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Household care products are top selling items in P&G products. In the past, household care products were always out of stock in store shelves in supermarkets, convenience stores and other retailers, especially when they executed with price cuts or promotion. But sometimes, one large lots was delivered to retailers, but it would be several weeks earlier and kept in warehouse. The unit cost of goods was raised if making products that consumers not buy. This problem happened because P&G used a forecast "push" system of moving products out the store door. In order to solve this problem, P&G made an innovation of supply chain by SAP system, it implemented a demand "pull" system and VMI (vendor managed inventory) to make efficient and accurate distribution of household care products to retails.
The demand pull system was designed to take the chaos out of the delivery system by bringing suppliers and retailers into the planning and delivery process. The "signals" of consumer demand come from the stores; "responses" come from P&G manufacturing managers, supply chain managers, distribution centres (DC) and suppliers, who are the person from production to sales in response to the reports coming from the stores. P&G can get dates and locations for all events with its retail partners and prepares for predictable increases in demand. If these stores are going to do promotion on their P&G household care products, P&G can better coordinate its production and distribution in that region. Example of such retailer is Wal-Mart.
Figure 1: Information and materials flow of Pull System
After implemented the demand pull system in P&G for twelve months. P&G cut out-of-stock conditions in half. 93% of retailers working under new system are experiencing from 10% to no more than 5% out-of-stock rates. That represents a yearly savings of $50 million to $100 million. Sales increased from $40.2 billions in 2002 to $43.4 billions in 2003, raised 7.8%. For net profits, P&G expected to improve 10%, now jumped from $4.35 billions to $5.19 billions, raised 19%.
Figure 2 (a): Inventory Level of retailers using PUSH System
Figure 2 (b): Inventory Level of retailers using PULL System
P&G made an important strategy and innovation in managing integrated supply chains from forecast push system to demand pull system, and share information between supply-chain partners like retailers and distributors. The main benefit of sharing information is to reduce the need for inventory. As a result, the supply chain achieves better performance in terms of revenue, cost reduction and turn-around times.
With information shared between manufacturers and retailers, VMI (Vendor Managed Inventory) can be implemented. P&G and manufacturers can share information and POS (Point of Sales) data, inventory level with retailer to manage the order frequency, order quantity, and timing of the shipments, instead of waiting retailers to place orders, then the manufacturer can place orders with themselves for the retailer. Also, this data allowed P&G to manage the inventory levels to insure that P&G products were in stock at all times. This continuous replenishment process (CRP), enables manufacturers to reduce the necessary inventory and plan the shipments more efficiently (Clark and Lee, 2000). And P&G can reduce the order cycle time. This process also dramatically increased inventory turns which results in a reduction of the inventory of the pull system and VMI method.
By comparing the change of supply chain system in NIBCO with P&G (Case II-1 by __Author___, 2009), there are some similar and differences between P&G and NIBCO.
Reason of implementation of new system
P&G always faced the problem of out-of-stock in store shelves or over stock in warehouse and pushed to their retailers, especially when they held promotions or price cut. This increased the unit cost of goods and decreased the sales if consumers could not buy the goods in shelves when they needed for.
NIBCO could not consider immediate actual sales demand because NIBCO got the forecast from divisional distribution centres regularly instead of immediately. This drove medium-term and short-term production planning on make-to-stock production and pushed to distribution centres which may be not fulfilled the immediate requests.
New System flow
Both P&G and NIBCO implemented demand Pull System and VMI method into its supply chain system in SAP. Consumer purchases product induces a "pull" signal to DC and DC places a replenishment order to P&G or NIBCO, then P&G or NIBCO arrange delivery of product to DC when they have stock. If there is not enough stock, manufacturer makes production themselves when receives the "pull" signal from DC. The pull system and VMI method in both P&G and NIBCO mainly focused on two areas. Firstly, the reliance of real customer orders which is the driver for day to day replenishment and production. Secondly, it is for the direction of triggers of the movement of products.
Difference between P&G and NIBCO
The data input method into VMI system is different between P&G and NIBCO. In NIBCO, its retailer provides the inventory level report electronically everyday. NIBCO monitors the inventory level in retailer in daily basis and the inventory is replenished weekly. The whole process is manual because the report generated manually everyday and input to NIBCO's SAP system, then NIBCO needs to monitor the inventory level in retails manually also. That is the difference between NIBCO and P&G. P&G implemented automatic pull system, when consumer buys a household care product, the system deducts the stock automatically when consumer pays. This is the starting of pull system which mentioned above, the signal will go to DC, manufacturers and P&G. The system can decide which party to replenish the stock. Therefore, the VMI system in P&G is more perfect than NIBCO. P&G does not worry the failing, because it is responding to demand instead of forecast. Therefore, the pull system and VMI in P&G is better than in NIBCO.
Improvement of innovation and IT aspects in Procter&Gamble
As the consumer web commerce continues to evolve, the innovation about online shop is necessary to enlarge the market share for P&G in the future. The data from online shop can be linked with supply chain system in P&G. That mean when consumer purchase household care products in P&G's online shop, the supply chain system can identify the nearest retail stores which have stock and arrange fastest delivery to consumer. At the same time, the system can deduct the stock and show the real time stock level. The "pull" signal from online store initiates the whole replenishment process by the supply chain system. Besides that, P&G can study the consumers' online buying habits through the system and make more suitable innovation to the household care products.
By comparing the new innovation of online shop between P&G and the Cliptomania Web Store (Case II-4 by Author , 2009), the following points are concluded.
Implementation of online shop module
P&G has the existing supply chain system, when online shop module is developed, the module can easier added into the supply chain system, it can simply link with other modules for data analysis and other purposes. For Cliptomania, online shop module is paid to the vendor for providing basic web store structure, it is the interface between customers and Cliptomania only, no supply chain function is included.
Stock Level control for online shop
As the online shop module is linked into the supply chain system in P&G, the out of stock problem will not happen because the stock is "pull" in the system, stock will be replenished if there is not enough stock. The stock level is controlled by system through the calculation of safety stock level, reorder point, demand, lead time and so on. For Cliptomania, most of the orders are back to back order, therefore, Cliptomania did not keep stock, it orders from its suppliers when received an order from web store. It may face a problem that there may be out of stock from Cliptomania's supplier. Therefore, the stock level control by P&G is better than Cliptomania.
Packaging and delivery of online shop orders
P&G can request retail shops to follow up the packaging and delivery or can outsource the packaging and delivery service to other courier company. For Cliptomania, it is a family based company which have limited capital, all the packaging and delivery are done by themselves. Therefore the packaging and delivery of order is more safely in P&G than Cliptomania because the packaging and delivery are done by professional company like P&G.