Customer value- How important?

P & G manages Core Processes for Customer Value.

 

When market research revealed that families loyal to P&G brands were paying $725 more each year than families buying private label or store brands, senior managers knew that a new strategy was called for. P&G had historically offered retail customers deals that included discounts, but it needed to offer these low prices every day to remain a market leader. However, it was obvious that it could not simply lower prices and hopes to maintain decent profits; a new operating strategy was required.

 Eleven cross functional teams examined every part of P&G. For instance, they examined forty one work processes within the broader core process they called ‘customer management’ (roughly analogous to our ‘demand management)’. The teams operated under four rules: Change work, do more with less, eliminate rework, and reduce costs that do not produce value for the customer. This rethinking led to important changes in P&G’s core processes.

 

Core Process: (Product development, Demand management and order fulfillment)

1. New product development:

For decades P&G had followed the same strategy for managing research and development: producing technologically superior goods and depending on marketing to sell them at a premium price that would cover the high R&D costs while still allowing for healthy profit margins. However, most of P&G’s opportunities for growth lay outside the saturated developed markets, and developing markets cannot pay premium prices for technological marvels. Consequently P&G’s reversed its approach to R&D. Now marketing decides first what blend of price and features a particular market most values, providing guidelines for R&D’s new product development, For instances, the com. Offers Pampers Uni, lowered priced and simpler versions of their sophisticated pampers line, in developing markets , such as Brazil.

 

2. Demand Management:

Analysis revealed that P&G had the highest marketing overhead in the industry. This was undoubtedly related to the complexity of marketing P&G product line. Five divisions wit three sales layers each sold more than 2300 stock keepping units (SKUs) covering 34 product categories and 17 basic pricing brackets. Special deals meant that an average of 55 price changes worked through the system everyday. The quarterly sales promotion plan for health and beauty products (one of five divisions) alone was more than 500 pages long and was sent to every sales person in the division. To simplify this complex process, P&G reduced the number of pricing brackets from 17 to just 3 and the number of special prices from 55 per day to only 1 per day. It also reduced its number of SKUs by 25 percent.

The changes had a dramatic short run impact, but another change may have a still greater impact in the long run. Part of the reason P&G‘s product line was so complex was its practice of introducing a new brand for every significant technological innovation that occurred (E.g., when the company added cold cream to its soap, a new brand was created, and the famous Ivory brand was left unimproved). Customers found the latest technology in newer P&G products but not in the famous brand names they valued. So, as P&G’s product line grew more complex many of the most famous brands saw their market share slowly decline as customers sought out newer brands with enhanced features. For example, P&G’s Spic &Span cleaner was not significantly reformulated for 45 years, and its once dominant market share gradually disappeared.

 

To address this problem, P&G combined its latest technology with its strongest brands, producing such items as Tide with Bleach and Tartar Control Crest. Now, loyal customers find their favorite brands with value-enhancing innovations, and P&G’s demand management process is simplified with fewer brand names to manage.

 

3. Order Fulfillment:

The US Packaged goods industry is involved in a massive cooperative reengineering effort that will change the way the entire industry operates. This effort is meant to reduce the $30 billion annually the industry must spend on non-value added activities, such as excess paperwork, handling, and inventories. The end result will be an order fulfillment process based on continuous product replenishment. In this process, when an item is purchased, information from the checkout line automatically triggers the work involved in replenishing the shelf. This largely paperless process reduces mistakes, lowers inventories all along the product pipeline, and improves cash flow.

 

Under the old process, special deals were constantly sending bubbles of artificially created demand through P&G’s factories. Though higher capacity was unnecessary most of the time, production facilities were sized to handle even these large bubbles in a timely fashion. Consequently, capacity utilization was a low 55% companywide. As the company moves toward a simpler product line, everyday low pricing, and continuous replenishment, the bubbles are disappearing. Consequently, the company has been able to reduce its production capacity (Closing some thirty plants worldwide) and improve capacity utilization at its remaining plants to 80 percent.

 

Industry experts feel these changes in core processes have left P&G in a string competitive position. As one explains- ‘what we have here is a company that has created a platform to execute a strategy that is dramatically superior to anything its competitors can offer. This new platform is anchored on customer value.’