Procter and Gamble: Improving Customer Value through Process Redesign Case Study

Essential case facts

Procter and Gamble is one of the largest and oldest manufacturer and distributor of groceries around the world. The company manufactures branded groceries and supplies these products to the market. In addition, the company is leading in determining the distribution channels of branded consumer goods to the market.

The internal processes that occurred enabled the company to make a sales volume of $30 billion US dollars. The company is well known for its aggressive and successful development of world class marketing and high quality consumer goods.

The company growth strategies involved developing and marketing new products, acquisitions and international expansions. The company succeeded in acquiring many medium sized firms in the US and as a result expanded its market share. However, this strategy lasted for only a very short time leaving the company to expand through new product development and international expansion.

The international expansion strategy included the product replication in new markets as well as developing and marketing new products that suits the need of particular market. This strategy enabled the company to increase its sales volume by almost 50%.

P&G product development strategy ensured broad range of product lines that included wide variety of products. The company organized its products into five major sectors. That is, Food/Beverages, Health/Beauty, soap, paper and special products.

Each of these sectors was further organized into product categories. The categories were responsible for the product group brands. New-brands were determined by extensions or improvements on existing products.

The company products were majorly sold through numerous channels including wholesalers, grocery retailers, club stores and mass merchandisers. While there was disharmony in relationship between the company and the distribution channels, the company later recognized that to be successful, it must serve the need of both the channel and the consumers.

Extensive market research, effective advertising, low cost pricing strategy and aggressive research and development contributed to the company sales increases not only in the US but also in other parts of the world.

The main focus of P&G has been to improve the customer value through the provision of superior products. This objective is the main driver of any innovative processes that occurred through the elimination of non-value-added processes in its distribution channel.

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These innovative processes that led to the transformation of the organization distribution channel were seen as the information system innovation. That is, the company developed information systems that automated all its distribution activities.

Due to the promotional competition and swings in the prices, P&G adopted new market strategies on its branded consumer products. One of the strategies was to improve the industry efficiency and changing the pricing policy to its products. Both of these strategies were essential in the improvement of its brand value.

As the company was implementing the pricing strategy, it also took leadership role in ensuring that the other players in the grocery industry have accelerated the adoption of new efficient systems and practices that add value to the products channel. The changes in the industry also increased P&G effectiveness in its effort to deliver value to its consumers.

One of the goals of transforming innovations in the channel of distribution was to develop a relationship with distribution partners that were more collaborative and mutually productive. Negotiations were to be replaced with cooperation so as to efficiently serve the consumer needs.

Through the combination of consumer loyalty and the efficient channel together with good relationships, the company would increase market share for its products. Besides, the cost of serving the end user and the channel will considerably reduce thus allowing all the stakeholders to benefit.

Major issues/dilemmas, pros and cons of two alternative paths of action, recommendation

Major issues/dilemmas, pros and cons of two alternative paths of action

There are several issues with strategies that the company implemented in order to increase the customer value. These issues range from the product promotions to the sale of the CSR to the IBM. The demand for the company products was being driven by the end consumer pull through the channel.

The consumer pull gave P&G an added competitive advantage as most of its products find themselves in the stores shelves than its competitors. P&G business engagement was primarily based on short-term negotiations for initiatives and promotions.

There was increased use of promotions as the manufactures within the industry competed for small shelf spaces in retail stores. Forward buying of merchandize was widely practiced by the industry players leading to brands being overstocked.

As a result of attractiveness for forward buying due to the low interest costs, inflation and huge promotional discounts, the product procurement cost was being determined by many incentives and allowances making the cost of a single product on the shelf difficult to determine.

The incapability of understanding the costs, discounts and allowances for aggressive purchasing led to the channels focusing on buying for profit instead of selling for profit.

The multiple promotions together with forward buying led to the increase in the retailer inventories. This requires that the manufacturers must also increase their inventories so as to be able to meet the artificially created increased demand. The variations observed in consumer and manufacturers demand made it difficult to accurately predict demand for the manufacturers.

The uncertainty in total demand and large fluctuations in periodic demand increased both manufacturer’s inventory requirements and cost of production. This could not be experienced under the direct pull through demand processes.

P&G sell its products through retail groceries channels that included wholesalers, retail stores, distributors and club stores. Approximately half of the P&G products go through retail stores while the rest are evenly distributed through wholesale and other distribution channels. These grocery channels operate with very thin profit margins.

High volumes and low unit prices ensured that the channels profits depend on efficient operations. In fact the total sales volume together with retail space becomes the critical factors that determine the channel profits. Moreover, regional market share becomes critical and advertising being significant cost, the channel profitability is being determined by leveraging the fixed cost of the regional advertising.

With these inefficiencies in the pricing and distribution channels, P&G came up with several programs that was aimed at improving services and reduce costs along the channel. The first program was aimed at improving the logistics in the supply chain and reducing inventories within the channels through continuous replenishment process (CRP).

