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Learning Outcome:
Understand the issues involved with transfer pricing inmultidivisional companies (question 1)
Provide an appreciation of logistics activities and theirrelationship to supply chain management, other business functionsand enterprises. (Question 2)
CASE STUDY
ECR in the UK
Dutchman Paul Polman, now CEO of Unilever, did a stint asGeneral Manager of Procter & Gamble UK and Eire from 1995 to1999. While admiring the UK’s advanced retailing systems, he sawopportunities for all four of the ‘pillars of ECR’ – range, newitems, promotions and replenishment. The following is extractedfrom the text of a speech he made to the Institute of GroceryDistribution.
Range
The average store now holds 35 per cent more than five yearsago, yet a typical consumer buys just 18 items on a trip. A quarterof these skus[1] sell less than six units a week!
The number of skus offered by manufacturers and stores hasbecome too large and complex. My company is equally guilty in thisarea. No question, we make too many skus. I can assure you we areworking on it. Actually, our overall sku count in laundry isalready down 20 per cent compared to this time last year. What’smore, business is up.
Clearly, we have an opportunity to rationalise our ranges. Aslong as we do this in an ECR way – focusing on what consumers want– we will all win. The consumer will see a clearer range. Retailersand manufacturers will carry less inventory and lesscomplexity.
The result will be cost savings across the whole supply chainand stronger margins.
New items
There were 16,000 new skus last year. Yet 80 per cent lastedless than a year. You don’t need to be an accountant to imagine thecosts associated with this kind of activity. And look how this haschanged. Since 1975, the number of new sku introductions hasincreased eightfold. Yet their life expectancy has shrunk fromaround five years in 1975 to about nine months now. We can hardlycall this progress.
Promotions
In promotions it’s the same story. Take laundry detergents. Thisis a fairly stable market. Yet we’re spending 50 per cent more onpromotions than two years ago, with Consumers buying nearly 30 percent more of their volume on promotions. This not only creates aninefficient supply chain, or in some cases poor in-storeavailability, but, more importantly, has reduced the value of thecategory and likely the retailers’ profit. We are all aware of theinefficiencies promotions cause in the system, such as problems inproduction, inventory and in-store availability. They all createextra costs, which ultimately have to be recouped in price. Butthere’s a higher cost. As promotions are increasing, they aredecreasing customer loyalty to both stores and brands by 16 percent during the period of the promotion. We commissioned a reportby 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 laundrypromotional investment goes on multi-buys. The level of investmenton multi-buys has increased by 60 per cent over the last threeyears. There’s been a 50 per cent increase behind brands and adoubling of investment behind own labels. Contrary to what wethought, most of this volume is not going to a broad base ofhouseholds. It is going to a small minority.
Seventy-one per cent of all multi-buy volume is bought by just14 per cent of households. Just 2 per cent of multi-buy volume goesto 55 per cent of households.
We really are focusing our spending on influencing and rewardinga very small minority of people indeed.
Replenishment
Based on the escalating activity I’ve just [referred to], costsare unnecessarily high. There are huge cost savings also here, upto 6 per cent, by removing the non-value-added skus and inefficientnew brand and promotional activity.
Questions
1 - Cutting down on range, new items andpromotions 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 brandin the US is Tide. This is marketed in some 60 pack presentations,some of which have less than 0.1 per cent share. The proliferationof these pack presentations is considered to have been instrumentalin increasing Tide’s market share from 20 to 40 per cent of the USmarket in recent years. Clearly, this is a major issue withinP&G.
What are the logistics pros and cons of sku proliferation?(2points)
please long answer
