Soaring energy prices are forcing P

Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill.

Keith Harrison, head of global supply at P&G, the maker of Tide detergent, Crest toothpaste and Pampers, said the era of high oil prices was forcing P&G to change.

“A lot of our supply chain design work was really developed and implemented in the 1980s and 1990s, when our capital spending was fairly high as a cost of capacity and oil was 10 bucks a barrel,” said Mr Harrison in an interview with the Financial Times.

“I could say that the supply chain design is now upside down. The environment has changed. Transportation cost is going to create an even more distributed sourcing network than we would have had otherwise.”

Earlier this year, P&G launched a comprehensive review of the design of its entire supply operations in response to rising energy costs and its increasingly global expansion.

“We’ve kicked off a study that really asks: what is our business going to look like in 2015?” he said.

The study will include assessing trends such as moves to reduce product size, new sustainable packaging and future consumer demand on a regional basis. It will also try to anticipate changes in the global operating environment.

“What happens if oil is $200 a barrel? What happens if you can’t ship trucks on the weekends or if there are road congestion issues?”

Mr Harrison, responsible for the supply chain behind P&G’s global sales of more than $80bn, said the supply system was currently based on “large, single-category regional production sites with long supply chains”.

“Up to where oil was $70 or so, it was hard to justify building new capacity only on the back of new distribution costs. With oil at $140, the world has changed.”

He said high energy costs were already changing the calculations affecting the siting of new production facilities. As an example, he cited a babycare facility being built to meet growing demand in China. It is being located at Xiqing in the northern province of Tianjin, rather than at an existing plant near Guangzhou in southern China.

“Part of the justification for going to Xiqing was distribution [costs]. Part was that I needed more capacity. But today’s distribution cost equation could lead you to a different answer than you might have done otherwise.”
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