P&G Takes Steps To Offset Rising Costs Without Alienating Customers

Procter & Gamble is streamlining production, consolidating staff and using innovative product development methods to offset the rising expense of raw materials, manufacturing and shipping without pricing products at levels that might alienate consumers.

Raising prices "beyond commodity and energy cost increases to maintain margin would be very risky given the pressure that our consumers are under," P&G VP and Treasurer Jon Moeller said at the Lehman Brothers Back-To-School Consumer Conference Sept. 4.

P&G already hiked prices across its portfolio earlier this year to compensate for the estimated $3 billion in incremental costs it expects to incur in fiscal 2009 (¹ (Also see "Despite Prilosec OTC Weakness, P&G Grows With Price Hikes, Cost Cuts" - Pink Sheet, 11 Aug, 2008.), p. 3).

"While consumers are seeing larger increases in some categories like food and transportation, we're committed to making sure that we provide ... the best value we possibly can," he said.

Rather than raise prices again, P&G aims to create efficiencies within its business to ensure that it has "the financial fuel we need to continue investing in innovation and growth," according to Moeller.

Firstly, P&G will improve productivity by leveraging its "global shared services model," under which the firm seeks to centralize, standardize and optimize work processes around the world so that "work can be efficiently moved between various low-cost locations ... or potentially outsourced," Chief Operating Officer Robert McDonald explained.

So far this method has reduced costs as a percent of sales by one-third (more than $600 million) in the past five years, he noted.

P&G will centralize work in part by quickly identifying local talent in developing markets so that it can cut expatriate assignments 40 percent by the end of the year compared with three years ago, McDonald said. The initiative also will substantially reduce travel expenses, which are escalating with the rising cost of fuel.

P&G will further reduce travel expenses with new video collaboration facilities that enable employees in different offices to work together virtually, without traveling, the COO said.

The firm also will economize by opening local multi-category production facilities closer to consumers in developing markets. Local facilities help keep capital spending below 4 percent of sales because P&G can buy local materials while lowering distribution costs and import duties, McDonald said.

The strategy is expected to help cut in half the company's more than 500 distribution centers by the end of next fiscal year, according to McDonald. "This will result in lower warehousing costs, less inventory and dramatically improved customer service," he said.

P&G also plans to optimize production by adopting best practices, including the use of innovative virtual tools to see how a potential product would look rather than create more expensive physical prototypes.

P&G has saved more than $30 million in materials and more than $35 million in capital avoidance by using "modeling and simulation technology ... to conduct virtual fit and wear cycle studies" of its Baby Care diapers, McDonald said.

The savings from virtual tools "are dramatic," he said. "We have been able to significantly cut development testing time and we have saved a substantial amount of money. We plan to use this technology on all of our new initiatives."

Meanwhile, P&G is containing costs by "reducing hierarchy," McDonald said.

The firm will lose 5 percent of its general and senior management staff through normal attrition in the next year, on top of a 10 percent reduction in senior management last year, McDonald said.

Negotiating better prices in exchange for buying in bulk is another tactic P&G employs. The company reduced bottle and label costs 10 to 15 percent by buying more from fewer suppliers with greater capabilities, McDonald said.

- Elizabeth Crawford ([email protected])