CASE STUDY

December 2002

Procter & Gamble: Building A Smarter Supply Chain

Issue/Solution
To remain profitable, consumer products manufacturers must find ways to optimize the performance of their supply chains. They need to support marketing promotions better and avoid frustrating consumers with out-of-stock situations in the store.

Situation

Procter & Gamble realized it needed a consumer-driven supply network to stay ahead in the consumer packaged goods industry. Retailings first moment of truth is a key focus area for P&G. When the shopper reaches the shelf, is the product there?

Discoveries

Links between supply chain and CRM processes are critical. Business leads, technology follows. But the technology must be proven, practical and scalable. Even with immature solutions, it is possible to get rapid payback on streamlined demand and fulfillment processes for critical products. A harmonized ERP applications backbone is a basic requirement.

Recommendations

Secure management support before you start redesigning your supply network. Dont let politics condemn the initiative to failure. Leverage the value IT can bring in connecting demand and supply side business processes. Simplify your applications architecture to allow collaborative business processes and cope with changes in network alliances.

Dig Deeper

Related Research from GartnerG2 Gartner Core Research Methodology Maria Jimenez with Derek Prior

Research has shown retailers lose 11% of sales

GartnerG2, a new service from Gartner, Inc., helps strategists guide and grow their businesses.

due to out-of-stocks, and that same-brand substitutions win back less than 25% of a manufacturers lost sales.

CAS-1202-0012 2002 Gartner, Inc and/or its affiliates. All rights reserved. GartnerG2.com. Page 1 of 7

CASE STUDY
Procter & Gamble: Building A Smarter Supply Chain December 2002

Situation
Zeroing in on the first moment of truth Procter & Gamble, a world leader in consumer packaged goods, sells nearly 300 brands in more than 160 countries. It has sales of $40 billion a year and 130 manufacturing sites around the world. P&G measures consumer satisfaction at two levels, which it calls the two 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 buyers satisfaction when consuming the product. This, too, has a crucial impact on consumer loyalty, but is beyond the scope of this case study. 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 the shopper sought, was available less than half the time. Something had to be done. Responsibility for having the product on the shelf every time a shopper wants it used to be seen as purely a matter for the retailer. If retailers got their forecasts wrong and ordered the wrong volumes, the manufacturer was not aware of the problem, or at least not concerned about it. But, at the end of the day, both the manufacturer and the retailer were losing. P&G was ahead of the pack 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. Top managers in P&G began to realize that the companys supply network needed to be re-engineered so that it was genuinely 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 alternatives, it becomes hard to persuade them to return to buying the initial product when they go shopping again. P&G decided that sophisticated 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. Retail changes put pressure on the supply chain For the major consumer packaged goods manufacturers, the strategies that are currently being pursued by the worlds most competitive retail chains are changing the game in two important ways. As consumers come to expect a greater assortment of product options, retailers are responding with greater product differentiation, driving up service level expectations. Cash requirements are creating pressure for shorter order-to-delivery cycles and a move towards flow-through distribution networks. These trends are already beginning to eliminate the safety stocks that used to be held in reserve in the retail supply network.

CAS-1202-0012 2002 Gartner, Inc and/or its affiliates. All rights reserved. GartnerG2.com.

Page 2 of 7

CASE STUDY
Procter & Gamble: Building A Smarter Supply Chain December 2002

This situation creates several new problems that P&G and other manufacturers need to come to terms with. Reaction times across the supply network have been compressed. Current processes cannot move fast enough to deliver what retailers need. Supply decisions require timely, detailed information that is not usually available today.

Optimizing supply chain performance demands a radical new look at the way the partners in the supply network collaborate, involving retailers, manufacturers and service providers. P&Gs aim has been to create adaptive, responsive supply networks that will link together sales and supply processes, inside and outside the organization, to improve product availability. This will allow it to develop demand chain management capabilities, especially for promotions. Promotional items are the highest priority, because of the large amounts of money involved in marketing programs. If manufacturers cannot deliver the product, they lose all the growth that should be generated by their marketing promotions, however much demand is stoked up. New thinking, new techniques, and new technology P&Gs vision of a consumer-driven supply network has two essential elements. Building collaborative supply chains at several levels (local market and global markets, for example). Ensuring that manufacturing sites serving both local and global supply networks are highly responsive to changes in demand, based on real-time data from the stores.

