UNIVERSITY FACULTY SUBJECT TITLE

: UNIVERSITI PUTRA MALAYSIA : GRADUATE SCHOOL OF MANAGEMENT : GSM 5170 MANAGEMENT INFORMATION SYSTEM : CASE STUDY (PROCTOR & GAMBLE: IMPROVING CONSUMER VALUE THROUGH PROCESS REDESIGN)

LECTURER

: DR. WONG SIAW MING PROFESSOR MOHAMMED ZAIN

STUDENT

: LEONG CHOI LI LEE HUI SHAN ENG PEK XAN

(GM 04473) (GM 04578) (GM 04693)

NGUYEN HAI HA (GM04700)

1.0

Introduction Procter and Gamble Worldwide (P&G) is one of the largest manufacturer

supplying grocery retailers and wholesalers. On top of that, P&G is a leader of designing how branded consumer goods manufacturers go to market. P&G has gained the reputation of world-class development and marketing of high-quality consumers over more than 150 years of operations. It also improved consumer value by eliminating nonvalue-added process to drive its process innovation. The changes at P&G in organization, systems, procedures and policies together with the manufacturers, distributors and retailers were to drive inefficiency out of the grocery distribution system. In the late 1970s and 1980s, the promotional that had been done in the retail industry did not successfully pass to the customers and even had produced a backslash among the brand-loyal customers. Other than that, it also have an effect on swings in price that created variability and massive inefficiency in P&G manufacturing and distribution system as well as throughout the entire grocery supply chain. Hence, P&G noticed that the improvement on distribution and merchandising systems were vital eliminate the inefficiency in the grocery supply chain. Consequently, P&G redesigned its objective plan by aiming to become as a branded consumer-goods maker in order to improve consumer value. To achieve this objective, two actions will be executed. In the mid of 1980s, two efforts were implemented by P&G management to develop more efficient contribution and merchandising systems. The first category was participation in industrywide efficiency improvement to improve supply logistics and reduce channel inventory via a process that called Continuous replenishment (CRP). The second category was to improve the ordering, shipping and billing (OSB) system to facilitate in improving total ordering and service channel for customers. This leadership role of P&G in working with the grocery industry and other manufacturers had extensively speed up the adoption of more efficient systems, policies and practices in the grocery channel. Following the implementation of CRP, Electronic Data Interchange (EDI) was used in the CRP system to provide an essential platform for CRP operations, as it helped

in error-free interchange of large amounts of data automatically between companies. In contrast, for the OSB system, it has to be rewritten because of its inefficient and ineffective in the batch processing system. However, the managers realized that it was necessary to improve the pricing policies and practices then only it will result in a dramatic improvement in total order quality at P&G. To lead the grocery channel transformation, P&G participated in development of Efficient Consumer Response (ECR) of channel innovations. The vision of the ECR is to provide channel innovations that enabled grocery chain to complete effectively with low cost alternative retail formats. CRP was a crucial element of ECR vision that helped a significant savings in the grocery industry. It is learned that, P&G was a clear leader in the implementation of CRP and other ECR programs, with the target of increasing the pace of ECR and CRP adoption in the industry overall. In the late 1993, P&G announced the sale of their CRP system to IBMs Integrated Systems Solutions Corporation (ISSC) subsidiary. The decision was based on strategic and not economic justification. It was claimed that, the agreement with IBM reduced P&Gs cost of operating the CRP system due to the service contract cost was less than the cost of operating the system using P&G internal staff and systems.

2.0

Problems/ Opportunities Identification There are five prominent issues that require the attention and focus by P&G. The

issues are as follows:

2.1

Forward Buying Causes Fluctuations in Price The promotional activities with the combination of high inflation and relatively

low interest costs made the economics of forward buying very attractive for chains. Besides, there was also variation in customer demand due to the increase of store promotions. The reliance on the promotional program had an effect on difficulty of forecasting for manufacturers. Therefore, this uncertainty of total demand increase manufacturer inventory requirement and higher manufacturing costs. Furthermore, it also

resulted in fluctuations of price. Fluctuations of price caused P&G created a huge inefficiency; the influents were not only on the manufacturing and distribution system, but the entire supply chain also being affected.

