Procter & Gamble’s Technology Spending Strengthens Supply Chain Resilience

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Companies are scrambling to cope with the intensifying supply chain crisis. Inflation, product shortages and logistics delays jeopardize business strategy, erode customer loyalty, deflate profitability and reduce cash flow.

While specific pressures vary from industry to industry, Kristina Hooper, chief global market strategist of Invesco, told investors that a “universal differentiator can be the amount of companies investing in the industry. technology to increase productivity “.

This is true at Procter & Gamble. Over the past decade, P&G has invested heavily in data, production and e-commerce technologies. Their investments illustrate how a long-term technology strategy can pay off in times of economic turmoil.

Competitive advantage

Known for its iconic brands including Tide, Cascade and Puffs, P&G is also distinguished by an unwavering commitment to fund productivity investments.

On P&G’s first quarter FY2022 results conference call, CFO Andre Schulten explained, “We will recover these costs over time. We will not sacrifice the investment in the business like we do. [Our] productivity programs intensify throughout the exercise. We intentionally take our time to recover costs to protect investments in our superiority strategy, which is working well to drive our top line growth and our globally balanced growth model.

Technology is at the heart of these plans for growth and profit. Led by CIO Vittorio Cretella, P&G has partnered with Microsoft and Google to focus on three goals: supply chain resilience, retail execution, and product superiority.

“The way we approach excellence as a business is to get the right product, the right package, the right communication and the right in-store execution,” said Guy Peri, director of data and analytics. “Almost everything about how we deal with our customers and the consumers who buy our products is changing, and data and algorithms are key to staying ahead of this change. “

“Advanced data analysis allows us to offer consumers the best selection of products in their local stores and reach them through their preferred channels,” explained Cretella. “Beyond using data for descriptive and diagnostic purposes to understand what’s going on in our business and why, we use analytics to make predictions, such as the success of a promotion or the best match. produced by clusters of stores. During the pandemic, this ability helped manage peak demand in the supply chain. “

Deliver the goods

P&G consolidates billions of consumer data points linked to thousands of SKUs each year with hundreds of retail customers. This repository enables data-driven supply chain agility. Schulten stressed: “The strength of our supply chains is mainly due to the flexibility we can create. Strong partnerships with suppliers around the world allow us to move supply, if necessary, from one supplier to another, either due to [either] supply or freight routes are not available.

In addition to logistical support, data analysis helps with production. “We have the ability to reformulate some of our products, which we actively do, without affecting product superiority or any noticeable impact on the consumer, and this gives us the ability to adapt again to material availability or cost, ”Schulten added. “We also have an organization that anticipates potential bottlenecks and then chooses to stock either materials or finished goods and then can pull out of those stocks globally.”

In an industry highly sensitive to supply chain disruptions, competing consumer packaged goods (CPG) brands have struggled to maintain uptime and margins. Yet P&G achieved record sales, profits and operating cash flow in fiscal 2021 – this is very convincing proof that its investments in productivity are paying off.

Significant measures

When making calls to investors, the P&G management team typically highlights three key financial metrics: organic growth, operating margins and free cash flow productivity. All of them help explain the past, provide ambitious benchmarks, and justify future IT investments.

In fiscal 2021, P&G achieved sales of $ 76 billion, supported by organic growth in each of its five major product categories. Notably, growth was driven by roughly equal price and volume increases – a compelling sign of strong consumer loyalty, effective supply chain management and reliable forecasting.

In the first quarter of fiscal 2022 investor call, P&G Vice President and COO Jon Moeller, discuss margins, explained,If we look back over the past 12 years, our operating margin on an aggregate basis increased 320 basis points from 20.4% to 23.6% last year. At constant exchange rates, this represents an increase of 1,020 basis points. Therefore the [goal] it’s staying the course, continuing to drive productivity to fuel investment in superiority in everyday use [product] categories where performance determines brand choice. This is the recipe for balance [top and bottom line] growth.”

Finally, P&G relies on a non-GAAP measure called “free cash flow productivity,” which measures the ratio of free cash flow to operating income. P&G generated more than $ 18 billion in operating cash flow in fiscal 2021 and posted an impressive 92% free cash flow productivity. Such a high ratio shows low reliance on questionable accruals, strengthens credit ratings, and signals abundant liquidity for large share buybacks and dividend growth.

Importantly, over time, such financial performance reflects a well-run business, alleviates barriers to borrowing, and should provide a sustainable source of competitive advantage.

Money in the bank

As companies seek to modernize their IT infrastructure and drive digital transformation, P & G’s supply chain resilience demonstrates that technology must be well-funded – long before market turmoil demands it. Otherwise, the high price of investment procrastination might be too high to pay.

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