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: UNIVERSITI PUTRA MALAYSIA : GRADUATE SCHOOL OF MANAGEMENT : GSM 5170 MANAGEMENT INFORMATION SYSTEM : CASE STUDY (PROCTOR & GAMBLE: IMPROVING CONSUMER VALUE THROUGH PROCESS REDESIGN)
: DR. WONG SIAW MING PROFESSOR MOHAMMED ZAIN
: LEONG CHOI LI LEE HUI SHAN ENG PEK XAN
(GM 04473) (GM 04578) (GM 04693)
NGUYEN HAI HA (GM04700)
P&G has gained the reputation of “world-class” development and marketing of high-quality consumers over more than 150 years of operations. P&G redesigned its objective plan by aiming to become as a branded consumer-goods maker in order to improve consumer value. distributors and retailers were to drive inefficiency out of the grocery distribution system. Hence. 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.1. Consequently. On top of that. In the late 1970s and 1980s. P&G is a leader of designing how branded consumer goods manufacturers go to market. Following the implementation of CRP. 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. procedures and policies together with the manufacturers. Other than that. two actions will be executed. It also improved consumer value by eliminating nonvalue-added process to drive its process innovation. The changes at P&G in organization. P&G noticed that the improvement on distribution and merchandising systems were vital eliminate the inefficiency in the grocery supply chain. In the mid of 1980s. Electronic Data Interchange (EDI) was used in the CRP system to provide an essential platform for CRP operations. shipping and billing (OSB) system to facilitate in improving total ordering and service channel for customers. The second category was to improve the ordering. systems. To achieve this objective. as it helped .0 Introduction Procter and Gamble Worldwide (P&G) is one of the largest manufacturer supplying grocery retailers and wholesalers. two efforts were implemented by P&G management to develop more efficient contribution and merchandising systems. 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. 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).
this uncertainty of total demand increase manufacturer inventory requirement and higher manufacturing costs. it has to be rewritten because of its inefficient and ineffective in the batch processing system. 2. there was also variation in customer demand due to the increase of store promotions. P&G participated in development of Efficient Consumer Response (ECR) of channel innovations. CRP was a crucial element of ECR vision that helped a significant savings in the grocery industry. with the target of increasing the pace of ECR and CRP adoption in the industry overall.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. P&G announced the sale of their CRP system to IBM’s Integrated Systems Solutions Corporation (ISSC) subsidiary. The issues are as follows: 2. P&G was a clear leader in the implementation of CRP and other ECR programs. Furthermore. the agreement with IBM reduced P&G’s 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. It was claimed that. for the OSB system. The vision of the ECR is to provide channel innovations that enabled grocery chain to complete effectively with low cost alternative retail formats. Besides. Therefore. To lead the grocery channel transformation. 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. In the late 1993. In contrast.in error-free interchange of large amounts of data automatically between companies. However. It is learned that.0 Problems/ Opportunities Identification There are five prominent issues that require the attention and focus by P&G. it also . The decision was based on strategic and not economic justification. The reliance on the promotional program had an effect on difficulty of forecasting for manufacturers.
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. Warehouse constrained due to rapid growth and high costly of LTL shipments were the problems that retailers faced to compete the demand. the influents were not only on the manufacturing and distribution system. Hence. service level improvement and labor savings for the retailers. the cost of small delivery every time was high. The results were inventory reductions.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. 2. where they afford to order in truckload quantities. Limited capacity forced retailer bought small quantities and incurred stockout problem frequently. the profit margins for grocery retailers were very low generally 1-3% of gross sales before tax. Fluctuations of price caused P&G created a huge inefficiency.resulted in fluctuations of price. 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. The development of efficient and distributing systems was vital to meet the challenge of agile growth in the economics at that time. the cost incurred was higher than old one where the retailers determined order quantities. example supermarkets. the LTL . Therefore. It was learned that. Moreover. 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. but the entire supply chain also being affected. The profits were depended on efficient operations due to the reason of the low unit price and high volumes of the products. distributors and retail stores. Nevertheless. 2.
The important part of P&G strategy was. Therefore. 2.5 Sale of CRP System to IBM that which Foregone the Economics Benefit In the late 1993. the paper will attempt to figure out the fact that P&G has taken part to handle the issues that it encountered. problem of complex pricing and promotion policies still required to be revised. EDI represented the essential for CRP implementation. Sales representative or customer services representative were able to catch the problem and adjust manually. When P&G expanded use the EDI in improving ordering efficiency. P&G announced the sale of their CRP system to IBM’s Integrated Systems Solutions Corporation (ISSC) subsidiary. CRP without EDI was not usable.shipments were expensive for both parties and it was a constraint for them to increase diaper sales. it was believed that there was no economics benefit to P&G once it outsourced CRP to IBM. However. Although it provided some advantages to P&G and the other manufacturers.4 Level Ineffective Ordering Shipping and Billing System leads to Poor Service OSB system was inefficient and ineffective. error free and reduce transaction costs. however EDI was an electronic envelope and not a system. 3. . problems with the order quality increased. it cannot fix anything by itself. EDI may transfer huge data. after rewriting the system. it combined with separate systems that did not work well together across functions and product sectors. 2. The role of EDI was to provide platform for CRP operations.0 Pertinent Fact and Assumptions In this section. These EDI trials increased costs for P&G instead of providing saving because of reworked and rekeyed into OSB system. EDI was the important part of improving efficiency of the ordering process.