2.2

Inefficient Distribution and Merchandising System as a Barrier for Rapidly

Growth in Competitive Environment Retail grocery was the most important channel for the sale of P&G products and consisted of manufacturers, distributors and retail stores. It was learned that, the profit margins for grocery retailers were very low generally 1-3% of gross sales before tax. The profits were depended on efficient operations due to the reason of the low unit price and high volumes of the products. Therefore, a wake up call by McKinsey study suggested that the entire processes needed to be improved to enable the offering of lower prices to consumers than traditional grocery retailers. The development of efficient and distributing systems was vital to meet the challenge of agile growth in the economics at that time.

2.3

Poor Logistics Channels that Increase Costs A new approach to channel logistics for replenishment ordering involved the test

of using EDI to transmit data daily from the retailer to P&G on warehouse product shipments to each store. The results were inventory reductions, service level improvement and labor savings for the retailers. Nevertheless, the cost incurred was higher than old one where the retailers determined order quantities. Limited capacity forced retailer bought small quantities and incurred stockout problem frequently. Hence, the cost of small delivery every time was high. The distribution system used for procurement reflected higher cost for diaper products (an important product because of the price lower than others) compared to competitors, example supermarkets, where they afford to order in truckload quantities. Warehouse constrained due to rapid growth and high costly of LTL shipments were the problems that retailers faced to compete the demand. Moreover, the LTL

shipments were expensive for both parties and it was a constraint for them to increase diaper sales. The important part of P&G strategy was, EDI represented the essential for CRP implementation. The role of EDI was to provide platform for CRP operations. EDI may transfer huge data, error free and reduce transaction costs, however EDI was an electronic envelope and not a system; it cannot fix anything by itself. Therefore, CRP without EDI was not usable.

2.4 Level

Ineffective Ordering Shipping and Billing System leads to Poor Service

OSB system was inefficient and ineffective; it combined with separate systems that did not work well together across functions and product sectors. EDI was the important part of improving efficiency of the ordering process. When P&G expanded use the EDI in improving ordering efficiency, problems with the order quality increased. Sales representative or customer services representative were able to catch the problem and adjust manually. These EDI trials increased costs for P&G instead of providing saving because of reworked and rekeyed into OSB system. However, after rewriting the system, problem of complex pricing and promotion policies still required to be revised.

2.5

Sale of CRP System to IBM that which Foregone the Economics Benefit In the late 1993, P&G announced the sale of their CRP system to IBMs

Integrated Systems Solutions Corporation (ISSC) subsidiary. Although it provided some advantages to P&G and the other manufacturers, it was believed that there was no economics benefit to P&G once it outsourced CRP to IBM.

3.0

Pertinent Fact and Assumptions In this section, the paper will attempt to figure out the fact that P&G has taken

part to handle the issues that it encountered.

3.1

Improving Channel Efficiency and Service

3.1.1 Improvement on Logistics through EDI and CRP Innovation In the mid-1980s, P&G tested a new approach to logistics improvement trails which involved electronic data interchange (EDI). EDI transmitted data from retail to P&G on warehouse product shipments to each store. Hence, this initial trial has improved the reductions of inventory, service levels and labor savings for the retail. However, the benefits for P&G were unclear and the new ordering process was more costly for P&G than the old one. EDI alone was not a system that able to solve problems itself, but it could be a powerful tool when it implemented in parallel with process and systems reengineering. Therefore, the strategy of P&G in improving the efficiency of the ordering process was implemented through CRP with the assistant of EDI. EDI could provide an essential platform for CRP operations, as EDI linked the linkage between systems across the two companies that resulted in error-free interchange of large amount of data. It was also observed that, successful implementation of CRP required both senior management commitment to the innovation and a relationship of trust between management at the two organizations. Therefore, we assume that the senior management had committed to the innovation of CRP and the trust affiliation between two organizations was also strong. The success of the CRP program with the leading mass-merchandisers attracted interest from other retailers in the new process. In 1990 and 1991, three grocery chains adopted CRP with P&G, and the innovation of CRP has proven highly successful in reducing inventory and stockouts levels. CRPs success with the early partners led the head of the diaper product group to commit $1.5 million in development funding to expand the initial CRP system into a more robust production system that could be expanded to large number of customers. By July 1994, a total of 47 channel customers had adopted CRP with P&G. It was expected that the use of CRP will reach 50% or more of total US product shipment volume by the end of 1995. Furthermore, increased retail sales were an important benefit of the CRP program for P&G and its distributors. Sales of P&G products through CRP retailers increase 4%

more on average, which represented a competitive and economic gain for P&G. It was also believed that gaining more market share could be done by expanding CRP rather than through line extensions.

