Procter & Gamble Company: Improving Consumer Value through Process Design - Essay Example

 Procter & Gamble: Improving Consumer Value through Process Design Abstract The Procter & Gamble Company has established its reputation as a brand management company which manufactures and distributes well known household names in more the 140 countries of the world. With a workforce of more then 100, 000 and sales exceeding $ 30 billion in 1993, which were evenly divided between the United States of America and the rest of the world, Procter & Gamble could be considered to be a great success. However, it was realized that in an era of stiff market competitions, government legislation related to price controls and uncertain consumer behavior, there was a requirement to enhance distribution channel efficiencies by incorporating Electronic Data Interchange or EDI and Information Technology or IT for better collaboration between the Procter & Gamble Company and its wholesale customers. A Continuous Replenishment Process or CRP system could reduce the requirements for warehouse space, utilize the trucking or shipping capacity more efficiently, reduce labor costs and result in a greater accuracy of projected consumer demand. The industry wide adoption of such an enhanced process for distribution and ordering was to mean that very substantial bottom line gains were possible for the manufacturers or brand managers and the wholesalers as well as the retailers. Although, other options for enhancing profitability also existed, the enhancement of the distribution process was expected to offered higher returns on investment with a lower level of uncertainty. The Proctor & Gamble Company, therefore, made an effort to take a leadership role in the development of a CRP system for the grocery industry in the 1980’s. The CRP system which was developed was later sold to IBM so that it could be further developed and emerge as a multi – vendor industry standard. This essay takes a look at the business perspectives associated with the efforts made by Proctor & Gamble to enhance its CRP by incorporating EDI and IT into its distribution channel processes. Contents Introduction 4 Company Description 5 The Macro / Micro Environment at the Time of the Development Of the CRP 6 Problem Definition 7 Economic Considerations Involved in the Development of the CRP 8 Available Alternatives 9 Implementation of the CRP in the Grocery Industry and at the Procter & Gamble Company 11 The Impact of the CRP on Procter & Gamble Company Infrastructure 11 Conclusion 12 References / Bibliography 14 Introduction The Procter & Gamble Company is a 150 year old multinational giant with operations extending into more the 140 countries of the world. Procter & Gamble is into manufacturing, brand management and it is also a distributor of a range of very well known household grocery brands. Because of the competitive nature of its business and very large global operations with manufacturing facilities distributed around the world, Procter & Gamble is always searching for ways to enhance its profits, efficiencies and satisfaction for its clients (P & G, 2005, Pp 1 – 5). The company has been an innovator of new techniques for the operation and management of its business and continuously researches new products for release into the household as well as over – the – counter drugs market. In the 1980’s, Procter & Gamble started to experiment with the Continuous Replenishment Program or CRP which utilized Information Technology or IT and Electronic Data Interchange or EDI techniques to better link Procter & Gamble with its clients for the ordering and distribution of its product range, eliminating the distribution channel inefficiencies associated with its grocery and household items distribution to wholesalers. The use of IT and EDI in distribution meant that the Procter & Gamble Company was able to fulfill orders on a JIT or Just – In – Time basis. This meant that there was a requirement for less warehouse space, reduced labor and the efficient use of transportation for distribution was possible. Consumer demand could also be predicted better. Efficiencies associated with manufacturing as well as better scheduling for manufacturing could be implemented. The efforts of the Procter & Gamble Company resulted in the widespread adoption of a new IT and EDI assisted process for managing customer replenishment for a wide and distributed distribution system for the grocery industry (McKenney, 2000, Pp 830 – 835). It is instructive to take a look at the methodology which was utilized by the Procter & Gamble Company to improve the ordering and distribution processes associated with the grocery industry. The sections below discuss various aspects of the Procter & Gamble business and the CRP process along with the enhancements that were made. Company Description The multinational giant Procter & Gamble has operations extending into 140 countries around the world with many brand names associated with the company which are household names. About 100,000 employees work for the company in about 80 countries around the world. Procter & Gamble is a manufacturing and brand management company which is active in the areas of fabric and home care, beauty care, over –the – counter drugs, baby and family care, health care as well as snacks and beverages. The most popular brand names of the Procter & Gamble Company include Pampers, Tide, Ariel, Always, Pantene, Bounty, Folgers, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay etc. The company has, over the years, managed to build an excellent reputation and brand image for itself. Procter & Gamble which