What's Still Missing in B2B?

Plenty, says Stephen David, chief information officer and B2B officer at Procter & Gamble.

What's still missing in B2B? Plenty, says Stephen David, chief information officer and B2B officer at Procter & Gamble.

[From iSource Business, June/July 2003] Stephen David, chief information officer and business-to-business officer at Cincinnati, Ohio-based Procter & Gamble Co., has spent much of his career on the boundary between business and technology. With P&G for more than 30 years, he started out as a sales representative in the company's Omaha district in 1970. After a two-year stint in the U.S. Army, David rejoined Procter in 1973 and worked his way up the sales chain. By 1982, as senior project manager for customer services, he was leading the deployment of the first personal computers at P&G, helping to train sales and advertising staff in how to use the new technology to boost the business.

Subsequently, David worked as country manager for Procter & Gamble in Greece, from 1986, and on the Arabian Peninsula, from 1989, before returning to the States and serving in a variety of product line and sales vice president positions. In July 2000, Procter & Gamble named David to his current dual positions, with responsibility for the company's Internet strategy, in a move that signified P&G's growing emphasis on using technology to drive cost reductions and sales growth.

Since his appointment three year ago, David has risen to prominence in the IT community, appearing at a succession of industry conferences and events to speak not only about Procter & Gamble's own experience implementing technology but also more generally about IT trends and technology's role in transforming the way enterprises conduct their business and how they manage their supply chains in particular. His evangelism has earned him recognition as one of the most influential executives in the consumer goods industry, and Salomon Smith Barney's Technology Group named him CIO of the Year for 2002.

From his perch atop the IT chain of command for a $45 billion manufacturer that has 100,000 employees selling more than 250 brands in over 140 countries, David offers a high-level perspective on what's still missing in B2B and on the technologies that, in his view, will be critical to building a successful consumer-driven supply chain. And while David himself is a product of the consumer-packaged goods industry, his insights are applicable to any company with a supply and demand chain, with suppliers and customers. But to understand his views on what's missing, we first must take a look at the global trends that David sees as key drivers for change in the B2B landscape.

Pursuing "Active Swarms"

"Demographics," David says, "are working against us." And he ticks off the statistics to prove it: With some 6.3 billion people in the world, just 800 million live in developed countries, with the balance, 5.5 billion, residing in developing parts of the world. The birth rate in the developing part of the world is 3.5, but the birth rate in the developed world is 1.9, below the level of population sustainability, 2.1. In Japan alone, today's population of 130 million is set to shrink to 65 million by 2050 if current birth and mortality rates hold. Thus, the developed world's population is shrinking and, along with it, the primary market for many, if not most, of today's major manufacturers. "So if you have products that are focused on the developed world," David warns, "you've got problems."

Second, the CIO notes, "The consumer goods market is not a happy place to be." The problems: deflation combined with sluggish, endlessly fragmenting markets. Average market prices around the world, in constant dollars, are going down, and consumer goods markets are growing at marginal rates, 1 to 2 percent. In Japan, many of those markets are shrinking by 5 to 10 percent. The result? "You're going to have to do something better, different. You're going to have to go into new categories. You're going to have to win your share." But winning that share is getting harder and harder as consumer markets fragment at a seemingly exponential rate. David points out that in 1965, for Procter & Gamble's advertising to reach 80 percent of its typical consumer audience — defined as women between the ages of 18 and 45 — it took three, 60-second commercials. Today, it takes 97 commercials. "We have incredible fragmentation of the marketplace," David says. "How do you get your message out there? Well, most people don't."

These demographic and market trends have transformed the environment from an ordered world with largely passive consumers to a more chaotic world with what David calls "active swarms of consumers" — small, transitory groups of customers with highly specific demands. Not surprisingly, processes and systems designed for the environment of the past are ill-suited for companies now forced to pursue those "active swarms."

As an example, David says that legacy, batch-driven supply chains have been a drag on inventory turns and have produced high out-of-stocks in the consumer goods industry. He notes that Procter & Gamble has 120 days of inventory in its own total supply system, which includes P&G and its customers, and he points to a study showing that for the company's top 2,000 items, the best in-stock position at a sample of 20 stores was 13.5 percent for a brief period on Saturday morning. "Saturday afternoons, it goes up to 18 percent, and it never goes back down until the next truck gets in," he says. And 75 percent of the time, the out-of-stocks result in no sale — the customer simply leaves the store. "We're not meeting consumers' needs," David concludes. "The retailers are losing revenue. We're losing revenue. We've got to do a better job of meeting consumers' needs."

So, what can companies do to win at what David calls the "first moment of truth" (when the consumer buys the product in the store) so that they can get a chance to win at the "second moment of truth" (when the consumer actually uses the product)? The answer, says the CIO, is to build a consumer-driven supply network, one that is real-time, data-driven, produced-to-demand.

