to pay the suppliers, that is, achieving negative “cash-to-cash cycle-times” makes Wal-Mart in the same league with companies such as Amazon. com and Dell Computers as companies having the most efficient supply chains. Additional Role of Informational Technology The role of technology was to link the supply chain by using industry standards Electronic Data Interchange (EDI) to communicate key business documents.
Purchase orders, invoices, advanced shipment notification, and financial payment are just a few examples the electronic transmission of EDI.It was critical that EDI not be used to automate poor business practices. It was imperative that we streamline the business “handoffs” then use automation to drive the process. To understand the value of simplifying the business process then applying technology, the business situation below provides a concrete example.
By 1990, P&G’s business relationship with Wal-Mart was headed in a positive direction. Joint sales were up, standard scorecards to track the business, and both companies were proud of the progress of the partnership. However, there continued to be issues in the area of accounts payable/receivable.For example, P&G had developed a billing accuracy system that was used to measure how accurate P&G’s invoices were against Wal-Mart’s purchase orders. P&G felt that Wal-Mart’s accuracy was very good, exceeding 95%. During a meeting to discuss vendor performance, the accounts payable manager of Wal-Mart stated that P&G was one of their worst vendors with the lowest purchase order to invoice match rate. Of the purchase orders sent to Wal-Mart, 15% matched invoices. Something was wrong.
All purchase orders were via EDI as were all invoices.If the invoices matched, they would be paid automatically. If they did not match, both companies manually handled them.
P&G believed that 95% of the invoices were accurate, Wal-Mart believed it was 15% and deductions were at an all time high. To address this problem P&G placed a person from their customer service organization into Wal-Mart’s accounts payable group. The person’s responsibility was to track each purchase order/invoice combination and attempt to identify the problem. After a 3-week assessment, P&G found that they had different definitions of billing accuracy.P&G defined billing accuracy asbeing billed for a certain number of cases that were shipped to Wal-Mart. However, Wal-Mart defined billing accuracy as both the number of cases and the dollar amount of each case. For example, if P&G had a box of detergent for $25 in their item file while Wal-Mart had the same product for $25.
05, the invoice sent did not match the purchase order! P&G also discovered that most purchase orders and invoices that did not match were due to different prices in the Wal- Mart and P&G systems.The automation through EDI only moved bad data faster and resulted in re-working both systems. The cost of the mismatch was calculated at $50 per occurrence. Adaptive and responsive supply chain P&G’s aim has been to create adaptive, responsive supply networks that will link together sales and supply processes, inside and outside the organization, to improve product availability. This will allow it to develop demand chain management capabilities, especially for promotions.
Promotional items are the highest priority, because of the large amounts of money involved in marketing programs.If manufacturers cannot deliver the product, they lose all the growth that should be generated by their marketing promotions, however much demand is stoked up. P&G’s vision of a consumer-driven supply network has two essential elements. • Building collaborative supply chains at several levels (local market and global markets, for example). • Ensuring that manufacturing sites serving both local and global supply networks are highly responsive to changes in demand, based on real-time data from the stores. Links between supply chain planning and supply chain execution processes are critical.In the transportation area, P&G expects a lot of change, including improved collaboration with logistics outsourcers and more use of techniques such as cross-docking.
This system, under which inbound trucks are unloaded and the goods are sorted and loaded straight onto outbound vehicles, without ever being put into store, can be used to cut inventory and handling costs, as well as delivery times. Daily planning will give way to continuous plan make- ship processes, which will demand improved loading techniques to make efficient use of vehicles as lot sizes become smaller.In the short term, P&G expects to see supply networks based on relationships, rather than entirely owned by manufacturers. This kind of collaborative organization offers the flexibility to vary capacity according to short-term or last-minute needs. End-to-end optimization is essential, as there is no point in optimizing one component (e. g.
production responsiveness) at the expense of another (e. g. delivery and transport costs).
In export markets, with their longer replenishment lead times, this kind of improvement can be difficult to manage.But these are the very markets that may also offer the biggest rewards in terms of inventory reduction and improvements in availability. In P&G’s vision of the consumer-driven supply network, daily demand updates provide timely warning of changes in product consumption. New Planning Strategies • Demand planning: P&G has launched a new demand planning system, which is now used to forecast 80% of the company’s sales volume. It is already showing that it can produce forecasts with significantly improved accuracy. Rough-cut capacity planning: P&G has introduced a pilot to support rough-cut capacity planning processes in its detergents business.
