Question

please no handwriting

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)

CASE STUDY

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)

please long answer

Answer 1

1). According to Paul Polman, CEO of Unilever, there are opportunities for cost cutting in all four ‘pillars of Effective Customer Response’ – range, new items, promotions and replenishment. Which means that cutting down on these attributes will improve the customer experience, by providing everyday lower prices.

The number of skus have increased by 35% in 5 years. Considering there were about 16000 skus in an average store last year, and a typical customer buys just 18 of them in a trip, there is a huge opportunity to cut down on the numberr of skus. Clearly, a person cannot compare even a thousand skus when in a store, so what's the point of having them. As mentioned, reducing the number of skus by 20% resulted in an increase of business, which means customerws don't want to be left confused with hundreds of skus closely similar in functionality and price. A lot of studies have also been focussed on the fact that customer loyalty is becoming less relevant, considering that many of the daily use products available on shelf in supermarkets from different brands are not very much different in composition and quality.

Furthermore, we are talking about skus that sell less than six units a week, and thousands of such skus don't even last for an year on shelfs, presumably due to very low returns value. Reducing skus means less inventory storage at both the manufacturer and the retailer levels. This will impact the prices right from the beginning of the supply chain, and better prices as well as margins due to more sale per sku. The spent will be reduced on manufacturing, procurement, storage, logistics and finally on promotions. Definitely, the result will be cost savings across the whole supply chain and stronger margins.

2). P&G consider that sku proliferation to about 60 packs was instrumental in increasing Tide's market share form 20% to 40%. But as General Manager of Procter & Gamble UK and Eire from 1995 to 1999, Paul Polman said that they have already reduced the number of skus by 20 percent in the laundry segment. Also as mentioned, 71% of all multi-buy volume is bought by just 14% of households & just 2% of multi-buy volume goes to 55% of households. Now business in large stores is always based on volume, as there is a cost war between stores as well as between brands. That means the funds spent on influencing and rewarding customers in large stores is wasted on a very few group of people.

So even if Tide's market share has increased by 100%, it doen not necessarily mean that all the steps taken in the process would have had a positive impact on the market share. In this case, it is very much clear seeing the numbers that sku proliferation is not a very successful strategy, with opportunities for savings in replenishment, promotions, and even in innovations, as research is not necessary to create so many skus, for example those which have less than 0.1 per cent share. If taken a closer look, it can be concluded that lesser number of skus would have only meant a further increase in market share. All the cost savings from cutting down on the number of skus, would mean better prices for the customers and maybe even better margins from increased market share.

Logistics is a very important part of business, specially in FMCG industry. As discussed earlier, more number of skus need even better inventory planning than before to ensure demand and supply balance for each of the skus. And increasing the skus without proper preparation may result in lesser units of the in-demand products and more of the not so popular products. Again adding to the costs of research and launches for new products. But it does not mean that there are no advantges. In industries such as related to fashion and which are very highly dependent on customer's personal choice, it is very essential to have a large number of skus which can match the demands of so many different customers. This in turn, helps manufacturers and retailers to have wide options while pushing products in the market, and have a huge variety on the shelf.