PROCTER & GAMBLE REVAMPS RETAIL INCENTIVES

JAMES TENSER

CINCINNATI -- Procter & Gamble here has mobilized its customer business teams to present retailers with details of its latest program for improving the efficiency of its business practices.

The effort, dubbed Streamlined '97, tackles persistent costs such as refunds for unsalables, delivery exceptions and discontinued product markdowns by offering monetary incentives to trade partners who adopt several new recommended practices.

A centerpiece of the new activity will be a payment to retailers that P&G is calling a Logistics Development Incentive. This LDI payment, to be made quarterly to retail accounts beginning in July, is intended to replace the above-mentioned refunds and adjustments while dramatically simplifying the administrative load associated with them.

P&G executives outlined details of the company's latest trade initiative to SN editors at its headquarters here last week. They said the reforms are based on activity-based costing principles and were developed from careful assessments of internal practices and those of the company's trading partners.

"If we owned the entire supply chain, we wouldn't be passing so much paper around," said Steve David, P&G's vice president of customer business development for North America. "We would not have these extra costs tacked onto the system."

He added, "We tried to go out to the broadest number of distributors and get their input up front. This is collaborative -- It's not about a unique P&G solution. We want an industry solution for common problems."

Streamlined '97 is being positioned as the latest in the continuum of P&G business practice reforms that date back to its controversial June 1992 "Value Pricing" initiative and continued with the "Streamlined Logistics" program in October 1994 and "Streamlined Logistics II" in February 1996.

All those initiatives shared a common objective, which was to minimize inefficient trading practices that added excessive administrative costs while interfering with effective selling of P&G's products to the consumer.

The latest set of initiatives is rooted in P&G's belief that reducing the source of inefficient practices represents the best solution, rather than focusing on fixing problems after they have been created.

On the delivery exceptions front, for example, P&G has determined from its studies that it costs the company approximately $250 to process a retailer claim for overage, shortage or visible damage to an order.

These administrative and handling costs often exceed the value of the claim, said a P&G logistics executive. Last year, it received 15,000 OS&D claims, of which 75% were for less than two cases of merchandise. "It is not efficient to invest in running down those claims," he said.

Under Streamlined '97, P&G will eliminate all such claims for less than $175, and substitute an advance LDI payment on a quarterly basis in lieu of those claims. In the first year, the amount paid will be based on account history. In subsequent years this will be based on customer audits.

The company expects that the retailers will also save on administrative costs under this arrangement.

P&G will also try to use part of the quarterly LDI payment to induce retailers to avoid what it calls "shipped-as-ordered refusals," where a customer refuses a shipment even though it is exactly what is ordered. Just a few customers do this, e.g. over-ordering for a promotion, then refusing part of a delivery later.

Nevertheless, the practice adds up to about 2,000 incidents per year, resulting in $3.1 million in costs for freight and handling expenses. "It costs us between $5 and $10.49 to handle a refused case," said the logistics executive. "We will spend that money to incent them not to do this."

Under the new program, customers will have an "option" of paying a $5 per case restocking fee if they refuse shipped as ordered products. This penalty will be deducted by P&G from the account's LDI payment.

With unsalables costing P&G "tens of millions of dollars annually," the company is putting much of its energy toward fixing its internal practices first, reasoning that source reduction will dramatically reduce costly rework.

The company's current damaged merchandise program is regarded internally as "complex and inefficient." On an annual basis it involves 18 million items inspected by third parties and 36 million customer claims processed.

Under Streamlined '97, P&G will eliminate its current Damaged Merchandise Program, and continue ongoing audits to determine the level of P&G-caused damage and expired products. The company estimates it is currently responsible for 70% of this inefficiency, while 30% is happening in the system. It expects to work with its customers on source reduction activities.

As in the other examples mentioned, the new program will substitute part of the quarterly LDI payments to customers for most OS&D claims. The amount is an average, based on historical levels, but the company expects this element to move toward an audit-based process over time.

Another key area of attack is on discontinued product transitions, or markdowns, an area that P&G said it has not handled consistently across its system until now.

Under Streamlined '97, most categories will provide a minimum of three months advance notice, and up to six months for slower moving items. The company will also initiate quarterly payments to customers to support markdowns, again as part of the LDI.

Customers can use the lead time to take action. If so, some of the markdown money will be left over to handle remaining problems, said the logistics executive.

Overall, the level of the LDI is set to provide incentives for both P&G and its customers to eliminate the source of system inefficiencies while rewarding efficient practices. As a practical matter, the LDI amount represents the sum of historical unsalables costs to P&G plus the new markdown incentive payment.

The quarterly LDI payments will calculated based on five P&G product groupings: grocery, chilled juice, OTC medications, cosmetics, and beauty and oral care. The rates will vary among these groupings based on historical costs.

The LDI will also look different to various trade classes. (See chart.) Food accounts will see a payment that will in most cases exceed their historical costs to P&G. Chain drug stores, which handle more over-the-counter drugs and cosmetics, historically have higher costs associated with unsalables, OS&Ds and markdowns, so their LDI will adjust higher than average.

