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P&G’s Efforts to Improve Productivity in Coming Quarters

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Productivity transformation overview

Previously in this series, we talked about The Procter & Gamble Company’s (PG) plans for four transformations:

  1. productivity
  2. supply chain
  3. portfolio
  4. rededication to category business models on superior product offerings

Procter & Gamble, or P&G, is aggressively improving productivity to improve investment to drive growth. In February 2012, the company had planned to reduce its non-manufacturing overheads by 10% by June 2016. However, in November 2012, the company increased the target to 22% by June 2016.

On July 1, 2015, the company reduced manufacturing overheads by 22%, which is more than double the original target set on February 2012.

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Manufacturing productivity

P&G also improved manufacturing productivity by 5% in fiscal 2015 by reducing the number of agency relationships and by cutting agency production costs by $0.3 billion, compared to fiscal 2014.

The company believes in new media analytical tools that will increase the reach of frequency and effectiveness. For example, P&G’s Always Like A Girl digital media campaign aired for 60 seconds during the Super Bowl and increased product weekly dollar sales by 6% ahead of the average week.

Cash flow productivity

Despite its weaker top-line, P&G is placing emphasis on value-creating and cash. P&G generated $11.6 billion in adjusted free cash flow, reaching 102% adjusted free cash flow productivity. P&G one of the strongest cash generators among competitive peers and mega cap companies like Unilever (UL), Colgate-Palmolive (CL), and Kimberly-Clark (KMB).

However, P&G’s free cash flow decreased by ~0.7% to $2.7 billion for 4Q15, while Colgate-Palmolive’s free cash flow decreased by ~79% to $0.3 billion for 2Q15. However, Kimberly-Clark’s free cash flow for 2Q15 increased by ~150% to $0.5 billion. (Please note that for P&G, the fiscal year ends on June 30, 2015, while for Colgate-Palmolive and Kimberly-Clark, the same quarter ends December 31, 2015.)

Future plans

The company plans to reduce manufacturing overheads even further, by 25%–30% at the end of fiscal 2017. This excludes divested businesses, which would increase this figure to over 35%.

P&G has exposure in the SPDR S&P Dividend ETF (SDY), with 1.3% of the total weight of the portfolio as of September 11, 2015.

In the next part of this series, we’ll look at P&G’s attempts to reduce inventory in its supply chain.

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