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Proctor & Gamble is one of the largest consumer goods companies in the world. Its brands are more than 300 and cover over 180 countries. And its products covere beauty, baby, fabric, baby care, personal care, health care, home and fabric.
Procter & Gamble always focuses on innovation and improvement on its products and operation. Its innovation can interact with its growth strategy, values, principles and purpose. That's the reason why Procter & Gamble is the largest consumer goods companies in the world (P&G, 2010).
Organisation interacts with its organisational environment
The interaction between organisation and organisational environment is important because the growth of organisation is influenced by the change of organisational environment (Carroll & Hannan, 1995). Therefore, most of the organisations strategy is to meet the long term change of organisational environment. The assessment of external environment and internal environment are the input data of how organisation interacts with organisational environment. And disruptive and sustainable innovation, technology strategy and continuous improvement are the action of organisation to interact with its organisation environment.
External environment assessment
It is the collection of market data, it includes analysis of competitive profiles, the study of macro and micro economic information, identifying the industry opportunities and threats, and understanding the need to be successful in the market (Cherrington, 1994). There are two frameworks which can assess the external environment of organisation, they are PESTEL Analysis (Grundy, 2006) and Porter's Five Forces (Porter, 1980).
PESTEL Analysis includes six factors, they are Political, Economic, Sociocultural, Technological, Environmental and Legal (Cherrington, 1994).
Political factor: It refers to the government policy, the level of intervention to the economy.
Economic factor: It includes the interest rates, exchange rate, growth of economic growth, the change of taxation, inflation.
Social factor: It is the change of social trends that have influence to the demand of products, like aging population.
Technological factor: It is the new products and new processes created by new technology to improve quality and the ability to lead the innovation.
Environmental factor: It is the awareness of protecting environment. Demand on environmental friendly products is an opportunity.
Legal factor: It is the legal environment change, it can affect the organisation behaviour and operation cost.
Porter's Five Forces
Porter's Five Forces includes five factors, they are threat of substitutes, buyer power, supplier power and barriers to entry (Porter, 1980).
Competitive rivalry: The ability of competitor in the industry
Threat of substitutes: The products from same industries, it affects the demand and price of product in existing market.
Buyer power: The bargaining power of buyer can affect the cost of products. For monopsony market, buyer bargaining power is higher to get lower price of raw materials.
Supplier power: The bargaining power of supplier can affect the cost of products. For monopolistic market, supplier bargaining power is higher to raise the price of raw materials.
Barriers to entry: The new organisations enter the same industry can affect the competition. The profits may be minimized.
Internal environment assessment
It is the reflection of organisation's ability to show its strengths and weaknesses. The organisational management process is evaluated and improved the value chain in the organisation in order to interact with its organisational environment. There are some models and factors which can assess the internal environment of an organisation. They are the product life cycle model, value chain analysis, core competences and organisational culture (Probst & Buchel, 1997).
Product Life cycle model
The product life cycle stage is from introduction to growth, maturity and decline. It shows the changes in marketing situation. The product revenue and profits is affected in different stages of product life (Probst & Buchel, 1997). Organisation can make decision on product life in order to meet the organisational environment.
Figure 2.2.1: Product life cycle Diagram
Value Chain Analysis
It is a chain of activities that organisation operates in an industry. New product passes through all the activities in the chain to add more values in each activity (Probst & Buchel, 1997). This process can improve the product design and management internally.
Figure 2.2.2: Value Chain Analysis
It is the most significant value creating skills in the organisation. These skills can be used to diversify to new products and technologies which can fulfil organisational environment. And it is critical in long term growth in the organisation. It can provide consumer benefits, leverage widely to products and markets (Probst & Buchel, 1997).
Disruptive and Sustainable innovation
Disruptive and sustainable innovation is business and technology strategy of organisation on product development. Different innovation can fulfil the needs of different kind of customers in order to interact with organisational environment.
Disruptive innovation is the breakthrough of product design to market. Traditional customers may not accept this kind of products. This innovation is lower cost, simpler and maybe lower quality compared with existing products, but it can diversify into new market which has great margin. Especially for low end product, the cost is lower with very high margin, but the product life cycle is short and less market share for disruptive innovation product (Yu & Qi, 2004).
Sustainable innovation is to improve the performance of existing products to maintain the mainstream of customers' value. This kind of product has less market growth and profit margin compared with disruptive innovation product, but the market share is higher (Christensen & Lundvall, 2004).
