Case Study Learning Outcome : Understand the issues involved with transfer prici

Question

Case Study

Learning Outcome:

Understand the issues involved with transfer pricing in multidivisional companies (question 1)

Provide an appreciation of logistics activities and their relationship to supply chain management, other business functions and enterprises. (Question 2)

CASE STUDY

ECR in the UK

Dutchman Paul Polman, now CEO of Unilever, did a stint as General Manager of Procter & Gamble UK and Eire from 1995 to 1999. While admiring the UK’s advanced retailing systems, he saw opportunities for all four of the ‘pillars of ECR’ – range, new items, promotions and replenishment. The following is extracted from the text of a speech he made to the Institute of Grocery Distribution.

Range

The average store now holds 35 per cent more than five years ago, yet a typical consumer buys just 18 items on a trip. A quarter of these skus[1] sell less than six units a week!

The number of skus offered by manufacturers and stores has become too large and complex. My company is equally guilty in this area. No question, we make too many skus. I can assure you we are working on it. Actually, our overall sku count in laundry is already down 20 per cent compared to this time last year. What’s more, business is up.

Clearly, we have an opportunity to rationalise our ranges. As long as we do this in an ECR way – focusing on what consumers want – we will all win. The consumer will see a clearer range. Retailers and manufacturers will carry less inventory and less complexity.

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[1] What is a 'Stock Keeping Unit - SKU'

A stock keeping unit (SKU) is a product and service identification code for a store or product, often portrayed as a machine-readable bar code that helps track the item for inventory. A stock keeping unit (SKU) does not need to be assigned to physical products in inventory. Often, SKUs are applied to intangible but billable products, such as units of repair time or warranties.

Read more: Stock Keeping Unit (SKU) https://www.investopedia.com/terms/s/stock-keeping-unit-sku.asp#ixzz56Rpdx7ov

Follow us: Investopedia on Facebook Stock Keeping Unit (or SKU) is a number assigned to a product by a retail store to identify the price, product options and manufacturer of the merchandise. A SKU is used to track inventory in your retail store. They are very valuable in helping you maintain a profitable retail business.

The result will be cost savings across the whole supply chain and stronger margins.

New items

There were 16,000 new skus last year. Yet 80 per cent lasted less than a year. You don’t need to be an accountant to imagine the costs associated with this kind of activity. And look how this has changed. Since 1975, the number of new sku introductions has increased eightfold. Yet their life expectancy has shrunk from around five years in 1975 to about nine months now. We can hardly call this progress.

Promotions

In promotions it’s the same story. Take laundry detergents. This is a fairly stable market. Yet we’re spending 50 per cent more on promotions than two years ago, with Consumers buying nearly 30 per cent more of their volume on promotions. This not only creates an inefficient supply chain, or in some cases poor in-store availability, but, more importantly, has reduced the value of the category and likely the retailers’ profit. We are all aware of the inefficiencies promotions cause in the system, such as problems in production, inventory and in-store availability. They all create extra costs, which ultimately have to be recouped in price. But there’s a higher cost. As promotions are increasing, they are decreasing customer loyalty to both stores and brands by 16 per cent during the period of the promotion. We commissioned a report by Professor Barwise of the London Business School. He called it ‘Taming the Multi-buy

Dragon’. The report shows us that over 70 per cent of laundry promotional investment goes on multi-buys. The level of investment on multi-buys has increased by 60 per cent over the last three years. There’s been a 50 per cent increase behind brands and a doubling of investment behind own labels. Contrary to what we thought, most of this volume is not going to a broad base of households. It is going to a small minority.

Seventy-one per cent of all multi-buy volume is bought by just 14 per cent of households. Just 2 per cent of multi-buy volume goes to 55 per cent of households.

We really are focusing our spending on influencing and rewarding a very small minority of people indeed.

Replenishment

Based on the escalating activity I’ve just [referred to], costs are unnecessarily high. There are huge cost savings also here, up to 6 per cent, by removing the non-value-added skus and inefficient new brand and promotional activity.

Questions

1 - Cutting down on range, new items and promotions is presumably going to lead to ‘everyday low prices’. Discuss the implications to the trade-off between choice and price. (2 points)

2- Procter & Gamble’s major laundry brand in the US is Tide. This is marketed in some 60 pack presentations, some of which have less than 0.1 per cent share. The proliferation of these pack presentations is considered to have been instrumental in increasing Tide’s market share from 20 to 40 per cent of the US market in recent years. Clearly, this is a major issue within P&G.

What are the logistics pros and cons of sku proliferation? (2points)

Explanation / Answer

1. To give the customer a depth of SKU's and range, manufacturers spend a lot of money on production and distribution of these SKU's. All SKU's come in a different packaging and require different promotions in order to sell. For Example - A One KG Surf Excel would have a different packing and be available for $2 whereas a five KG Surf Excel would have a bigger packaging with the promotional price at $9.Once a company decides to rationalize its SKU's and focus on the SKUs that actually sell then the company can save a lot of money. The money saved can be passed on as savings to end-customer leading to low prices. However, having lesser SKU's may lead to churn of customers. For Example - A customer may prefer to buy items in bulk or bigger packs (and store), whereas another customer may buy depending on the need. In the absence of preferred SKU, the customer may shift the brand bought. It is imperative for companies to cater to both types of customers. Hence, it is imperative to balance manufacturing costs and churn. Companies to understand the buying pattern of customer and focus on SKU's that sell in the region and promote accordingly.

2. The logistics pros and cons of SKU proliferation are:

Pros

Cons

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