Links between supply chain planning and supply chain execution processes are critical. In the transportation area, P&G expects a lot of change, including improved collaboration with logistics outsourcers and more use of techniques such as cross-docking. This system, under which inbound trucks are unloaded and the goods are sorted and loaded straight onto outbound vehicles, without ever being put into store, can be used to cut inventory and handling costs, as well as delivery times. Daily planning will give way to continuous planmake-ship processes, which will demand improved loading techniques to make efficient use of vehicles as lot sizes become smaller. In the short term, P&G expects to see supply networks based on relationships, rather than entirely owned by manufacturers. This kind of collaborative organization offers the flexibility to vary capacity according to short-term or last-minute needs. End-to-end optimization is essential, as there is no point in optimizing one component (e.g. production responsiveness) at the expense of another (e.g. delivery and transport costs). In export markets, with their longer replenishment lead times, this kind of improvement can be difficult to manage. But these are the very markets that may also offer the biggest rewards in terms of inventory reduction and improvements in availability. In P&Gs vision of the consumer-driven supply network, daily demand updates provide timely warning of changes in product consumption. To make the CDSN work, this information must then be rapidly integrated into replenishment plans, internally and for partners and suppliers. P&G is also piloting new distribution requirement planning techniques that will make it easier to understand product requirement implications across the distribution network. For the CDSN idea to become a reality, some organizational changes were necessary, as

CAS-1202-0012 2002 Gartner, Inc and/or its affiliates. All rights reserved. GartnerG2.com.

Page 3 of 7

CASE STUDY
Procter & Gamble: Building A Smarter Supply Chain December 2002

existing processes could not keep up with the new business targets for customer and consumer service. But it was also clear that there were technology issues that must not be forgotten. The battle cry of Business strategy first, technology second is now accepted wisdom, but changing the business strategy would not have been feasible without changing the technology, too. Achieving optimization across the supply and demand chains requires network collaboration between partners, and a set of tools that will help and facilitate that collaboration. These tools must include a harmonized business applications portfolio, including, in P&Gs case, a globally standardized ERP platform predominantly based on SAP software. The final element required to make the CDSN concept work is technology for real-time tracking of products, cases and pallets within a manufacturing operation. P&G is one of the sponsors of MITs Auto-ID Center, which is working to develop cheap radio-frequency ID tags that can be built into packaging to provide real-time demand monitoring from the retailers shelves all the way back through the supply network.

Discoveries
Out-of-stocks cost you one sale in nine Though the consumer buys from the retailer, and not directly from the manufacturer, the manufacturer cannot afford to ignore the problem of shortages at the store or shelf level. P&Gs direct customers are the retailers, and todays supply chain structures were originally developed to supply retailers warehouses with goods, according to plans laid down and orders placed in advance. But at a time of highly volatile consumer demand, doing this reliably is not enough. Service at the consumer level is becoming the key strategic metric, and out-of-stocks need to be monitored very closely. P&Gs research has shown that retailers lose 11% of sales due to out-of-stocks, and that same-brand substitutions win back less than 25% of those lost sales for a manufacturer. Perfection can wait From the CDSN pilots it has run so far, P&G has already discovered that effective collaboration in non-linear supply chain environments is a demanding disciplineand that it is important to force the pace of change. Systems and technologies may not yet be ideal, but P&G has learned that it is not worth waiting for perfection. It has identified the main requirements for successful network collaboration under four headings: The potential to move large volumes of data fast. Data should be handled automatically, without needing to be transformed or translated on arrival. An adaptive, dynamic approach that uses new business applications to monitor, alert, evaluate and, where appropriate, trigger action. The ability to establish connections quickly on demand, if necessary within hours. Enhanced back-up and recovery strategies for all the systems involved. The technical challenges cannot be ignored, because batch processing windows soon narrow right down. This is especially critical if these harmonized business applications are going to be deployed on a global scale.

P&G is working with its IT suppliers to develop additional functionality and to resolve the

CAS-1202-0012 2002 Gartner, Inc and/or its affiliates. All rights reserved. GartnerG2.com.

Page 4 of 7

CASE STUDY
Procter & Gamble: Building A Smarter Supply Chain December 2002

scalability problems inherent in most new applications. But it has also learned the value of assembling and making a firm commitment to a small group of technology partners for such an ambitious global project. Getting down to the practical detail It is still too early for P&G to be able to point to business results and ROI figures in connection with this work, but several programs have already been approved and launched. These projects are already contributing tangible business benefits in several planning areas. Demand planning: P&G has launched a new demand planning system, which is now used to forecast 80% of the companys sales volume. It is already showing that it can produce forecasts with significantly improved accuracy. Rough-cut capacity planning: P&G has introduced a pilot to support rough-cut capacity planning processes in its detergents business. This has already succeeded in cutting out-of-stocks by three-quarters and reducing inventory levels. Distribution requirements planning: Among others, there has been a successful pilot project in P&Gs North American cosmetics manufacturing facility, supporting a daunting 10,000 permutations of product and distribution channel.

