The Value of being Indispensable

Volume 3 Letter 6

Profit is the payment you get when you take advantage of change – J Schumpeter

In the retailing world shelf space and shelf location are everything and Proctor and Gamble (P&G) had organized themselves to maximize their share. P&G had traditionally been organized into thirteen business units with thirteen different sales forces. Even though the P&G product lines didn’t compete directly against each other the thirteen sale forces did. They were constantly competing for shelf space and vying for the purchasing agents’ attention at the large chain department stores and drug stores.

Purchasing agents generally disliked this situation as not only did they have P&G and their competitors calling on them but they had these multiple sales forces constantly vying for their attention. Dislike it they may have, but P&G was too big and too important of a product line for any purchasing agent to ignore and the P&G model prevailed. However in the 1990’s a dramatic shift in power happened in the retailing industry – in a word “Wal-Mart”. Wal-Mart had developed a dominant position in the North American retailing market and sold a full one third of P&G’s production. The power had now shifted and when Wal-Mart complained about thirteen different sales-forces P&G decided to listen.

After negotiations with Wal-Mart P&G decided to drop their multiple sales forces but was concerned that they would soon be losing market share to Unilever and Colgate. No longer could they count on their superior sales force to push through sales. Instead, P&G went to Wal-Mart with a novel idea. P&G would connect into Wal-Mart’s inventory control system and help them better manage the P&G inventory.

In retail marketing approximately 50% of the cost of sale is in the inventory holding costs. Imagine a store with millions of dollars worth of inventory – the cost of financing that inventory is tremendous. Now imagine a chain of stores with hundreds of millions of dollars of inventory – if one could reduce the inventory the payoff would be huge.

In the early 90’s scanners were just entering the retail arena. P&G proposed to Wal-Mart that they connect them up directly to P&G so they could collect the data real time. This way P&G could see what was selling and react accordingly. P&G projected it could save Wal-Mart 20% of their inventory holding costs – effectively adding an additional 20% to Wal-Mart’s bottom line for P&G products. An additional 20% to anyone’s bottom line usually gets some attention and Wal-Mart was no exception.

P&G set up a program whereby they reduced Wal-Mart’s P&G inventory dramatically yet kept stock-outs at a minimum. P&G rented warehouse space across the street from the major Wal-Mart distribution centers across the country. Each day P&G would deliver just enough product to match Wal-Mart’s projected sales and keep inventories (and stock-outs) to a minimum.

Soon the savings starting rolling in and Wal-Mart’s profits jumped dramatically. But what about P&G? P&G had invested in changing their whole delivery system but Wal-Mart wasn’t paying any premium for this service.

Wal-Mart soon saw the advantage of promoting P&G products. It didn’t take Wal-Mart long to figure out that for every P&G product they sold that they made extra money due to the reduced inventory holding costs. Wal-Mart was soon promoting P&G products pushing their shampoos, soaps, diapers etc. into the premium end isle slots and giving P&G the prime self space. The strategy was brilliant – P&G had aligned the goals of Wal-Mart with their own. Sales of P&G products sky-rocketed at Wal-Mart stores across North America.

It didn’t take competitor’s long to figure this all out but by the time they did the game was already over. P&G controlled the scanners and the flow of information. The only way (at the time) for Unilever and Colgate to deploy the same system was to have their own dedicated scanner and two scanners at a retail check out is one scanner too many. It would take Unilever and Colgate five to six years before they could crack into the system. In the meantime P&G moved into other big chain stores like Target and Kmart with the same strategy.

When looking at your business:

– Determine the true delivered cost of your product or service (do a value chain showing the cost at each step)
– Of the total delivered cost determine what percentage of that is for your product or service?
– Is there something you could do to reduce the total delivered cost?
– If you can reduce the delivered cost, align your goals with your customers’ (i.e. Share the savings)
– In addition share systems and enter into long term contracts with your customer making it difficult for your competitors to enter the market.

P&G was successful in aligning their goals with those of their major customer. If profit is the payment for taking advantage of change – drive the change and reap the rewards.

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