Oh, and you're not going to have a choice. As David puts it: "You are going to have to build it because your consumers, your suppliers and your supply chain are going to demand that you start to operate in a real-time, connected environment where you have no-touch, perfect, real-time transactions. It's going to be a requirement. The Wal-Marts and the Targets of this world are going to demand that we do that, and we're going to demand that our suppliers do it, too. Which means that we're going to have to demand of our vendors — high-tech vendors, application vendors — the tools that feed into this."

The First Missing Link

Ah, the tools, the answer to the "what's missing?" question. The first tool on David's list is a product data management system that can create a true standards-based electronic product catalog, with clean and continually scrubbed data, as an initial step toward getting a company's own house — and its product data — in order, a situation this is a clear concern for all organizations today. Here's his logic, based on his experience at P&G: "We have, in the United States, $250 million of returns and refusals on our products annually. We sell about $25 billion, so about 1 percent of our products are a return or refusal. Why? Because of transcription errors or bad data in the system. People have to fill things out, and they transcribe wrong."

Solving that issue has not been possible in the past, in part because the processes involved have cut across functions, and each functions blames another for the problem. The sales rep would say: "I can't do anything about it. I've got to fill out all these forms, and I receive bad data, so I send bad data on." The finance people would say: "Can't those lousy sales people do a better job? We're going to have to start taking it out of their salary pretty soon, because all this product is coming back, and it's costing us money." The product supply people say: "It's finance's problem. Let them handle the deductions. It's not a big deal." Concludes David: "That went on for 50, 70, 80 years. The issue is that you have to have a better system to work horizontally across the business process, and electronic product catalogs are the answer."

Of course, putting in place a product catalog that can be used by an entire supply chain is going to require global standards so that everyone is using the same playbook. David estimates that putting a standards-based electronic product catalog in place could save P&G $40 million or $50 million a year by reducing returns and refusals alone. Moreover, the catalog is the first step toward shoring up a company's ability to get the right product to the consumer in time for the "first moment of truth."

The Promise of EPC

Standards are also key to another component of the consumer-driven supply chain, the electronic product code, or EPC, which is a project of the nonprofit Auto-ID Center, set up by the Massachusetts Institute of Technology and other research institutions, along with an array of commercial enterprises, including Procter & Gamble. EPC is the core standard underlying radio frequency identification (RFID) tags that hold the promise of eventually allowing companies to track virtually every good they manufacture throughout the entire supply chain, from start of production to point of sale.

Under this vision, each individual unit of a product would have a unique "license plate" that could be read by RFID receivers deployed strategically throughout the supply chain and networked to information systems, allowing companies to collect more precise information on where their products are on the plant floor and in the distribution pipeline at any given moment. David (and he is far from alone) believes enterprises will be able to use that type of item-level, real-time information to better produce to demand, reduce out-of-stocks and trim inventories; Procter, for example, is aiming to reduce its inventory to 65 days, down from 120, in part by using the EPC tags. "That's cash that comes back into the company," David says, "and that gets a lot of attention from our finance and our business people."

Other potential benefits contributing to the EPC business case include their use in preventing theft, which, for retail outlets, is a $50 billion problem globally. Reduced counterfeiting could be another result of wide-scale use of EPC tags, and that is a half-trillion-dollar problem globally. Finally, EPC tags have the potential to reduce labor costs on the retail side by speeding checkout, for example, by using RFID equipment to scan a shopper's basket and tally the total for self-checkout.

For the moment, the per-tag cost is one of the limitatitions to the application of EPC, but David sees that barrier falling in the next few years. "Twenty months ago those chips cost $1.20 a piece," he says. "Today I can buy them for a nickel, and, at a nickel, there's a business case at P&G and the retailer to put this on pallets and shipping cases. In two or three years, the chips will cost a cent or two." And at that price, the CIO believes, manufacturers will have the incentive to start embedding the tags in virtually every product that rolls off their lines. As important, the potential financial payback from adopting the tags will create sufficient pressure on manufacturers, distributors and retailers to reach an accord on how to split the costs of building the RFID infrastructure necessary to support the item-level tracking envisioned by EPC enthusiasts like David.

New Tools and the Data Problem

Procter & Gamble's information chief sees several more tools that companies will have to adopt as they build their consumer-driven supply chains, including tools that will allow companies to plan faster. "The lines between the short-term planning cycle and execution are being blurred," David says. "They're going to become one in the same." That means moving from a batch-mentality for processing information to an "always-on" state. And the systems for moving data must be both perfect, with no room for error, and hands-free, with no need for human intervention. Meanwhile, tools for dynamic replenishment will allow companies to move to a produce-to-demand model on a day-in/day-out basis.

