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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  Nov. 3, 2011  
     
 

P&G's New Service as Measured by Customer - Supply Chain Industry Inflection Point?

 
 

Editor's Note: Subsequent to the release of this column, Procter & Gamble has communicated with SCDigest that the current status of this program is not as far along as the CSCMP presentation may have depicted it, and that it is still actively working with retailers to determine if and when this will be adopted as its standard approach.

 

As I noted in my conference review, something very noteworthy may just have occurred at the CSCMP conference in Philadelphia, courtesy of Procter & Gamble.

P&G has been directly connected to almost every major overall supply chain innovation in the consumer packaged goods to retail sector, roughly in this order:

Gilmore Says:

I mean, it can't really work any other way in the end, can it? And this would now change the whole dialog between suppliers and customers over supply chain performance and joint strategies.


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  • Efficient Consumer Response
  • Continuous Replenishment
  • The Bullwhip Effect
  • The Perfect Order
  • The Two "Moments of Truth"
  • Demand/Consumer-Driven Supply Chains
  • RFID

They share the RFID role with many others of course, and it frankly is the one on the list that has yet to produce any real benefits for the company or other CPG firms. Maybe some day.

The only major innovation in the sector that I don't believe has strong P&G roots is Collaborative Planning, Forecasting and Replenishment (CPFR), which was concept first envisioned as best I can tell by consultants at then research firm Benchmarking Partners, who were then involved in a pilot between Warner-Lambert (later acquired by Pfizer) and Walmart (that pilot was actually just called CFAR). P&G was certainly an early participant, and you could argue CPFR has some real roots in P&G's continuous replenishment innovation, but think that one we'll credit to others.

Why this trip down consumer goods to retail memory lane?

Because in Philadelphia, Deirdre Wilson, associate director, customer service operations for P&G, did a presentation on "Beyond the Perfect Order," which rather amazingly presented the news that Procter & Gamble has now firmly established inside its supply chain operations a new metric framework: Service as Measured by Customer (SAMBC). I say amazing because this wasn't really hinted at in the session description, and could be a major inflection point again in supply chain history.


Like nearly all companies, while P&G certainly discussed its supply chain performance with its customers, internally it was really driven by its own metrics spread across all customers around cost, fill rate, on-time deliveries, etc. (As an aside, I was told by an insider that a powerful metric within P&G is something like "Cases not shipped because of warehouse" - if cases are shorted on a shipment that were actually in the DC, lots of alarm bells start going off and the warehouse manager gets real nervous. If it happens more than a few times, he or she can expect a visit from Cincinnati.)

With SAMBC, Procter & Gamble is now today measuring itself primarily based on how well it is performing against the individual performance metrics of all of the customers it has on the program. In fact, SAMBC is defined as:

The Percent of Customers for which P&G is meeting or exceeding all of those customers' unique expectations.

I believe that is a binary measure at the customer level, meaning missing just one performance expectation would lead to a miss on the measure for that customer.

So just to be clear, let's walk through this. Say P&G has 20 retail customers on the program. Each one of those has 3-5 core metrics. For each of these customers, P&G must hit or exceed each of those 3-5 measures. If they don't, it's a fail on a pass-fail measure. P&G could hit 4 out of 5, but score a zero for that customer. If they hit each of the metrics for 9 of the 20 retailers, the SAMBC score would be 45%.

 

Impact of the SAMBC Approach

 

There are several pretty important aspects to this, beyond that a company is really and meaningfully orienting their performance measurement systems this way.

First, SAMBC not only recognizes that customers vary in what metrics are most important to them, how those measures on defined, and what the levels of expectations are for each measure, it embraces that diversity. That is really the core of the concept - service as measured by [each individual] customer.

Wilson showed a real chart, with customer names removed, of about 10 retailers and what those core metrics were. I won't say they were all over the map (on-time delivery I think was on every list), but there was also a lot of variation in what metrics were included across the group. Even nearly universally embraced metrics such as on-time and fill rates were calculated differently by various retailers, and there were a variety of xpectations. Some wanted 98% on time delivery, others 94%, or whatever.

