Procter & Gamble’s Journey to Lean IPD
More Value, Less Waste, Smoother Flow
While Procter & Gamble (P&G) is known for brands like Tide, Pampers, Crest, and Head & Shoulders, it’s also a significant player in the Design & Construction industry with an average annual CapEx of $3.5b.
Before retiring from P&G in 2019, I was responsible for Global Capital Management. In this role, I led the Company’s move to Lean IPD in order to achieve greater value from our capital investments.
The Design & Construction industry’s challenges are well documented:
- Flat to declining productivity
- Relatively low investment in technology
- A fragmented supply chain
For an owner like P&G, this often results in projects that end up over budget, behind schedule, and with claims to settle.
That’s why we were intrigued by a Boston Consulting Group article The Lean Advantage for Large Construction Projects, that stated that Lean projects were achieving:
- 30% faster schedules
- 15% lower costs
- 2-3% increase in margins for project partners
- Enhanced quality and safety
Around the same time, we started benchmarking with other owners including Intel, Disney, and BMW. At BMW, for example, we heard how they built a large assembly plant in Brazil for about half the cost and in half the time than they initially thought by using Takt planning and scheduling. The fact that we had three projects in Brazil at that time that did not go all that well made this an even more impressive feat.
P&G before Lean IPD
As a large Fortune 500 international company, we had taken a very traditional approach to project delivery. For large projects, we used EPCm (Engineering-Procurement-Construction Management), which is a hybrid of Design-Bid-Build, so we saw a lot of the usual problems with this delivery method. We’d hear we had a Guaranteed Maximum Price, but we knew better, it was really a Guaranteed Minimum Price because the cost was only going up from there.
The other thing we saw was that the structure of two-party contacts did little to integrate the project team. In fact, it had the opposite effect. It created an environment where every company on the job was in it for themselves. They knew that to make the most money they needed to get in early, get their work done, and if they had to come back it would be on a change order where they’d make twice the margin. So, overall, it became 'Game on for each individual company'.
Change to Lean, change the game
Moving to Lean IPD was a game-changer and it started with partner selection. We selected partners based on qualifications, interest, and pricing factors. Qualifications are a must as you’d expect. Interest is defined as ‘interest in doing this particular job and in doing it this way’. The key question here is, “Are you willing to sign an IPD Agreement?” Pricing factors include wages, benefits, overheads, mark-ups, and profit expectations.
One key learning for us was that there was usually little difference in pricing factors among competing trade partners. For example, when selecting an electrical contractor, if you compared what their expected costs would be assuming the same number of hours worked and materials purchased, you’ll typically see little difference in bids. The good thing about this is that it then lets you select partners based on qualifications and how well you see them working with the rest of the team.
Progressive partner selection
We also found it’s important to select partners progressively. This means to select your most important partner first, and then together select your next partner. Once you have this partner, then the three of you select the next one. You keep doing this until you have the whole team selected. This selection process gives you your best chance of having a team that will work collaboratively through good times and bad. You get a team where the key players are in it together. So, overall, it’s ‘Game on for the whole team’.
The difference the IPD Agreement makes
With traditional contracting methods, there’s an incentive for the project team to increase the cost of the project because when they do this they make more profit. The higher the project cost, the more money they’ll make.
With Lean IPD, there’s an incentive for the project team to decrease the cost of the project because when they do this they make more profit. The lower the project cost, the more money the project team makes from shared savings, and the less money the owner pays. The risk and reward sharing enabled by the IPD Agreement further integrates the project team.
In their Motivation and Means Study, the University of Minnesota found that IPD sets the terms and provides the motivation for collaboration and that Lean provides the means for teams to optimize their performance and achieve project goals.
The Big Room is an invaluable tool in Lean projects to foster collaboration and innovation and create more value for the owner. Read more about Pull Planning in Design.
Why did P&G move to Lean IPD?
P&G moved to Lean IPD because it created more value from our capital investments. When we estimated the “size of-the-prize” for making the switch, it was $1b per year. That’s a BIG number that consisted of two components. The first was lowering our CapEx by $0.5b or 15% of the $3.5b we were spending every year. This percentage was consistent with studies by The Boston Consulting Group, McKinsey & Company, and others. The other $0.5b was increased value from the projects themselves because of faster speed-to-market, improved safety and quality, and lower O&M costs. The latter is important for our manufacturing sites.
Project in Japan adds $100m in value
Speed-to-market is a critical capability for any consumer products company and Lean IPD gives P&G a competitive advantage in this area. A great example of this was a project in Japan where the team not only reduced the project’s capital by $40m, but they created another $60m by having the much-needed capacity on-line way ahead of schedule.
Procter & Gamble’s journey to Lean IPD
We are 4 years into our Lean IPD journey (see the chart below).
For me, the most important step in the Learning Phase was partnering with our Capital Purchases leaders. They needed to understand how this approach would lower CapEx and create value so that they could fully support it in front of our business and technical leaders.
I often get asked how I was able to enroll our Capital Purchases leaders.
- Our Capital Purchases leaders are business leaders first and they understand that value and cost are not one and the same.
- Their careers in Purchases give them experience buying non-commodity items where creating value with a partner is more important than trying to squeeze a dollar out of a contract.
- They get experience in buying talent where the difference in the product created, like an advertising campaign, will outweigh any small difference in fees.
15 pilot projects in 2016
We also had to start somewhere, so the 15 pilot projects we initiated globally in 2016 was a big step. Another key milestone was signing our first poly-party IPD Agreement. That project went so well that we did the next large project with the same team. These successes made it easy for our Engineering and Purchases leaders to declare that Lean IPD would be our default project delivery method for all large projects from this point forward.
7 Essential Team Integration Practices
On our Lean IPD journey, we identified 7 Essential Practices. In its own unique way, each one helps to integrate the project team. This naturally created the acronym “TIPs” for Team Integration Practices. While not every project will do each of these 7 practices to the same extent, we have seen that the projects that do, get superior results.
- Partner Selection
- Collaborative Design Sessions
- Big Room
- Conditions of Satisfaction
- Target Value Design
- Last Planner System®
- IPD Agreement
A key emphasis in P&G’s approach is to not “Procterize” things. This allows us to take advantage of industry available training, facilitators, and contracts. It also eliminates the waste partners would incur translating and deciphering P&G’s lingo.
In a nutshell
- Lean IPD is superior. It outperforms all other project delivery methods including Design-Bid-Build, Design-Build, and Construction Management at Risk.
- The contract matters. The IPD Agreement further integrates the team and provides a risk and reward feature for motivation.
- Tech is not enough. While technology will help, it will take the kind of work system changes promoted by Lean IPD to truly transform the industry.
- The fix is integration. The Design & Construction industry is so fragmented that every effort to integrate the companies working on your project will pay major dividends.