3.1.2 Development on Order, Shipping, and Billing System Ordering, shipping, and billing system has been developing since 1960s. P&G kept on upgrading and rewrite the system so that it was able to provide the level of service required by customers. Besides, the OBS also supported all P&G activities in serving channel customers, including pricing, ordering, shipping, invoicing, and separate credit systems. In terms of accounting, OBS system will interactively record every transaction that takes place during the business day and merge all this information into concise, accurate report, including Sales Recaps, Income Statements, and Balance Sheets. However, the purpose of redesigning was to eliminate manual processing steps but not to redesign the existing processes. The advantages of OBS system were standardization the process, automation, reduction of complexity, reduction of error, and reduction in the cost of processes. For example, the OBS system was developed to understand how the business worked and then to automate processes with sufficient was to simplify design and improve practices to a common level across the organization. On the other hands, OBS system also faced the challenges including consumers were resistance to change, time and cost if implementation. Although the new system did improve order shipment quality, problems with existing pricing and promotion policies and processes still created deductions. Hence, the involvement of pricing and promotion policies as the front end of OSB system ware needed to be revised.

3.2

Redesigning the Complete Ordering Process In the previous section, several actions have been taken to solve problems

identified earlier on this paper. Nevertheless, things do not always turn out as accordingly

and perfect, therefore, they need to redesign and improve the total ordering process, starting with pricing policies and practices. A new pricing structure was introduced; it represented a change in corporate strategy and policies. Due to the changes of pricing policy, it improved consumer value and building brand loyalty and facilitated expansion of the OSB systems to allow improvements in billing accuracy and reductions in invoice deductions. Hence, the combinations of pricing policy changes and system have brought several benefits for P&G, as well as customers. For example, billing error declined by more than 50% from 1992 to 1994. In the long term of strategic goal of increasing consumer value and brand loyalty, CRP was replaced by value-pricing program. Value pricing was able to eliminate incentives for retail forward buying and essentially offered constant procurement costs combined with some flexible allowances. Value pricing was important for CRP customers where encouraged increasing CRP adoption. On the other hand, some of the senior managers were resistance to change in pricing philosophy. They found that this was opposite of the high-low pricing strategies. Although, it was noted that the new pricing did cost P&G sales, the incremental revenue actually cost P&G more to generate than the income created by the promotions. Hence, while sales were lower, but the profit was stronger, the company was better positioned to build a future based on value-priced products for brand-loyal customers.

3.3

Leading the Grocery Channel Transformation One of the objectives of the channel-transforming innovations was to enhance

more collaborative and mutually productive relationships with the channel partners, and replacing negotiations with cooperative to better serve consumers need efficiently. P&G believed that by combining consumer loyalty with the improved channel efficiency and relationships, it will increase the market share for P&G products, decrease the cost to serve the channel and the end consumers, with the intention of benefiting all members of the channel.

Therefore, to continue competing effectively with low cost alternative retail formats, P&G had participated to develop the Efficient Consumer Response (ECR). ECR vision contained CRP as an important element. Based on statistical given, implementing ECR in grocery industry could save up to 38% of the $30 billion in the projects and more efficient in replenishment ordering. In the late 1980s, P&G management made a decision which changed from brand management to category management due to improve coordination and efficiency. There was a category manager who in charged combining multiple brands into product categories. The benefits of category management could provide more flexibility, simplify and standardize operations and product lines. P&G expanded the innovation of CRP and used it especially in the production and inventory parts. The aim was to cut inventory level and improved the speed of product flow. Manufacturing and planning improvements of P&G made them to increase adoption of CRP by P&G customers offered dramatic cost saving opportunities for production and raw-material purchasing. Next, shifting from buyers to category managers was the second important aspect of using ECR vision. The roles of category managers were the entire profit of a product category across all stores and meeting consumer needs required new skills and capabilities. Hence, it could make both retailers and P&G Category managers to understand better about the true costs and profits generated from each product in their category.

