Web Chapter 4A

Procter & Gamble Supply Chain Restructuring:

Procter & Gamble (P&G) Blends Models, Judgment, and GIS to Restructure the Supply

Chain1

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1Adapted from J. D. Camm, T. E. Chorman, F. A. Dill, J. R. Evans, D. J. Sweeney, and G. W.

Wegryn (1997, Jan./Feb.), “Blending OR/MS, Judgment, and GIS: Restructuring P&G’s Supply

Chain,” Interfaces, Vol. 27, No. 1, pp. 128–142.

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Introduction

Procter & Gamble (P&G, Cincinnati, OH) produces, markets and distributes more than 300

brands of consumer goods worldwide in more than 140 countries. P&G has operating units

(plants, divisions, facilities) in 58 locations around the globe. In 1995 worldwide sales were $33.5

billion with earnings of $2.64 billion.

The company has grown continuously over the past 159 years. To maintain and accelerate the

growth experienced continuously since the early 1800s, P&G performed a major restructuring

called strengthening global effectiveness (SGE) to streamline work processes, drive out no value-

added costs, eliminate duplication, and rationalize manufacturing and distribution. As a

consequence of this program, there were major impacts on P&G, which wrote off more than $1

billion in assets and transition costs. The program affected more than 6,000 people and saved

$200 million annually before taxes. It involved hundreds of suppliers, more than 50 product lines,

60 plants, 10 distribution centers, and hundreds of customer zones.

A major component of the initiative was to look carefully at the North American product supply

chain, specifically to investigate plant consolidation. Before, there had been hundreds of

suppliers, more than 50 product categories, more than 60 plants, 15 distribution centers (DCs),

and more than 1,000 customers. As P&G became global in terms of brands, common formulas,

and packages, there were economies of scale and fewer operations. Thus, plants needed to be

closed to cut manufacturing expense and working capital, to improve speed to market, and to help

avoid capital investment. P&G also wanted to deliver better consumer value by eliminating non value-

added costs; thus, they wanted to develop more efficient linkages with trade customers,

reduce customer inventory, and eliminate the least productive sizes. The decision to restructure

the supply chain seemed like the right approach. For more on supply chain management (SCM),

see Chapter 8 in the text.

P&G wanted to restructure the supply chain because

• Deregulation of the trucking industry had lowered transportation costs.

• A trend toward product compaction allowed more product to be shipped per

truckload.

• Recent focusing on total quality had led to higher levels of reliability and

increased throughput at every plant.

• Product life cycles had decreased to about 18–24 months instead of 3–5 years

over a few decades.

• Several corporate acquisitions had given P&G excess capacity.

So executives focused on product sourcing: choosing the best site and operation level for

manufacturing each product. The production scope at a given site is limited to products relying on

similar technologies. Producing too many products at a site can be too complex. But large, singleproduct

plants can be risky (if demands shift). Since plant locations affect raw materials supply

costs and the distributing of finished products, the distribution system had to be considered. The

scope of the project was defined by these factors.

DSS Project Organization

Many teams were formed from multiple business functional areas to handle product sourcing

options and the DC location options with customer assignments and transportation decisions (one

team). Early in the project, P&G executives recognized that mathematical programming models

would be needed to examine the potentially millions of possible alternatives and select a

reasonable set of scenarios to investigate. More than 500 P&G employees were involved in this

supply chain restructuring.

It took months to collect and analyze data (plant closings had to include the “people factor”). A

team from the University of Cincinnati joined the company’s operations research/management

science (OR/MS) team to provide analytical support and objective input to the decision-making process. The combined OR/MS team was responsible for developing a DSS for the product strategy

and distribution teams to use to obtain the best options for more detailed analysis.