had grown from humble beginnings in 1837 was voted as one of the most admired companies by Fortune Magazine and it is considered to be amongst the best corporate citizens around the world. Procter & Gamble started off as a soap and detergent manufacturing company whose founders William Procter and James Gamble who had married sisters gradually expanded their business into a substantial undertaking. The Procter and Gamble Company expanded its business into Canada in 1915 and a UK overseas subsidiary was established in 1930. In 1935, Procter & Gamble expanded into Philippines, diversifying into the over – the – counter drug business (Procter & Gamble, 2003, Pp 1 – 5). Because the Procter & Gamble Company is involved in branding, it is important for the company to put into place efficient processes associated with the branding and marketing of branded consumer goods. The company has been involved with the brand management and marketing of reputable brands including Pert Plus / Rejoice shampoo, Ultra Pampers, Luvs Super Baby Pants, Blend-a-Med and Blendax toothpastes as well as Shulton Old Spice and Pantene Pro-V range of shampoos amongst others. Headquartered in Cincinnati, Ohio, Procter & Gamble has excelled in the branding and the brand management of household goods for everyday use. Procter & Gamble has built a good integrated management system which exceeds the requirements of ISO 14000 series (Procter & Gamble, 2005, Pp 1). Consumer value is added for the consumer in the Procter & Gamble branding process through the elimination of non – value added processes in the channel. Although the Procter & Gamble Company sales were about $30 billion in 1993, it was felt that higher profits and efficiencies associated with distribution and the release of new brands into the consumer market could be achieved. Proctor & Gamble has always been a company which has tried to bring new innovations into its business and many interesting experiments as well as innovations have been made possible by the company. The Macro / Micro Environment at the Time of the Development of the CRP The Procter & Gamble Company has a number of competitors in the business including Johnson and Johnson, Pfizer, Kimberly Clark, Gillette as well as Sara Lee and Schering Plough. In the 1970’s and 80’s price competitions within a stable demand environment had been a source of worry for Procter & Gamble as were the high inflation that was prevalent in the economy at the time. Interest costs were relatively low, but any borrowed funds had to judiciously invested in business for decent returns to be made possible (Hitt, 2001, Pp 210 and Pp 470 – 471). Profit margins in the grocery business have usually been low, ranging from 1% to 3%. The major source of increased profits for Procter & Gamble had been through its efforts to introduce American household names to other parts of the world. International sales had increased from virtually nothing in 1953 to $ 4 billion in 1985. However, it was desirable that the company also find some means for enhancing profits for its core businesses at home. As a result of the introduction of price controls by President Nixon in 1971 in an attempt to reduce inflation, some other means had to be found to enhance profits in the household grocery distribution business. Enhanced profits were only possible through higher sales and distribution efficiencies. Promotional efforts could potentially increase demand, but these also required that manufacturers maintain large inventories in order to cope with the uncertain, but potentially large consumer demand. Competition, variations in consumer demand and changes in retailer buying activities made it difficult for the manufacturers to predict the requirements for their manufactured household goods. Furthermore, consumers were less inclined to be loyal to their brands and the sale price of grocery items were far more important (McKenney, 2000, Pp 830 – 831). Such uncertainties increased the manufacturing costs and hence the only viable alternative to increasing profits was to try and enhance distribution channel efficiencies. Hence, concerted action and collaboration was required between all parties which brought the household products from Procter & Gamble to the consumers. Problem Definition Intense competition and low margins in the household grocery business, coupled with increased expenditure on promotions to capture a larger share of the consumer market and an inability to increase product prices at the time because of government legislation had meant that other means had to be found to increase corporate profits by reducing distribution channel inefficiencies. The Procter & Gamble company management discovered that value was not being passed on to the consumer because of the inefficiencies which were inherent in the processes involved with the marketing and distribution of its branded products. There was a requirement for manufacturers, distributors and retailers to cooperate so that industry wide inefficiencies could be driven out of the grocery distribution business. Introduction of automation and information systems in order to eliminate all those processes which did not deliver value to brand loyal customers had to be considered. It was discovered that less then half of the Procter & Gamble promotional dollars were passing on to the consumer. In order to improve the situation, the Procter & Gamble Company had to take on a leadership role, working with other actors in the distribution business to accelerate the adoption of efficient practices in the distribution process for its household grocery products (McKenney, 2000, Pp 830 – 