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Procter and Gamble Significantly Shifts its Supply Chain Strategy

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Among many of the major U.S. consumer product goods (CPG) manufacturers the annual Consumer Analyst Group of New York Conference (CAGNY) held in February is a “big deal’.  It is the opportunity for senior management of these companies to share strategic plans with the major Wall Street analysts who follow and advise investors in these companies, and is often a venue where financial news headlines are often created.

This year’s event was no exception, and the biggest financial news headline stemming from the CAGNY conference concerns Procter and Gamble (P&G) and its announced plans to cut an additional $10 billion in overall costs by 2016. P&G’s net profit plunged 49 percent in the last quarter as consumer markets presented a far more competitive challenge for the company.

Supply Chain Matters views the global supply chain related headline of these Latest P&G announcements as a fundamental realignment of the company’s global supply chain strategy as a response to a revised business strategy. A new emphasis will be on optimizing supply and product fulfillment within the more developing markets across the globe while doubling down on cost and efficiency needs within the developed markets supply chain.

P&G senior management informed analysts that the company’s strategic goal over the coming years is to significantly grow revenues from the developing markets as contrasted with developed markets. The reasons are obvious.  These markets are growing at double digit rates and P&G estimates an increase of 700 million more consumers in these markets by 2020. Currently, roughly 17 percent of overall sales stems from these regions, and P&G’s goal is to grow product margins in these regions to double digit dimensions. Being a recognized leader in supply chain capability, P&G management has also come to the realization that in order to tap this increased emerging market opportunity, supply chains must be adjusted in resource, productivity and cost dimensions.

The $10 billion in overall cost reduction by 2016 will originate from three broad areas:

  • $6 billion in cost of goods sold reduction (COGS)
  • $3 billion in overhead cost reduction
  • $1 billion in savings through increased marketing efficiencies

Supply chain focused COGS reductions include improvements in product design and formulation, in essence leveraging product concentration, weight and efficiency opportunities into global scale production efficiencies. The best analogy would be the beverage industry where syrup concentration is utilized as a base compound for global-wide final packaging and distribution needs. Other areas cited include increased manufacturing efficiencies through a combination of product and process quality initiatives, manufacturing platform simplification and more efficient packaging to reduce global material and logistics costs.

Overhead cost reductions include targeted headcount reductions in the amount of 4100 positions by fiscal year 2013, including aggressive cuts in executive level positions.  These headcount cuts are incremental to the previous announced reductions of 1600 positions in the current FY12 fiscal year, making a total targeted headcount reduction goal of 5700 positions by FY13, and a total impact of $800 million on P&G’s balance sheet.  In its reporting, the Wall Street Journal quoted Yannis Skoufalos, P&G’s global product officer, as indicating that the company will continue with plans to hire between 3000 and 5000 manufacturing employees associated with the opening of  new manufacturing plants in countries such as Brazil, China, South Africa and Eastern Europe.

Headcount reductions at P&G are not a common occurrence, and industry watchers note that this may only be the second time in the company’s history that such measures have been undertaken.

The area of increased marketing efficiencies is also significant and deserves its own separate commentary.  In the CAGNY briefing package, P&G CEO Bob McDonald pointed out the soaring rate of marketing expenses, which is approaching 17 percent of sales in the current fiscal year.  A good portion of these marketing initiatives were targeted to P&G’s developed markets such as the U.S. and Europe vs. developing markets such in Asia, Africa, Russia and others.  New initiatives in this area are to be focused on increased global reach, frequency and digital marketing tools directed at multi-brand scale.  We would not be surprised if this also includes more leveraged use of social-media based marketing tools.

Supply Chain Matters has observed too often in past months a pattern among many CPG companies to target aggressive cost cutting goals in various areas of the supply and value-chain to fund needed offsetting increases in marketing budgets to drive top-line revenue growth objectives. These marketing budget increases tend to lack an overall strategic goal, and consequently CPG companies find themselves in the situation of cutting in the operational supply chain areas needed to sustain future growth such as supporting the increased channel complexity involved within distribution to the developing markets.  That effect alone leads to increased tensions among CPG focused supply chain planning, operations, and marketing teams in coming to consensus over the aligned sales and operations plan related to geographic growth. P&G has however on the surface, placed context to both its strategic market growth and overall cost reduction needs in what appears to be a balanced perspective across all of its corporate functions.

While these latest P&G headlines are certainly the concern for existing P&G employees, the takeaways for the broader supply chain community are that the company may be set a new industry benchmark for focusing on broader strategic vs. short-term results, and a balanced, integrative perspective on product, people, supply chain and marketing requirements required to support a longer-term strategic plan.

Time, degree of execution and future consumer demand will prove to be the ultimate report card for P&G’s strategic supply chain shift. It may also portend other industry shifts in the coming months.

Bob Ferrari

© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

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