Modeling

The structure of the teams followed the organizational structure of P&G in terms of a brand

management philosophy. Each product-strategy team was familiar with its product category, and

so all reasonable options (alternatives) for that brand would be investigated. This provided a

natural decomposition in the modeling effort. The distribution team could work on DC choices

based on its knowledge of the consolidations being considered by each of the product-strategy

teams. Given the product-strategy teams’ possible consolidation plans, the distribution team could

analyze changes for the DC network to support the complete consolidation plans. This could,

however, lead to sub optimization because the entire system was not considered at once. However,

similar projects at other firms had taken years to develop comprehensive supply chain and

distribution models. This project had a tight time limit (1 year). This is a good example of

satisficing because the ‘complete’ model would have been of no use due to the time constraint. A

prototyping approach was used to develop the DSS. As teams required new features (as team

members better understood the problem), they were added incrementally. As data became

available, they were encoded and built into the software modules that were added to the system

anticipating the data “arrival.”

The OR/MS team’s objectives were to

1. Provide models and decision support for the product-strategy teams

2. Provide support to a team of experts in transportation and distribution for solving

warehousing, distribution, and customer allocation problems

3. Obtain a best, complete supply chain solution across product-strategy and

distribution teams.

P&G had been using a successful comprehensive logistics optimization model to support its

sourcing decisions for multiple product categories and multiple echelons for a few years. But it

ran on a mainframe, took a long time for each run, and required a long cycle time to obtain an

answer in a managerially meaningful report. There were a number of other weaknesses related to

data display and access. Because of the many what-if cases the product-strategy teams had to run,

an interactive tool with a quick turnaround time was critical for project success. Following the

decomposition structure of the teams, the supply chain model was further decomposed into (1) a

distribution location problem and (2) a set of product-sourcing problems (one for each product

category).

Distribution Center Location Model

The team aggregated trade customer demand into 150 customer zones to determine the correct

location of 5–12 facilities (plants and DCs) in the supply chain. The major considerations

influencing the choice of DC locations were customer location, customer service, and sole

sourcing. The DCs had to be close enough to customer zones to maintain customer service levels.

The model was an ordinary incapacitated facility location model for finding optimal DC

locations and assigning customers to DCs, while minimizing the cost of all DC–customer zone

assignments. There were 17 possible locations for DCs, both existing locations and reasonable

alternatives based on earlier studies and analyses. Alternatives with 5–13 DCs for the 123

customer zones were considered. The models had about 2,000 variables (only 17 binary–one for

each DC, meaning 0 [if closed] or 1 [if open] values) and 2,200 constraints.

Families of optimal and near optimal solutions for each case were found and stored in a database

for later access by the product-sourcing model. Near-optimal solutions give the decision makers

more options from which to choose. This is important in the choice phase of decision making,

especially if the decision maker has additional information that creates “implicit” constraints or

preferences, unknown to the DSS development team. Furthermore, there may be other

considerations not built into a model that can lead to the selection of a near-optimal solution. This

also helped when working with the product-sourcing options in that the near-optimal solutions

expanded the solution space, giving the analysts and decision makers a larger set from which to

choose and a sense that the solution would be optimal (or at least closer to the global optimum

value).

The Product Sourcing Model

The product-sourcing model (PSM) was a simple transportation model for each product category.

The product-strategy teams specified plant location and capacity options to investigate, while

each DC was a demand representing the total aggregated demand from its customer zones. Since

manufacturing costs were the most important in the product-sourcing decision, good estimates

were developed. Real data were used (when available) or a simple model generated the cost for

shipping between two points. The generating algorithm was validated using known costs.

The transportation models were solved with a readily available, fast computer code (an out-ofkilter

algorithm). Thus, options could be evaluated in real time.

