It's safe to say that RFID wasn't the deciding factor in Procter & Gamble's 2005 buyout of Gillette. Company leaders were far more focused on the $1 billion P&G stood to save by integrating the companies' supply chains and the prospect of $11 billion in additional sales. Then there was the dazzling array of synergies P&G could potentially achieve by consolidating the two companies' purchasing, transportation, and research and development groups.
But a funny thing happened on the road to integrating the two companies in the weeks after the deal went down. As executives struggled to combine the systems and personnel of the two global giants, the radio-frequency identification (RFID) initiative unexpectedly emerged as a poster child for effective post-merger teamwork. "The [RFID] initiative was identified fairly early on as one of those areas of remarkable synergy between the two organizations," says Milan Turk, director of global RFID operations for P&G. Turk notes that P&G even featured the RFID team on its internal Web site as an example of how P&G and Gillette groups could unite to focus on the combined company's new goals.
What made this particularly noteworthy is that the two groups had started out from very different points. Although both were founding members of the Massachusetts Institute of Technology's Auto-ID Center and had worked together on RFID-related projects long before the subject of mergers ever arose, they had taken distinctly different paths in developing the technology. Just how different became clear from their responses to Wal-Mart's initial RFID mandate in 2002. Gillette, which was excited about RFID's potential to curb theft of its high-value products (like razor blades and Duracell batteries), invested heavily in the technology. P&G, which initially focused on tagging low-cost products like paper towels, opted for the slap-and-ship approach.
Though the odds weren't looking particularly favorable, plans to unite the RFID operations went forward. In May 2006, just over six months after the merger was completed, Turk traveled to Boston to meet with Dick Cantwell, the head of Gillette's RFID team. The pair devised a strategy for getting the most value from their combined resources. "We wanted to make the [RFID] initiative one of the shining examples of one plus one being equal to three when it came to merging the two companies," says Turk.
A month later, Cantwell and Turk met with Bob McDonald, vice chairman of global operations at P&G, and Ed DeGraan, the chairman of Gillette's board of directors. From that meeting, P&G's EPC Advantage Strategy was born. That strategy (whose name reflects P&G's decision to use RFID technology based on the Electronic Product Code, or EPC) set out a clear roadmap for RFID adoption.
That strategy represented something of a breakthrough for P&G because of its implicit acknowledgment that while there was obvious value in tagging Gillette's products, there was a value proposition for the P&G side of the business too. Though some P&G products were better candidates for tagging than others, the company still had much to gain from the use of RFID with certain products and in specific business applications, such as new product launches and tracking promotional displays that P&G ships to retailers.
Fits with the profile
By July 2006, P&G had brought the two groups together, forming one of the first combined Gillette/P&G teams to begin operating after the merger. Though the new team's strategy was in place, a lot of work still remained to be done. For example, the groups had to determine which products were "EPC advantaged"— meaning that for reasons of, say, value or vulnerability to theft, they were most likely to deliver a high return on the company's RFID investment.
When it came to this task, the Gillette group had it relatively easy: A large number of Gillette products—especially blades, razors, and batteries—fit the EPC-advantaged profile quite well. The P&G group, however, had to sort through a hundred times as many stock-keeping units (SKUs) as the Gillette group did in order to identify items that matched the profile.
As the P&G team members discovered, the EPC-advantaged products were there; they just had to know where to look. "We had to teach ourselves to focus on beauty care products and leave soap and detergent aside," says Turk. "The benefit of RFID on beauty care was much easier to identify than on super high-volume but relatively low-value soap and detergent. That was a challenge at first; the two teams did not see things the same way, but the necessity of producing a commercial go-to-market approach quickly brought us together."
The plan dictated that once the groups had identified the EPCadvantaged items, they would begin developing RFID pilots around them. The money saved in the initial RFID trials would be used to fund research into ways to overcome some of the problems presented by the "EPC-challenged" items. "We found that the EPC Advantage Strategy would allow us to identify product sweet spots and to deliver value faster, and that the value that was delivered could be reinvested in other tiers like EPC [research] and in EPC-challenged situations," says Turk.
Follow that display!
To date, P&G has mined the most value from tagging the promotional displays it sends out to stores during product launches and promotions. The tags allow P&G to track the displays' whereabouts once they leave P&G's hands to ensure that they make it onto the retail floor on the specified dates.
Retailers' compliance with promotional display terms has historically been spotty, as Gillette discovered in 2005. While analyzing RFID data collected from test stores that had participated in a Father's Day promotion of its Braun shaving products, Gillette realized that only one-third of its displays had made it onto the sales floor in time to capitalize on the marketing blitz. "It told us that there is a huge opportunity available," says Turk. "RFID delivered actionable visibility so we could really see what was happening. That allowed us to sit down with retailers and talk about what a huge opportunity this was for both the manufacturer and the retailer."
P&G's initial RFID pilots proved encouraging: More product displays reached stores on time, and stock-outs dropped. For some product lines, stockout rates that had been as high as 15 percent were cut in half. According to Paul Fox, external relations leader for global operations at P&G, the company's return on its RFID investment is "significantly above what you'd expect" (the company won't reveal the number).
Today, P&G is forging ahead with its RFID pilots. The company is now tagging about six promotional displays per month and is conducting further pilots with several major U.S. retailers as well as the German retailer Metro. Those pilots were expected to conclude late last year or early this year, at which point the company planned to evaluate the results and (most likely) expand the pilots.
"There are some encouraging signs about building scale," says Turk. "It's an extremely attractive proposition because it benefits the manufacturer and retailer right from the beginning. Measurable shopper outcomes are seen and that creates a runway for RFID, and hopefully, that will make the technology even more attractive to retailers."
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