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Today, the competition happens in global marketplace more and more intensively. With the driven factors such as globalization, technological change, and demanding customers, companies do not compete solely to each other but compete with their whole supply chains. They are forced to create new managerial practices and unique business models to survive in this less-kind, less-gentle, and less-predictable world.
Among those successors, who have strong competitive supply chains, Procter & Gamble (P&G) is really the pioneer in the area of supply chain management. Most of strategies of P&G are studied and applied by many famous companies in the world. The following sections will discuss primary strategies that P&G is most popular for.
1.1 Definition of Supply Chain Management
According to Shimchi-Levi, et al (2000), in the 1980s, companies invented new manufacturing technologies and strategies that allowed them to reduce costs and better compete in different markets. Strategies such as just-in-time manufacturing, kanban, lean manufacturing, total quality management, and others became very popular, and vast quantities of resources were invested in implementing these strategies. Recently, it is obviously that many companies have reduced manufacturing cost as much as it practically possible. Many of these companies are discovering that effective supply chain management is next step they need to take in order to increase profit and market share. The importance of the role of supply chain management is clear so what is supply chain management? The Institute for Supply Management defines that Supply Chain Management is the design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.
1.2 Brief history of Procter & Gamble (P&G)
William Procter, a candle maker, and James Gamble, a soap maker, emigrated from England and Ireland respectively. They settled in Cincinnati initially and met when they married sisters, Olivia and Elizabeth Norris. Alexander Norris, their father-in-law, called a meeting in which he persuaded his new sons-in-law to become business partners. On October 31, 1837, as a result of the suggestion, Procter & Gamble was created.
P&G has been developed through five main periods:
1837-1890: The partnership years.
1890-1945: A company built on innovation
1945-1980: New Lands and Dynamic Growth
1980-1999: A Global Company
2000-Today: Booming business
Three billion times a day, P&G brands touch the lives of people around the world. The company has one of the strongest portfolios of trusted, quality, leadership brands, including Pampers, Tide, Ariel, Always, Whisper, Pantene, Folgers, Charmin, Downy, Lenor, Iams, Crest, Oral-B, Actonel, Duracell, Olay, Head & Shoulders, Wella, Gillette, and Braun. The P&G community consists of almost 140,000 employees working in over 80 countries worldwide.
1.3 Strategies of P&G supply chain management
According to Jimenez, et al (2002), P&G measures consumer satisfaction at two levels, which it calls "the moments of truth". The first moment of truth occurs when the consumer reaches the shelf and finds that the desired product is, or is not, available. This is a critical moment, because if the product is not immediately available, the consumer usually moves on to buy a rival product. The second moment of truth depends on the buyer's satisfaction when consuming the product. Detailed consumer surveys in July 2000 told P&G that in 55% of cases (75% for promotional items), consumers were not satisfied when they looked on the shelf for the products they wanted. The exact product variant, in the size and packaging that the shopper sought, was available less than half the time. There were something needed to be improved in this situation.
It seems the responsibility that the product must be always available on the shelf whenever customer wants it belongs purely to the retailer. If retailers make mistakes in their forecasts and order wrong quantities, the bullwhip effect may happen. Even though the manufacturer does not know the problem, in the end, both the manufacturer and retailer are suffered from the damage of bullwhip effect. P&G was ahead of the pack in realizing the significance of this, though other manufacturers are now also focusing on the end consumer, which is one reason why the industry is seeing so many new CPFR (collaborative planning, forecasting and replenishment) and VMI (vendor-managed inventory) programs.
Top managers in P&G began to realize that the company's supply network needed to be re-engineered so that it was genuinely responsive to consumer demand. This was especially important for promotional items, because of the cost of merchandising and promotional activities, and the long-term negative impact of stock-outs on consumers. After customers have been unable to buy the desired product and have switched to alternatives, it becomes hard to persuade them to return to buying the initial product when they go shopping again. P&G decided that sophisticated demand chain management, establishing direct connections between sales and supply chain business processes, could be the key to maintaining its leading position in the consumer packaged goods industry. As a result, a multi-level initiative was launched, which P&G calls its "consumer-driven supply network" (CDSN) program.
One of the major transformations in the rapidly evolving digital economy occurs in the supply chains of both traditional and e-commerce companies. Information technology has enabled channel partners to trade goods, share information, and integrate their processes, thereby reshaping the inter-organizational dynamics and resulting in more efficient channels. Electronic integration of data and the automation of business practices has driven costs down and built sales by better satisfying consumer needs. And by utilizing the benefit of information sharing, both P&G and Wal-Mart can focus on reducing needs for inventories with increased sales by focusing on selling what the customer want.
