P&G boosts leverage

The consumer products giant is making impressive gains in specifications management and technology innovations while building greater spend pool collaboration across the enterprise.

By Doug Smock -- Purchasing, 11/4/2004

Whenever buyers at Cincinnati-based Procter & Gamble reduce annual costs by 5%, corporate profits jump more than 20%.

And net earnings at the consumer product giant jumped 25% in the last fiscal year despite intense pressure on pricing of its own products such as Pampers, Tide and Crest, coupled with escalating costs for transportation and raw materials, particularly those tied to oil.

As a result, chief buyer Rick Hughes has the ear of CEO A.G. Lafley and other members of senior management who increasingly recognize the importance of the supply side on the bottom line.

"I don't think purchasing has ever had a higher profile in our company than it has right now," comments R. Keith Harrison Jr., global product supply manager, a senior corporate officer who oversees manufacturing and purchasing. "The influence of purchasing not only has been rising, it has been spreading. We see improvement of our overall corporate cost structure as an area of real competitive advantage. We are in an environment where our ability to price has been more constrained than it has ever been in the past."

Procter & Gamble is actively studying how it buys and how purchasing should be positioned within the company. The results to date include a growing emphasis on innovation, particularly through use of advanced information technology tools; a high level of training for all purchasing professionals; increased teaming between buyers and corporate research; and growing efforts to build spend pool leverage across business units. P&G also has a highly advanced buying program in China, mostly because of its major drive to boost sales to the Chinese market. Another big win has been application of strategic sourcing and advanced bidding tools to the company's $5.4 billion marketing buy.

At the center of the effort is a corporate staff of just 28 led by Rick Hughes, vice president of corporate purchases. There are 1,131 purchasing professionals globally who report up through their business units but are trained and guided by the central office.

One of the most interesting new initiatives is application of an electronic expressive bidding tool that relies on applied combinatorial science. The tool delivered more than $120 million in hard savings in the fiscal year that ended in June, 2003. In the most recent fiscal year, the savings total was more than doubled. About 10% of P&G's total spend of some $28 billion now goes through the tool. And that number is sure to rise. The tool optimizes efficiency by giving suppliers the power to change economic order quantities, product bundling, delivery routes and timing, or other variables.

One of the first bidding events using the tool was done in aroma chemicals for two business units, Beauty Care and Fabric & Home Care. "In that space, we had 300 different materials from a large number of suppliers," says Dennis Begg, associate director, corporate purchases, innovation. "The issue for that one is: how do you define lotting? You try to do the best you can based on your understanding of the supplier capabilities. How do you bundle them? How do you establish the economic order quantities?"

The expressive bidding tool, developed by Pittsburgh-based CombineNet, allows suppliers to designate economic order quantities and lotting based on optimization of their price structures, production system and inventory management. Savings of 13.5% were recorded on the aroma chemicals contract.

One of the benefits of the process is that it forces discussion with the business stakeholders about what's really important because it pinpoints the exact cost of various requirements.

One example is delivery on a just-in-time schedule.

"We can go to the business managers (after the expressive bidding event) and show them what the on-time delivery requirements cost," says Begg, an IT professional on loan to the purchases group. "We have a lot of discussions around their business choices. When business stakeholders understand the costs of some of their decisions, they may go back and change the parameters."

"Since we deliver our software via an ASP model, P&G's IT department has had to have almost no involvement, so it's been easy for business managers to quickly take advantage of the technology," comments Michael Concordia, vice president of marketing at CombineNet.

P&G is a conservative company that promotes from within and was not on the bleeding edge of Internet procurement. (See "P&G Leaps on the Net", May 6, 2002). Today, however, P&G uses its own desktop tool called Navigator to view and manage quotes and proposals (developed through Procuri and CombineNet), transactions (SAP ERP backbone), planning (through its own material price forecasting system) and specifications.

P&G uses Procuri broadly to collect data from its supply base. Electronic bidding events, including reverse auctions, are used most typically with suppliers identified with P&G's supplier relationship management approach as having a competitively based incumbent relationship. The SRM approach, managed by Lisa Cooley, associate director for purchases mastery, is used as a platform to train P&G buyers worldwide how to deal with different levels of suppliers.