P&G has also developed private e-marketplace facilities for both suppliers and customers, allowing its key business partners to see its inventory levels and production plans and perform real-time transactions via Web-enabled front-end systems. This approach has produced inventory savings across the whole supply chain, and allowed the introduction of other improvements, such as automatic invoice processing. Improved responsiveness to events has enabled P&G to increase promotional product volumes, but still be left with less residual inventory when each promotion is over. At its manufacturing sites, P&G is experimenting with early pilots to support produce-todemand capabilities. These involve superimposing real-time demand signals onto the production plan, and integrating real-time shop-floor and warehouse data. It is also piloting a dynamic distribution requirements planning system, in which the planning cycle is automatically triggered by major events, such as changes in demand or inventory, and could be run many times a day. Though the pilots are still in early stages, incorporating these highly responsive processes into the supply chain will eventually cut costs and lead to real improvements in consumer satisfaction. These projects are all contributing to P&Gs overall goal of building its consumer-driven supply network, while producing immediate improvements in the companys capacity to do business.

CAS-1202-0012 2002 Gartner, Inc and/or its affiliates. All rights reserved. GartnerG2.com.

Page 5 of 7

CASE STUDY
Procter & Gamble: Building A Smarter Supply Chain December 2002

Recommendations
Secure management support before you start redesigning your supply network. Dont let politics condemn the initiative to failure. Collaboration inside the organization is usually every bit as difficult as external collaboration with trading partners. Different functions and departments need to develop true internal collaboration to make a seamless consumer driven supply network possible. Leverage the value IT can bring in connecting demand and supply side business processes. Senior managers will not need much prompting to recognize the waste of marketing resources that occurs when consumers arrive at an empty shelf. Convincing them that investment in IT and a faster, more flexible supply chain can solve the problem may take longer. Simplify your applications architecture to allow collaborative business processes and cope with changes in network alliances. It is crucial to design a flexible, harmonized business applications architecture for collaborative business processes. Dont wait for perfection, but invest in understanding technology and its potential impact on your business. It is important that new operations can be added or detached quickly (in less than six months) when the inevitable acquisitions and divestitures occur. Limit the number of systems used to avoid being overwhelmed by interfacing issues that add little to the bottom line. Remember that Webifying your internal systems will merely expose their inadequacies to a bigger audience. Since this audience is exactly the group of external partners you need as close and confident collaborators, do not advertise your weaknesses. You cannot make advanced near-real-time collaboration work without secure and efficient internal systems.

CAS-1202-0012 2002 Gartner, Inc and/or its affiliates. All rights reserved. GartnerG2.com.

Page 6 of 7

CASE STUDY
Procter & Gamble: Building A Smarter Supply Chain December 2002

Dig Deeper
Related Research from Gartner G2 Understand Whats Driving Your Retail Demand Chain By Hung LeHong (16 October 2002) Square Soup Helps Squeeze Air Out of the Supply Chain By Gill Mander (11 October 2002) The Brave New World of Supplier Relationship Management By Cathy Spencer (19 October 2001) Gartner Core Research How Procter & Gamble Runs its Global Business on SAP By Derek Prior and Nigel Rayner (25 February 2002) Summary: P&G has successfully standardized on a centralized ERP and supply chain backbone from SAP, combined with a radical approach to master data integration. This strategy, adopted five years ago, has yielded significant economies of scale, but has still provided the flexibility needed to support the CPG giants business plans. Balance Optimization- and Synchronization-Focused SCM By Jeff Woods and Maria Jimenez (30 September 2002) Summary: Externalized manufacturing and logistics processes have become the rule, changing the scope of supply chain management by increasing the importance of real-time extended enterprise SCM functionality. Organizations that let optimization outrun their synchronization capabilities risk seeing SCM projects fail. Measuring Collaborative Supply Chain Effectiveness By Maria Jimenez, Lora Cecere, Karen Peterson and Frank Buytendijk (23 May 2001) Summary: SCM performance management allows an enterprise to see the strengths and weaknesses of its existing operations and thus become more responsive to changing business conditions. Several IT vendors offer tools for this task, but none has all the answers yet. Buyers must choose between four classes of immature solutions. Methodology Information for this case study is derived from detailed GartnerG2 discussions with senior European managers of Procter & Gamble in 4Q 2002. P&G has been given the opportunity to check the facts reported here. Background information and insights are drawn from the industry knowledge and experience of the authors and other specialized Gartner analysts.
Entire contents 2002 Gartner, Inc. and/or its affiliates. All rights reserved. Gartners prior written permission is required before this publication may be reproduced in any form. The information contained in this publication has been obtained from sources Gartner believes to be reliable. Gartner does not warrant the completeness or accuracy of such information. Gartner shall have no liability for errors, omissions or inadequacies of the information contained in this publication or for any interpretations of that information. Any opinions expressed herein are subject to change without notice.

CAS-1202-0012 2002 Gartner, Inc and/or its affiliates. All rights reserved. GartnerG2.com.

Page 7 of 7