3.4

Sale of the CRP System to IBM P&G announced the sale of their CRP system to IBMs Integrated Systems

Solutions Corporation (ISSC) subsidiary. The P&G CRP system was to be offered by IBM to manufacturers as a service provided by IBM, with P&G outsourcing support and operations of their CRP systems to ISSC. After the sale of CRP to IBM, there were few benefits being identified. First, it offered manufacturers CRP systems capabilities quickly, at low cost and with experienced operating personnel which created a powerful force in the industry for standardization. Second, the IBM CRP service also increased the

attractiveness of CRP for manufacturers and retailers by reducing barriers to CRP adoption. Third, the net benefits to P&G and its customers of implementing CRP increased as the total number of customers and other manufacturers using CRP increased. Fourth, the agreement with IBM reduced P&G cost of operating the CRP system, since the IBM service contract cost less than the cost of operating the system using P&G internal staff and systems.

4.0 4.1

Alternatives solutions Alternatives on Improving the supply chain channels

4.1.1 Used Supply Chain Management (SCM) Supply Chain management is a cross functional interenterprise system that uses information technology to help improve manufacturing efficiency and distribution effectiveness. The main key functions of SCM is to create a fast, efficient, and low cost network of business relationships. SCM helps to develop an accurate forecast of customer demand by sharing demand and supply forecasts instantaneously so that every partner in the process can share accurate inventory and procurement order information. The fluctuations in periodic demand problems could be forecasted, and stock out problem could be solved. Thus, P&G and their partners do not have high manufacturing costs anymore. Moreover, the ability of SCM to forecast the inventory level will also help them to reduce raw material spending, procurement costs, safety stocks, raw material and finished goods inventory. SCM can process faster, more accurate order processing, quicker times to market. It can help fulfill orders from all channels on time with order management, transportation planning, and vehicle scheduling. It is also allowed to overview product line, and predict what could be delivered in real time. The place that SCM can cover not only restricted in an area, or a country. It can support the entire logistics process, including picking, packing, shipping, and delivery all over the world. In addition, SCM program helps to monitor every stage of supply chain activities, from price quotation to the moment when customer receives the products. The

monitoring is processed and controlled day to day, thus unexpected problems will be minimized. The major problem for SCM is that there is a certain lacking of proper demand planning knowledge, tool and guidelines. Inaccurate or overoptimistic demand forecasts will cause major production, inventory, and other business problems. Managers can not only depend on the software data or model to give managerial decisions. Sometimes, the general data is not accurate when it is applied in a real situation, or the computer model is not as accurate as the real experiment in the market. If a product is a reliable seller, and its model is different than the computer model, then the company should think carefully before choosing between them. The other problem is lacking of collaboration among marketing, production, and inventory management departments within a company, and with a suppliers, distributors and others.

4.1.2 Using Collaborative planning, forecasting, and replenishment (CPFR)

4.2

Alternative on the Sale of CRP to IBM

4.2.1 P&G Alone Owns the Ownership of CRP Instead of Selling to IBM 4.2.2 Partnership Between P&G and IBM to own the Ownership of CRP Together

5.0

Decision choices/Recommendations It was realized that the sale of CRP system IBM had some advantages, but it also

resulted P&G lost its opportunity in gaining economics profit. This is because, once the CRP was sold to IBM, the profit of customers signing up CRP systems would belongs to IBM but not P&G. P&G was in disadvantage position from being the technological leader of the innovation.

Hence, we suggest that, P&G should not sell CRP to IBM, instead of P&G could build partnership together with IBM to own the ownership of CRP. To illustrate, the profits that earned from the customers sign-up package on CRP system would be shared by both P&G and IBM. The portion of the profit could be segregate in a way that, 30% profit would belong to P&G, while the other 70% of profit would be earned by IBM. The reason of IBM would gain more profit than P&G was due to the IBM would render its MIS service to those who sign up CRP system. Meanwhile, P&G as the leader of the CRP system innovation, it was reasonable for P&G to earn the 30% profit. Consequently, other than eliminating nonvalue-added processes, P&G also able to make profit from its innovation on CRP, hence P&G will ultimately win in the market by providing the best product to the consumer at the lowest cost through the channel.

6.0

Conclusion Information Technology, IT is an powerful business tool to provide information in

helping P&G to redesign its business in order to improve the consumer value.

7.0

Reference

Website OBS Information technologies, Wholesale & Retail Management System, from http://www.obsinfotech.com/ Avinash. R, Ravi Pandey (2011) Proctor and Gamble process reengineering it perspective, from http://www.slideshare.net/AvinashRajasekaran/proctor-and-gambleprocess-reengineering-it-perspective

Book OBrien, J.A., Marakas, G.M. (2011) Management Information System. (10th ed.)McGraw-Hill/Irwin