Hughes estimates that more than half of the company's competitive bids now go through electronic tools. P&G has been running close to 300 Procuri events a year. The number was slightly lower in the last fiscal year as many buyers chose to extend favorable contract terms, particularly in chemicals and plastics, rather than reopen bidding. "As those markets started moving up, we found that was an excellent strategy," comments Hughes.

New purchasing tools are more powerful when complexity is removed from the supply chain, which is why specifications is one of the four key spokes on the Navigator hub.

"Our specifications really define what we buy," says Begg. Currently, P&G has some 300,000 to 400,000 specifications, which is not necessarily a lot or a little, depending on how they were crafted. Flexibility on specs creates more options and more opportunity to automate and build spend pools.

As a result, a major initiative at Procter & Gamble has been increased collaboration between commercial and technical communities. "My counterpart at R&D and I are more aligned than at any other time in the history of the company," comments Harrison. P&G launched a project three years to study specifications with a goal to move toward broader, industry-based performance specifications where it was possible. First focus was on packaging: corrugated containers, films, paper and other products.

"We needed to get people to sit down and talk so they would understand the implications of their choices," says Begg. "We had 40 specifications just for water. Typically, the commercial people (the buyers) will say that this kind of thing is silly. The research and development people explain why these specifications are important. We also take the specifications out to the suppliers and ask if it makes sense. We're not trying to reduce the specification, we're trying to map into an industry standard."

Progress is being made. P&G previously had 15-17 different specifications globally for polyethylene shrink wrap. Now it has three.

P&G's research and development organization reorganized along global lines two years ago matching organization of the global purchasing teams. The Baby Care business unit now has a global technical material leader and a global purchasing leader. "We jointly decide on the right supplier based on technical and commercial criteria," comments Ghobad Rahrooh, director of R&D for the Global Baby Care business unit. "The result has been an absolute win. We show up together for a supplier meeting. We do not have separate agendas. P&G speaks with one voice. That was a tremendous breakthrough for me. It has eliminated a tremendous amount of redundancy and rework."

Within the business units, buyers and technical personnel are organized within materials groups: chemicals, packaging, third-party manufacturing, and absorbents/substrate/components. Packaging is further broken into blow molded plastics, injection molded plastics and fiber packaging. One person becomes the enterprise leader for that spend based on the size of spend, the complexity of the spend and other factors.

There has also been a major push at P&G to use suppliers more for technical development, following the lead of such best-in-class organizations as Chrysler when led by Thomas Stallkamp.

"We made a strategic decision that 50% of our development will come from our supplier partners," says Rahrooh. "There are supplier technical people who work directly on P&G projects and in some cases we have co-located our technical people with a supplier. This approach cuts through all of the meetings, all of the bureaucracy."

P&G's chief technology officer is guiding the change to boost the volume of innovation at P&G, which now even has a Web site where it poses questions such as how can we make such and such a molecule? Academicians and researchers around the world can pick problems and pose solutions. "A researcher in India came up with a way to make a molecule in three steps versus 15," says Rick Hughes. "The number of ideas we're getting has increased tenfold."

Another major focus in the R&D organization is to make sure that purchasing personnel are involved at the very early stages of product development. One of the roles of the buyers is to make sure that strategic suppliers are involved at that stage as well.

Does this mean that P&G is increasingly putting emphasis on technology skills when it hires new buyers? Not at all.

"Our recruiting is degree-immaterial," says Hughes. "We have had people with romance language backgrounds and psychology degrees. Our goal is to find people with a track record of performance in such areas as goal-setting and problem resolution. If I do hire someone with a technical degree, I tell them to check their technology hat at the door and become a good commercial person. We're also not looking for people with sourcing experience. We teach people what we feel is important."

Purchasing University, run by Lisa Cooley, is where buyers get trained.

