Driving at The Speed of Demand

With good reason, Procter & Gamble (P&G) is re-writing the supply chain rulebook. By nearly abandoning what was perceived to be the most logical way to sell goods to retailers -- producing to a forecast -- P&G is bypassing big volumes of stock in favor of revving up a leaner supply chain that is focused on the consumer, hence the name: Consumer Driven Supply Network (CDSN).

The CDSN transforms supply chains into a consumer-driven network where goods move at the rate consumers take products off the retail shelf. The idea behind the CDSN is to meet daily and weekly needs on every customer shelf, across numerous SKUs. According to Patrick Arlequeeuw, vice president of global consumer driven supply network implementation for Procter & Gamble, to truly become a consumer-focused company, it is vital to understand what it means to become a demand driven company. "It's all about collaborating with retailers and suppliers versus working with a supply chain that is only forecast oriented. Being consumer driven means fulfilling the wants and needs of consumers. Product quality is paramount."

In the year 2000, P&G had a tough time meeting analyst expectations and it was during this rough patch that the company's chairman and CEO, A.G. Lafley, was on a mission to steer the company back to its core as a consumer-focused company. Arlequeeuw says this idea has formulated into the famous words that have been gaining traction, especially with the pages of Consumer Goods Technology: "Winning at the first and the second moments of truth."

"A.G. made it clear that every single person in the company needs to work towards those two premises, regardless of function," says Arlequeeuw. "Obviously if the consumer doesn't choose a P&G product, we already lost. But if they do, then we need to win over and over again with the second moment of truth which is when they use it at home." In response the entire P&G organization began to develop projects to focus on those two moments of truth: Winning at the shelf and winning at home. "Things turned around very quickly for us once this strategy took effect. Now the supply chain is one of the elements that is helping us win at these moments of truth," says Arlequeeuw.

Why Forecasts Fail
Industry figures suggest that out-of-stocks run at about 10 percent, jumping to 25 percent during promotions and other sales boosting efforts. In addition, about 40 percent of consumers respond to an out-of-stock by simply not buying, which means the retailer loses the sale as well. Today, consistent in-stock availability for fickle consumers cannot be accomplished with internal measures like forecasts, production efficiency, product quality at the end of the production line, and the amount of product pushed onto trucks. Forecasts, even under the most sophisticated mathematical modeling, are more often than not, a streamlined version of last year's numbers. Production efficiency is often pegged to minimum change-overs, long runs and stockpiled raw materials, creating inventory, but not necessarily fuller retail shelves.

For these reasons, the CDSN is P&G's supply operating strategy. "It ensures that demand and supply work hand in hand, says Arlequeeuw. "It's just as much about IT as it is how you manage demand."

Arlequeeuw, however, is quick to point out that forecasting is still very much needed. "Producing to demand doesn't mean that we don't need forecasting." Capacity Planning and Sourcing Decisions, like where to put plants and warehouses, are duly important. Producing to demand also means that companies need to know what is happening over the next two to three months. "The forecasting sets the parameters," says Arlequeeuw. "Producing to demand looks at the reality and adjusts. We are not striving to improve our forecast to a level where forecasting becomes a thing of the past."

Implementing the Strategy
How does one begin to implement such a forward-thinking strategy at such a massive corporation? Charged with making the CDSN implementation an ongoing and smooth one, Arlequeeuw admits that his travel schedule is quite daunting at times but is quick to add that the CDSN strategy would fail if he were to simply visit the global P&G operations and preach a philosophy. "The one thing that P&G folks should understand is how to make this CDSN strategic for business growth," says Arlequeeuw. "It also means looking at what works and what doesn't work so there is a lot of internal sharing of data. I have a whole network of people across the globe that share information. But more than anything management needs to be on board with this because there is a sizeable prize out there."

P&G's CDSN work to date has allowed the company to lower the standard 10 percent out-of-stock rate issue to below five percent for many of its categories, which has created for P&G several hundred millions in sales. "Once management starts seeing this type of results, they become interested," says Arlequeeuw.

Mandatory, externally focused, metrics, across the entire P&G organization, also helps validate the CDSN. These metrics include constantly monitoring key indicators with customers, through point-of-sale information. "In the past we were measuring only on internal criteria, e.g. did our shipments leave our plants and distribution centers on time and complete," says Arlequeeuw. "Now we are also measuring the impact on the consumer that is happening at the shelf."

In addition to having a firm grasp on what is happening at the store level, P&G also employs the following four performance models to ensure CDSN success:

1. Understand store merch-andising. P&G collaborates with its major retail partners on store promotions and events.

2. Refocus manufacturing strategy. Move from produce to forecast to produce to demand.

3. Collaborate and integrate with all supply sources. From production to retail outlet, Arlequeeuw believes it is key that companies work together. One element is easy identification so that product is not lost in back rooms, where every carton looks the same as every other.

4. Deploy internal checkpoints. Ensure that each link in the chain is tightening throughput and operational reliability.

Technology As the Enabler
Once P&G saw movement on the aforementioned fronts, the company turned to SAP to find unique ways to manage, monitor and act upon the massive amounts of data the CDSN generates. In the past, P&G would spend much time and effort to customize software to meet the changing business needs. SAP and P&G now work collaboratively on an evolving front of software functionality to provide business solutions that includes the complex interplay of continuous communication among multiple partners.

"It's a very pragmatic approach," says Arlequeeuw. "That's why we work with companies like SAP -- to get all of our information integrated." The biggest challenge, after the company has ensured clean data is being generated, is to deploy that data at the plant level and manufacturing sites. "We use dashboards to help facilitate this but not all through SAP even though they are the primary engine that generates the data."
Results and Rewards

"When we started the CDSN journey, more than 20 percent of the company's product categories were plagued with high ( more than 10 percent) shelf-out-of-stocks; now that number has dropped to below 5 percent," says Arlequeeuw. "Plus, the number of categories that show a low 5 percent or less shelf-out-of-stock rate has increased significantly -- from 43 percent to 60 percent." There are also sizeable returns from successful initiatives. Compared to five years ago, P&G increased its numbers of SKUs, while reducing costs and inventory, and increasing volume and profit. "By becoming a demand-driven company we are taking out a tremendous amount of waste from the system," says Arlequeeuw. "We're using supply chain capabilities to improve customer operations and to drive our business forward."

Procter & Gamble Fast Facts

• Every day, nearly 6 million products are produced at P&G manufacturing facilities around the world. P&G has 106 manufacturing facilities in 41 countries.

• P&G has two to three times more SKUs today than five years ago.

• Over the last few years, P&G's average out-of-stock rates have fallen from
  20 percent of brand categories having a 10 percent out-of-stock rate, to just
  7 percent of categories experiencing that rate. Over the same period, the
  percentage of categories that are achieving an out-of-stock rate of less
  than 5 percent has increased from 43 percent to 60 percent.