2. Consumer Driven Supply Network (CDSN)
In the belief of P&G, there are two moments of truth: the first one is when customers buy the product from the shelf and the second one is when they actually use it and like it. To ensure the first moment of truth valid, it is important to have stock available on shelf. Depending on the detailed consumer surveys in July 2000 of Jimenez, in 55% of cases, products were unavailable on the shelf when the customers wanted it. Because of losing the large numbers of sales, P&G need to adjust their strategy.
Under the leadership of Keith Harrison, head of global product supply division, a new concept of supply chain strategy was presented. P&G decided to have a connection between actual sales and the supply chain process. The viewing of supply chain management will shift from producing what is forecast to sell to what is actually selling. P&G started its supply chain from store shelves and moved back to its suppliers. This strategy is called Consumer Driven Supply Network (CDSN). This strategy requires P&G to create a responsive supply chain that would produce and supply products as per demand at the customer level.
According to Harrison (2006), P&G uses actual demand is to pick up scanner data at the point of sale and make it visible at the plant where it becomes part of daily production schedule. For customers, whose demand signals are just not big enough to be a factor in planning, P&G uses replenishment data from retailers' distribution centers. P&G aggregates data from systems handling ordering, shipping and billing into useable numbers that become the demand field for the plant systems. That demand field drives the replenishment plans, which are displayed in supplier portal of P&G where they find their way back into suppliers' systems. P&G has some suppliers who can see its production plan, and they run their operations with that live data within a few hours.
One of the most important components of CDSN is intelligent daily forecasting (IDF). IDF is the software used by P&G to forecast the demand based on actual sales. IDF tracks daily demand across different stores, and that itself becomes the replenishment plan of P&G for those stores. Actual demand is picked up from the scanner data at the point of sale and it is made available at the plan where it becomes part of daily production schedule. As a result of implementing IDF, P&G is running few plants at 6-8 hours response time.
According to P&G annual reports and sustainability reports, P&G has achieved a mount of impacts to its supply chain.
Forecasting accuracy: improving by 30%
Shelf-level out of stock: the percentage of products that are out of stock on retailers' shelves at any given time has reduced from 10% to 5% within 8 months of implementation.
Total supply chain response time: the time when a cash register record s the sale of a product to the purchase of raw materials to produce its replacement. From six months, it came down to two months.
Total supply chain inventory: the hard counting 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 is daily executed rather than weekly and monthly so that P&G can reduce the safety inventory by 10%.
Pricing-design from the shelf back: CDSN helped in 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.
Top line and bottom line: increasing overall sales by 15% in one year. Net profits witnessed a 19% gain from $4.35 billion to $5.19 billion.
3. Collaborating Planning Forecasting and Replenishment (CPFR)
The successful globalization of P&G is widely concerned by everyone. However, P&G also has faced a supply chain challenge that the ability to connect efficiently and effectively with the thousands of retailers who sell its products worldwide in order to speed products to market (Cisco success stories customer profile: Procter & Gamble.2001.). According to Christine (2005), in the past, Proctor & Gamble used a make-to-stock strategy to forecast to force their manufacturing, selling, and buying process, however, forecasting demand was often not accurate. There has been an important improvement in inventory management. Thus, P & G has decided to use Collaborative Planning Forecasting and Replenishment (CPFR) technique to help the company to forecast demand. Because of the benefits of Collaborative Planning Forecasting and Replenishment (CPFR), increased forecast accuracy facilitates a decrease in the safety stock, reducing inventory levels and increasing on-shelf availability. Thus the inventory cost for P & G has reduced.
Inventory management in a company of P&G's size, scale, and complexity requires leveraging the right people, organization, and tools. As mentioned by Ingrid et.al (2011), P&G has achieved two step-change improvements in inventory levels through combining the appropriate operations research techniques with a unique planning-organization structure. The first improvement based on electronic form from the wide application of the inventory model; this work produced four tools that locally optimize different portions of the supply chain. The second improvement could be integrated inventory software in P&G's more-complex supply chains. In 2009, these tools to promote $150 million cash savings, while maintaining and improving the service level, through the good coordinated planning and implementation of the community (Ingrid, et al 2011).
According to Procter & Gamble Pilot (1999), Procter & Gamble has operated in more than 140 countries with over 110,000 employees, and with worldwide net sales greater than $37.2 billion (1997/98). P & G has nearly 300 brands and reached five billion consumers. CPFR for P & G has become a key important process to start optimizing supply chain. P&G made consumer demand data creation and integration through the deployment of CPFR. This will trigger product flow from manufacturing plants to customers' DCs, from the customers' DCs to their retail store shelves, and ultimately from the store shelves into consumer homes. To complete CPFR capacity assessment can quickly understand the partnerships' strengths and weaknesses, and improve the process.
By combining the tools of inventory optimization with the people in P&G's horizontal planning networks, P&G has defined an inventory management process that has significantly reduced its total inventory investment. The work began with single-stage inventory models designed by P&G's OR group and implemented in spreadsheets that planners can use directly. To this day, these spreadsheet tools drive 60 percent of P&G's business.
