Interview with Ralph Drayer on CPFR, Business Process Automation and P&G’s Deal with Wal-Mart

Now that every company on the planet is trying to automate the relationship between suppliers and customers, it’s worth remembering who invented this stuff more than 20 years ago: Procter & Gamble. Specifically, teams of business and IT people led in 1980 by P&G Brand Manager Duane Weeks (who now runs his own software company, Exemplary, in Cupertino, Calif.) and in 1987 by Ralph Drayer, P&G’s vice president of customer services (who now runs his own consulting company, Supply Chain Insights, in Cincinnati).

Weeks prototyped the granddaddy of collaborative business processes?continuous replenishment?with P&G automatically shipping Pampers to the warehouses of Schnucks, a St. Louis grocer, without the Schnucks managers having to place orders. Drayer took that prototype, broadened its goals and sold it to Wal-Mart in 1988. Today, P&G’s software and process design is the industry standard.

But continuous replenishment was and is about much more than computing. It was a road sign that pointed to the future. It transformed the business process landscape. It identifies the winners and the losers in the IT era.

Not convinced? Consider this: Drayer successfully piloted his system first with Wal-Mart’s archrival Kmart. But Kmart’s executive team didn’t approve moving beyond the pilot stage. The rest, as they say, is history.

CIO: The story of Wal-Mart and P&G working together on supply chain management in the ’80s has become the stuff of legend. Based on your experience, how should two companies approach one another to build the kind of business process relationship that you built with Wal-Mart?

Ralph Drayer: First, you have to have a trusting business relationship with your counterpart before you’ll get very far in collaboration and, specifically, in establishing jointly managed processes. Secondly, you need senior management support in beginning to work with your trading partner in new ways that have a mutual benefit. Collaborative planning, forecasting and replenishment [CPFR] is a great example of a process that dramatically changes the trading relationship between two companies. [For more information on CPFR, see www.cpfr.org.]

We hear that word trust all the time. What does it really mean?

Trust means you have a working relationship with your trading partner, where you have confidence that they will use information that is given to them and not share it with competitors. That when you say you’re going to do something you do something. In this industry, there were so many adversarial win/lose trading relationships that trust was at a very low level overall. The relationship between manufacturer and retailer was focused on price with very little time spent trying to understand the consumer and how to work together to deliver value. So the first thing that had to be done before you could start these joint processes was build a trusting trading partner relationship with others. That’s everything from pricing and promotion practices to follow-through. You have to demonstrate that you’re interested in their well-being and success, and can use information that is shared to the benefit of the joint partnership.

What was the first collaborative process you did with Wal-Mart?

Continuous replenishment. We used it to build trust and demonstrate the value of sharing information and focusing on the ultimate consumer. That created some dramatic benefits for P&G and the consumer, and it built the foundation for a bigger sharing.

How did the relationship between Wal-Mart and P&G start?

Who knows who really pushed it, but there was a mutual recognition that there had to be a better way to do business. The way we were working together was not only frustrating, time-consuming and expensive, but we knew both companies could benefit from working with their largest trading partner in a different way.

I had the good fortune to be in the first meeting, which was in 1987. We approached this on the basis of total quality. We used that as a framework for figuring out how we were each organized and how could we work together.

I remember Sam Walton saying, “The way we do things is way too complicated. You should automatically send me Pampers, and I should send you a check once a month. We ought to get rid of all this negotiation and invoicing.” That was his vision. It just so happened that we had been piloting a continuous replenishment process with another retailer, purely as a logistics project to drive down the landed cost and their acquisition cost. So I had a capability that we had developed, and I mentioned that maybe here was a good place to start. So that began the new working relationship. We began replenishing their inventory using this new computer-to-computer tool and established some incredible results in terms of improved service levels and reduced inventory.

But the biggest benefits from this were the soft benefits. It really built a foundation for a collaborative trading relationship that eventually went beyond logistics to include sharing consumer information and shopper loyalty card data. It was incredible.

Who was the retailer you had been working with before Wal-Mart?

Kmart.

And yet we hear nothing in the legend about Kmart.

Well, there’s a reason for that. The Kmart project was started to drive down their acquisition cost of diapers. But the difference at Kmart was that it was just a distribution project; it wasn’t a strategic project to really, fundamentally change the trading relationship. It was always just something that was run by the distribution people. And it worked too. I mean, my gosh, they had dramatic improvements in landed cost, which could be reflected in lower pricing for diapers at the stores. Their in-stock was better, and they eventually saw continuous replenishment as something they wanted to extend to all their suppliers. And they did. But it didn’t become the foundation for a fundamental change in the trading relationship until much later.

So this is one of those turning points where you can look back and say this is the one that missed the boat and this is the one that made it?

I think so.

Did you have an inspiration for the continuous replenishment project?

We knew there were inefficiencies in the supply chain because of the high inventory and transportation costs and the variability in shipments. We knew there was a fundamental problem in how we were serving customers. And I got the support of the chairman of the company who invested some money to see if we could develop a tool. We actually bought Inform from IBM as the software. What was funny was that in the course of this we rewrote the product and later sold it back to IBM. And they took it and created a de facto industry standard for continuous replenishment with it. [The product today is called CRP.]

What were the challenges when you first approached Wal-Mart to begin the work?

