Proctor & Gamble (P&G), one of the world’s largest Consumer Packaged Goods (CPG) companies reported $3B sales from the online channel, growing by roughly 30% in Fiscal Year 2017. Meanwhile, the overall company’s organic growth was only 2%.
Statistics like these are not only true for P&G but for the entire CPG industry. 9 dollars out of 10 dollars of growth in CPG has come from the online channel the past year. E-commerce for CPG is also slotted to grow at 20-25% for the next five years. With more consumers moving online for daily grocery requirements, this is a channel that the CPG Goliaths can no longer ignore.
“I want this particular product and I want it before I think of it.” – this defines the customer. Servicing this digital consumer stretches the deeply rooted supply chains across different dimensions.
P&G has different options to service the online customer: 1) Pure play i.e. partner with companies that offer online sales like Amazon 2) Click and Collect i.e. brick and mortar retailers allow customers to order online and collect their shopping list from the store and 3) Direct to Consumer i.e. cut out the retailer altogether.
P&G is trying their hand at all three but what surprised me the most is their foray into Direct to Consumer. P&G has their own e-store and couple of subscription services as well (Gillette for shaving and Tide Wash Club for detergent pods). While going direct-to-consumer adds a lot of value to the consumer, it also adds the maximum amount of pressure on the existing supply chain for the company. The biggest challenges are managing the increase in cost due to last mile delivery, managing and packaging small orders and meeting the fast response times of some of the other nimble players in the market.
Demand Planning: By going direct-to-consumer (especially with regards to the e-store), the volatility in demand can be high with practically no barrier on demand geographically. To service the customer, the company will need to forecast demand with better precision. P&G is adding capabilities by adopting a demand-based replacement model based on point of sale information from its retail customers in the offline channel for its manufacturing plants
SKUs and Packaging: As the company moves to a direct to consumer model, P&G will need to adapt their packaging to make it friendlier for last mile delivery. P&G has done that smartly for Crest (their oral hygiene brand), where they have bulk packs for the offline retail stores but also the single cycle pack for digital .
Inventory Management and Transportation: Serviceability is critical to all the stakeholders in any supply chain, be it the distributor, retailer or the final consumer. However, when this chain is longer, the inventory build-up is across the chain. When P&G removes this chain altogether, it needs to maintain a very high level of serviceability while maintaining inventory and transportation costs. P&G has set up distribution mega centers across the US which have the capability to receive and cross-dock products from P&G’s different business units. This has allowed them to satisfy 80% orders within 24 hours irrespective of the size and complexity of the orders .
As one can see, P&G has taken important steps to transform and digitize their supply chain to cater to the digital consumer. However, there is still lots that can be done.
Do more of what you are doing: Planning processes and distribution can be completely automated removing the middle chains altogether while continuing to extract cost and servicing efficiencies. As we enter the world of driverless transportation and drones, logistics will get automated as well. P&G can get a head-start on that.
Do new things: Another avenue for P&G to extract more efficiencies is the procurement of raw materials. P&G can invest in digitizing that side of the supply chain and work its vendors to analyze data and help them get efficient as well.
As I think about these steps, I start to wonder. Is P&G turning from a CPG to a retailer? Do we foresee a world where the brands will interact with the consumer directly and hence, will distributors and brick and mortar retailers will cease to exist?
If that is the order of the new world, is P&G doing the right thing by trying to go directly to the consumer, even though Amazon looms much larger than them as far as direct customer reach is concerned?
These are interesting times for CPG companies and I guess time will tell what the winning strategy is. But one thing is for sure – change is the name of the game!
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 E-commerce strategy is no longer optional for CPG brands: https://retail.emarketer.com/article/ecommerce-strategy-no-longer-optional-cpg-sector/5952e2ceebd4000b2ceae08c
 As Grocery goes digital how should CPG Supply Chains adapt?: https://www.bcg.com/publications/2017/consumer-products-supply-chain-management-grocery-digital-cpg-supply-chains-adapt.aspx
 Procter and Gamble launches Direct-to-consumer subscription business: http://www.businessinsider.com/procter-and-gamble-launches-direct-to-consumer-subscription-business-2016-7
 The Digital Future of Consumer Packaged Goods companies: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/the-digital-future-of-consumer-packaged-goods-companies
 Digitization and Advanced Planning in CPG: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/digitization-and-advanced-planning-in-cpg
 Supply Chain 4.0 in Consumer Goods: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods
 What does it take to be a supply chain leader?: http://www.supplychain247.com/article/what_does_it_take_to_remain_a_supply_chain_leader