Question

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Learning Outcome:

Understand the issues involved with transfer pricing in multidivisional companies (question 1)

Provide an appreciation of logistics activities and their relationship to supply chain management, other business functions and enterprises. (Question 2)

ECR in the UK

Dutchman Paul Polman, now CEO of Unilever, did a stint as General Manager of Procter & Gamble UK and Eire from 1995 to 1999. While admiring the UK’s advanced retailing systems, he saw opportunities for all four of the ‘pillars of ECR’ – range, new items, promotions and replenishment. The following is extracted from the text of a speech he made to the Institute of Grocery Distribution.

Range

The average store now holds 35 per cent more than five years ago, yet a typical consumer buys just 18 items on a trip. A quarter of these skus[1] sell less than six units a week!

The number of skus offered by manufacturers and stores has become too large and complex. My company is equally guilty in this area. No question, we make too many skus. I can assure you we are working on it. Actually, our overall sku count in laundry is already down 20 per cent compared to this time last year. What’s more, business is up.

Clearly, we have an opportunity to rationalise our ranges. As long as we do this in an ECR way – focusing on what consumers want – we will all win. The consumer will see a clearer range. Retailers and manufacturers will carry less inventory and less complexity.

The result will be cost savings across the whole supply chain and stronger margins.

New items

There were 16,000 new skus last year. Yet 80 per cent lasted less than a year. You don’t need to be an accountant to imagine the costs associated with this kind of activity. And look how this has changed. Since 1975, the number of new sku introductions has increased eightfold. Yet their life expectancy has shrunk from around five years in 1975 to about nine months now. We can hardly call this progress.

Promotions

In promotions it’s the same story. Take laundry detergents. This is a fairly stable market. Yet we’re spending 50 per cent more on promotions than two years ago, with Consumers buying nearly 30 per cent more of their volume on promotions. This not only creates an inefficient supply chain, or in some cases poor in-store availability, but, more importantly, has reduced the value of the category and likely the retailers’ profit. We are all aware of the inefficiencies promotions cause in the system, such as problems in production, inventory and in-store availability. They all create extra costs, which ultimately have to be recouped in price. But there’s a higher cost. As promotions are increasing, they are decreasing customer loyalty to both stores and brands by 16 per cent during the period of the promotion. We commissioned a report by Professor Barwise of the London Business School. He called it ‘Taming the Multi-buy

Dragon’. The report shows us that over 70 per cent of laundry promotional investment goes on multi-buys. The level of investment on multi-buys has increased by 60 per cent over the last three years. There’s been a 50 per cent increase behind brands and a doubling of investment behind own labels. Contrary to what we thought, most of this volume is not going to a broad base of households. It is going to a small minority.

Seventy-one per cent of all multi-buy volume is bought by just 14 per cent of households. Just 2 per cent of multi-buy volume goes to 55 per cent of households.

We really are focusing our spending on influencing and rewarding a very small minority of people indeed.

Replenishment

Based on the escalating activity I’ve just [referred to], costs are unnecessarily high. There are huge cost savings also here, up to 6 per cent, by removing the non-value-added skus and inefficient new brand and promotional activity.

Questions

1 - Cutting down on range, new items and promotions is presumably going to lead to ‘everyday low prices’. Discuss the implications to the trade-off between choice and price. (2 points)

2- Procter & Gamble’s major laundry brand in the US is Tide. This is marketed in some 60 pack presentations, some of which have less than 0.1 per cent share. The proliferation of these pack presentations is considered to have been instrumental in increasing Tide’s market share from 20 to 40 per cent of the US market in recent years. Clearly, this is a major issue within P&G.

What are the logistics pros and cons of sku proliferation? (2points)

Answer 1

1. Giving too many choices to the consumers, often lead to their increased confusion of what to buy. This ultimately leads to no sale at all. Having too many options leads the customer to stall the purchase. Hence it is always better to have limited but distinct options in a product range. This, enviably rules the price of the product as well. If the consumer is stalling the purchase, the sale of the product is going down, which invariably impacts the price of the product.
2. SKU proliferation happens if the product gets segmented and is transformed to a niche product. The main objective is to offer consumers more choices and thus increase the sales of the product.
   1. The benefits of SKU proliferation are:
      1. Creates increased capacity for product growth and responsiveness
      2. Cuts down the inventory cost, working capital as well as material handling costs which ultimately leads to increased profits
      3. Leads to a reduction in fixed assets
   2. The disadvantages of SKU proliferation are:
      1. Risk of losing loyal customer base
      2. Reduction in innovation level of the company