P&G's Logistics Revolution: Co-creating Value

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Themes: New Product Development
Pub Date : July 2009
Countries : Global
Industry : FMCG

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Case Code : MM0030
Case Length : 7 Pages
Price: INR 250;

P&G's Logistics Revolution: Co-creating Value

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P&G's Logistics Revolution: Co-creating Value

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They are a true source of advantage.”3 Such efforts coupled with the digital boom and Internet of the 21st century improved P&G's operational excellence.

However, consumer goods companies like P&G, which sell their products directly to consumers through retailers were vulnerable to fickle consumer decisions. Various factors like packaging, advertising, point-of-sale promotions, product placement in the store shelves, etc. were found to have a profound impact on the customers' decision-making process. They may change their choice even within the time they walk down the store aisle and price-based decisions may take a back seat. Thereby, the necessity to influence consumers more effectively at the point-of-sale or ‘Shopper marketing', as it is also called as, gained greater momentum as global retailers like Wal-Mart, Costco and Target accounted for substantial part of the consumer goods companies' sales.

Therefore, in the highly competitive industry of consumer packaged goods, it was essential for P&G to know consumers' pulse and understand their needs better than its competitors. It was crucial not only to offer innovative products that consumers look for but also ensure the speed of delivery to the market.

However, apart from internal complexities, P&G was pressurised with external factors like rising commodity and energy prices, impact of inflation on the consumer disposable income, global economic crisis, etc. Besides, higher raw-material prices could not be transferred to consumers in the form of higher prices.

Under such conditions, P&G turned towards cost-cutting strategies and realised that its success would lie in its ability to connect with the consumers and reach the fragmented retailers across the globe – from small street shops to mega malls; all without losing focus on bottom-line cost efficiencies. Hence, it reinvented its supply chain with a focused approach to the end user.

P&G's Logistics Revolution

P&G redefined its supply chain strategy under the leadership of Keith Harrison (Harrison), head of its global product supply division. Since his appointment in 2001, he focused on cutting costs and helped P&G achieve longterm growth in sales and earnings despite soaring input costs. Since 1995, P&G's annual cost savings accounted for more than $1 billion and the figure rose to $2 billion in 2007.4 He brought a paradigm shift in viewing supply chain management from being an add-on businessmodel driven by forecasting to the one that focused on real-time demand. He used the term ‘supply network' instead of ‘supply chain' as the information flows in every possible direction rather than in a single horizontal line. He developed it not only as a core corporate concept but also as an operating strategy and called it ‘Customer Driven Supply Network' (CDSN) (Exhibit II). In the past, supply chain process started with the procurement of supplies and then moved through the organisation to retailers. Now, through CDSN, P&G starts its supply chain from store shelves and moves back to its suppliers.

Mike Power, president of GBS, asserts, “We're changing our overall approach to supply chain management to become even more consumer centric. When consumers walk into a retail environment, they want the right product at the right time at the right place. They don't want to find it out of stock. That's a disappointment to them and a lost sale for us. Systems based on real-time data allow us to deliver a much better result, meaning fewer out of stocks, on time delivery, more desirable products, and a very satisfied consumer.”5 For P&G products, the average level of out-ofstocks is between 10%–15%range. Itmeans that 10%–15%of the time a consumer cannot find the specific product he or she is looking for. Harrison said that from 2005 to 2007, P&G has cut its out-of-stock level to half.6

Companies which win consumers choice are the ones which perform best at two critical ‘moments of truth'. The first moment of truth is when the consumer stands at the store shelf and makes the purchase decision on a particular brand. This became the centre for P&G's CDSN, which works back through the supply network starting from the store shelf. The second moment of truth was when the consumers use the product and decide whether it was satisfactory or not. Therefore, the complex consumer goods supply chain system of P&G(?), linked by sophisticated technologies and logistics systems, was centred round the consumer.

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3]“2008 Medal of Professional Excellence: P&G is king of collaboration”, op.cit.
4] Ibid.
5] “Procter & Gamble”, http://www.cisco.com/warp/public/779/ibs/solutions/supply/pgcasestudy1.pdf, 2001
6] Wohl Jessica, “P&G supply changes can lead to $1 bln in sales”, http://www.reuters.com/article/ConsumerandRetail07/idUSN1841019320070619, June 19th 2007