831). Because of the competition, companies like the Procter & Gamble Company which were involved in supplying groceries or household items to consumers had made substantial efforts to promote their products. Faced with such a promotional activity, consumers had become price conscious and there was little brand loyalty left in the market. Price conscious and consumers shifts from one brand to the other, had made it difficult to predict future demand and hence retailers, both large chains as well as small operators, were faced with the prospects of maintaining large inventories of grocery stock items in order to satisfy the requirements associated with customer service for the prevention of stock outages. However, it had been demonstrated by some club - store retailers that a low margin approach coupled with the acceptance of a slightly lower level of service made necessary as a result of accepting lower inventory levels in warehouses could produce better profits. This meant that it was important to try to identify and remove the inefficiencies from the product ordering and replenishment processes so that higher efficiencies could be converted into profits. Such an approach was one of the few options that were available to increase the profitability of all parties involved in the grocery supply and distribution channels. Although attempts to improve long term profitability for Procter & Gamble and its distribution partners and the processes for the release of new products at Procter & Gamble had also offered hope for the company (Hitt, 2001, Pp 210 and Pp 470 – 471). Economic Considerations Involved in the Development of the CRP Procter & Gamble envisioned improvements in retail channels consisting of manufacturers, distributors and retail stores. Nearly half of the distribution at the time was made through chain stores which used their own distribution and warehousing, while the other half went through wholesalers which supplied small chain stores as well as the smaller independent retail stores. Mass merchandisers such as Wal - Mart and club - stores such as Sam’s Club had demonstrated the inherent efficiencies could be achieved by providing their customers a slightly lower level of service but reducing costs by maintaining lower level of inventories and using just – in – time ordering techniques, while accepting the risk that some products will be out of stock. Economic considerations demanded that for all to benefit, a better coordination was required between Proctor & Gamble, as the supplier of goods and the retailers. If the inventory levels of goods in the warehouses could be reduced and the prediction of demand could be made more reliable as well as accurate, then both the parties could benefit from reduced inventories as well as efficient manufacturing. Electronic data interchange, more economical billing and ordering as a result of the use of computers, as well as more accurate demand forecasting, along with a better utilization of transportation space while trucking goods to wholesalers were capable of reducing ordering, transportation, warehousing and labor costs. Thus, the application of Information Technology or IT, software design and Electronic Data Interchange or EDI could be translated into a Continuous Replenishment Program or CRP system which could be widely adopted for use in the grocery industry, bringing economic advantages to all. Procter & Gamble could benefit as a result of the efficient manufacturing which was made possible because the requirements of goods could be predicted better and thus the manufacturing process could be scheduled for economy. Although investments were required from all parties involved in the distribution channel for the procurement of computers, software and the EDI capability, savings as a result of enhanced efficiency were sufficient to justify such procurements. It was estimated that a 100 % implementation of the CRP for all product ordering was to result in 100 % savings in manufacturing costs. Such savings were sufficient to justify investments in the development and implementation of the CRP. With the evolution of the CRP system, it was possible to have category managers who managed product lines take over from buyers in the retail industry. As a result of the installed IT equipment, these category managers were able to control a number of product lines instead of being responsible for only one product (McKenney, 2000, Pp 845). Available Alternatives Amongst the available alternatives that were open to the Proctor & Gamble Company for improving its profits were the selection of efficient store assortments which involved trying to improve the productivity of retail space and inventory by selecting the inventory lines which were most in demand or likely to be in demand and making them more prominent as well as accessible for the consumer, efficient promotions, efficient replenishment and efficient product introductions. Efficient promotions involved trying to enhance brand awareness by using more cost effective marketing strategies. However, in a market scenario in which there was fierce competition amongst suppliers and a lot of effort was being put into promotions, not much efficiency could possibly be injected into promotions for products. Efficient product introduction which involved inventing new brands and introducing them to the consumers in the market is an essential task for a company like Procter & Gamble which is usually involved in developing several new products at the same time. Although it is possible to enhance efficiencies related to the invention of new products or brands by delegating such processes