Integration with a Geographic Information System

The product-strategy teams wanted a powerful, flexible decision support system that could

display and manipulate solutions for ease of interpretation. So, the product-sourcing model was

integrated with the geographic information system (GIS) Mapinfo. Mapinfo had a readily

customizable user interface through its Map basic programming language. The GIS provided the

capability to make quick changes, run new scenarios, and compare the results. The whole system

runs in seconds on a standard laptop PC. File manipulation is used to ship data from Mapinfo to

the optimization software and back. The user interface provided by the GIS led directly to user

acceptance of analytic techniques. The product-strategy team members interacted directly with

the optimizers but created scenarios directly with the GIS and saw the results there as well. Often,

insights given by the spatial visualization led to new and better options. The model acted as a

laboratory in which product-strategy teams tested ideas and developed insights.

The spatial visualization also readily identified database errors that could have gone undetected;

that is, links between DCs and customers had to look reasonable. If a DC was linked to a

customer in the middle of the ocean, the error could be seen.

DSS Operation

The solutions to the DC model were inputs to the product-sourcing model. The product-strategy

teams chose the consistent potential plant locations, capacities, and manufacturing costs and

solved the product-sourcing model. An optimal manufacturing-and-distribution plan was then

found. Given the solution, the product-strategy teams created a new case, re-solved the model,

and repeated this process until they were satisfied. This rapid process lead to the teams working

in more than 1,000 sessions to evaluate alternatives. (Often DSS leads to extra analysis because

the tools are so good.) It was felt that the objective value of any solution was within 10 percent of

the real value because demands and costs were forecasted and some estimates were made. The

model was validated to be within 2 percent of the optimum using existing data, even though it

was designed to represent the state of P&G in the year 2000.

Once the teams had established reasonable alternatives, they focused on collecting data needed to

select an optimal long-term solution based on risk-adjusted net present-value analysis. This was a

simulation model of a net present-value analysis built in a spreadsheet. It was solved with @Risk,

a popular spreadsheet add-in.

While evaluating options, the OR/MS team discovered that the best product-sourcing options

were indeed independent of DC locations, thus justifying the decomposition made initially.

Manufacturing costs dominated transportation costs in alternatives of product-sourcing options.

Integration of Human Judgment

The distribution and product-sourcing models were integrated and solved. Using the models, each

category team developed a number of potential sourcing options, varying from 2 to 12, rejecting

some. During this process, they included many subjective considerations, including the minimum

number of plants, which DCs to consider, and whether to use cross-border sourcing.

They used the product-sourcing model to find the best options for each product category and then

subjected these options to a more thorough financial and risk analysis. This analysis took into

account costs including taxes, interest rates, labor rates, and utilities over a number of years into

the future. The risk analysis considered the possibility of earthquakes, hurricanes, and so on.

Political considerations were also considered in some of the site selections.

Expert human judgment was considered a critical part of the DSS approach. Difficult problems

like this need a hybrid approach which closely links expert human judgment and mathematical

optimization. The GIS and consideration of qualitative factors lead to the system’s success.

DSS Benefits

Two years after completion of the DSS, P&G closed 12 sites and wrote off more than a billion

dollars worth of assets and people-transition costs. The new North American manufacturing and

distribution system is saving more than $250 million (pretaxes) annually. Most savings have

resulted from lower manufacturing costs, because of fewer plants with less staff, and from a more

efficient supply chain. Because there are fewer sites, delivery expenses have indeed increased.

Regardless of the DSS, P&G would have closed plants and improved its operations. The OR/MS

team feels that it was directly responsible for 10 percent of the total savings ($25 million). In

addition, the solution implemented affected about 6,000 people because of changes in the product

supply system. One-third retired early, another third were relocated, and the last third were

retrained and hired by other companies. P&G treated these people fairly, with respect and dignity.

Because of the project’s success, P&G now requires that all future sourcing decisions be based

on analytic methods. P&G has also used the model to conduct competitive analyses. Tools similar

to the model have gained widespread acceptance, with demand for their use in domestic, regional,

and global sourcing studies. P&G has established a new internal Center for Expertise in Analytics

for solving business problems.

Questions

1. Why is the visual system with a graphical interface provided by a GIS an ideal

workbench for analyzing distribution scenarios?

2. Why do you think so many people were involved in the P&G supply-chain