In 1985, P&G tested a new approach to channel logistics for replenishment ordering with a
moderate-sized grocery chain. This test involved using electronic data interchange (EDI) to
transmit data daily from the retailer to P&G on warehouse product shipments to each store. P&G
then determined the quantity of products to be shipped to the retailer's warehouse by using
shipment information rather than shipping based on retailer-generated orders. Product order
quantities were computed by P&G with the objectives of providing sufficient safety stock,
minimizing total logistics costs, and eliminating excess inventory in the retailer's warehouse.
The results of this initial trial were impressive in inventory reductions, service level
improvements (e.g., fewer stockouts), and labor savings for the retailer. Besides other savings, the
retailer was able to eliminate several buyer positions through this process restructuring. However,
the benefits for P&G were unclear, and the new ordering process was more costly for P&G than the
old one where the retailer determined order quantities.
The second test of the new ordering process was with a large mass merchandiser. In 1986,
P&G approached this retailer's management with a proposal to dramatically change the way
diapers were ordered and distributed in an effort to reduce retail store stockouts, lower product
acquisition costs, and minimize total inventories. Limited warehouse capacity forced the retailer
to purchase P&G diaper products in small quantities to be delivered directly to each retail store.
Retail stores had frequent stockout problems, and the cost of these small orders delivered directly
to the store was high for both P&G and the retail chain. Diapers were an important product
category for this retailer, and it wanted to price diapers lower than other retailers in their
markets. Unfortunately, the distribution system used for procurement resulted in higher acquisition
cost for diaper products than many of its competitors (e.g., supermarkets), who were able to order in
truckload quantities.
In 1985, P&G tested a new approach to channel logistics for replenishment ordering with a
moderate-sized grocery chain. This test involved using electronic data interchange (EDI) to
transmit data daily from the retailer to P&G on warehouse product shipments to each store. P&G
then determined the quantity of products to be shipped to the retailer's warehouse by using
shipment information rather than shipping based on retailer-generated orders. Product order
quantities were computed by P&G with the objectives of providing sufficient safety stock,
minimizing total logistics costs, and eliminating excess inventory in the retailer's warehouse.
The results of this initial trial were impressive in inventory reductions, service level
improvements (e.g., fewer stockouts), and labor savings for the retailer. Besides other savings, the
retailer was able to eliminate several buyer positions through this process restructuring. However,
the benefits for P&G were unclear, and the new ordering process was more costly for P&G than the
old one where the retailer determined order quantities.
The second test of the new ordering process was with a large mass merchandiser. In 1986,
P&G approached this retailer's management with a proposal to dramatically change the way
diapers were ordered and distributed in an effort to reduce retail store stockouts, lower product
acquisition costs, and minimize total inventories. Limited warehouse capacity forced the retailer
to purchase P&G diaper products in small quantities to be delivered directly to each retail store.
Retail stores had frequent stockout problems, and the cost of these small orders delivered directly
to the store was high for both P&G and the retail chain. Diapers were an important product
category for this retailer, and it wanted to price diapers lower than other retailers in their
markets. Unfortunately, the distribution system used for procurement resulted in higher acquisition
cost for diaper products than many of its competitors (e.g., supermarkets), who were able to order in
truckload quantities.
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