to specialized departments in the company, the impact of such attempts are likely to be felt in the long term with a certain level of uncertainty (Hitt, 2001, Pp 470 – 471). It was, therefore, important for the Procter & Gamble Company to try all means that were available to it to try and improve its profits, but there was a requirement for the achievement of real efficiencies as urgently as possible. Efficient store assortments could only be identified if the requirements of the consumers could be identified with greater certainty and this too was more likely to happen as a result of improved and timely availability of product consumption data which could only have been possible as a result of the introduction of information technology as well as EDI capabilities for the distribution channels. Hence attempts to select efficient store assortments were also closely tied to attempts to enhance the efficiency of product replenishment. A climate in which the borrowing rates were low, it was worth trying to acquire the additional information technology and EDI equipment that was necessary for the attempts to make the Continuous Replenishment Process or CRP more efficient. Thus, it was appropriate to focus efforts on making the Procter & Gamble CRP system more efficient as a matter of the highest priority because it promised to generate returns on investment which were better then for the other alternatives, far quicker. An enhanced CRP system also promised to reduce price volatility associated with inventory items which were purchased from Procter & Gamble so that greater market stability could be achieved (McKenney, 2000, Pp 841 - 843). Implementation of the CRP in the Grocery Industry and at the Procter & Gamble Company The implementation of the enhanced CRP system necessitated that equipment for EDI, IT and servers was required to be installed for all parties associated with the grocery management chain. Databases containing information related to various aspects of the distribution channel operation had to be developed and software modules for demand analysis, billing, invoicing as well as shipping had to be used. The implementation had to be undertaken in collaboration with an increasing number of interested distribution channel partners such as wholesalers, retailers and distributors. The whole industry was not interested in immediately adopting the CRP system which had been developed and after initial successes. It was considered strategically important to sell the CRP system to IBM for further refinement and standardization so that it could become increasingly acceptable throughout the industry. A considerable amount of effort at the level of the development of algorithms and software had to be undertaken to upgrade the CRP system into a multi-vendor software suite which could be used as a standard for the industry (McKenney, 2000, Pp 845 - 846). The Impact of the CRP on Procter & Gamble Company Infrastructure The company infrastructure that was going to be affected as a result of the attempts to implement a CRP system included the ware houses, the distribution or trucking equipment and the manufacturing capacity involving the manufacturing processes or equipment. The implementation of the CRP would have required that additional computer equipment was required to have been installed to support the automated order processing system. As a result of the implementation of the CRP, it was expected that the warehousing space requirement at Procter & Gamble as well as its retailers will have been reduced. The trucking fleet requirements will also have been reduced due to efficient trucking or transportation of goods. Because it was going to be possible to predict with greater certainty the demand requirements for manufactured household goods, the manufacturing processes at Procter & Gamble would have benefited from a different type of manufacturing equipment which was to support the much better scheduled manufacturing and higher demand driven throughput. IT and the shared databases which were required for the implementation of the CRP system meant that a paperless environment existed in the company and this will have required changes in the skill mix in the billing, order processing, fulfillment and manufacturing divisions of the Procter & Gamble Company. Thus, the adoption of a CRM system by Procter & Gamble and its channel partners would have meant that considerable changes were made in the physical as well as the human resource structures of the company. One obvious human resource related change was the addition of personnel with IT skills to the workforce and the shifting role of buyers or purchasing managers into category managers (McKenney, 2000, Pp 840 - 845). Conclusion The development of a CRP system by the Procter & Gamble Company and its industry wide adoption by the grocery industry as a result of its subsequent purchase and re-development by the IBM Corporation for multi – vendor operations marked the beginning of an era for the enhanced use of automation in retailing, distribution manufacturing. Process reengineering through the utilization of the CRP system had demonstrated that business processes could be reengineered using IT components to deliver higher levels of efficiency, productivity and profits for all concerned. References / Bibliography 1. A.G.Lafley. (March 7, 2000). Getting Procter & Gamble Back on Track. The Rotman School Integrative Thinking Seminars. Retrieved: September 12, 2005. 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Transnational.org. Retrieved: September 12, 2005. From: http://www.transnationale.org/fiche/920791676.htm Read More