Consumer goods supply chains are extremely complex. They include many plants and suppliers all over the world linked by sophisticated technologies and robust logistics systems. But despite all of this complexity, a single moment of truth is all that really counts: When the consumer stands at the store shelf and chooses a product to purchase.
For Procter & Gamble, one of the world's largest consumer goods manufacturers, this "first moment of truth" has become the centerpiece for its entire business strategy called the consumer-driven supply network, or CDSN.
"We start at the store shelf and work our way back through our supply network," says Keith Harrison, the global product supply officer for P&G, which uses the term supply network instead of chain because information flows in a variety of directions, not just along a horizontal line.
P&G's CDSN is a core corporate concept as well as an operating strategy.
"Our goal is to win at the consumer level, so the CDSN is a concept we have created to direct all of our activities to what is going on at the store-shelf level," says Harrison. "We need to work off of real demand, so we produce what is actually selling, not what is forecast to sell."
One way P&G uses actual demand is to pick up scanner data at the point of sale and make it visible at the plant where it becomes part of the daily production schedule.
"We are running some of our plants today on a six- to eight-hour response time based on aggregated sales data," says Harrison. "We are reading demand data and that becomes our replenish plan for certain products with a few large retail customers."
Harrison points out that many customers' demand signals are just not big enough to be a factor in its planning. For these customers P&G uses replenishment data from the retailers' distribution centers. But even here, the data is based on actual product flow, not just forecasts.
"We aggregate data from systems handling ordering, shipping and billing into useable numbers that become the demand field for the plant systems. That demand field drives the replenishment plans, which are displayed in P&G's supplier portal where they find their way back into suppliers' systems.
"We have some suppliers who can see our production plan, and they run their operations with that live data within a few hours," says Harrison.
Ultimately, Harrison says, P&G would like to have all of its 140 plants in 80 countries and many of its 100,000 suppliers work off of real data, not forecasts, purchase orders and traditional processes, but the company is a long way from that goal. For the foreseeable future, P&G's supply network will continue to run off of an underlying flow of real demand data that is supplemented with forecast data, promotions and other initiatives.
"There is always going to be a role for forecasting, especially event forecasting," Harrison says. "Large customers increasingly require customization that adds lead-time that we cannot handle on an instantaneous basis. We know we get to the point where our regular turn business is running off of real-time demand."
Running on Consumer Demand
The CDSN approach provides many tactical advantages, especially for new product launches where demand is based on assumptions.
"We have been monitoring the real-time off-take of these launches," says Harrison. "If we see that the consumer response is different from our assumption, we can quickly change our plan to make more or less of a new product. We have been able to greatly reduce excess inventory for products that are selling slower than expected."
Another important role for P&G's CDSN capabilities is to become an engine for volume and profit growth by creating value for retail customers. For example, P&G is using CDSN to help its customers lower inventory, customize products and grow their business, all in a way that recognizes the value that P&G brings to them without adding cost to whole supply network.
"Creating a more agile supply network that provides unique customization for each retail customer rather than just give them a one-size-fits-all product is an idea that is not widely talked about in the industry," says Harrison. "This value creation requires different thinking from what we have been doing over the past few decades when CPG companies succeeded in the marketplace with long runs of a simple SKU mix. That strategy does not work in a world of mass differentiation."
For example, P&G developed the capability to print on every single Pringles chip, and the company has introduced a special promotion for customers based on this capability. In return for this added value, the customer has to commit to a certain volume. On a more basic level, P&G is customizing pallet assortments of different SKUs for customers. It is designing smaller and larger package sizes for specific customers, as well as special packaging and product presentations. The challenge for P&G is not to end up with millions of SKUs or to add costs to its own operations. P&G already has two to three times the SKUs in its system than it had five years ago.
"From a customer point of view, we have become more menu-driven," says Harrison. "CDSN has allowed us to understand channel strategies and how we can increase the agility of our manufacturing and distribution operations to handle that kind of complexity."
For example, to provide the increased need for customization, the company is adding more slow lines in certain plants, so production can be more flexible. The company is adding more end-of-line customization capability that could be manual or robotic.
"The point is that you design your supply network all the way back to your suppliers in ways that allow you to focus on winning at the shelf," says Harrison. "Conceptually that is the big idea behind CDSN. We are being recognized in the marketplace as being more responsive to customer needs and being more proactive in creating value."
Technology and Metrics
P&G has a collaborative working arrangement with SAP, which the CPG company views as its primary software supplier for its supply network.
"Every piece of our IT is not SAP, but we start there," says Harrison, who is P&G's leader in its SAP relationship.
"SAP sees us as a supply chain innovator, so they want to work with our development team to build new supply network solutions," says Harrison, who adds that the relationship is symbiotic. The IT development process is R&D for P&G, which receives tools it can use to better support its CDSN initiatives. SAP gains solutions that are tested in the marketplace and that it can sell.
"IT is an enabler for us and our CDSN initiative," says Harrison. "Our customers don't care about our underlying IT. They are looking for what benefits we can bring to them. IT allows us to execute our CDSN initiative and that is what allows us to be more responsive and proactive in creating value for these customers."
The CDSN initiative is so ingrained into P&G's operations that the company is changing its metrics. Standard supply chain and production performance measurements are not enough. P&G now has what it calls shelf metrics. For example, P&G now measures shelf out-of-stock levels, not just perfect orders as they leave the plant. Inventories are beginning to be measured at the customer level, not just at P&G facilities.
"We are trying to use metrics that really matter to our customers and consumers," says Harrison. "If we have damage on the shelf or an out-of-stock, the consumer doesn't care who is at fault. We are not going to get the sale, and we ultimately pay the price."