In the following Supply Chain Matters blog perspective, we reflect on Procter and Gamble’s latest report of Q1-FY22 quarterly financial and operational performance along with the implications of these results for investors, lines of business teams and the supply chain management community in the consumer products industry.


Financial Performance Highlights

This week, global consumer products provider Procter & Gamble (P&G) reported financial performance for the quarter that ended September 30. The results for the company’s Q1-FY22 quarter exceeded expectations and the implications of these results contain significant observations and insights for investor interests, supply chain management and lines of business teams.

Financial and operational headlines were impressive given the current environment of continuous global supply chain raw material shortages, rising prices and transportation disruptions. They included:

  • Organic sales growth of 4 percent with net sales of $20.3 billion, and an overall 5 percent year-over year increase that exceeded analyst consensus forecast of $19.8 billion. Organic growth accelerators were noted as a two percent increase in product volumes, a one percent increase in pricing and a positive product mix impact.
  • Nine of ten product categories experienced year-to-year organic sales growth.
  • E-commerce growth of 16 percent with this channel now representing upwards of 14 percent of total sales.
  • Operating income decline of 5 percent to just over $5 billion. Data presented indicated that gross margin decreased 370 basis points year-over-year, fifty basis points of which attributed to higher transportation and logistics costs. Company executives indicated to analysts that P&G expects an additional $2.3 billion in after tax expenses on inbound materials and transportation for the company’s fiscal year that ends in June 2022. Back in July, the estimate was $1.9 billion.

CFO Andre Schulten indicated to analysts: “Inflationary pressures are broad based and sustained.” As a result, the company is initiating another set of pricing hikes on various products, especially in the U.S.

Schulten further indicated:

We have an organization the looks around the corner, anticipated potential bottlenecks, and then chooses to build inventories, either on materials and intermediates or unfinished products to then be able to ensure products are on the shelf, discoverable, and able to be fulfilled in-store.”

A review of the company’s statement of cash flows indicates that inventory investment has nearly doubled in a year-over year basis amounting to $409 million. That is a testament to not only growing sales volumes but to elements of supply chain risk mitigation.


Investments in Supply Chain Resiliency and Agility

Investors and business media had mixed reactions to P&G’s financial performance.

The company’s stock declined 2.5 percent on the news, the most since May of this year. The stock movement was attributed to investor jitters to both concerns for continuing supply chain disruptions and higher inflationary drag on consumer spending

Bloomberg’s perspective included in-part:

While P&G is benefitting from elevated demand for household essentials during the pandemic, snarled supply chains are darkening the horizon for all consumer goods companies. P&G has performed well in recent quarters, but investors are skeptical the company will emerge unscathed from what’s expected to be a lengthy period of higher costs.

The Wall Street Journal’s coverage provided a more supply chain context: Procter & Gamble Uses Its Size to Lessen Impact of Supply-Chain Mess (Paid subscription required)

One of the important themes presented in the Journal’s report was that with this ongoing and unprecedented global-wide supply chain disruption, larger companies have an advantage in their ability to adsorb added costs or flex their market pricing power. That is indeed a reality, and that does not bode well for smaller companies without the resources to buffer this ongoing set of forces.

A further and rather insightful perspective that bears highlighting is the following:

P&G executives said the company’s scale, ability to spend on supply-chain fixes and its flexible operations are enabling it to keep products in stock even as consumers increasingly encounter sparse shelves at stores.”

The WSJ report cited supply chain actions including the ability to quickly pivot to alternate raw material and production suppliers as well as P&G’s own operational and production resources. Examples include the ability to charter ships or command significant supply from back-up suppliers when prime suppliers could not deliver to plan.

This outside-in tenet manifests that the customer order arrival dictates overall supply network response as contrasted to localized optimization of production and other supply and demand network elements.

A reality is that the company’s latest supply chain transformational efforts began five years before this pandemic. Business and supply chain planning processes have since been augmented and transformed to be concurrent, with direct and near real-time information links to supply chain customer fulfillment requirements. That includes investment in supply chain control tower and what-if simulation planning capabilities that allow teams to analyze the impact, resolve various product demand, and supply imbalances.


Additional Supply Chain Matters Perspectives

We like others in the supply chain management thought leadership community have cited P&G’s continued investments in supply chain agility and resiliency capabilities. The producer has long been recognized and admired for its relentless customer fulfillment perspective that focuses planning from an outside-in lens, from the customer retailer’s fulfillment facility and back among supply network, production and distribution capabilities.

The company is not alone, and there are other consumer goods producers who are on the journey of supply chain transformation that is making a difference during this very challenging period.

However, accelerating supply network and global transportation costs are leading to difficult decisions related to product pricing. Such decisions run the risk of consumers becoming more price sensitive and switching buying preferences to lesser or local brands.

This week, Nestle, the globe’s largest consumer packaged goods producer reported a very upbeat quarter headlined with a 6.5 percent rise in third-quarter organic sales growth. The Swiss company acknowledged increasing input costs and supply chain challenges. Product pricing has subsequently increased by an average of 2.1 percent in the third quarter.

Unilever has reportedly increased product pricing by 4.1 percent in the latest quarter, the most since 2012, amid an estimated 1.5 percent reduction in product shipment volumes. The company’s CFO indicated a 20 billion euros rise in annual raw material and packaging costs along with 3 billion euros of increased logistics costs.

P&G’s ongoing performance during this unprecedented time of supply chain disruption is the manifestation of an understanding that integrated business planning and supply chain management process capability are the fabric of overall business capability. It is the result of cumulative investing in supply chain agility, responsiveness and resiliency, along with a more skilled workforce. It should be little surprise that the company’s CFO can tout supply chain agility capabilities as a catalyst to navigating a challenging quarter.

Our takeaway message for the equity and shareholder investment community is to consider and weight two post pandemic tenets.

First, consumers and businesses have become far more educated in product preferences, market dynamics and now, with the ongoing supply chain disruptions, what that implies in current and future buying decisions. Thus, the current anvil of rising supply chain related costs has to be managed rather carefully. The gains of 2021 and the preferences for buying trusted brands could be fleeting if pricing strategies go too far. Similarly, if large producers are forced once again to institute wide ranging expense reductions directly on supply chain management teams it can compromise needed post pandemic transformational needs.

Second, evaluate a company’s financial and operational performance in the context of demonstrated investment and manifestation of supply chain process agility, resilience and decision-making capabilities. The reality is that many companies are now being impacted by the ongoing global supply chain disruptions from a number of dimensions.

Some will fare better than others, and some will convert crisis to market opportunity and market share gains. The differentiator is that supply chain capabilities and competencies matter quite a lot, and especially in post-pandemic times of continual disruptions.


Bob Ferrari


© Copyright 2021, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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