Second , this obviously requires a very collaborative approach with customers. Many retailers did not immediately have answers as to what metrics, what levels, etc. During the discussion process, P&G of course discovered that how they and the retailers defined many metrics weren't the same.


Importantly, in the end this will/should force the retailer to think about this at a supplier and maybe even product category level. Maybe metrics and expectations for P&G will be different than for say fresh produce suppliers - I would think so.

And just for P&G, is it possible that toothpaste would have some differences in metrics/targets versus diapers? Maybe so. Vendors themselves of course set different service levels for A versus C items - but usually, that is often done without any real dialog with the retailer.

Most critically, these customer-specific metrics are not meaningful just at sort of the account management/customer logistics team level, but driven back through the supply chain from demand planning all the way to individual manufacturing sites. This is really the amazing thing. Plant managers will need to be aware of how they are performing not at an aggregate level, but at a customer-specific level, perhaps across dozens of customers. (I got the sense the program now was active at between 10-15 customers). This takes the concept of "order pegging" in manufacturing to whole new levels.

Now, let's just say this takes off, first in consumer goods to retail, but maybe then in other industries too. If P&G can make it really work (meaning retailers see value), it will obviously put pressure on others to do the same, both P&G competitors and vendors in other categories which see an opportunity for first-mover advantage. This will have a huge impact on supply chain performance management and supply chain planning and execution. It may truly represent a milestone change in supply chain practice.

Second - and this is simply my opinion - I think P&G may be setting the for service-level agreements with customers. Right now, Wilson said, there is really no cost to the retailer for wanting 98% on-time versus a 95% target with another customer. But we know that difference has a real cost to P&G. While the metrics and measures are developed collaboratively, in the end wouldn't customers push for 99% on everything?

Not if there are more explicit trade-offs to the differences, just the way there are in the "menu-based pricing" approaches many CPG manufactures use that make price adjustments based on order details (e.g., full truckload versus less than truckload, full tirs versus loose cases, etc.).

That mindset will be taken to service levels around fill rates, on-time, inventory on-hand, etc. So, if you want a 95% case fill rates, the price is X. How about 98%? Well, that's X + something.

I mean, it can't really work any other way in the end, can it? And this would now change the whole dialog between suppliers and customers over supply chain performance and joint strategies.

I will note a couple of other interesting aspects. (1) P&G can't really yet measure this from its main ERP/scorecarding systems (understandably). It is working on that, but has to calculate many of the individual measures more manually today; (2) Often, the retailer will use P&G's number because they can't calculate it either; (3) P&G has already made changes/investments to support SAMBC, such as better GPS/tracking systems relative to on-time performance; (4) This could cause some actions many might not yet have thought through. For example: going to be late on a shipment for a customer? If I am behind on this metric, maybe I call the "hotshot" carrier and absorb the high transport cost. If I am ahead on that metric, maybe I will just be late and save the cash.

I think SAMBC is an extremely innovative, bold but risky move for P&G. It could dramatically impact our supply chains the way other P&G innovations have. We will be watching closely here to see how this one plays out. More soon.

What is your reaction to P&G's SAMBC? Pros/Cons? Do you think it will stick, and if so, how will it change supply chain practice? Let us know your thoughts at the Feedback button below.

 
 
     

Recent Feedback

Too much data is involved. Too many facilities, too many systems. As well, customers are already placed into tiers and are allocated product per these tiers. Combine this with which customer wants 95% fill vs 98% fill and the algorithms to fill orders, whether systematic or manual, become bogged down, and no one is allocated. You manage to numbers, a few specific KPIs. P&G now says they will manage to hundreds, or thousands of numbers. I say great effort, but not going to happen. Chaos will reign deep in the bowels where decisions are truly made.


Mr. Smith
Director Logistics
CPG company
Nov, 15 2011


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