I have an unabashed love affair with P&G. Not the products so much. I use Tide High Efficiency detergent and, ahem, Charmin but don’t care for Crest or think that Folgers is any good (coffee snob that I am) But I love P&G. The folks there understand that all supply chain processes need to be constructed around the customer and that, if they are, it will save money, drive up the revenues and provide each customer with what he or she needs in a particular way.
P&G’s story is important if you recognize—and you should—that there’s a new world revolving around an individual version of a customer value chain that includes your enterprise value chain as subsumed feature. And, that, my friends, is a very different view of the supply chain than most companies have.
This is not the supply chain of old that was focused around parts replenishment, inventory management, logistics, delivery and other things that the customer weren’t seen as a part of. It’s still concerned with those things, but it’s also the supply chain that affects the customer and which the customer has some transparency into. It is only a piece of a total supply chain that is extended often beyond a single enterprise so that it meets the demands of the individual customer.
Executives at P&G have understood this for a long time. P&G is a highly successful and always innovative company that stays far ahead of the pack when it comes to actual insight and vision. It has 300 brands—each with a supply chain component—16 of which are worth at least $1 billion or more. Why? Because its CEO, A.G. Lafley, thinks as a true visionary who "gets" the customer value chain. Listen to this comment he made:
We have to create a great experience every time you touch the brand, and the design is a really big part of creating the experience and the emotion. We try to make a customer’s experience better, but better in her terms (Designing Innovation by Jennifer Reingold, Fast Company, 2005).
Supply chain innovation
When this vision was applied to the supply chain, here’s how P&G handled it. First, corporate leaders appointed a general manager of supply chain innovation whose sole job is to figure out how to make the supply chain work on behalf of the customer in both effective and efficient ways.
In 2002, key executives recognized that 60 percent of P&G’s sales were made based on what they called "events"—roughly equivalent to what I and others call "experiences." So for example, Pringles had a Mac the Stack "event" that gave teens decoder cards at concerts and theme parks. Teens took the codes online and found out how much they won, from $3 to $50. Procter & Gamble used this event to create an adventurous experience—and discover a lot of people who then bought products.
Sixty percent of a company that makes tens of billions of dollars is a lot of dollars. But this led to a number of critical insights and new processes. First and foremost, to bolster the idea of experience-driven sales, Jake Barr, the aforementioned GM, put a plan into effect with the supply chain that was based on this idea, "If you can’t drive sales and deliver product at the point of purchase, you lose." (Procter & Gamble: Delivering Goods by Randy Barrett and Tom Steinert-Threlkeld, Baseline, July 1, 2004). In other words, P&G adopted a "pull," rather than "push," approach to inventory, which cut out excess inventory and was based on the idea the company would produce only what customers bought.
Second, the company reverse-engineered the products by looking directly at the cost components after it had surveyed customers to see what price point they were willing to pay for something. The idea was to produce the products profitably and still be able to set a price customers were happy with. It’s called pricing from the shelf back, and it’s one of their KPIs.
Third, company leaders put other KPIs in place designed to produce and deliver quickly according to purchase and continuously. So, for example, besides the ones mentioned above, they look at:
- Total supply chain response time, from purchase at register to purchase of raw materials to replace product. Originally six months, it came down to two months.
- Shelf level quality: how many and what kind of damaged or unappealing packages are on the store shelves. Zero is the optimal number.
- Out-of-stock rates: a mission-critical KPI for the customer-centered supply chain. P&G research showed that 41 percent of the time an item is out of stock, the sale is lost; 28 percent of the time a competitor gets the sale. Given that they were producing "on demand," the risks here seemed high, but I’ll get to that.
Keep in mind, this wasn’t just a matter of P&G doing this alone. The company has 5,000 key retailers and 30,000 key suppliers dealing with its 300 brands. They all had to buy in.
Results
Needless to say, if all of them had failed, I wouldn’t be using P&G as an example, but the plan has been wildly successful. Here are the numbers:
- Out-of-stock rates dropped from 16.3 percent to 7.6 percent between 2003 and 2004.
- Earnings growth went from 15 percent in 2002 to 20 percent in 2004.
- P&G saw annual savings of between $50 and $100 million.
- It increased sales from $40 billion in 2002 to $43.4 billion 2004.
You can’t do much better than that.
We live in, as one sage put it, a world in which "customers leave value in their wake." When considering the supply chain in that, all businesses have to realize that their old siloed versions of the supply chain mean nothing anymore. The thinking around customer—focused value chains that include supply chain capabilities, exactly what P&G calls "supply chain innovation"—is what now drives how your new business logic needs to work.