4. Single-Stage and Multi-echelon Inventory Models
4.1 Single-Stage Inventory model:
As mentioned by Fengqi et. al (2008), the single-stage inventory is used by base stock policy to face stationary demand. P&G has a long history of applying inventory management techniques. Its uses scientific stock plan can be traced back to the 1970s (Murphy 1975); however, in the later 1980s, the development of P & G is triggered by the adoption of distribution requirements planning (DRP) systems, but robust models for setting inventory targets across a distribution network. P&G has successfully adopted single-stage inventory models in over 60 percent of its supply chains (Ingrid et.al .2011). The single-stage models were developed by P&G's internal OR group and implemented as end-user spreadsheets for use by planners. As mentioned by Farasyn et al. (2008), a deeper discussion of single-stage inventory models included an analysis of the design choices, benefits, and weaknesses of spreadsheets as the technology platform for this type of application.
Supply chain planner could avoid prejudice toward excessively high levels of safety stock through statistical inventory models. In fact, the safety stock level is too low will cause customer service problem, the planner normally will select higher safety stock target to solve this problem. However, when a planner manually sets a high safety stock target, the automatic correction mechanism is unavailable to adjust the safety stock levels downward. In addition to the quantifiable results, there are intangible benefits. The single-stage models have created a common method for inventory in the supply chain function. The planners should be more aware of the role and influence of the various inventory building blocks (e.g., safety, cycle, transit stocks). Inventory management concepts are now a significant part of the supply chain function, helping people to manage the complex trade-offs between capacity, inventory, and service. For more complex supply chain networks, multi-echelon inventory models have replaced the single-stage models, producing additional average inventory reductions of 7 percent. These multi-echelon models now drive 30 percent of P&G's business.
4.2 Multi-echelon Inventory model:
Fengqi et. al (2008) also indicated that the base stock policies are optimal for multiple machines in series and a single product in terms of multi-echelon inventory. As indicated by Ingrid et.al (2011), P&G's three global business units (GBUs) are Beauty & Grooming ($26.3 billion), Household Care ($37.3 billion), and Health & Well-Being ($14.4 billion), which would be large enough to be placed on the 2009 Fortune 200 list. However, Beauty & Grooming's products have the most complex supply chains. There are some factors to promote its complexity, all of which increase the benefits derived from multi-echelon inventory optimization.
To properly set inventory targets across the supply chain, the supply chain must be modeled at the level of complexity consistent with the production planning system. Therefore, it is modeled as a network in which a stage represents a specific SKU at a location and arcs denote precedence between the stages; this corresponds to SAP's classification for raw materials, semi-finished products, and finished products. The mapping must be one-to-one to implement the optimization results.
From a mathematical perspective, the need for multi-echelon inventory optimization is driven by review periods, demand pooling, cost accrual, and network complexity. Although production runs each day, many SKUs are reviewed and replenished weekly or monthly, thus introducing important dependencies between stages. The demand at upstream stages is a complex function of downstream demand, and properly defining how adjacent stages transmit demand information is necessary (Bossert and Willems. 2007).
4. Information Sharing
Technology drives global change. Modern information technologies make SC integration possible. Every critical SC process relies heavily on information flows cross the product or service life cycle from concept to customer. Effective SC networks are held together and their value-added activities synchronized by the flow of information. Advances in information technology have facilitated the globalization of business and are enabling many of the changes taking place in SCM. Changes in information technology provide new areas in which firms can differentiate themselves from competitors and cultivate genuine competitive advantages. Information should be shared for many reasons. The most frequently discussed role of information in SCM is to substitute for inventory, reducing a company's cost. In a similar way, information substitutes for time, helping companies be more responsive to customer requests (Cachon & Fisher, 2000). Simply stated, sharing information helps companies reduce costs, improve customer service levels, reduce lead times, improve profitability, increase quality levels, and enhance innovation. Taking a different perspective, information can be used to change company and supply chain capabilities. For instance, information enables process redesign and reengineering. Information enables SC collaboration. Information can also be used to promote constant improvement and learning. These are powerful capabilities that can change the rules of the competitive game, enabling a company to win big (Seidmann & Sundararajan ,1998).
5.1 Sharing Information to Make P&G's Supply Chains More Sustainable
Based on P&G's belief that people can make a better product with an abundance of input and insights, P&G's global sustainability group has been working hard at developing, improving and sharing its supply chain environmental scorecard.
Using scorecards to measure business performance isn't a new idea. But there has been a recent trend among companies to measure the environmental impact of their supply chain. For example, the way a product's raw materials are sourced, transported and manufactured can have a significant impact on its total environmental footprint.