All these changes will begin July 1, 1997. P&G's customer development teams have already made presentations to about half the company's customers.

"This is aimed at creating a more transparent, more efficient business environment between trading partners so the consumer can win," said David.

"Efficiency is consumer-related, because the savings can fund progress and creativity," he added. "Because consumer packaged goods is a competitive business, we think companies will invest increased cash flows toward things that benefit consumers."

KEY COMPONENTS

Streamlined '97 is a large basket of trade programs, many of which are linked to a central incentive payment. It addresses activities in four main areas -- unsalables, delivery exceptions, discontinued product transitions and shipped-as-ordered refusals -- by simplifying, and encouraging and rewarding efficient practices. It also has a number of components related to pricing, logistics and promotions, along with a specific effort for the cosmetics category. Here's a rundown of the key elements:

The Logistics Development Incentive (LDI)

What It Is: A simple, quarterly payment designed to reward efficient practices, while encouraging P&G and its customers to eliminate system inefficiencies.

How It Works: LDI replaces current unsalable, delivery exceptions (overage, shortage and damage) and discontinued product transition (markdown) programs. To cover restocking and other costs, payments will be reduced for shipped-as-ordered refusals and unsalables deductions.

Quarterly payments are made based on five product groupings -- grocery, chilled juice, over-the-counter medications, cosmetics, and health and beauty care and oral care. (Each segment has different payment rates based on unique characteristics.)

Unsalable Products Program

What It Is: A combination of retailer incentives and process improvements aimed at reducing the number of claims for damaged, expired or otherwise unsalable products.

How It Works: P&G's current Damaged Merchandise Program will be eliminated. Quarterly customer payments will be made in lieu of claims as part of the LDI. Regular audits will monitor what proportion of product damage is caused by P&G's own practices, including so-called "hidden" damage, such as expired products or packaging errors. P&G will offer customers assistance in reducing or eliminating claims for unsalables at the source.

Delivery Exceptions Program

What It Is: An incentive for retailers to reduce overage, shortage and damage claims, by substituting a flat quarterly payment for most smaller individual claims, which amount to 75% of all OS&D claims.

How It Works: All OS&D claims for under $175 will be eliminated. Quarterly customer payments will be made in lieu of claims as part of the LDI. Year-one payment amounts are based on historical levels; future payments will be audit-based.

Discontinued Product Transitions Program

What It Is: An incentive for retailers to focus on selling through discontinued products, rather than returning them to P&G.

How It Works: Categories will provide retailers a minimum of three months advance notice prior to discontinuing a product.

Quarterly customer payments will be made in lieu of product returns as part of the LDI.

Retailers may use the lead time to take markdowns or other actions to sell through the products on hand.

P&G will eliminate some instances through a commitment to 100% Universal Product Code compliance.

Shipped as Ordered Refusals Program

What It Is: An incentive for retailers to end the practice of refusing properly delivered shipments of merchandise. A total of 2,000 such incidents occurred in 1996 at a cost to P&G of $3.1 million.

How It Works: P&G will spend an amount roughly equivalent to last year's costs to encourage customers not to engage in this practice. The payments will be made quarterly as part of the LDI.

Customers who elect to refuse properly delivered goods will pay a $5 per case restocking fee, which P&G will deduct from their LDI payments.

Cosmetics Category

Previously outside the Streamlined Logistics program, this category will jump to Streamlined '97 in one step.

A new pricing structure will reward streamlined, full-case ordering, with costs passed through for added service, such as shelf packs and cross docking.

The category will participate in quarterly LDI and special incentive payments and procedures will reduce the cost of discontinued item administration.

Other Program Elements

Health and Beauty Care Producing Plant Incentive: A new lower best price, effective July 1, 1997, for Streamlined Logistics II customers, is linked to new requirements for ordering these products in "layers."

Regional Distribution Center Consolidation and Cost Recovery: A group of varied price increases on some categories is intended to fully recover costs of operating P&G's regional distibution centers.

Increases in Alaska and Hawaii Upcharges: Ranging from 30 cents to $1.20 per case, these changes also are aimed at fully recovering shipping costs.

Paper Goods Upcharges: These cover multistop and retail drop trailer deliveries in the paper goods category.

Chep Four-Way Pallets: Full adoption of the program by January, 1998. Coffee brands have already made the transition. Paper products are slated to change this summer.

Promotion Flexibility: Easier terms for Brand Development Fund participation, including a 20% reduction in the number of brands required to meet program criteria. Also, four lightly used BDF promotion options will be eliminated.

Source: Procter & Gamble

Pegging the Incentives

Procter & Gamble's Logistics Development Incentive is calculated to compensate retailers for historical average levels of unsalable products, delivery exception and markdown product costs. Those levels have varied significantly by class of trade.

Chart:

COST AS A PERCENT OF GROSS SALES, 1995-96