Case Study Analysis Service

Actors of the Supply Chain

The supply chain of The L’Oreal group is controlled by a mix of distributors, producers and downstream users who make use of different strategies and distribution channels to keeps the supply chain functional. In literal terms, the supply chain certainly refers to the movement of the merchandise from one end to the other and it is through these set of actors who play their part well in making sure that the products of the L’Oreal Group reach their final destination without any issues in the channels of distribution.

The L’Oreal Group is the main producer of the cosmetics which has now taken over shelf spaces in several supermarkets, drug stores and specialty store to become available to different groups of customers. L’Oreal Germany has been made responsible for the marketing and distributing of L’Oreal Products to drug store chains whereas L’Oreal Paris is the distributor of L’Oreal’s products to the high end segment of the market.

The consumer product division of L’Oreal Germany acts as the distributor of brands such as L’Oreal Paris, Jade, Maybelline and Garnier through retail stores.

The customers, specifically the downstream customers make up the third important set of actors in the supply chain and in this case DM-DROGERIE is one of the largest customers of the L’Oreal Group for mass marketing L’Oreal’s products.

Other downstream users who make up this supply chain include hair salons, drug store chains, grocery stores and retail stores which act as the final point from where the products are ultimately available to the end user. So in this way, through a systematic and diversified supply chain, the products of L’Oreal are made available to the final customer through a coordinated network created by the actors of the supply chain namely the producers, distributors and downstream users.

All of the actors of the supply chain have a vital role in the supply chain management. Without the producers, the product would not be there in the first place. Likewise, the distributors are the ones who make sure that the product gets to the right place through the right channels. It’s the customer or downstream user who makes use of the product and brings a successful end to the supply chain.

Issues and Objectives

With a systematic supply chain management, L’Oreal has managed to clearly set out its objectives in the form of organic growth and wants to focus on developing the brand through innovations and brand loyalty rather than an unplanned growth through acquisitions and take overs.

L’Oreal seems to have a SMART objective in hand as evident from its thought out strategy of increasing the market share of L’Oreal in the new emerging markets. The plan seems to be attainable and effective because of the solid network that has been created beforehand in the form of infrastructure which has already been set up in the emerging markets. So from here onwards, L’Oreal plans to make use of economies of scale which would now be attainable because of the large scale production that it plans to achieve for the new markets in which it has already set its foot. With such economies of scale would come high profit margins that the brand hopes to achieve along with cutting operational costs with the help of simplified organizational structures. So the company does not only plan to work on a global strategy of organic growth but is also trying to look at the objectives at the lower end to achieve the full benefits of Management by Objectives.

At the marketing and production end, L’Oreal plans to focus on quality and efficiency. The company hopes to achieve the concept of JIT, just in time delivery, so that orders are made available to customers without any delays due to mismanagement.

Lastly the objective of a smooth supply chain management seems to be one of the major concerns of L’Oreal and since it plans to ensure quality and a quick delivery system, implementation of an ERP system has been one of the objectives too which has been attained through the VMI.

Challenges

For achieving these objectives, L’Oreal would have to look deeper into certain factors which may prove to be hindrances in the supply chain later on if not tackled at this point. The potential challenges can be summed up in the following points:

  • unpredictability in sales
  • keeping warehousing costs minimum while managing order delivery
  • keeping a direct link with the DM-DROGERIE MARKT
  • Management of order placement and delivery through the electronic channel

The cosmetic market may be dependent on brand loyalty but with the changes in preferences and constantly changing products lines of competitors, L’Oreal needs to keep itself in line with the variations in orders especially during the holiday season, due to various promotional campaigns and seasonal demands. The unpredictability in sales would prove to be problematic if L’Oreal does not have a well-planned strategy of dealing with sudden changes in demand.

However, being ready for immediate supply of orders means keeping the warehouse properly stocked whereas one of the objectives of L’Oreal has been to keep warehousing costs low to achieve the full benefits of economies of scale.

To achieve a systematic delivery of cosmetics with a problem-free supply chain, L’Oreal has introduced an electronic distribution channel where orders are placed electronically from DM-DROGERIE MARKT and L’Oreal Germany gets ready to dispatch the orders. However there are issues with that too as L’Oreal Germany cannot know about the orders till they are placed and if there are unreasonably large orders, they may not be available for delivery right away due to the fact that warehousing costs have to be kept to a minimum at the same time. So there are challenges that the cosmetic brand seems to face even through it has shown a well-planned strategy for managing its supply chain.

In a competitive industry such as that of L’Oreal, there can be problems of over-stocking and under stocking and so a system which would manage this problem effectively was the need of the hour.

The mechanism of VMI

For handling the challenges, an electronic ERP system by the name of VMI was installed which has a very simple and systematic mode of operation. The VMI works by a typical ‘actual and forecasted’ comparison and generates an order automatically. The idea to implement this system was to keep a real time link between L’Oreal Germany and DM-DROGERIE so that issues of shortages or unplanned demand would not arise.