service levels and labor savings for the retail. It was expected that the use of CRP will reach 50% or more of total US product shipment volume by the end of 1995. By July 1994.1 Improvement on Logistics through EDI and CRP Innovation In the mid-1980s. but it could be a powerful tool when it implemented in parallel with process and systems reengineering.1. the strategy of P&G in improving the efficiency of the ordering process was implemented through CRP with the assistant of EDI. a total of 47 channel customers had adopted CRP with P&G. Hence. this initial trial has improved the reductions of inventory. we assume that the senior management had committed to the innovation of CRP and the trust affiliation between two organizations was also strong. the benefits for P&G were unclear and the new ordering process was more costly for P&G than the old one.1 Improving Channel Efficiency and Service 3. 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. as EDI linked the linkage between systems across the two companies that resulted in error-free interchange of large amount of data. P&G tested a new approach to logistics improvement trails which involved electronic data interchange (EDI).3. EDI alone was not a system that able to solve problems itself. Furthermore. Therefore. The success of the CRP program with the leading mass-merchandisers attracted interest from other retailers in the new process.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. increased retail sales were an important benefit of the CRP program for P&G and its distributors. Therefore. EDI could provide an essential platform for CRP operations. CRP’s success with the early partners led the head of the diaper product group to commit $1. Sales of P&G products through CRP retailers increase 4% . However. three grocery chains adopted CRP with P&G. and the innovation of CRP has proven highly successful in reducing inventory and stockouts levels. In 1990 and 1991. EDI transmitted data from retail to P&G on warehouse product shipments to each store.
several actions have been taken to solve problems identified earlier on this paper. Nevertheless. Income Statements. Shipping. ordering. 3. including Sales Recaps. On the other hands.more on average. The advantages of OBS system were standardization the process. P&G kept on upgrading and rewrite the system so that it was able to provide the level of service required by customers. automation.1. 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. Besides. problems with existing pricing and promotion policies and processes still created deductions. In terms of accounting. things do not always turn out as accordingly . including pricing. OBS system also faced the challenges including consumers were resistance to change. and separate credit systems. It was also believed that gaining more market share could be done by expanding CRP rather than through line extensions. which represented a competitive and economic gain for P&G. Hence. the purpose of redesigning was to eliminate manual processing steps but not to redesign the existing processes. reduction of complexity. and Balance Sheets. Although the new system did improve order shipment quality. and billing system has been developing since 1960s. However. For example. OBS system will interactively record every transaction that takes place during the business day and merge all this information into concise. 3. shipping. shipping.2 Development on Order.2 Redesigning the Complete Ordering Process In the previous section. reduction of error. accurate report. the OBS also supported all P&G activities in serving channel customers. the involvement of pricing and promotion policies as the front end of OSB system ware needed to be revised. and reduction in the cost of processes. and Billing System Ordering. invoicing. time and cost if implementation.
P&G believed that by combining consumer loyalty with the improved channel efficiency and relationships. billing error declined by more than 50% from 1992 to 1994. the company was better positioned to build a future based on value-priced products for brand-loyal customers. . it will increase the market share for P&G products. starting with pricing policies and practices. but the profit was stronger. Due to the changes of pricing policy. CRP was replaced by value-pricing program. Although. They found that this was opposite of the high-low pricing strategies. In the long term of strategic goal of increasing consumer value and brand loyalty. therefore. A new pricing structure was introduced. On the other hand. 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. the incremental revenue actually cost P&G more to generate than the income created by the promotions. Value pricing was important for CRP customers where encouraged increasing CRP adoption. Hence. Value pricing was able to eliminate incentives for retail forward buying and essentially offered constant procurement costs combined with some flexible allowances. some of the senior managers were resistance to change in pricing philosophy. it represented a change in corporate strategy and policies. the combinations of pricing policy changes and system have brought several benefits for P&G. while sales were lower. as well as customers. with the intention of benefiting all members of the channel. Hence. they need to redesign and improve the total ordering process.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. decrease the cost to serve the channel and the end consumers. 3. it was noted that the new pricing did cost P&G sales. and replacing negotiations with cooperative to better serve consumers need efficiently.and perfect. For example.