Figure 2.3.2: Disruptive and sustainable innovation occur over time.
The technology strategy helps to deliver the organisation strategy. The key deliverables and principles control the flow of organisational environment information within the organisation (Hanrieder, 1986), so that the information like market data is shared into different departments.
Figure 2.4: Technology Strategy Framework
Continuous improvement is important to build a strong relationship between organisation and organisational environment. The improvement is includes products, service and processes to fulfil customer satisfaction (Marsh, 1998).
Innovation and IT aspects of Procter & Gamble
Household care products are top selling items in P&G products (P&G, 2010), there are some innovation on product package which can improve the supply chain flow.
Most of the household care products have different packages like bottle, box or stand-up pouches. Different kind of packages can affect the packing size, for bottle and box packing, more space is required, for stand-up pouches packing, less space is required because it can be folded to maximize the storage space. Also, smaller packing size can increase the quantity of shipment which can speed up the flow of products, help to reduce out of stock situations.
(a) stand-up pouches (b) bottle (c) box
Figure 3.1: Different packing in Household care products
Besides the product packing innovation of household care products in P&G, the IT innovation in P&G also helps to improve the supply chain flow. In the past, household care products were always out of stock on the store shelves in supermarkets, convenience stores and other retailers, especially when they executed price cuts or promotion. But sometimes, one large lots was delivered to retailers, 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 deducts sold products by forecast "push" systems in retail stores. 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 include retail stores and suppliers into the goods planning and order delivery process. When consumer buy the household care products, the demand signal is raised, this signal is transferred to distribution centres (DC), suppliers and P&G supply chain staff, who handle the product to sales reports coming from retail stores. P&G collects the data and sites for all the sales activities from retail stores, the system predicts the increase of needs, so that P&G can control its production and delivery of goods in that region. Example of such retailer is Wal-Mart.
Figure 3.2: Information and materials flow of Pull System
After implemented the demand pull system in P&G for twelve months. P&G cut the stock out situation 50% less. Retail stores which tried the new systems, cut the stock out situation from 10% to not more than 5%. It means they save from $50 million to $100 million. The sales volume increased to $43 billions in 2003 which raised 7.8% compared with 2002. For the net profits, it jumped to 5.2 billions which raised 19% (P&G, 2010)
Figure 3.3 (a): Inventory Level of retailers using PUSH System
Figure 3.3 (b): Inventory Level of retailers using PULL System
P&G makes an important strategy and innovation in managing integrated supply chains from forecast push system to demand pull system, and shares information between supply-chain partners like retailers and distributors (P&G, 2010). The advantage of information sharing is to reduce the requirement for inventory. Therefore, the supply chain can carry out better performance in revenue, cost reduction and refill stock time.
As manufacturers and retail stores can share information themselves, VMI (Vendor Managed Inventory) can be implemented. P&G and manufacturers can share information like POS (Point of Sales) data, inventory level with retail stores. They can control the order quantity to be placed and order frequency, rather than waiting the orders from retail stores. And manufacturer can place orders with themselves for the retailer (Waters, C.D.J., 2003). Also, this data can provide inventory level information to P&G, so that P&G can guarantee there is enough stock all time. This continuous replenishment procedure (CRP), manufacturers allow to reduce the inventory and more efficient on shipment planning (Clark and Lee, 2000). Also P&G can reduce the order cycle time. This procedure can increase the inventory turns, as a result, the inventory is reduced due to the pull system and VMI method.
By comparing the change of supply chain system in NIBCO with P&G (Case II-1 by Brown, Tatikonda and Vessey, 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 on the store shelves or over stock in warehouse, especially when they held promotions or price cut (P&G, 2010). This increased the unit cost of goods and decreased the sales if consumers could not buy the goods on the shelves when they needed to.
NIBCO was unable to consider immediate actual sales demand because NIBCO only got the forecast from divisional distribution centres regularly instead of immediately. This created medium-term and short-term production planning on this make-to-stock production and pushed to distribution centres, but they may be unable to fulfil the immediate requests.
New System flow
Both P&G and NIBCO implement 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 focus 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 on innovation and IT aspects in Procter & Gamble
Innovation on product packing is important to P&G household care products because the packing size can affect the shipping quantity that can carry each time. There are some improvements on product packing.
