If only William Procter and James Gamble could see the company they started now!

In 1837, when the brothers-in-law began making soaps and candles, their supply base was limited to nearby meat-packing plants in the general vicinity of Cincinnati, where they sourced lard and beef tallow.

Today, that supply base stretches across the globe, and the $83.5-billion company sources thousands of chemicals, polymers, packaging and other materials for some 300 products—ranging from prescription-medication Actonel to Zest hair and body wash.

Procter & Gamble (P&G) today is, according to many analysts, the largest consumer-products company in the world. And among its hallmarks is a dedication to continuing the kind of collaboration that brought its founders together. Now, of course, there are many more parties to collaborate with.

In fact, if you put just one person from each of the company's suppliers into Cincinnati's Paul Brown football stadium, and let no one else in, the crowd would overflow into the parking lot and onto Central Ave. and Elm St.

Some 90,000 suppliers provide the raw materials used by the company's 150 manufacturing plants worldwide, and supply P&G a separate suite of already-manufactured finished products. It's one of the largest supply bases in the world. And, the number is down from 100,000 three years ago. The company plans to knock it down further, to 70,000 in the next two years, even while adding new suppliers where appropriate.

Of the total, 400 suppliers qualify as key partners and get about a quarter of P&G's spend.

Managing collaborative relationships with such a large and dispersed supply base is a gargantuan chore, especially since, by corporate design, much of the innovation behind P&G's products comes from outside the company, including the supply base. But P&G's Global Purchases organization has excelled in that management. And for its success, as well as its accomplishments in delivering both value and significant savings to the corporation, Purchasing has awarded the company our Medal of Professional Excellence.

The 1,700-strong Global Purchases group, led by Vice President Richard A. Hughes, includes 1,400 buyers and managers. It's a globally focused, center-led organization that covers nearly 100% of P&G's $48 billion outside spend. Excluded from its mandate are taxes, contributions and mergers/acquisitions.

Here is the basic organizational structure:

• Global Purchases has strategic sourcing groups located in six regional centers (Cincinnati; Geneva, Switzerland; Frankfurt, Germany; Guangzhou, China; Singapore and Caracas, Venezuela.). The staff uses software from SAP as the backbone of its spend-management efforts. It also uses Combinenet and Upside software.
• There is one purchasing leader for each category of spend who speaks for and represents all of P&G's business units for that category or industry. Among the spend categories: chemicals; packaging; logistics; shared services such as MRO, IT, consulting and facilities management; and marketing.
• Additionally, many of those category leaders represent the Global Purchases organization on business-unit leadership teams, providing a single point of contact for the business-unit presidents. "That matrix allows us to stay in touch with our businesses and leverage scale and knowledge across the company," says Hughes.
• Buyers also are part of the company's Global Business Services organization, leading supplier management and spend for outside services, such as consulting and professional services, facilities management, employee services and IT support.
• Of the 90,000 suppliers, 15,000 are in the marketing arena, a core competency for P&G as it is for many consumer-products companies. Those 15,000 include advertising agencies and other marketing-services-related suppliers around the world.
• About 600 other suppliers provide the finished products to P&G, like the Mr. Clean Magic Eraser and Swiffer product lines. They actually make the final products in their own plants under the guidance of purchasing and operation staff in P&G's external supplies and global devices organization.

Consumer-products companies like P&G that sell direct to end users through retail outlets are more susceptible to customer whims than manufacturers who sell to OEMs. Consumers can change preferences in the time it takes them to walk down a store aisle. Packaging, advertising, point-of-sale promotions, even product placement on a store shelf can sway decisions. And that's all before pricing enters the picture. "At some level, you're fighting for share of wallet," says Keith Harrison, P&G's global product supply officer and Hughes' boss.

"Value creation is as important as savings" say Richard A. Hughes, P&G's vice president for Global Purchases. Innovation from suppliers is part of value creation.

"Great" is not too strong a word. Since 1995 the organization has delivered more than $1 billion per year in savings. In 2007, the figure was $2 billion. Results like that have helped the company post healthy financial results.

Its most recent results, for the fiscal fourth quarter ending June 30, included profit growth to $3.02 billion.

