Procter & Gamble Case Study

BRIEF HISTORY

Procter & Gamble was established in 1837 when candle maker William Procter and his brother-in-law, soap maker James Gamble merged their small businesses. They set up a shop in Cincinnati and nicknamed it "porkopolis" because of its dependence on swine slaughterhouses. The shop made candles and soaps from the leftover fats. By 1859, P&G had become one of the largest companies in Cincinnati, with sales of $1 million. The company introduced Ivory, a floating soap, in 1879 and Crisco, the first all-vegetable shortening, in 1911.

In the 1940s and 1950s, P&G embarked on a series of acquisitions. It acquired Spic and Span (1945), Duncan Hines (1956), Chairman Paper Mills (1957), Clorox (1957; sold in 1968) and Folgers Coffee (1963).

In 1973, P&G began manufacturing and selling its products in Japan through the acquisition of Nippon Sunhome Company. In 1981, when John G. Smale became the CEO, P&G's financial performance was under pressure. Manpower strength had crossed 100,000 due to P&G's acquisitions. P&G also faced intense competition from companies such as Kimberley-Clark and Colgate. P&G stumbled in many categories, losing market share and profits. P&G moved into health care when it purchased Richardson- Vicks and G D Searle's non-prescription drugs division in 1985. In the same year, P&G announced several major organizational changes relating to category management, purchasing, manufacturing, engineering and distribution. In 1988, the company formed a joint venture to manufacture products in China. P&G became the biggest cosmetics company in America when it acquired Noxell (1989) and Max Factor (1991).

In 1990, Ed Artzt, who had been heading P&G's international operations since the 1980s, replaced Smale as the CEO. Two years later, the company initiated an everyday low-pricing policy that reduced its reliance on coupons and trade promotions. The move helped in smoothening demand fluctuations and allowed P&G to cut prices on major brands. A year later, P&G initiated another restructuring program, cutting 13,000 jobs and closing 30 manufacturing plants. After years of trying to penetrate the orange juice market, P&G disposed off its Citrus Hill juice line and took a $200 million charge in 1992.

In 1993-94, market research revealed that families loyal to P&G brands were paying $725 more on an average, each year, than those buying private labels or store brands. P&G had been offering its retail customers discounts from time to time, but it realized the need to offer low prices consistently to remain a market leader. Analysis revealed that P&G had the highest marketing overheads in the industry due to its complex product line. Five divisions with three sales layers each, sold more than 2,300 stockkeeping units (SKUs) covering 34 product categories and 17 pricing brackets. Special deals meant that an average of 55 price changes was involved every day. To simplify this complex process, P&G reduced the number of pricing brackets from 17 to just 3 and the number of special prices from 55 to only 1 per day. It also reduced the number of SKUs by 25%. P&G decided to prune its Head & Shoulders product line, which had 31 varieties, and Crest, which had 52 versions. It also began to exercise strict control over its advertisement budget to reduce overall marketing costs to 20% (from 25%) of revenues by 2000. The company announced that it would pass on the cost savings to customers.

PAST SUPPLY CHAIN INITIATIVES

In the late 1980s and early 1990s, P&G noticed inefficiencies in its supply chain due to complicated product lines and pricing strategies. Complicated pricing was the result of special promotional offers to gain temporary market share rapidly. Special promotions led wholesalers and retailers to book orders for as much as three months supply of some products in order to take advantage of favorable terms. P&G estimated that one-third of the existing inventory was held in the pipeline between its plants and the consumer. Variations in product, pricing, labeling and packaging necessitated by extensive promotions had created a highly complicated supply chain system which did not add value for customers.

P&G began to simplify its operations in the 1980s. It made efforts to prune the product range, consolidate suppliers and streamline manufacturing processes. P&G also realized the importance of streamlining logistics practices. By the 1990s, more than 40% of P&G's shipments were automatically linked to withdrawals from customers' warehouses. This minimized paperwork and reduced inventory costs. As part of its simplification exercise, P&G restructured its US hair care business by selling Lilt home permanents, and mega brands such as Prell and Ivory shampoo. The Head and Shoulders product line was reduced to 15 variations. P&G also tried to simplify the special deals offered to retailers and distributors. In 1990, P&G eliminated many of the discount schemes it offered to retailers and instead lowered the list prices on most of its products.

P&G took several steps phased over a five year period (1992-97) to streamline its operations. In 1985, P&G introduced a program known as Continuous Replenishment (CRP). Using Electronic Data Interchange (EDI) P&G was able to approximate a "Just In Time" supply of products. In 1992, the company instituted a comprehensive program, called Efficient Consumer Response (ECR) to remove unwanted costs from the supply chain. ECR concentrated on four key areas: efficient replenishment, efficient promotion, efficient introduction and efficient assortment. Efficient replenishment linked the replenishment process to consumer demand. Efficient Assortment led to a 20% reduction in the number of stock keeping units (SKUs). Efficient introduction strengthened the criteria for introducing new products based on genuine customer needs. Efficient promotion enabled the success of the other elements of the ECR Program.

P&G launched three other programs called Streamlined Logistics Initiatives (SLIs) to support its ECR program and further increase supply chain efficiency. Launched in 1994, SLI I began to simplify pricing and trade terms across all categories. The objective was to make P&G operate like a single, integrated company with one set of trade terms across all the five business segments. SLI II, introduced a year later, gave retailers new, low product prices if they met supply-chain efficiency criteria: two-hour carrier turnaround; on-time customer pick-up and electronic purchase orders. In 1997, P&G launched SLI III, called Streamlined 97, to reduce costs arising out of damaged merchandise in the supply