Firstly, P&G can replace the old cardboard shipping boxes by seal-tight plastic bags for bulk shipment of household care products. In figure 2, it shows that the size of seal tight plastic bag packing is smaller than carton shipping box. It can save 20% of space for transport and storage (Fernie, J. & Sparks, L., 2004), so the shipment quantity of goods can be increased each time to improve the whole supply chain.
Figure 4.1: Carton shipping box vs Seal tight Plastic Bag packing
Secondly, innovation on product can help to reduce the package size of household care products. For instance, concentrated formulation on laundry detergent can use the same volume of detergent to wash double volume of clothes. The package of concentrated laundry detergent can be smaller, it is an advantage on space using on shelves, transportation and storage.
Figure 4.2: Size difference between new packing for "2X" concentrated formulation product and existing product
Besides on the advantage of space using, there is an advantage on manufacturing side as well. Concentrated formulation uses fewer raw materials on production, it can shorten the process of pull system, decreases the lead time for ordering raw materials and manufacturer can keep fewer raw materials for P&G (Knolmayer, G. & Mertens, P & Zeier, A., 2002). Then the whole supply chain is faster than before.
In IT innovation, internet is needed for faster information sharing, 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 means 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 in the supply chain system (Knolmayer, G. & Mertens, P & Zeier, A., 2002). Besides that, P&G can study the consumers' online buying habits through the system and make more suitable innovation on the household care products.
By comparing the new innovation of online shop between P&G and the Cliptomania Web Store (Case II-4 by Martin, 2009), the following points are concluded.
Implementation of online shop module
P&G has existing supply chain system, when online shop module is developed, the module can be easily added into the supply chain system, it can simply link with other modules for data analysis and other purposes. For Cliptomania, it paid to the vendor for providing basic web store structure to develop the online shop module, it is the interface between customers and Cliptomania only, no supply chain function is included (Case II-4 by Martin, 2009).
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 (Seifert, D., 2003). 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 online store. It may face a problem that there may be out of stock from Cliptomania's suppliers (Case II-4 by Martin, 2009). 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 has limited capital, all the packaging and delivery are done by themselves (Case II-4 by Martin, 2009). 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.
Barriers on new innovation and IT aspect in Procter & Gamble
With the innovation of using seal tight plastic bag packing on shipment, the household care product are broken on transportation, these damaged goods could not be sold to customers, so the whole supply was decreased and may not fulfil consumers demand, also the cost of goods was increased. The cause of this problem is the weak protection of seal tight plastic bag. The protection ability of seal tight plastic bag is not as strong as carton box, it cannot resist force. Therefore, goods are damaged during transportation.
For IT innovation, in order to sell the household care product in online store, P&G needs to re-engineer the supply chain system and implement online store module into it. In the implementation, there are some barriers that inhibit the change (Dougherty, D., 1992).
Staff and retail stores resist learning the online store module
In the organisation, staff are not willing to change their routine jobs, they do not understand how to use the new supply chain system. They prefer using traditional method to handle the routine jobs instead of using new supply chain system.
Data Quality of online stores
There are more than 10,000 different household care products in P&G, it needs to know which item is ordered by consumers in online store. The exact item should be sent to retailers through online store, otherwise wrong item will be sent to consumer.
Data Protection and Security of online store in internet
There are some personal information is used in online store, like credit card number, address, contact. Some consumers are afraid that their personal information is disclosed accidentally.
Internal and external customers' perceptions about online store
The new implement of supply chain system may not help the internal and external customers. Sometimes, they may need to do the jobs manually if the new system cannot fulfil their needs.
Budget for implementation of software and hardware
Money is needed for buying new hardware and developing online store module into existing supply chain system. It is hard to get enough budget for new development in an organisation. Therefore, budget is an issue on developing online store in P&G.
In the case of Clarion School for Boys Inc. (Case IV-1 by Del-Iayes, 2009), its problems are poor staff perception about the new system and the budgeting. These problems are the same as P&G when implementing online store into existing supply chain system.
In another case, Data Governance at InsuraCorp (Case I-4 by Brown, Khatri and Lockwood, 2009). It talked about the problems faced in integration and sharing data between different business units at organisation. Some of the problems are the same with P&G like Data Quality problem.
In both cases, the user is the internal staff of organisation, but for P&G, it includes external customers like consumers and retail stores. So, the solution to overcome these problems is a must.
Solutions to overcome the barriers
In order to overcome the barriers listed above, the following suggestions are recommended.