Certainly, part of that growth came from price increases P&G implemented for some of its products, according to the Reuters news service. But Morningstar financial analyst Lauren DeSanto adds that the company's ability to control costs—overhead as well as supply chain costs—was a big factor too.

"The company can only pass on so much to consumers," she told Purchasing. The company's procurement muscle was a big advantage too, she says.

That muscle, according to many, is as much brain as brawn. "P&G's approach to innovation and how it interacts with its suppliers to support innovation are best practices from my perspective," says Lisa Martin, senior vice president for worldwide procurement at Pfizer.

Adds Greg Shoemaker, vice president for central direct procurement at Hewlett Packard, "P&G has one of the most progressive procurement organizations on the planet. They consistently work to proactively address real and challenging issues that keep their organization on the leading edge of business practices."

One of those issues, of course, is getting the maximum value from purchasing operations. Value creation is as important as savings, says Hughes. In fact, the word "value" comes up in virtually every conversation with purchasing staff at P&G, much more even than the word "savings."

Says A. G. Lafley, CEO and chairman, "P&G Purchases is much more than a cost-management leader." He says the organization is a strategic business partner that drives innovation, creates key alliances and enables business agility and financial flexibility. "They are a true source of advantage," Lafley says.

Hughes defines the value Global Purchases delivers as the sum of gross hard savings, cost avoidance, value add and asset utilization. The short-form definition could in part be getting more goods, service or quality each year for the same amount of spend as the previous year.

Another part of the value, though, is Global Purchases' contribution to product innovation.

CEO Lafley has said he wants 50% of P&G's total innovation to come from sources outside the company. Hughes' personal goal is that 50% of that number will come from suppliers. To reach that goal, the purchasing operation uses its tight integration with all the company's business units and research and development efforts as the backbone for its supplier-management and outreach initiatives. Those initiatives encourage the out-of-the-box thinking that results in new products.

One example that was literally "out of the box" was the development of a concentrated formulation for the company's liquid laundry detergents—Tide, Gain, Cheer, Era and Dreft.

Serving as a bridge between suppliers and P&G's research and development and engineering teams, Global Purchases facilitated development of a compacted version of the products, including new chemistry and new packaging. The new packaging was a bottle half the size of the original that contains enough detergent to do the same number of loads as the original while reducing fuel consumption, warehouse-space usage and amount of packaging.

The project was the result of the company's sustainability efforts that have identified a wide range of ways by which P&G could make changes that benefit the environment and offer the consumer an attractive value proposition. In addition, those changes benefit P&G in terms of supply chain operational efficiency. The project also resonated with retailers responding to consumer interest in sustainable products and their own business goals on environmental issues.

Global Purchases had been working with other functions within P&G, such as engineering and R&D, and with suppliers and other external partners to increase the sustainability of its products. In all, Global Purchases harnessed the efforts of some 30 different suppliers in the compaction project.

(See "procurement success stories" under "more videos" on www.purchasing.com for details.)

Another example is the development of the Mr. Clean Magic Eraser.

P&G supplier BASF manufactures a melamine resin foam called Basotect for soundproofing and insulation for industries such as construction, automotive and aviation. In the early part of this decade, P&G became aware of the cleaning properties of Basotect through discussions with BASF as well as commercialization of the foam in Japan as a cleaning product by another company.

After P&G conducted product and market research on the foam, Global Purchases negotiated the purchase of Basotect and terms for further collaboration with BASF.

As a result of that collaboration, in 2004, P&G launched the Magic Eraser Duo in the United States, its first co-created Basotect product. Also that year, P&G launched the co-created Magic Eraser Wheel & Tier product.

"We want to know about Tier 2 and Tier 3 suppliers abd risks they might present."-Uldis Sipols

In the late 1980s, senior management created the Global Product Supply Organization, bringing engineering, manufacturing, logistics/distribution and purchasing together in one group, now led by Harrison. By 1992, purchasing took on a global face and in 2005 it evolved into its present center-led, globally dispersed structure.