This new supply chain also will require new data-mining and decision-support tools to handle the huge amounts of information that all the other tools and technologies are going to produce. "We just have no comprehension today of the amount of data that is going to come into an individual company or an individual retail unit," David says. Procter & Gamble, he points out, sells about 2 billion cases annually. If each case contains, say, 15 units, that makes for 30 billion items, each with an individual license plate, plus the 2 billion cases and the half-billion pallets they ship on. "What are you going to do to store this amount of data?" David asks rhetorically. "What are your decision support tools? I need new data-mining capabilities to understand the patterns."

Retailers and manufacturers will be using those patterns to go far beyond just identifying their top-tier customers. Rather, they will be looking to gain a better understanding of how to sell more product, for example, through changes in product mix, adjacencies, shelving and pricing at individual stores. This increasing emphasis on analyzing data is going to require a cross-functional effort within the enterprise, a marriage between the market research organization and other functions with analytical competency in order to produce actionable information that both the company and its business partners can use to better sell product. "Your business partners want to know how to sell," David explains. "They want to know how to deliver better value to the consumers. They want to understand how they can put more content around their product so that consumers see the reason why that product is better versus the competition. And we need to work on those kinds of questions."

The Big Question

So, you're thinking, that all sounds great, but how are we supposed to make it happen? David has a few thoughts on the challenges involved in putting together the building blocks of a consumer-driven supply chain. "My first comment," he says, "is that it's obviously easier when you have a culture at your company that is governed by objectives and strategies that everyone in the organization can and does buy into. If your culture is not like that in your company, that's a hurdle to get over, but then you have to pick your battles and go in on those initiatives that really can make a difference both in terms of the payout and in terms of a way to operate your business better."

Either way, David advises, when pursuing initiatives that are going to require substantial investments and changes across the organization, company executives must build top-level consensus around a few core priorities, use the high-level support to dictate necessary changes across the organization, demonstrate results and then start the process over again, always keeping an eye on the bigger strategy, the ultimate goal. Initial priorities can be as basic as setting a standard policy for consumer privacy across the enterprise so that you can be sure that, say, your company is handling information in the United States in a way that meets European legal requirements (or vice versa) so that you can move that data across your supply chain without tripping over any legal hurdles. Or, in Procter & Gamble's case, dictating the use of a standard decision-support tool, which they call SourceOne, to eliminate "parallel, rogue tools." Starting with a core set of priorities and building out helps build a track record for you and your team within the organization, so that both the chief executives and the other business units will come to trust that you can, in fact, deliver results when you come around the next time seeking to implement some new process or technology.

Of course, some internal pushback is inevitable, but David says there are degrees. "The acceptable pushback you work with is about the timing. I'm willing to work with people who say they can't do something today but who will agree that they'll do it in August. Put a horizon on it." It's important, the CIO says, to not come across to fellow executives as if you believe your new initiative is the most important factor in moving their business forward. "That's just not true, most of the time. What you need to do is say that you can be a vital contributor to their success by delivering some of these tools." (In particular, David, as a technology executive, argues that IT departments must change the way they think about success: "Success for IT is not building a system and saying it's up and running," he says. "Success is about delivering the greater return to the business unit that they expect.")

The same consensus-driven approach is applicable to trading partners. "The way to work with customers is to work at a senior manager level to create a vision of what's possible in the future that can deliver tangible results." As an example, David cites the electronic product catalog. "It's something that's relatively easy to put together and that saves money at the manufacturer and the retailer by providing perfect information on your product in real-time when they want it." Listening and understanding your partners' priorities is critical, too: if the retailers are focused on implementing EPC, manufacturers can put that in their list of priorities and help make EPC a reality. In the end, everyone wins.

The Vision Thing

Asked when all this might come to pass, David offers this caveat: "It won't happen at all unless my boss has the same vision and is working toward it, and unless the other business units have the same vision and are working toward it." Given that buy-in, though, David believes that pilots for EPC tags will be underway by early next year, probably beginning with high-cost items at risk for theft, loss or counterfeiting, such as pharmaceuticals or compact disks. Broader pallet- and shipping case-level use is likely to start in early 2005. Item-level use of EPC tags will probably follow sometime thereafter, but for the moment David is focusing on the next stage, the pallets and cases. "If we can put that stake in the ground, then we need to all be working toward it," he says. "That forces us to get the costs right so that we can start to focus on the benefits and get the benefits accruing at the same time that the costs are accruing." That will also prompt companies to look for the new planning, replenishment, data mining and analytics tools they'll need to manage their new consumer-driven supply chains.

Clearly, all the participants in the supply chain have their work cut out for them in the years ahead, and many technical and organizational challenges remain to be resolved. But David is adamant both about the inevitability of change and about the need to deliver ongoing returns on investment as a result of those changes. "I don't know if I can say it strongly enough: We're going to be required to do these things," he says. "The environment has changed, and the people who are going to be most successful are those that recognize this and that start to build the business cases today, within their corporations, to make the changes. And the business cases are about returning tangible results back to their business units today — not the year after next."