Increase safety stock level
It is recommended to increase the safety stock level of household care products in retail shops. The safety stock is a buffer stock to retail shops. As the goods are packing in seal tight plastic bag which is weak in protection, goods may be damaged in transportation, it decreases the supply to retail stores and may become shortage on shelves. In order to prevent shortage of goods safety stock can cover the damaged goods. And the increase of safety stock level can provide stock for unexpected increase in demand.
Redesign the packing for bulk shipment
The seal tight plastic bag for bulk shipment is weak on protection, so it is recommended to change the packing for bulk shipment into large triangle box. Triangle box can provide better protection to packed goods. Triangle is the best shape to resist force. Force is shared with another two sides of triangle when one of the edges with force acting on it. Therefore, the goods stored inside can have better protection.
Figure 6: Triangle packing box
Provide Training to staff, retail stores and online consumers
Online store is new to staff and retail stores, so training is needed for them to understand how to use it, for instance, what they should do when they get an order from online store. P&G can choose the important concepts and process in training. Using graphical image to show the complicated relationships and concepts is easier to understand by users. Besides that, this eLearning training can give chance to staff and retail stores to practise the process and collect the feedback from them.
Training for online consumers is also important, if they don't know how to buy household care products in online store, they will not try. Therefore, developing a multimedia to instruct the online purchase procedures step by step and put this multimedia training to online store webpage. Then online consumers can follow the instructions to purchase household care product in online store.
Data Management for online shop
The data management includes the data quality, data protection and data secure. It is important that the items are correct for consumer selection, if wrong message is received from the online shop system, then wrong goods is delivered to consumers. Therefore, data quality is important. In order to have correct data, identifier of unique value from each entity, unique naming and unambiguous descriptions of items are important. For data security, prevention of hacker to get the credit card information and personal data is needed. IT department can monitor the status of online shop, adding digital signature and data encryption. And they can purchase some software or solution which can improve the security of online store. Also, setting password, assign access level, data redundancy, backup, firewall, forbid to use USB etc can increase the data security internally.
Survey on collecting the perception from staff, retail stores and online consumers
Survey can help to get better understanding the needs of staff, retail stores and online consumers. They can show where the real difficulties are because they are the users, not developer. The survey can be conducted at two different moments. One of the surveys can be conducted before the implementation of online store, it is used to collect the new ideas as the input to the online store development. The second survey can be conducted after the online store is released, it likes a performance analysis to collect the perception from staff, retail stores and online consumers, in order to make continual improvement to the online store.
Follow 7Cs Framework for online store design
7Cs framework is used for thinking about the design of website, the seven design elements of a customer interface, included context, content, commerce, community, connection, customization and communication (Rayport, J., and Jaworski, B, 2001). By using this framework to design online store, the outcome can meet both internal and external customer needs.
Prepare proposal before the implementation of online store
The purpose of proposal is used to plan the resource allocation and estimate the total cost of the whole online store implementation, In the proposal, it includes risk and uncertainty management to prevent sudden problem in the progress of implementation, for instance, business process and strategy change in company or the change in management. The proposal can provide a full picture of online store implementation to top management, it is easier to get budget.
By comparing with the Clarion School for boys Inc. (Case IV-1 by Del-Iayes, 2009), it hired consulting firm to do the assessment of the company. Its result was that the staff felt trouble on using the system and the system cannot help their work. From this result, it shows that training, survey of on staff's perception is important to implementation of system. Therefore, the suggestions mentioned above are needed for online store development.
For the implementation of online store in P&G mentioned above, the design, survey, implementation and training of online store are done by internal staff, as internal staff should understand fully what P&G online store needs, the development can be more fulfil to P&G. On the other hand, it is different with Schaeffer (Case IV-4 by Martin, 2009). In Schaeffer, it outsource some of the IT resources instead of implement itself, because they realise that outsourced company has well-trained staff in that area, enough hardware and software resources to know the unforeseeable needs and meet its goal with little difficulty within the budget.
P&G is a creative and innovative company that always makes sustainable products to increase the sales volume. P&G believes that the return on investment can increase sales, increase productivity, decrease error rates. Its innovation on packaging helps to improve the supply chain flow, reduce the out of shock situation.
Also, the leveraging of information technology and using internet as a medium for sharing information helps P&G to have growth of sales each year. The online store is another way to diversify the range of consumers by selling goods without boundary. P&G can become the head of selling retail goods if it continues its strategy.