P&G’s Attempts to Reduce Inventory in Supply Chain

At the Barclays Consumer Staples (XLP) Conference on September 10, 2015, The Procter & Gamble Company (PG) announced that it plans to reduce inventory in supply chain and improve stock rates on the shelf. Improvement in payables has been another strong source of cash generation for the company.

As the graph above shows, Procter & Gamble, or P&G, has implemented a supply chain financing program that contributed $2.3 billion to the cash flow on a cumulative basis. The program is expected to contribute $1 billion or more over the next two years, thus benefiting the company significantly in the transformation of its supply chain.

The inventory turnover metric for P&G for fiscal 2015 came in at 6.4x, which was the highest among peers, due to increases in sales for all product segments except the beauty segment. Estée Lauder (EL) and Colgate-Palmolive (CL) reported inventory turnover metrics of 1.7x and 5.1x, respectively, in fiscal 2015.

Procter & Gamble and other companies like Kimberly-Clark (KMB) and Clorox (CLX) plan to transform supply chain by lowering cost and reducing inventory. P&G plans to improve customer service levels and increase product quality and process reliability. P&G is planning to shut down remote single category production sites and focus on creating new multi-category facilities, which should speed up product delivery to suppliers as well as increase sales.

Earlier in 2015, P&G announced new manufacturing facility in Virginia and its expansion to an existing facility in Utah. The company is also focusing on improving supply chain efficiencies in the European region.

Meanwhile, P&G continues to strengthen its supply chain, including the opening of six new mixing and distribution centers in North America, according to P&G CFO Jon Moeller.

P&G and Kimberly-Clark have exposure in the iShares S&P 100 ETF (OEF), with 1.7% and 0.5%, respectively, of the total weight of the portfolio as of September 11, 2015.

In the next part of the series, we’ll discuss P&G’s plans to revamp its product portfolio.