Hence. Next.Therefore. with P&G outsourcing support and operations of their CRP systems to ISSC. implementing ECR in grocery industry could save up to 38% of the $30 billion in the projects and more efficient in replenishment ordering. The P&G CRP system was to be offered by IBM to manufacturers as a service provided by IBM. ECR vision contained CRP as an important element. P&G management made a decision which changed from brand management to category management due to improve coordination and efficiency. it offered manufacturers CRP systems capabilities quickly. The benefits of category management could provide more flexibility. shifting from buyers to category managers was the second important aspect of using ECR vision. First. In the late 1980s. P&G had participated to develop the Efficient Consumer Response (ECR). 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. 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. 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.4 Sale of the CRP System to IBM P&G announced the sale of their CRP system to IBM’s Integrated Systems Solutions Corporation (ISSC) subsidiary. there were few benefits being identified. at low cost and with experienced operating personnel which created a powerful force in the industry for standardization. P&G expanded the innovation of CRP and used it especially in the production and inventory parts. 3. The aim was to cut inventory level and improved the speed of product flow. After the sale of CRP to IBM. Based on statistical given. to continue competing effectively with low cost alternative retail formats. There was a category manager who in charged combining multiple brands into product categories. Second. simplify and standardize operations and product lines. the IBM CRP service also increased the .
efficient. raw material and finished goods inventory. Thus. transportation planning. and delivery all over the world. packing. and stock – out problem could be solved.attractiveness of CRP for manufacturers and retailers by reducing barriers to CRP adoption. The fluctuations in periodic demand problems could be forecasted. It can support the entire logistics process. or a country. from price quotation to the moment when customer receives the products. the ability of SCM to forecast the inventory level will also help them to reduce raw material spending. The main key functions of SCM is to create a fast.1. In addition. Moreover.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. 4. SCM can process faster. procurement costs. more accurate order processing. It can help fulfill orders from all channels on time with order management.0 4.1 Alternatives solutions Alternatives on Improving the supply chain channels 4. Third. shipping. The place that SCM can cover not only restricted in an area. SCM program helps to monitor every stage of supply chain activities. The . and predict what could be delivered in real time. Fourth. 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. and low – cost network of business relationships. since the IBM service contract cost less than the cost of operating the system using P&G internal staff and systems. quicker times to market. P&G and their partners do not have high manufacturing costs anymore. 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. and vehicle scheduling. the agreement with IBM reduced P&G cost of operating the CRP system. including picking. It is also allowed to overview product line. safety stocks.
2 Partnership Between P&G and IBM to own the Ownership of CRP Together 5. The major problem for SCM is that there is a certain lacking of proper demand planning knowledge. This is because.0 Decision choices/Recommendations It was realized that the sale of CRP system IBM had some advantages.1. once the CRP was sold to IBM. forecasting. or the computer model is not as accurate as the real experiment in the market. P&G was in disadvantage position from being the technological leader of the innovation. the general data is not accurate when it is applied in a real situation.2 Using Collaborative planning. and with a suppliers. the profit of customers signing up CRP systems would belongs to IBM but not P&G. If a product is a reliable seller. then the company should think carefully before choosing between them.2. Managers can not only depend on the software data or model to give managerial decisions. production. and inventory management departments within a company. Inaccurate or overoptimistic demand forecasts will cause major production. distributors and others. and other business problems. . but it also resulted P&G lost its opportunity in gaining economics profit. and its model is different than the computer model.2. tool and guidelines.2 Alternative on the Sale of CRP to IBM 4. 4. Sometimes. The other problem is lacking of collaboration among marketing.monitoring is processed and controlled day – to – day. and replenishment (CPFR) 4.1 P&G Alone Owns the Ownership of CRP Instead of Selling to IBM 4. inventory. thus unexpected problems will be minimized.
6. Meanwhile. The portion of the profit could be segregate in a way that. the profits that earned from the customers’ sign-up package on CRP system would be shared by both P&G and IBM. 30% profit would belong to P&G. P&G should not sell CRP to IBM. other than eliminating nonvalue-added processes. P&G also able to make profit from its innovation on CRP. Consequently. IT is an powerful business tool to provide information in helping P&G to redesign its business in order to improve the consumer value. 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. while the other 70% of profit would be earned by IBM. To illustrate.Hence. . it was reasonable for P&G to earn the 30% profit. P&G as the leader of the CRP system innovation. instead of P&G could build partnership together with IBM to own the ownership of CRP.0 Conclusion Information Technology. we suggest that. hence P&G will ultimately win in the market by providing the best product to the consumer at the lowest cost through the channel.
com/ Avinash.A. G. (10th ed.7.. (2011) Management Information System. from http://www.M. J.slideshare. Marakas. Wholesale & Retail Management System.)McGraw-Hill/Irwin .net/AvinashRajasekaran/proctor-and-gambleprocess-reengineering-it-perspective Book O’Brien. from http://www.obsinfotech.0 Reference Website OBS Information technologies. Ravi Pandey (2011) Proctor and Gamble process reengineering it perspective. R.
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