All employees are required to know 13 skill areas within stewardship, strategy development, relationship management and execution. In order to be retained and promoted, proficiency in those areas must be proven by applying those skills to deliver actual results. Managers also must take training and demonstrate proficiency in areas such as leadership and coaching. Training sessions are run in three-day blocks over a period of a year or longer.

Stewardship is one of the areas emphasized because of its importance to the company as well as growing accountability standards, such as the federal Sarbanes-Oxley legislation. Sourcing principles require a new look because automated tools such as reverse auctions changed the rules of engagement with suppliers. Another important aspect of the stewardship program at P&G is supplier sustainability.

Expansion of leverage and spend pools is a growing priority at P&G.

A lot of the blocking and tackling has already been done through global implementation of an SAP enterprise resource planning program. "All of the materials numbers we use within SAP comes out of the specifications," says Hughes. "And we set up global reference data so that Shell in North America is the same as Shell in Europe. As a result we can track all direct spend history through SAP." P&G has seven different SAP databases globally and is using its Navigator tool to make the databases more user friendly.

The issue remains corporate structure.

In 2000 P&G switched from regional profit centers to global business units that Wall Street saw as a success. "But because they are relatively self-standing business units, in some ways we atomized purchasing," says Keith Harrison. "Instead of buying as a $50 billion company, we were running as seven billion-dollar-plus units. What we have been doing over the last couple of years is moving toward corporate designs that move us back toward corporate spend pool management where we can [leverage] the scale of the company. At the same time we want to maintain purchasing linkages to the businesses, which we think is key."

Hughes told P URCHASING he plans to devote more time to building the spend pool concept and will turn over day-to-day operation of the corporate purchasing group to Alfredo (Jet) Antonio, who is director of innovation within corporate purchases and the former head of P&G buying in China.

A focal point of increased leverage will be the indirect buy, especially services. One area P&G plans to rein in is professional services. "We spend between $400 million to $800 million a year on professional services among some 120 companies," says Hughes. "We want to do with consulting what we did with media (see sidebar above) and see how strategic sourcing can improve the buy." That is, identify key requirements and then negotiate contracts with strategic suppliers that can be leveraged across the enterprise. Purchasing is already involved with health benefits and management compensation issues.

Real estate spending has also been analyzed as an opportunity. "It's important to us, but not top of the heap, because the people there are already doing a good job," says Hughes. P&G is studying the creation of additional spend teams in edible ingredients such as coffee beans, palm oil, coconut oil and potato flakes. One more possibility is a team that focuses on devices that incorporate molded parts, motors and batteries. They don't fit squarely with either injection molding or third-party manufacturing.

Another piece of the purchasing puzzle at P&G is credibility.

When spend pool leaders go to presidents of global businesses and suggests changes in procurement strategy they receive full attention.

Purchasing breakthrough is one of six core capability areas reviewed by the company's core leadership team twice a year. Hughes also meets regularly with CEO Lafley to review purchasing performance. Purchasing's "contribution scorecard" is reviewed quarterly with Lafley. The scorecard tracks value contributions in addition to hard savings. Hard savings are verified by the finance department and even P&G's outside auditor at times. Cost avoidance is important to measure for the indirect spend, which often does not operate on a year-to-year comparison. "Indirect is often a one-time buy, so we have a clear description that finance provides of how to value purchasing effort if we do x, y and z."

A second measurement is what Hughes describes as purchasing excellence. "This measures how well we are doing as a purchasing organization in our work processes, such as sourcing strategies. Our management believes that everything we buy ought to have a sourcing strategy. So this measures where we stand in implementing sourcing strategies. It also measures how well we are doing at implementing innovation. Are we present or are we absent across the global business units? This gives us a pretty good temperature check of whether or not purchasing is robust."

A third measurement tracks how well purchasing contributes to overall growth. "If we do something that drives up overall growth of the product then that counts as a purchasing contribution," he adds.

Procter & Gamble has a reputation as a conservative American corporation. Viewed through a purchasing lens, that's true in many ways: the company promotes from within, certainly wasn't one of the leaders in Internet development, and keeps a low profile. What's impressive about P&G is its steady push toward improvement, especially through internal collaboration.