It wasn’t just Wal-Mart. We took this CRP approach and expanded it to all our key customers. Imagine the skepticism among retailers hearing a manufacturer say they could manage the retailers’ inventory better than they could themselves. Buyers at the different retailers were very reluctant to let go of this responsibility. We had to completely rethink how we used transportation because transportation became a key ingredient in our ability to dramatically reduce inventory at our customer and at the same time improve service levels at retail. We had to reeducate our plants on this whole just-in-time approach. The customers had to learn to receive these trucks immediately when they arrived. Particularly at Wal-Mart, when they were growing by leaps and bounds, it wasn’t unusual to have hundreds of trailers sitting in their yard. They had to get used to the fact that there was no inventory sitting around in the warehouses. Those trucks had to be unloaded immediately. So the mechanics of scheduling had to be completely rethought. But once we got it worked out, it delivered a lot of results, and it led us into many more sensitive areas of collaboration.

Speaking of sensitive areas, how did you break the news to the retailers that you thought you could manage their inventory better than they could?

We knew we had a superior tool. We knew we would be giving a lot more attention to our products than the Wal-Mart buyers could ever do. They’re focused on hundreds of different products and typically reviewed them only once a week whereas we had a dedicated customer service effort focused only on these products and were focused on the entire supply chain, not just what was going on in the Wal-Mart distribution center or store. So it just took laying out why we thought we could do it better and starting out small, like anything else. Pick a distribution center and demonstrate you can do it before you roll it out to all of them.

At the beginning, did you envision that this would build into something that could involve some of the more sensitive processes?

No, we didn’t. When we started this whole customer business development team and extending our supply chain work beyond the four walls of P&G, we knew that there was value there, but we kind of learned as we went. We did not know that it would end up serving as a foundation for a vastly improved trading relationship.

What other processes did this lead to?

The most exciting is CPFR. This grew out of continuous replenishment. We knew we needed to go beyond the customer’s warehouse and start using actual point-of-sale [POS] data. And CPFR, which is now an industry standard, we helped develop.

The beauty of this process is that it not only does a superior job on replenishment but it links demand planning and supply planning together for the first time in one process. This is a nine-step process. It starts with joint business planning between the two trading partners. That follows into promotion planning and various tactics leading to a sales forecast, leading to an order forecast and concluding with an evaluation of how the promotion did so you could have a continuous improvement loop.

All through the process you’re using historical POS data to better project what a particular promotion is going to develop into in terms of volume and [using that] on a daily basis to alter replenishment schedules. Very powerful process but very comprehensive, so it’s been a little slower on the uptake than many companies thought it would be. This is probably 4 years old. A lot of pilots have been accomplished. We have it going with about 12 big retailers globally. The idea from a manufacturing standpoint is not only to get a much better idea of what’s coming from your key retailers, but from a retailer’s standpoint to be able to better manage the inbound flow of goods so they don’t have to have a whole lot of warehouse space. Think of it as a pipeline that’s continually flowing product rather than a warehouse.

How should you structure these efforts so that they are successful?

You need a strong business leader to run it. We not only had a chairman who knew there was value if we could create a new collaborative trading relationship with customers, but we also had a senior sales executive who personally championed this collaborative, team-based relationship with retailers. He then put together a supporting organization that would basically change our capability at the customer interface.

I had the good fortune of leading the customer service and logistics component of that capability. We created a new organization called customer business development, which was previously the sales department. We brought into that organization new skills: logistics, IT, finance, marketing and some HR people. We created this multifunctional organization with a new mission: to make our customers more profitable in the categories in which we sold products. We almost became consultants to our retailers. In fact, just to give you an idea of how far that went, we eliminated the sales quota. Sales representatives no longer wrote orders; that was done by the logistics person on the team.

You blew up your sales organization.

We changed its look and feel. We retrained and redirected the work so that the sales representatives became category managers, category business consultants, marketing consultants. This all helped build the trust factor that I talked about earlier.

Typically, companies start a pilot and develop one of these cross-functional teams, and meanwhile the rest of the organization keeps cranking along, doing things the way it always has. Then you have conflict between the groups: Which is better, our way or theirs? How did you deal with that?

That’s exactly how it played out. I remember sitting in a meeting with Dick Beckhardt, who is an organization effectiveness guru, and him saying, “You know, your organization is going to want to kill this.” Meaning they won’t like what’s going on at Wal-Mart because they’re losing control. And he was absolutely right. So the senior sales executive had to support the team and protect it until it was strong enough.

Give me some examples of some of the things you had to defend against.

Whereas before a product division might have had direct responsibility for Wal-Mart, now all of a sudden there was this corporate person responsible for the team and the business at Wal-Mart. The battles were continuous. Everything from, What resources are we going to put on this team? to, We don’t like that particular promotion.

What was the key in enabling you to fight off the internal challenges?

Leadership. Senior management being committed to this change.

What would you say to industries that despair of this ever working?

One of the hurdles when it started was I don’t want to sit down with competitor X, Y, Z and compare data. What you find is that on things like EDI and even continuous replenishment, that shouldn’t be an area of competitive advantage. It’s how you execute a standard or an agreed-upon process that will determine your advantage in the marketplace. The leaders who started all this and shared the information are now onto the next innovation.

But you’re P&G. You have clout and respect. How can a small company expect to do something like this?

Well, the small companies that could never have done it all of a sudden had the opportunity to use continuous replenishment. The first company to take advantage of the IBM service offering was a little company called Golden Cat. They made kitty litter. Their CEO said, My gosh, that’s perfect for my business! He had that system up and running for most of his big customers in two months. He was so successful he was purchased by Ralston Purina. So the small companies?if the CEO sees the advantage?can take advantage a lot quicker than the big guys.