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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 at the beginning and met when they married sisters, Olivia and Elizabeth Norris. Alexander Norris, their father-in-law, set a meeting in which he persuaded his new sons-in-law to become business partners. On October 31, 1837, as a result of the offer, 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 consumers' satisfaction at two levels, which it calls "the moments of truth". The first moment of truth happens when the consumer reaches the shelf and finds that the desired product is, or is not, available. This is an important moment, because if the product is not immediately available, the consumer usually moves on to buy a competitor's product. The second moment of truth depends on the buyer's satisfaction when customer uses the product. In the research of Jimenez, et al (2002), 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. The cost of merchandising and promotional activities can be very high. Moreover there is possibility of the long-term negative impact on consumers due to stock-outs. The worst scenario is when customers can not find the product they need on shelves; they switch to other substitutes and never come back to first product anymore. Therefore 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 supported channel partners to trade goods, share information, and integrate their processes, thereby restructured the inter-organizational functions and resulting in more efficient channels. Electronic integration of data and the automation of business practices has reduced costs down and increased sales by better satisfying consumer needs. And by utilizing the benefit of information sharing, both P&G and Wal-Mart can focus on decreasing needs for inventories with increased sales by concentrating 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 gathers data from systems handling ordering, shipping and billing into useable numbers that become the demand field for the plant systems. That demand field affects 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 through different stores, and it can establish the replenishment plan of P&G for those stores from the data collected. 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 can run few plants at 6-8 hours response time.
According to Tom Steinert-Threlkeld (2004), 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 same way, time information substitute can help enterprise response to customer's request quickly (Cachon & Fisher, 2000). Simply stated, haring 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 powerful function, can change the rules of the game of competition, the company to win big (Seidmann & Sundararajan ,1998).
5.1 Sharing Information to Make P&G's Supply Chains More Sustainable
P&G is based on the belief that people can make products better, Frequency followed by enterprise product, a little of the business expansion of a large, rising customer distribution requirements.
Using scorecard to measure the performance of the enterprise is not a new idea. But since the company has been between the recent trend to measure the supply chain of the impact on the environment. For example, a product of raw materials procurement, transportation, manufacturing way can have a marked impact on its influence to environment.
The scorecard for P&G suppliers is to keep the sustainable development. Suppliers could improve the development level, save the energy such as greenhouse gas emissions, electricity consumption; water consumption, waste as well as environmentally sustainable development of innovative ideas to report on the scorecard. P&G suppliers can easily see the progress to save energy, and Procter & Gamble to discuss advancing the supply chain. The scorecard plays an important role in better the environment. Optimization and innovation to reduce the environmental footprint in order to improve their products and operation of the impact on the environment part of the part, they hope to further understand the effects of our supply chain upstream. 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 and willing to hear innovation ideas from suppliers. They share their experience and what process is the most suitable for their work (Tan, 1999).
Finally, scorecard is a wonderful tool. Procter & Gamble will soon realize that this is not only related, but any company that you want to measure and improve supply chain of sustainable development (Lee, Padmanabhan & Whang, 1997). P&G shared the tool of excel analysis to other companies; the tool can help companies collect and analysis data which is gathered from suppliers.
By sharing, P&G has received more feedback on how to improve it and have incorporated those insights into subsequent iterations.
As more and more companies use tools, their insights will help it better, this makes it for all use of it, a better products and more sustainable world to everyone.
5.2 Supply Chain Integration through Information Sharing
As is known to all, Wal-Mart and Procter & Gamble (P & G) information sharing, the retail sales of P & G products in Wal-Mart stores. This information to better manage the P & G people to produce these products, to provide more "store" vacancy Wal-Mart. P&G and Wal-Mart hople to find a method to take advantage of the Information Technology in their common supply chain (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). The main benefit of sharing information is to reduce inventory needs. Therefore the supply chain financial return, the service level, turnaround time to obtain better performance.
Between manufacturers and retailers of information sharing, manufacturers can use retailers' inventory level information management according to the frequency, quantity and time - rather than wait for retailers will order. It was mentioned to continuous replenishment (CRP), Timely and accurate point of sale information to determine the number of shipments supplement plans and delivery time method to determine the number of goods sold, according to the retailer or wholesaler inventory information and inventory replenishment program prescribed (Clark and Lee, 2000).
Procter & Gamble's data management inventory levels to ensure that at any time (Cachon and Fisher, 1997), Procter & Gamble products in stock. P&G use their own information data highway with Wal-Mart's to purchase the products through DC. Procter & Gamble shorten the order cycle time of 3 - 4 days (from order to delivery time). This process is also significantly increase, causing the system inventory reduced inventory turnover ratio.
5.3 Benefits of Information Sharing
1) The use of information technology resources of the business, information technology (IT) resources can play a large role. IT technology solutions can provide link suppliers and retailers. These resources, to ensure that the appropriate personnel drive volume, reduce the cost.
2) Teach them the business: Take time to train the IT about the business. Nowadays, the business ignorant programmers are becoming disappeared. The business perspectives have to be known by IT professionals
3) Pays great attention to the consumer: use the data and technology to better understand the needs of the consumers. When the issue on the law, and considered what the customers need. It helped the company.
4) Data information can be used to decide and support the retailer: P&G, the data for analysis and decision support. Merger, the data for the two companies to create a huge income. Information technology can also be used to through the screening of large quantities of data, and provide anomaly or narrow the range of business parameters. Use it to identify key interrupt, such as low sales fast moving project out of stock, a key SKU, etc., the two companies will provide a strong business solutions.
5) Invite industry standard: the communication business transaction and data sharing, the commonly used method to reduce the cost of the entire supply chain drive. Automating business transactions will drive down costs of the manufacturer/supplier relationship.
6) Information sharing: sharing point of sales data commitment. Market data and consumption data is an important channel partners the union between the successes of the integrated supply chain decisions.
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.