The information about the daily sales and inventory of DM-DROGERIE is provided through the VMI to L’Oreal Germany. This information is transmitted to the system called mySAP SCM, the system for handling the supply chain at the other end. From the information provided in the form of current inventory and sales, the system automatically generates an expected delivery quantity. This is basically based on the forecasted demand which is generated by mySAP SCM demand planning. The system automatically comes up with this order quantity on the basis of the inventory level available and the forecasted demand. The system generates another demand in the form of a delivery plan which is forwarded to the SAP APO, the transportation system. Once the process gets completed at L’Oreal’s end, it sends out an invoice to DM as a confirmation of the order which has been placed automatically with L’Oreal.

So, in short the VMI works by placing and order with L’Oreal on the basis of the inventory and sales at DM, and L’Oreal in turn replies with a confirmation by sending out an invoice.

The Bullwhip effect: Mechanism, Risks

What L’Oreal hopes to achieve is a system which is free from the hassles of a ‘Bullwhip effect’. The ‘Bullwhip effect’ is a scenario where due to delays in information being transmitted from one end, production plants are unable to get the products ready in time for delivery and since there are delays in manufacturing, delays in shipping are sure to follow. Such an issue in the retail industry makes the firm lose out on customers and credibility and ultimately the reliability of the supplier is at stake which can lead to lower profitability due to lower sales.

The question is, why would the ‘Bullwhip effect’ hit an industry or firms in particular and what are the risks involved with it. As evident from L’Oreal’s situation, there is a vast customer base that has to be managed through the supply change. In case of sudden changes in order, the information needs to be transmitted to the distributor right away otherwise there are chances of being hit by the ‘Bullwhip effect’. The ‘Bullwhip effect’ could result from inaccurately forecasting demand, lack of coordination in the supply chain, reducing inventory abnormally, miscommunication in orders etc. The VMI implementation of L’Oreal is intended to solve all of these issues through a systematic order management system. For instance, there are fewer chances of inaccurate forecasts as the forecasting would be done logically by the system. Similarly, the VMI is there to solve the problem of miscommunication and create ease of communication from both the sides.

One typical example of the Bullwhip effect could be seen in L’Oreal’s legacy system where there was no direct link between L’Oreal Germany and DM before the introduction of th VMI. As a result of this, L’Oreal Germany was not aware of the stock count or sales volume of DM right away and so could not get an order ready if a demand was created unexpectedly due to a change in promotional strategy or rise in seasonal demand.

The ‘Bullwhip effect’ can prove to be rather risky for a retail industry since in case of an inability to fulfil customer demand accurately or immediately, brand switching may occur as customer may be compelled to try alternative brands. Likewise, there are risks of excessive costs as well excessive stock in warehouses rather than a shortage.

Other risks associated with the Bullwhip effect can be a braking of trust between the supplier and the buyer which makes the supplier lose his credibility which is definitely a problem. Similarly, firms relying on a JIT system would find it harder to face the consequences of a ‘Bullwhip effect’ since they are in any case relying on a real time transmission of data and immediate delivery.

SO, it can be concluded that the supply chain management of L’Oreal has been enhanced through the VMI and has made it easier for the actors of the supply chain to manage their roles appropriately, preventing an ‘Bullwhip effect’

 

References

INFORMATION INTERFACE CLASSIFICATION OF ACTORS IN SUPPLY CHAINS, Christian Scheer, Thomas Theling, and Peter Loos Chemnitz University of Technology (Germany)

chris.scheer@isym.tu-chemnitz.de thomas.theling@isym.tu-chemnitz.de, loos@isym.tu-chemnitz.de

 

Vendor Managed Inventory in Retail Industry, WHITE PAPER, Authors: Phani Kumar & Muthu Kumar

February 20

 

Supply Chain Management , Use Case Model, Document Status: Final Specification

Version: 1.0 ,Date: December 1, 2003, Editors: Scott Anderson, Visuale, Inc., Martin Chapman, Oracle

Marc Goodner, SAP, Paul Mackinaw, Accenture, Rimas Rekasius, IBM

 

How human behaviour amplifies the bullwhip effect –a study based on the beer distribution game online

Joerg Nienhaus, , Arne Ziegenbein, , Christoph Duijts

 

 

Centre for Enterprise Sciences (BWI), Swiss Federal Institute of Technology (ETH) Zurich,

Zuerichbergstrasse 18, 8028 Zurich, Switzerland,  joerg.nienhaus@ethz.ch, arne.ziegenbein@ethz.ch

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IBM Business Consulting Services AG, Affolternstrasse 56, 8050 Zürich-Oerlikon, Switzerland

E-mail: christoph.duijts@gmx.ch

 

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