CLOM/013

ICMR Center for Management Research

The Bullwhip Effect at P&G

This caselet was written by Rika Sengupta, under the guidance of Jitesh Nair, ICMR Center for
Management Research (ICMR). Caselets are intended to be used as a basis for class discussion rather
than to illustrate either effective or ineffective handling of a management situation.

 2006, ICMR. All rights reserved.

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 CLOM/013

The Bullwhip Effect at P&G

Procter & Gamble (P&G), the world's leading producer of household products, markets over 300
brands to 5 billion people around the world. 1 P&G's products fall under three broad categories,
namely, beauty care; health, baby, and family care; and household care. In the early 1990s P&G
faced a problem of extreme demand variations for one of its best-selling brands - Pampers diapers.
The logistics executives at P&G examined the order rates for Pampers across the supply chain.
Though the purchase rate remained more or less steady at the consumer end, the logistics
executives found that the variation of orders increased from the retailer level to the distributor
level up the supply chain. The variations in orders were attributed to reasons like infrequent
placing of orders, changes in prices by the manufacturer; and distributors placing multiple orders,
when it was not certain whether the manufacturer would be able to meet the demand. P&G
realized that the increasing variability in orders were because channel members upstream did not
have information on actual consumer demand.

P&G was using an old supply chain model at this time. The problem with this supply chain model
was that replenishment at both the distribution and the supplier sides of the supply chain took
several weeks, and sometimes even months. Retailers ordered for replenishment only when they
found that a particular P&G product was missing from the shelf, and was not available in the back-
office inventory and the distribution center for replenishment. Once the order was placed, the
product would be sent to the retailer's nearest distribution center at the earliest. Even at the supplier
side, P&G’s procurement was based on the historical sales data. P&G would contact the suppliers
for the required ingredients and packaging materials based on current inventory levels.

To correct this situation, P&G took steps to ensure that information on consumer demand and
demand forecasts of all channel members were available throughout the supply chain. P&G
initiated the use of vendor-managed inventory (VMI)2 systems in its diaper supply chain
(involving its supplier, 3M, and its customer, Wal-Mart). The new VMI led to a fall in Wal-Mart’s
operating costs. At the same time there was an increase in P&G’s market share because Wal-Mart
provided increased shelf space for P&G’s products across its stores. P&G also began to revamp its
supply chain to increase its efficiency and to get a clear view of demand from actual customers.
The company began to provide information to the suppliers on what was sold on a particular day
through aggregate point-of-sale (POS) data. The main objective was to improve flexibility in the
supply chain and provide suppliers with production data on a regular and up-to-date basis.
According to Patrick Arlequeeuw (Arlequeeuw), vice president of the global supply network at
1
Charles L. Decker, “Winning the P&G Way,” www.indiainfoline.com, December 19, 2005.
2
A process where the vendor assumes the task of generating purchase orders to replenish the customer.

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 The Bullwhip Effect at P&G

P&G, “This allows [the suppliers] to better plan their production, and deliver raw and packing
materials on a just-in-time basis.”3

P&G ensured that its entire supply chain was driven by demand. This was because better demand
forecasts would lead to less inventory, better order fulfillment and higher profit margins. P&G also
understood that sales and operations planning needed to be integrated because a promotional offer
from the sales department could easily lead to a rise in demand and an out-of-stock at the retail
store as more customers were attracted by the discounts. According to Arlequeeuw, “Sales,
logistics and general managers need to work together to get an aligned picture of demand.”4 For
this, P&G arranged for important personnel from each product category to meet at least once in a
month in order to go over the demand plan. Some divisions, that were under pressure from
customers to develop and sell innovative products met more frequently. For instance, the
cosmetics division of P&G, met every Monday to exchange demand data.
P&G implemented the POS based information system for a number of products. P&G aggregated
the POS information from the store and provided suppliers with this information through a supplier
portal linked to P&G’s proprietary SAP system and a customer connect portal. Everybody in the
network accessed the same data. This resulted in a fall in the average out-of-stock rates from 20
percent of brand categories with a 10 percent out-of-stock rate, to just 7 percent of categories
experiencing that rate. The percentage of categories that attained an out-of-stock rate of less than 5
percent increased from 43 percent to 60 percent.5 P&G planned to ensure flexibility in the supply
chain to such an extent that its manufacturing plants could produce for the next day what was sold
the week before.

Questions for Discussion:

1. What steps did P&G take to reduce the impact of the bullwhip effect (i.e. extreme demand
variation) on Pampers Diapers? In what other ways, according to you, can P&G reduce the
bullwhip effect across its supply chain?
2. Coordination between the various stages of the supply chain increases overall profits and
moderates the bullwhip effect. What are the basic obstacles in supply chain coordination and
how can P&G ensure this coordination?

3
Susannah Patton, “Supply Chain the Perfect Order,” CIO Magazine, August 01, 2005.
4
Susannah Patton, “Supply Chain the Perfect Order,” CIO Magazine, August 01, 2005.
5
Susannah Patton. “Supply Chain the Perfect Order.” CIO Magazine. August 01, 2005.

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 The Bullwhip Effect at P&G

Additional Readings & References:

1. Charles L. Decker, “Winning the P&G Way,” www.indiainfoline.com, December 19, 2005.
2. scm.ncsu.edu/public/lessons/less030403.html.
3. “Vendor Managed Inventory,” Paridhan Samwaad, Vol.6, July 07, 2004.
4. Susannah Patton, “Supply Chain the Perfect Order,” CIO Magazine, August 01, 2005.
5. www.fashionexchangeonline.com/news/newsjuly/VMI3.asp.
6. Hau L. Lee, V. Padmanabhan, “The Bullwhip Effect in Supply Chains,” Sloan Management
Review, Spring97, Vol. 38, Issue 3.

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