This has already succeeded in cutting out-of-stocks by three-quarters and reducing inventory levels. • Distribution requirements planning: Among others, there has been a successful pilot project in P&G’s North American cosmetics manufacturing facility. P&G has also developed private e-marketplace facilities for both suppliers and customers, allowing its key business partners to see its inventory levels and production plans and perform real-time transactions via Web-enabled front-end systems.This approach has produced inventory savings across the whole supply chain, and allowed the introduction of other improvements, such as automatic invoice processing.
Improved responsiveness to events has enabled P&G to increase promotional product volumes, but still be left with less residual inventory when each promotion is over. At its manufacturing sites, P&G is experimenting with early pilots to support produce-to demand capabilities. These involve superimposing real-time demand signals onto the production plan, and integrating real-time shop-floor and warehouse data.It is also piloting a “dynamic distribution requirements planning” system, in which the planning cycle is automatically triggered by major events, such as changes in demand or inventory, and could be run many times a day. Though the pilots are still in early stages, incorporating these highly responsive processes into the supply chain will eventually cut costs and lead to real improvements in consumer satisfaction. These projects are all contributing to P&G’s overall goal of building its consumer-driven supply network, while producing immediate improvements in the company’s capacity to do business.Supplier Initiatives & Guidelines 1. Suppliers should comply with all applicable laws of their country, including laws relating to employment, discrimination, environment, and health and safety.
Suppliers who knowingly violate laws or have repeated problems conforming to them will not receive our business. 2. Commercial bribery is illegal and subject to criminal penalties in many countries, including the United States. Any personal payment or bribe to individuals employed by P&G’s customers or suppliers—or receipt of a bribe or personal payment by P&G employees—is strictly prohibited.Even in locations where such activity is not technically illegal, it is absolutely prohibited by Company policy. 3. P&G supports universal human rights, particularly those of our employees, the communities within which we operate, and the parties with whom we do business. P&G utilizes fair employment practices, striving to provide a safe, healthy, and productive work environment for employees.
The Company respects employees’ right to freedom of association, third-party consultation, and collective bargaining where allowed by law. The Company expects suppliers to uphold the same standards.Specifically: * It will not conduct business with suppliers employing child, prison, indentured, or bonded labor, or using corporal punishment or other forms of mental and physical coercion as a form of discipline. * Expects the suppliers to conduct their business without unacceptable worker treatment such as harassment, discrimination, physical or mental punishment, or other forms of abuse. * At a minimum, its suppliers should comply with all applicable wage and hour laws and rules and regulations, including minimum wage, overtime, and maximum hours.
The suppliers should provide a safe work environment, to prevent accidents and injury, and to minimize exposure to health risks. Purchase Initiatives The management system has three components mainly – * Communicate: All purchasing personnel who interface with suppliers are trained on the supplier guidelines and how to conduct supplier assessments. This makes compliance with the guidelines a condition of business; therefore, non-compliance is grounds for disqualification for all new and ongoing supply agreements. * Check: Ongoing periodic performance assessments are done as part of regular commercial and technical supplier visits.Emphasis is placed on suppliers that are high-risk because of country of operation or potential hazard.
In addition to these internal assessments, third-party assessments to identify areas for improvement are done. * Correct Non-compliance: When potential non-compliance issues are identified, they are communicated to the supplier as part of the closing meeting. Corrective actions—including formal notification and a remediation action plan—are then implemented. These include child labor or forced labor, and egregious health and safety violations presenting immediate danger to human health.
If a compliance issue is not resolved in a timely manner, the business relationship is terminated. P&G Retail-A New Venture Procter and Gamble has opened its new online store namely e-store. P&G says it enlisted 5,000 shoppers to help guide the design and development of their “ideal” online shopping site. The e-Store features many of the bells and whistles of such leading e-commerce sites as Amazon. com, including product ratings by consumers, purchase recommendations based on products placed in the shopping cart, and free shipping over $25.While the e-Store sells P&G’s household, beauty, and grooming brands directly to consumers, it serves another even more valuable purpose for the company. Its main function, says P;amp;G, is to act as a “living learning lab,” both to develop e-commerce innovation, and to garner continuous feedback and what consumers like and want. The e-Store will help deliver new tools, services and features that can ultimately be shared with retailers to provide a real convenience and value for shoppers, while also delivering innovation for the industry and specifically for our product categories,” says Kirk Perry, P&G’s VP for North America.
