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It is widely known that how to design the supply chain efficiently and effectively become more important for the company to beat its competitors. In this paper, firstly, we will talk about the definition of supply chain design, and then we will make use of P & G Company as a case study to understand how supply chain design make it successful. Next, it will describe Consumer Driven Supply Network (CDSN) and Collaborating Planning Forecasting and Replenishment (CPFR) of P & G. Moreover, a single-stage model and multi-echelon inventory also will be discussed. Finally, information sharing in P&G's supply chain is also important.
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 a lot of money was 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)
According to Procter Meet Gamble (2012), 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
The P&G: A Company History (2006) showed that 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 the first one 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.
In her research, Jimenez (2002) showed that top managers in P&G started to realize that the company's supply network needed to be restructured so that it was quickly and fully 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 substitutes, it becomes hard to persuade them to return to buying the initial product when they go shopping again. P&G decided that complex 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 quickly 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 wanted 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 in Procter & Gamble Uses Consumer Demand Info to Drive Supply Network (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 considered by everyone. However, P&G also has to face a supply chain challenge that is the ability to connect efficiently and effectively with the thousands of retailers who help it sell its products globally in order to speed products to market (Cisco success stories customer profile: Procter & Gamble.2001.). According to Christine (2005), forecasting demand was usually inaccurate although Proctor & Gamble used a make-to-stock strategy to forecast during their manufacturing, selling, and buying process in the past. However, there has been an important improvement in inventory management. P & G has decided to use Collaborative Planning Forecasting and Replenishment (CPFR) technique to help the company to forecast demand. The benefits of Collaborative Planning Forecasting and Replenishment (CPFR) leads to forecast accuracy increasing, safety stock level decreased. Thus P & G has a reduction on the inventory cost.
Scale and complexity of the company's inventory management in P & G Company need to use the right people, the organization and the tool. As mentioned by Ingrid et.al (2011), P&G realize to improve the level of inventory changes by two steps by combining with sole organization structure and suitable technology of the operations research. The studies of Ingrid et. al (2011) indicated that the first improvement of P & G inventory model was based upon the spreadsheet which has four parts to perfect the different positions in supply chain and the second improvement of P & G could be redesigned inventory software system. In 2009, Ingrid et al (2011) also mentioned around $150 million cash savings was improved by using these tools through the good coordinated planning and implementation to keep and improve the service level
According to Procter & Gamble Pilot (1999), Procter & Gamble Company has employed more than 110000 people in over 140 countries and the global net sales of P & G are more than $3.72 billion during 1997 and 1998. More than 300 brands owned by P & G have reached the numbers of consumers about five billion. CPFR in P & G has become a key important process to start improving supply chain. P&G made consumer demand data creation and integration through the deployment of CPFR. The product flow will be stimulated from manufacturing factories to distribution center, and then to reach the retailer's store, and finally from the stores to arrive consumer homes. To complete CPFR capacity assessment can quickly understand the partnerships' strengths and weaknesses, and then improve the process (Procter & Gamble Pilot. 1999).
According to Procter & Gamble Pilot (1999), by using the optimizing inventory methods in P&G's networks, an inventory management process has been defined by P & G that the total inventory investment has been decreased obviously. This work is done by the designers use single-stage inventory model based on the implementation of electronic form, because these forms push as much as 60% of the company'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 used the technology of inventory management technology a long time ago. Murphy (1975) indicated that P & G used systematic plan on storage management in the 1970s, nevertheless, at the end of 1980s, a distribution requirements planning (DRP) system was accepted to stimulate the development of P&G, but robust model which was offered by Dr. Taguchi to build the targets of inventory across a whole distribution network. P & G become success in the early stage of the supply chain due to using single-stage inventory model on over 60 percentage areas (Ingrid et.al .2011). The single-stage inventory model was implemented by internal users and end users through the electronic form. As mentioned by Farasyn et al. (2008), his paper had a further discussion about single-stage inventory models that included a study of this type of application from advantages and weakness of electronic form.
Supply chain planner can through the establishment of inventory model to avoid high safety stock level. In fact, because the safety stock level is too low which also will cause some customer service problems, the planner normally would like to select higher safety stock target to solve this problem although it may lead to high costs. However, as mentioned by Ingrid et al (2011) that if a higher safety stock goal was built by a designer, the automatic correction system is unable to reduce the safety stock level. He also indicated that a common method for inventory was invented by the single-stage models in supply chain. The manager also should be wise to the impact of all different kinds of inventory blocks like inventory safety and transfer storage. Inventory management concepts for the businessmen must be aware of an important part of the supply chain function because it could assist people to conduct the complex trade-offs. With the increasingly development of supply chain network, it become more complex, single-stage model has been replaced by multi-echelon inventory models because of producing additional average inventory reductions of 7 percent (Ingrid et. al. 2011). Ingrid et. al. (2011)'s paper showed that P & G's business was increased to 30 % due to using multi-echelon inventory model.
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), the three global business units (GBUs) of P & G are Beauty & Grooming, Household Care and Health & Well-Being which have provided $37.3 billion, $14.4 billion, and $26.3 billion profits respectively. However, the supply chain of the beauty & Grooming products is the most complicated. It leads to some factors contributed to its complexity; all these increase multi-echelon inventory of the good.
Ingrid et.al (2011) study also showed that in order to accurately set inventory goal through the supply chain, supply chain must simulate to compliance with production planning system. Therefore, a network as a model was formed. In this network, each stage is to stand for a specific stock-keeping unit (SKU) in the same position. In order to get the best result, the mapping must be coupled.
According to Bossert and Willems (2007), the optimizing requirement for multi-echelon inventory is pushed by the period time of investigation, the quantity of demand, increased cost, and complex network. Although the company manages production every day, the company will investigate and supply some SKUs every week or every month, thus it is important to understand each stage of dependency. It is necessary to identify how to transfer the demand information between adjacent stages because it is more difficult to define the demand at upstream stages.
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.