P&G TO RESTRUCTURE LOGISTICS AND PRICING

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MARC MILLSTEIN

CINCINNATI -- Procter & Gamble here last week began telling retailers about plans to introduce a simplified, volume-driven pricing structure for most of its products and to take other measures, including creating cross-docking facilities, to streamline its complex logistics system.

The broad initiative, termed Streamlined Logistics, calls for a fundamental reshaping of how P&G handles and prices all its products, excluding cosmetics and fragrances. It will take effect Oct. 1. Details of the program were revealed in an interview with SN. If successful, the initiative could mark the start of a new wave of manufacturer-driven programs built on, or even exceeding, the industry's current Efficient Consumer Response quest to eliminate excess costs and enhance operating efficiencies. It could lead to broad changes in areas such as invoice deductions, product-ordering procedures and cross-docking capabilities.

Specifically, the plan calls for:

The establishment of up to seven regional cross-docking distribution centers that would allow customers to order mixed-stockkeeping-unit loads of virtually any

P&G product.

The creation of two basic best-price brackets based solely on quantities ordered across all product categories in full truckloads from P&G's manufacturing plants or cross-docking facilities.

The introduction of standardized ordering terms across all business units to simplify the ordering process and dramatically cut down on the number of invoices required.

"We're trying to simplify our pricing structures, standardize our order requirements and reduce some of the nonvalue-added costs in the system," said Steven N. David, Procter & Gamble's vice president of sales in the United States.

"The program is designed to help P&G and our customers reduce inventory levels and systems errors. This is a continuation of activities like continuous replenishment. But we felt that we didn't have our own house in order to push it to the next level."

With P&G's current system, four or more pricing formulas often apply to each product category. In addition, each product line requires a separate invoice and has to be shipped on a separate truck. That, David said, is enormously inefficient and can no longer be tolerated as standard business practice.

Under the new system, customers will be able to choose to receive a variety of product brands from different categories on one truck, requiring only one invoice and one set of payment terms, he said.

"In the past, our customers had minimum case requirements, for instance, in soap and food and paper. Now they'll be able to mix a load of soap or paper or food products on a full truck to get the best possible pricing. We're going to make available common-quantity pricing brackets across all our sectors. We're going to have multisector ordering for the first time," David said.

"We will essentially have two pricing brackets. The best price will be for full truckloads from the plant. The next best will be from the regional distribution centers," he said.

Payment terms will be standardized to a 2% discount for payment within 19 days and 30 days net for products, beginning with the receive date rather than the ship date, he noted. The new terms will apply to all P&G product categories, with the exception of cosmetics and fragrances.

"One of our industrial sectors has about 5% to 6% of our case volume, but they have about 13% of our invoices simply because they have to deal with all of these different trade terms.

"Internally, the terms will remain exactly the same on average for P&G. We are not taking one penny out of the system or trying to do anything that impacts on the cash flow of our customers. We just want to standardize the system," he said.

David underscored the need for P&G to change the way it does business. Despite several recent efforts to move toward a more efficient system, including the company's highly publicized move about two years ago toward value-pricing, or everyday low pricing, the system still isn't working optimally.

"We really have been going to market as five separate companies: a soap company, a food company, two health and beauty aid companies and a paper company. Each one has initiated their own buying requirements, their own terms, their own minimum order quantities, and that was creating a tremendous amount of complexity for P&G and our customers," David said.

"Some indications of that were that we had 27,000 manual interventions per month in our order, billing and shipment system. One of three orders required manual intervention. Many of our customers have studies showing that each invoice costs them between $35 and $75. If we can cut the number of invoices we have in the system by 200,000 to 300,000, there will be savings on both sides," he said.

"We also had 55 price changes per day, and we only have a little more than 100 brands. So one in two brands per day are undergoing some type of price change. It has become very, very complex to work with us," he added.

While stating that the program could help promote greater efficiency in the sensitive area of trade promotions simply by creating a more sensible distribution system, David stressed that it was not the aim of P&G to address trade-promotion issues.

"I want to make sure there is no misunderstanding. What we are talking about here today is 100% on the logistics side of the equation. There is nothing that is promotional here, other than we think the things we are doing from the logistics side should enhance our ability to work with customers more productively on the promotions side. But this is a logistics plan."

David did stress, however, that the program would drive costs out of the system and lead to lower customer prices. To what extent that will translate into lower product prices on the shelf for consumers, though, remains an open question.

"We don't have any specific number in terms of total cost savings, but there is no question it is going to be significant for most customers. Individual retailers will have to decide about product pricing [at the store level]. But the potential for savings clearly exists from reducing inventories and dramatically lowering the complexity of dealing with P&G."

David said P&G would immediately begin contacting its customers to discuss the new system and make detailed presentations about specific changes. All its customers will be called on in person within a few days, he said.

The plan calls for P&G to operate seven cross-docking centers initially, although that number could eventually drop to about three or four. Some storage of the products at the centers will be required, at least for the foreseeable future.

In terms of total number of manufacturing plants, P&G currently operates 45 facilities, with a small number expected to be shut down by the end of the year.

Although customers would receive best pricing for full truckload orders only, they would still be able to order partial truckloads, provided P&G could combine them with other orders to send out a full truckload. P&G also will agree to make multiple stops to individual stores or warehouses, up to three stops per truckload, with each order.

"We're going to have to do some work with customers to create groupings that will work for them," David said. "But it won't necessarily be that every customer will have to order a full truckload. The best-pricing bracket, though, will be for full truckload orders."