Retailers are a pretty key constituency that P&G could easily alienate by selling products directly. With P&G’s marketing muscle, online and brick-and-mortar retailers are understandably concerned and will be watching closely to see what online tools P&G develops and intends to “share” with its retail distributors. Recognizing that its skill is in marketing brands and not building e-commerce sites, P&G engaged PFSweb to build and operate the eStore. In a novel arrangement, PFSweb will actually buy P&G products and re-sell them using its own warehouses, providing P&G with access to consumer buying data.In many ways, it’s a risky experiment, but if it works, the eStore could ultimately mark a major shift in the way P&G markets its brands and the manner in which consumers purchase them and retailers distribute them.
Competitors of P & G Hindustan Unilever Hindustan Unilever Limited (‘HUL’), formerly Hindustan Lever Limited (renamed in late June 2007 as HUL), is India’s largest Fast Moving Consumer Goods company, touching the lives of two out of three Indians with over 20 distinct categories in Home & Personal Care Products and Foods & Beverages.Hindustan Unilever is a company with a complex supply chain because of the diversity of the products that it offers. Consequently it becomes important for the company to ensure availability of products at all points in the supply chain to delivering outstanding customer service while supporting sustainable growth which is reflected by the vision of the Company. HUL employs IT solutions based on SAP application systems which have led to significant improvements in planning and logistics efficiencies.The motto of HUL with regard to its supply chain is ‘From sourcing raw materials to delivering the end product, our technologically advanced supply chain underpins our growth, providing service excellence at competitive costs’. It endeavours to understand customer needs and work towards ensuring the shelf availability of its products.
The different steps in the process include order management, working at the interface between warehousing and transportation, and ensuring the right products arrive in the right place at the right time. * Demand Planning: HUL uses statistical models as well as market knowledge to determine potential sales.Applying data mining and forecasting principles on this data, supply planning ensures factories are able to meet these sales on time in the most cost effective way. * Intelligent Sourcing: This is about optimizing the cost and quality of what the company buys and how they buy it.
Intelligent sourcing of raw materials, packaging and non-production items helps in reducing costs and making the business more effective. HUL is always looking to explore new ways of working with suppliers. * Manufacturing- Output & Costs: HUL has state-of-art manufacturing facilities which are rated as one of the best among its competitors.The company focuses on helping the factories improve efficiencies and adapt to the changing needs of customers and consumers by managerial initiatives like monitoring a team’s quality, output and costs as well as engineering steps like designing and building high-speed production lines. Hindustan Unilever has taken a number of steps to make its supply chain more efficient which are – * Levercare: HUL focused on connecting with customers and consumers to get valuable inputs on product performance which helped them to understand consumer behaviour and to improve the quality of certain products in design and manufacturing. Continued focus was maintained through cross functional teams to drive cost effectiveness throughout the Supply Chain by identifying opportunities for eliminating waste which again helped it to achieve significant savings. * HUL worked on energy conservation activities through all their manufacturing sites which helped in reducing specific energy consumption. * HUL pushed the use of sustainable alternative bio-fuels at many of their major manufacturing sites which helped reduce fuel costs and carbon emissions.
* The principles of Total Productive Maintenance were applied and progress tracked across all the manufacturing sites.This resulted in an increase in asset productivity levels. * HUL also executed appropriate capital expenditure investments in creating fresh capacity in all categories. These investments have facilitated growth and de-bottlenecked capacities of existing assets. * HUL also leveraged benefits of scale and synergy through Unilever’s global buying network which delivered improved efficiencies and reduction in procurement costs of its buying function.
HUL also restructured its distribution network strategy by rationalizing its own sales force and adding more muscle to its distributors on the field.Earlier, HUL had different distributors for its home and personal care division and food division in the same area. Now, all the products would be sold by the same distributor in any one area.
Also, earlier, products from different divisions used different distributors, even in the same city but this was changed. Now, products across divisions are fed to retailers through unified distributors. Johnson & Johnson J&J India is a 50-yr old company with more than 2000 employees and businesses spanning Consumer, Medical Devices and Diagnostics, Pharmaceuticals and Vision Care.In the 50 years since its establishment as a modest 12-employee outfit, Johnson & Johnson Ltd. has gained a reputation for delivering high-quality products at competitive prices.
