Friedman, Mike

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Research Papers in Economics

The Information Explosion:
Implications for Physical Product Distribution
Chairperson: Doug Richardson, American Home Foods Corporation
Total System Efficiency
by
Mike Friedman
Senior Project Manager
Proctor & Gamble
Cincinnati, Ohio
What It is . . .
It is a modern overall approach to the
business whose final objective is lower costs.
Lower costs not just for the manufacturer,
nor just for the retailer, but throughout the
entire distribution system. It covers all as-
pects of a brand and its costs from the raw
materials a manufacturer uses--every step of
the way to the consumer leaving your stores
and taking the product home to use. It
looks, for the first time, at the industry as
one total system and recognizes that all costs
involved ultimately have to be passed on to
consumers.
When we say “total,” we mean it. We’ve
put countless little ideas to work that add up
to big savings in our own operations. For
instance, we’ve saved about $1.5 million by
developing special hopper cars to transport
peanuts in bulk and then offloading them with
flexible hoses that pick up the peanuts like a
vacuum cleaner. We save $2 million yearly by
redesigning our detergent laundry packages to
use less ink, without sacrificing any point-of-
sale impact. We cut costs by $4 million a
year simply by utilizing cardboard already in
our Pampers package as a sturdy handle,
Journal of Food Distribution Research
rather than having to buy and insert plastic
handles. There are many more cost-efficient
innovations to come--in all areas of our
operations.
But most businesses try to be efficient.
We all try to do the right things, and do
them at the best price to present value to
the consumer. At P&G, we felt we were
doing a good job of keeping our part of the
“system” efficient. But as we listened to our
customers, we realized there was more we
could do to reduce your handling costs and
thus reduce the price consumers pay for our
products.
So we set the objective to achieve
Total System Efficiency, and in doing so we
have developed the following statement of
philosophy:
We will support any project that re-
duces the total cost of the distribution
system even if the project increases
our own cost.
We will resist any
increases the cost of
tern, even if it reduces
program which .
the entire sys-
our own cost.
February 86/page 9How It Works , . .
Costs incurred by you are reflected
either in the price to the consumer or your
profit--or both. Conversely, any reduction in
handling costs we can bring about on our
products has a favorable effect on consumer
price or your profit--or both. It is clearly in
our self interest, at P&G, to be concerned
with Total System Efficiency, and we believe
it is also in your best interest.
In late 1981, we identified a concept
called Direct Product Profitability, or DPP, as
a very good way to measure costs and deter-
mine profitability, DPP ascertains the speci-
fic and precise costs which are incurred in
handling each brand, You have been aware
that there is a wide variation in your costs
flrom product to product. But it is very
difficult, if not impossible, to accurately
allocate so many cost factors to arrive at
reliable figures.
Not any more! P&G engaged an inde-
pendent consultant who has been deep into
this cost allocation process. A project team
created a special program which can be used
on a personal computer, including the ability
to answer “what if” questions. To determine,
for example, effects on handling costs of
changes in package configuration, case dimen-
sions, delivery procedures, etc. As a result,
DPP can measure productivity on a product-
by-product basis. When the computer keeps
track of all these cost changes, one can be
assured that costs are reduced, not just
transferred from one place to another in the
system.
As a result, we are modifying our prod-
ucts and packages, our case packs and pallet
configurations and a variety of other vari-
ables to further enhance the profitability of
our brands for you. For example, we have
improved cube efficiency on a number of
products. By going to a denser formulation
with all our powdered laundry detergents, we
were able to reduce cube size. Also, our
new Downy triple-concentrate improved cube
efficiency. We reduced the case-cube of
Crisco Oil by redesigning bottles, and
Pringle’s went from a twin to a more effi-
cient single, super-size canister.
In addition to cube efficiency, we are
working in many other areas to help reduce
your overall costs and to make the system
more efficient. Some of the areas in which
we are active include the following:.
Direct Product Profit
Scanners
Uniform Communication Standard
Innovative Packaging
Computerized Shelf Management
Customer Pick-up Program
It is evident that the advent of TSE
provides a welcome opportunity for the
entire industry to work together in partner-
ship as never before. And that’s good news
for the group we all serve--the public.
February 86/page 10 Journal of Food Distribution Research

TOTAL SYSTEM EFFICIENCY

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