Picture two separate supply chains stretching around the world to 180 countries. Now picture weaving them into a single supply chain while taking out each and every redundant thread. That's exactly what Procter & Gamble (P&G) had to do when it bought the Gillette Company for $57 billion.
When P&G of Cincinnati, Ohio, bought Boston, Massachusetts-based Gillette in October of 2005, the combination made it the world's largest consumer goods company. By that time, P&G—which started out as a soap manufacturer 150 years ago—had become a global provider of personal care, household cleaning, and laundry products as well as such varied items as disposable diapers and prescription drugs. The acquisition added such well-known brands as Gillette razors, Duracell batteries, Braun personal care products, and Oral-B toothbrushes to P&G's portfolio.
Merging the two supply chains was a high priority because it would significantly contribute to P&G's bottom line. The amalgamation, company executives believed, could deliver $1 billion in cost savings and another $750 million in incremental sales—if it were done right.
But the integration was fraught with difficulties. "The biggest challenge was the sheer complexity of the change," says Daniel Myers, the P&G veteran who oversaw the supply chain merger. "The Gillette acquisition was the largest in P&G company history and the largest in the history of the consumer products industry."
Despite that complexity, by June 2007 P&G had completed 97 percent of the supply chain integration. A look at how the company managed this considerable challenge offers some insight into how very large organizations can combine their operations with minimal disruption.
A complex task
As vice president of product supply for global operations at P&G, Myers was put in charge of integrating the two companies' supply chains. Myers was a natural choice: A University of Tennessee graduate with a degree in chemical engineering, he had worked in every P&G business unit at one time or another during his 28-year career with the company.
In his current position, Myers is responsible for getting finished product from the manufacturing plant to the store shelf, from the time orders are placed until the company collects payment. You might say he oversees three supply chains: the movement of the product itself, the flow of information surrounding that physical movement, and the monetary flow associated with the sale.
The monumental task confronting Myers and his team was to figure out how to handle the addition to P&G's supply chain of 100,000 new customers, 50,000 stock-keeping units (SKUs), and $11 billion in revenue. The two companies also needed to create a single 'order pad,' or common alignment, for all of their SKUs within a single order-entry system as well as an integrated distribution system to leverage their combined scale, says Myers. One of the overarching corporate objectives was incremental growth of 1 percent globally, he adds.
Regardless of the integration's complexity, P&G wanted to complete it as quickly and seamlessly as possible to avoid disrupting its customers' business. "Many of the product lines offered by P&G and Gillette are pretty fundamental to the retailers' margins," Myers explains. "The last thing you want to do is in any way upset the flow of products to retailers because of the integration."
Creating a balanced team
Myers began the integration process by assembling teams of experienced, senior managers from both P&G and Gillette. He selected one executive from each company and appointed them as co-leaders of the project, reporting directly to him. He then divided the world into seven regions and handpicked coleaders from both companies to manage the regional integrations.
These leaders oversaw a large number of people who were devoted to the project. "We had 1,000 fulltime people from the existing staffs just working on the integration over the last year and a half," says Myers. Devoting so many employees to the integration, however, meant that a number of other special projects had to be pushed back. "We had to make choices on things we would delay to enable the capability to be freed up and flowed into the Gillette project," he says.
The project team decided to undertake the integration in phases, handling a couple of areas of the world at one time. First in line for supply chain conversion was Latin America. In April 2006—just six months after P&G received final government approval for the Gillette takeover—the company piloted the integration in five countries there. Why choose Latin America first? "The countries had complexity similar to what we would face in other parts of the world, but they were small enough to not present huge risks to the company," explains Paul Fox, External Relations leader in P&G's Global Operations organization.
Then in October 2006, Procter & Gamble merged the two supply chains in North America, China, half of Western Europe, and some smaller countries in Eastern Europe. The remaining Western and Eastern European countries were converted in January of 2007; Japan and the remaining areas of Asia were brought into the fold some six months later.
Starting small was a wise strategy, as it turned out. "The October 2006 project was the largest [integration] in P&G history," Myers notes. "What helped us get competent was what we had done during the first five country pilots."
Mastering data and distribution
One of the most critical, challenging, and time-consuming components of the supply chain integration involved creating a common information technology (IT) platform for data exchange. P&G primarily uses an SAP system to oversee the information flow throughout its network of factories and distribution centers. As part of the regional changeover projects, Gillette's production and distribution data were transferred to the SAP system, creating a single IT platform worldwide for all order shipping, billing, and distribution center operations.
There is still much work to be done, however. "We are moving toward a common warehouse management system and transportation management system," says Myers. "Within the next six months, we will have a standard platform worldwide for demand planning. It will take another year, however, to get the Gillette [manufacturing] plants on our core financial and operating systems."
Some of the challenges faced by the technology integration team were broad in scope. The addition of 50,000 Gillette SKUs to P&G's information system, for instance, required painstaking execution of master data management to ensure consistency and accuracy. "The master data has to be perfect from the sourcing site," says Myers. "If we're making product in Boston, such as razors, and exporting them to another country, and the data is not perfect, the paperwork for customs won't be perfect."
Other integration tasks were more narrowly focused, but big jobs nonetheless. For example, P&G had to change the case-identification codes printed on the cartons for all Gillette products to reflect the new ownership. That step was necessary so P&G's bar-code technology and the information systems in its DCs could identify Gillette's products. "The detail work here had to be done seamlessly to avoid disruptions," says Myers.