J&J operates in different business segments like pharmaceuticals, consumer products and medical equipments etc. , which have different industry and competitive dynamics. To manage the different environments, J&J has adopted a decentralized operational style in India with each business focusing on its industry with an independent supply chain.Resources are shared in a planned manner wherever synergies exist, as in non-stock activities like IT, treasury management, audit, insurance, travel and hotel bookings etc. J&J has extensively deployed information technology solutions to increase productivity and automate various business processes. J&J was the first company in India to successfully eliminate CFCs from manufacturing operations. It also won the Six Sigma Award by the Indian Statistical Institute and the National Institute of Quality and Reliability.
A large part of this success has to be contributed to J&J’s commitment to ‘Process Excellence’ through which the varied business sectors have been able to assess and improve critical business areas. The three main elements of Process Excellence (PE) are- * Competitive Excellence: This provides J&J companies with a way to compare themselves to world-class standards of excellence and to identify opportunities to improve business performance. This information is used to develop action plans that determine how it strengthens their processes and business results.
The assessment is done in two forms- internal and external.During internal assessment, an organization uses its own people to review their business processes and results. In case of the more rigorous assessment, a special team of experts would help the team. * Improvement: J&J focuses its efforts on processes that affect their performance measures through displays called “Dashboards”. They employ powerful methodologies and tools that provide a systematic method to accurately measure, analyze and improving existing methodologies. Dashboard is a collection of outcomes & drivers that are derived, and directly linked to, the sector’s mission and strategic missions.It helps in identifying and launching PE projects that will significantly impact the organization’s performance.
Six sigma is another improvement methodology that is used for existing processes to get rid of process variability and defects. It utilizes tools that follow a roadmap to make the decisions customer-focused and data-driven. J&J also emphasizes a lot on Design Excellence which entails disciplined application of tools used to design & develop products, processes and services that meet customer requirements.This is mostly applied to a new product or service development when a process can’t be improved internally or doesn’t meet customer requirements.
* Recognition: J&J has set up a reward system to recognize a section’s effort and reflect its level of performance against specific criteria. The expert team also helped in gauging the same. The divisions are also eligible for other significant awards for different achievements like overall business excellence as well as core process awards for demand generation, supply chain, compliance, human resource management, business planning etc.
Recommendations to improve the supply chain The main recommendations to improve the supply chain are – 1. Develop better customer insight and interaction: PnG should listen and understand its customers better to maintain a holistic view of their needs. This can be done through mining & studying data collected from a variety of sources including supply chain systems; sales and marketing; customer service and field service systems; internal database information; and knowledge gathered from unstructured interaction with customers.This would help the company to look beyond just order fulfilment and gain a better understanding of customer wishes for customized products and services—which can help the company differentiate its offerings and increase profits. This would help in answering questions like: What are the buying patterns? Are we driving larger orders to customers? What does our pipeline look like? Are we seeing demand increases or downturns that we must react to? All these would help in making their supply chain more efficient. 2.Global visibility of Supply Chain: In order to provide excellent customer service and manage costs, manufacturers need to know where inventory is throughout the entire supply chain. Knowing when and where inventory is needed enables manufacturers to develop the best plan for production and resupply in critical customer relationships—building only what is required for shipments.
PnG should focus on building this ERP kind of a system to have a better control over their inventory and keep track of where exactly a product is in the chain.This could be achieved by incorporating technologies like mobile and radio frequency identification (RFID) technologies. 3. Lean manufacturing and supplier integration: In order to manage the lowest possible manufactured cost, it is essential to apply lean manufacturing practices and connecting to the best suppliers on a global basis.
Locating the best suppliers requires a comprehensive supplier database that enables a manufacturer to recognize where new opportunities for lower costs exist. This can be achieved if manufacturers have real-time connections to suppliers to respond to changing production demands.If identified, these new suppliers must be brought on board quickly and cost effectively with the ability to share—and respond to—real-time demand and production data, including new product designs and critical engineering changes. 4. Managing Performance: The Company should develop new metrics like key performance indicators (KPIs), and benchmarks which can give advance warning of problems managers may face in their operations. This analysis can make manufacturers significantly more agile which is an important consideration in today’s very lean supply chains.
Exhibit 1: Business Organizational structure