Summary Avon - Avon Case study - Strategic logistics management – A supply chain management approach PDF

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Avon Case study...

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Summary AVON Avon is the one of the leading company which deals in the different types of beauty products like cosmetics, skin care product, fragrance and other personal care product and this company also have wide range of gift items like jewelries and other items like fashion accessories. This company is a well-known company in direct selling with an annual profit of $6.2billion. Avon sell their product in 145 countries through 3.9 million sales representative provides opportunities to women to earn throughout the world, in the Europe region Avon sale more than $ 1.2billion with the help of 1million sales representative. The main focus of Avon is on the selling and marketing department and totally ignore the supply chain department for a long time they never take the supply chain as an important department. Because of which regions strong growth is threatened by a supply chain organization in Europe region. Back in 1980s Avon Europe had branches in only 6 countries, each country have its own setup means each country have it separate factory and warehouse for their local market each branches work independently with separate information system, no overall planning and they do not share the manufacturing, market or distribution system. This system can work fine on a small scale. Each branch is very responsive to local need of market. In 1990s they began globalizing their brands and work on a stetagy to modernize its image by launching new product, packaging, and campaigns to attract mare younger customer. Avon make strategy to double the sale from 500 million in 1996 to 1 billion dollars in 2001.for the European region as a whole growth power in large part by dramatics inroads in central and eastern Europe. But the company realized that

the same model of supply chain cannot work properly in every new market. The bottom line is Avon cannot achieve its target by the existing supply chain model. Explains BobToth, Executive Vice President, “Ten years ago we operated country to country, with a much decentralized financial holding-company model. You just can’t compete that way now, especially if you’re a fast-moving consumergoods company.

A growing business and growing problem: The first problem was a fundamental gap between the sales department and supply chain department. In most of the European market the Avon began new sale campaign complete with a new brochure, new product and campaign and promotion every three weeks. This selling cycle is short which is cornerstone of Avon sale model. By offering regular new product and promotions, the company give their sale representative a reason to call their customer more often strengthening those relationship and driving sale from them. The short selling cycle work effective with flexible and responsive supply chain system. Avon don’t not have proper supply chain system to support their strategy because of short selling cycle Avon supply chain is unable to perform effectively. Avon’s factories manufactured everything to forecast and then shipped inventory to the country warehouses before the start of each three-week selling campaign. However, it took an average of 12 weeks for products to cycle through Avon’s supply chain from sourcing to manufacturing to distribution out to the branches— far too long for the short selling cycle. Avon relied on the heroics of its people to meet customer needs—regardless of cost. This was viable when Avon Europe was

relatively small. But as the business grew, keeping up with the needs of the different markets and accurately forecasting demand for individual products became increasingly difficult, especially since Avon was entering new markets at a rate of two or three per year. Changeover costs were High—especially since the factories were set up for high-volume production. Slowselling products also were costly. In every selling cycle a number of products would sell less than forecast, so Avon had a growing amount of unsold merchandise. Avon’s inventory levels were high—as much as 150 days ‘worth was typical—far too high for a three-week selling cycle. And most of this inventory consisted of unsold items. The capital tied up in inventory would only increase as Avon’s business expanded in Europe. Language variants presented another growth-related problem. Avon bought preprinted containers from its suppliers. With new markets came new languages and a growing number of print variants. Given its manufacture-to-forecast approach and the suppliers’ lead times, Avon had to order a wide range of preprinted containers well before it knew what its sales volumes actually would be in the different markets. Avon often would have demand in one country that couldn’t be filled because the only containers on hand were printed in another language. MAKING THE BUSINESS CASE AND MOVING FORWARD: it required the lengthy and critical analysis to prove that the supply chain of Avon is not able to carry the burden of Avon growing business in Europe. Still, after all that, it took year and a half to construct the business case and get leader buy in to push ahead with the extensive changes required.