As a part of P&G's commitment to improve the environmental footprint of their products and operations, they wanted to deeply understand the upstream impact of our supply chain. P&G also wanted to hear their suppliers' sustainability innovation ideas and encourage them to help other suppliers who might need assistance with their own environmental improvements.
It took P&G more than two years to develop their supply chain scorecard, which measures absolute or intensity improvements in nine key metrics including energy use, water use, waste disposal and greenhouse gas emissions on a year-to-year basis. They knew they couldn't develop it all on our own. So they created a board of suppliers from a variety of industries to join them. They shared their experiences and what process would work best for them. P&G shared theirs (Tan, 1999).
In the end, the scorecard was a surprisingly versatile tool. P&G quickly realized that it wasn't just relevant to them, but to ANY company that wanted to measure and improve the sustainability of its supply chain (Lee, Padmanabhan & Whang, 1997). So rather than keeping it all for themselves, P&G decided to share the Excel-based analysis tool, which makes it easy for any company to aggregate, sort and summarize the scorecard data from their suppliers for free.
Since then, other companies like General Mills have adopted or adapted our scorecard for their needs. By sharing, P&G has received more feedback on how to improve it and have incorporated those insights into subsequent iterations.
As more companies use the tool, their insights will help make it even better-which makes it a better product for all who use it and a more sustainable world for everyone.
5.2 Supply Chain Integration through Information Sharing
It is widely known that Wal-Mart and Proctor & Gamble (P&G) share information regarding the retail sales of P&G products at Wal-Mart stores. This information enables P&G to do a better job of managing its production of these products and provides Wal-Mart with greater "in store" availabilities.
P&G and Wal-Mart found a way to leverage on information technology by sharing data across their mutual supply chains (Figure 1).
Figure 1 Role of Information Technology in Supply-Chain Integration
An important strategy for managing integrated supply chains is to share information among supply-chain partners (Nahmias, 1989). 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 more efficiently (Clark and Lee, 2000), as has been implemented by P&G and Wal-Mart.
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 (Cachon & Fisher, 1997). 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 DC's. P&G reduced the order cycle time (amount of time from the order generation to delivery) by 3-4 days. This process also dramatically increased inventory turns which resulted in a reduction in the inventory of the entire system.
5.3 Benefits of Information Sharing
Use Information Technology Resources: Information Technology (IT) resources can play a big role in the business. IT can provide technology solutions to link suppliers and retailers. Ensure proper staffing of these resources to drive volume and reduce cost.
Teach them the business: Take time to train the IT about the business. The days of the business ignorant programmers are fading. IT professionals have to know the business perspectives.
Focus on the consumer: Use data and technology to understand better the consumer's needs. When a debate about approaches occurs, ask the question "What is right for the consumer, what are her/his needs?" This will help company approach the problem differently.
Data can be information: Retailer data is typically used for quick decision support, P&G data is used for analytic decision support. When merged, this data create tremendous gains for both companies. Information Technology can also be used to sift through large amounts of data and provide exceptions or out of range business parameters. Using IT to identify key outages such as low sale on a fast moving item, out of stock on a key SKU, will provide powerful business solutions for both companies.
Employ industry standards: Driving towards common methods of communicating business transactions and data sharing reduces cost for the entire supply chain. Automating business transactions will drive down costs of the manufacturer/supplier relationship.
Commitment to Information Sharing: Sharing point of sales data. Market data, and consumer data among channel partners for joint decision making is a key to the success of the integrated supply chains.
Through this paper, three main key strategies that help P&G gains the competitive advantage are revealed such as: consumer driven supply network, collaborative planning forecasting and replenishment and information sharing.
In order to eliminate the bullwhip effect on supply chain, collaborative planning forecasting and replenishment is the tool that P&G successfully uses. CPFR enables creation and integration of consumer demand data. This will trigger product flow from manufacturing plants to customers' DCs, from the customers' DCs to their retail store shelves, and ultimately from the store shelves into consumer homes. The primary objective is 100% product availability on the store shelf, while simultaneously reducing inventory requirements in the retail stores, customer distribution centers, and P&G plants. Eventually, P&G expects to produce and ship in response to a consumer demand signal.
On the other hand, because of the cost of merchandising and promotional activities, and the long term negative impact of stock-out on customers becomes more serious, the consumer driven supply network strategy is used to solve this problem. With the concept that P&G uses actual demand is to pick up scanner data at the point of sale and make it visible at the plant where it becomes part of daily production schedule. CDSN can offer many tactical advantages, especially for new product launches where demand is based on assumption. Moreover, CDSN can become an engine for volume and profit growth by creating value for retail customer. Besides, CDSN create a more agile supply network that provides unique customization for each retail customer.
Finally, information sharing helps two big players like P&G and Wal-Mart create a common language, reducing costs, and increasing sales. However, in order to make the information sharing becomes more effectively. The role of information technology should not be underestimated.