CRP was first tested using the electronic data interchange (EDI) that was used to transmit data on daily basis from the retailer to the P&G warehouse. Using EDI data, P&G was capable of determining the quantity of the product that could be shipped to the warehouse of the retailers.

This process proved to be successful as P&G could easily compute the product order quantities with the aims of providing sufficient safety stock, eliminating excess inventory in retailer’s warehouse and minimizing the overall logistics costs.

Moreover the process led to the inventory reductions, improvements in the service levels and saved much of the retail labor. Furthermore, retailers were capable of doing away with several buyer positions using this restructuring process.

However, there was no clarity on the benefits that the company derives from this process. In addition, the new ordering process proved to be more costly to the company that the previous method where the retailer determined the order quantities.

The success of CRP on mass merchandisers made this program to be implemented in all business processes. Moreover, it generated the interest of other retailers. The CRP process spread very first among mass merchandisers and many implemented CRP.

To these grocery chains the CRP has proved to be successful in reducing inventory as well as stock out levels. The CRP became popular among the retail channels as a tool in selling and expanding their product line.

As the CRP was being integrated in all business processes through the EDI, P&G realized that the technology needs to be redesigned to suit the increasing business processes as a result of expansions. In fact, the redesigning process had to start with the improvement of the total ordering process that has to begin with changing the pricing policies and practices.

The improvement in the ordering quality had to be accompanied simple pricing structure that can easily be understood and tract by the customers in their systems. The pricing policy changes were essential in increasing the consumer value as well as building the brand loyalty. The pricing policy changes and system improvements were beneficial to both channel customers and P&G.

Recommendations

P&G should thrive to improve on its business processes transformation through information technology to have an added competitive advantage and to keep its leadership role in transforming the groceries industry. In addition information technology adoption in the business processes will ensure increased value chain which in essence determines the businesses processes.

Besides, increasing the company competitive advantage, information technology will change the industry structure, the products as well as the mode of competition within the industry. Most importantly, transformations through information technology will add value to the end users of the product.

Three essential concepts on how information increases the competitive advantage

Information technology comprises of that information that businesses create and use as well as the technologies or hardware that process the information. The revolution of information impacts on competition in three different ways.

First it changes the industry structure and as a result changes the rules of competition. Secondly, changes in information create competitive advantage through new ways of doing business that they use to outperform their competitors. Finally, information penetrates all forms of new business in most cases, from within the firms existing operations.

Value chain

Information technology transforms the way companies do business. It has the effect on the entire business processes through which the end products are created. Moreover, it gives the product a new shape. In fact information reshapes the entire package of physical goods and services thereby adding more value to the customers.

The value chain is the important concept that brings out the vital role of information technology in enhancing competitive advantage. The value chain divided the company actions into technologically and economically activities that it performs to do business.

In most cases, what consumers buy is proportional to the values that the company creates in a product or service. Whenever the value that is created is in excess of the value creation cost, the profit is made by the company. Therefore, the company will only have added competitive advantage if operates at lower cost, differentiate its products or sell at lower prices than its competitors.

The company value chain in a specific industry is embodied into the value system. That is a larger stream of activities that the company performs to increase the product value. The value system includes the value chain of suppliers, production processes and distribution channels to the final consumer. In fact, a series of interdependent activities determines the firm’s value chain.

These activities are connected together through relationships. Linkages connect the company activities from the supply chain to the distribution channels that finally deliver the products to the consumers. Moreover, the company competitive advantage created through differentiation and low cost is component of its value chain.

Product transformation

Information also transforms the product. Products normally have physical and information components. The manufactured goods information element is the knowledge that the buyer is required to have so as to make informed decision about the product.

The information component of the product includes its use, characteristics as well as the way it should be supported, for instance, the product accessibility, convenience, service procedures, maintenance and criteria in consumer appliances.

The information technology makes it easier to provide more information together with the physical products. Moreover, information enhances the possibility of offering the commodities to the consumer devoid of substantial constituent. Furthermore, the product information content enhances its performance. In addition, the nature of competition can easily be changed through the adoption of information technology.

Altering the competition

Potentiality of changing the way companies compete within the industry is inherent in the Information technology. The rule of competition is changed by the information technology in three ways. First is the transformation of the industry structure. Secondly, companies use information technology to leverage their activities to create the competitive advantage.

Companies normally thrive to be at the competitive edge and information technology offers the means through which they can have that competitive edge. As search competitors will always try to imitate what the industry leader is doing so as to be at the top of the industry. As a result, a new industry structure is created. Finally the information technology affects almost all the business processes.

These characteristics have been applied by P&G in the transformation of its products as well as the competition in the industry. The company value chain is seen in the innovative CRP system that is aimed at reducing cost and eliminating inefficiencies in the distribution channel so as to add value to the customers.

The company also transformed competition in the industry through the changes in promotions. Through the business process redesign, the company has increased their product information.