Collaboration for Global Purchases begins with close working relationships with P&G's business units. When the business units develop their strategies, they share those strategies and goals with purchasing, which then brainstorms with business leaders on ways purchasing can help them save money or find alternative ways to reach their objectives, including outsourcing. "Sometimes, there is a gap between the savings the business unit wants and the savings we think we can provide, and so we have to work together to find ways to fill the gap," Hughes says. The key phrase is "work together."

Hughes and his team also work closely with engineering on capital design, construction services and equipment specifications. And, they work with marketing on strategic sourcing of all advertising and marketing-related goods and services, including the buying of advertising space. Likewise, they work closely with research and development teams through P&G's Connect & Develop programs to bring innovation into the company from the outside, as it did on the compaction and Mr. Clean products.

But without finely tuned supplier-relationship management (SRM) practices, the external collaboration wouldn't pay off. "SRM is not just a set of guidelines, but a way of thinking," says Hughes.

The thinking begins, appropriately, with supplier selection. And for that, the company defaults to a global strategy. Global Purchases looks for the best suppliers wherever they may be. In some cases, the global approach may be a regional buy, such as for contract manufacturing, contingent labor or in-store promotional services.

In assessing suppliers, P&G looks hard at such characteristics as their financial stability, legal structure, financing and sources of supply, their cost competitiveness relative to competition, their operational practices, track record for innovation, agility, flexibility, responsiveness quality of products and services and strategic alignment with P&G, among many other factors.

Says Uldis Sipols, vice president for external supply and global devices, "we also want to know about tier two and tier three suppliers and any potential risks they might present."

Among those potential risks are a supplier's inability to get financing to add capacity to meet P&G's needs. Recently, says Sipols, who was chief procurement officer for recent acquisition Gillette, the company collaborated with suppliers to ensure they obtained appropriate financing—critical due to the credit crunch and banks' general unwillingness to offer financing.

P&G will also help suppliers get better prices from their own suppliers by using its own scale as leverage.

To be sure they're working with the best suppliers, Hughes and his team drill down deep to analyze their performance and help them make adjustments where necessary. "We stratify our supply base, we have a rigorous categorization process and we perform our SWOT (strengths, weaknesses, opportunities and threats) analyses," he says. "We use SAP for spend analysis, among other things. But most of all we communicate constantly."

Global Purchases and the business unit leaders hold regular supplier summits by region and category to share information and business needs, and to review technology roadmaps and new ideas. The meetings are both at the buyer level and the senior management level, and among other discussions the participants develop joint business plans to address existing and anticipated needs.

Recently, the company implemented a formal performance-management system that also covers such things as suppliers' diversity spend, social responsibility, environmental sustainability and even whether they invoice properly.

Hughes and his team will share the results of that performance measurement as well as exchange ideas with the top 400 suppliers at a special summit next month. The theme of the summit is "Collaborating for a Sustainable Future."

But the performance measurement isn't a one-way street. Since 2006, P&G has used a reverse score-carding system where they have asked suppliers to rate the company itself as a customer. The genesis for that system was in 2003, when some suppliers said they weren't being paid on time. P&G revised its bill-payment process as a result and went from 60% on time to more than 90% on time.

Also, in response to supplier requests Hughes and his team developed a supplier portal on P&G's website so suppliers could get better access to key information on product schedules and changes in specifications.

Supply chain management is anything but a static system. At P&G, Hughes and his team are constantly tinkering with their systems to make them better. New initiatives underway now include scenario modeling for risk management where they look at what the future might hold in terms of supply problems, and how they can prepare for those contingencies. "For example," says Hughes, "we brainstorm what we'll do when energy prices rise or fall so we can react quickly."

The team has done the scenario modeling for their chemicals and packaging spend as well as their energy spend, and it has already paid off. Through the modeling process, they discovered opportunities to further strengthen the supply of surfactants and detergents, major commodities that go into several of the company's products. Result: They formed a joint venture with a supplier in Asia to ensure comprehensive supply.

That's just another example of the collaboration ethos at P&G. With its own expectations that commodities prices could increase about $3 billion next year, that ethos, plus disciplined supply management, will help Global Purchases ensure that the company not only survives but prospers.