Manufacturing itself, however, was not a concern because Gillette's and P&G's product lines did not overlap. But overlap in their distribution center networks was a problem, and one that proved to be particularly difficult to solve.
With the acquisition, Procter & Gamble found itself with more than 500 DCs and warehousing sites scattered across the globe. Many of those distribution centers had been inherited from earlier acquisitions, such as P&G's buyout of Clairol in 2001.
The goal was to halve the number of warehouses and DCs while retaining the best facilities in the right locations to meet local market requirements and maintain high levels of customer service. In making those adjustments, P&G took into account its customers' product requirements in various regions of the world—not only their current needs but also their anticipated requirements five years into the future.
In that effort, P&G was aided by its Global Analytics Group, which it formed in 1992. The group uses a variety of software applications and simulation tools to model the DC network for every region of the world. "The modeling starts with the customer marketplace requirements," Myers explains. "Then you look at future [shipping] volumes, the [product] portfolio, and geography."
A critical consideration was that Procter & Gamble had a different sourcing strategy than did Gillette. P&G tended to manufacture its products in the regions of the world where they were sold; Gillette, on the other hand, generally exported products into those markets. As a result, they had different needs in terms of the locations, sizes, and capabilities of DCs in various countries.
The restructuring of the distribution network also took into account P&G's desire to maximize its use of delivery channels for certain products. For example, where feasible, the company will use the same carriers and delivery methods for both P&G and Gillette products. The distribution redesign also reflected a commitment to a consumer-driven supply network that would keep retail stores plentifully stocked. "Our thinking starts at the store shelf," Myers explains. "We visualize what the store shelf should look like. From there we plan the supply chain backwards to ensure we can deliver the best product. That results in superb retail execution."
Equally important was the opportunity to introduce Gillette's products into new markets. For instance, P&G had been especially successfully in penetrating deep into the Chinese market and was selling its products even in small village stores. Since the integration, Gillette has been piggybacking on P&G's distribution system to reach those stores, Myers notes.
By the same token, P&G had to learn how to work with unfamiliar sales channels. In Japan and Germany, for example, Gillette's major outlets for its Duracell line of batteries are electronics retailers. The refashioned distribution network had to maintain Gillette's existing relationships and support the electronics retailers' specific order and delivery requirements, even though P&G had no experience with that type of store.
Outsourcing and transportation
One area of agreement was the use of third-party logistics companies (3PLs): Both P&G and Gillette were relying on them to operate their warehouses and distribution centers. "The majority of our DC network has been operated by third parties, and it varies greatly by country whether it's a local capability or someone has multicountry capabilities," says Myers.
Although the integration of distribution centers, slated for completion in 2009, inevitably will result in lost business for some of the 3PLs, P&G has not experienced any problems with its third-party partners. "We have been very conscious of ensuring we communicate changes as quickly as possible to ensure that they have sufficient time to prepare for any business changes in the future," Fox says.
As the distribution network rationalization moved forward, so too did opportunities for P&G to leverage its transportation network by combining its own shipments with Gillette's to realize significant cost savings. Historically, P&G has shipped mostly full truckloads; in North America alone, it ships about 3,500 trucks to some 8,500 locations each day. Gillette, on the other hand, was shipping much of its volume by less-than-truckload service.
To date, though, the supply chain integration has not resulted in deep reductions in the ranks of motor, ocean, rail, and air carriers. "There has been some carrier rationalization but most of this has been combined shipment lanes versus reducing the total number of carriers," Fox notes.
For both companies, cost reduction isn't the only benefit of rationalizing their transportation networks. "By integrating Gillette into our larger distribution network, Gillette products are now riding on our system with a much higher frequency of delivery to major customers," Myers says. "By combining products, we're delivering daily to the DCs of major customers." More frequent delivery will also allow P&G to keep pace with shelf replenishment and optimize inventory levels for itself and for its customers, he adds.
Mutual respect leads to success
When two companies merge, the new owner often insists that its acquisition adopt its procedures—the proverbial "My way or the highway" approach to management. But P&G had the opposite attitude: Managers recognized that the supply chain integration allowed the companies to learn from one another and adopt best practices for all of their brands worldwide.
For instance, Gillette was particularly adept at working with retailers to curb theft and other types of loss, also known as "shrinkage." The company even had a global director of loss prevention assigned just to that area and had developed a 10step plan to determine the causes of shrinkage and identify areas of vulnerability in its own and its customers' supply chains. "Gillette has done outstanding work on shrinkage and loss in the customer's supply chain, and we are rolling out that program worldwide," says Myers.
On the merchandising side, Gillette generated high levels of impulse sales by placing products such as batteries and razors near retail checkout counters. P&G now plans to adopt that marketing practice and set up secondary displays of its products at locations within stores that are likely to boost impulse sales.
In addition to sharing and adopting each other's best practices, professional respect within the ranks of Gillette and P&G also played a role in the success of the supply chain integration. That respect was assured in part because the two companies had often benchmarked their supply chain performance against one another. "We have had great success with Gillette employees joining our organization. That's due to mutual respect," Myers says. "We had a clear message that we were going to staff the best team."
Procter & Gamble executives believe that their company's supply chain integration with Gillette and the adoption of each other's best practices will generate about $1 billion in savings and another $750 million in incremental sales revenue. That comes as no surprise to Myers, who is confident that "the best team" is exactly what P&G now has in place. "We took two world-class companies and brought them together where their portfolios complemented one another," he says with pride. "We needed to do it in record time. And the organization has just done it amazingly."