P&G Considers Consolidating Purchasing Efforts

Case Type: operations strategy.
Consulting Firm: L.E.K. Consulting 2nd round job interview.
Industry Coverage: household goods & consumer products.

Case Interview Question #00337: Procter & Gamble (P&G, NYSE: PG) is a large diversified Fortune 500 multinational corporation headquartered in downtown Cincinnati, Ohio, United States. P&G manufactures a wide range of consumer products and household goods with nearly $79 billion dollars in sales in fiscal year 2010.

The company’s operations are categorized into several Business Segments:

• Beauty segment
• Grooming segment
• Health Care segment
• Snacks & Pet Care segment
• Fabric Care & Home Care segment
• Baby Care & Family Home Care segment

In Procter & Gamble, each business unit currently operates autonomous purchasing departments. Recently, however, the Vice-President of Procurement of P&G is considering consolidating their purchasing efforts within the company. He has hired you as a consultant to advise him on the consolidation plan. What are the considerations of consolidation? What would you recommend P&G’s VP of Procurement to do?

Possible Solution:

This case is a tough one to use a framework for, I basically applied a cost-benefit analysis to see what benefits there would be in consolidation, and what costs the client would incur.

Candidate: In P&G, how much synergy would there be in consolidated purchasing, i.e., how much of the same types of products do each division purchase?

Interviewer: Although each division orders specific materials, there is significant overlap in some divisions.

Candidate: How does purchasing work currently?

Interviewer: Each division has their own purchasing department, and materials are purchased and delivered to each of the 13 divisions’ central warehouses.

Candidate: Where are these warehouses located geographically?

Interviewer: They are all in the U.S., with 9 on the East Coast, 1 in Texas, 1 in Chicago, and 2 in California.

Recommendations for Client:

I recommend that the client consolidate the purchasing department if the benefits outweigh the costs:

1. Benefits:

• Economies of scale from larger purchasing quantities.
• Reduction in number of buyers, managers.
• Closing of some East Coast warehouses (there can’t be a need to have 9!).
• Reduction in administrative costs (billing info, secretarial support, etc.).
• Buyers may be able to establish closer relationships with vendors (we now order bigger quantities) and become more knowledgeable about products they are purchasing.

2. Costs:

• Making the materials purchased uniform may be a problem for some divisions, i.e., order products with features that division 1 and 2 need but not that divisions 3 and 4 need — features that might make the materials more expensive than they would otherwise be if divisions 3 and 4 bought them on their own.
• Distribution costs may be prohibitive, if warehouses were closed.

Overall, I anticipate the benefits would outweigh the costs, but would have to perform the analysis to determine what recommendation I would make.