Convincing the organization to invest money that wouldn’t recovered until the later long periods of the change was an intense sell. In fact the first two year would result a net loss. "This postponed payback was an awkward thought, particularly given that Avon had never put much in the supply chain previously and wanted faster outcomes," clarifies Michael Watson, director of Avon's supply chain information. “It was very difficult getting that initial momentum going.” When Avon began the undertaking the project, be that as it may, corporate buy in was outright, and the board had submitted an extraordinary resources. Notes Watson, "We took 45 of our best individuals in Europe out of their current positions and put them into the venture full an ideal opportunity for 18 months." Removing these individuals from everyday activities was incredibly painful, costly, and risky from a business viewpoint, however it was totally basic to progress. Clarifies Watson, "In the event that we had attempted to do this as an afterthought with a small group, it couldn't have ever worked—and we'd never be seeing the advantages we are presently."

RETHINKING THE SUPPLY CHAIN: Avon began by creating a centralized planning function—a critical priority. Explains John Kitchener, head of the supply chain in Europe, “There was no way Avon would achieve its growth targets without a centralized planning group that could see demand and inventory levels across the region and react very, very quickly.” Firstly the Avon start to create a data base commonly. Avon spend months to provide the standard code for its product

so that description and other information of those country that speaks same language. The database gives the clear view in sale trends and inventory so that the manager have the visible view across the region and see what is happening in demand and supply perspectives. The company also installed Manugistic’s supply chain planning and scheduling system to support integrated planning and coordination across the whole European region. To leverage this new capabilities and manager growing complexity of the business, Avon put in place a regional planning group empowered to make decisions about service levels, inventory, and costs based on a bird’s-eye view of the whole supply chain. Other decisions regarding the new organization, roles, and responsibilities were put on hold until later. Using the supply chain reference model the team point out some key changes which are required to make supply chain process according to Avon business. Avon kept its main plant in Germany and consolidated plant in Poland for other production. First, it expanded manufacturing capability in the heart of Avon’s emerging markets. And second, it delivered major cost efficiencies, mainly due to the lower cost of labor. Avon also created a centralized inventory hub in Poland near the manufacturing area to services its branches in all over Europe. With the end to end over view the new stream line of supply chain, Avon is able to make big changes to its business.

END TO END VISIBLITY Once Avon is able to see all the function of supply chain as a whole, those decision which don’t see to make sense before suddenly make sense and become a beneficial for Avon. For example, Avon had labeling bottle itself intend of have the bottle printed by suppler a postponement strategy that would delay the final decision about what language to put on a product until sales trends were clearer. For a year marketing had resisted this idea, convinced that the look of product would suffer. The manufacturer was not interested in adding to its overhead cost structure because the function was run as a cost center. Where they stand financially the postponement strategy do not make any sense. The added equipment and labor costs involved in making labels and affixing them to bottles likely would offset any savings. “All the accountants were telling us it was the wrong thing to do,” says Watson. Postponement strategy start to make sense when the Avon step back and take the look the postponement strategy with the eye of supply chain. If we look from the point of sourcing before we have to buy five or six bottle of shampoo according to the language now we have to buy only one plain bottle stock. Avon’s manufacturing plant can make one long production run instead of continuously change bottle stock. The customer services is improve very sharply because the branches could be more responsive. Now, when inventory runs out in a given market, the warehouse can respond quickly by labeling products with the right language and loading up a truck. The postponement strategy plays a vital role in improving cost and efficiency and service all long the supply chain. Yet the strategy seemed counterintuitive until

Avon assessed the trade-offs in cost, flexibility, and cycle time across the total supply chain. Very closely linked to the postponement strategy is a new inventory hub strategy. Explains Kitchener, “The postponement strategy works well, but only in conjunction with a distribution hub that lets us quickly push products out to the markets. “Avon’s two manufacturing plants supply the one centralized warehouse in Poland which labels the products and puts loads together for distribution to the different branches. Now it holds products back in the centralized hub and diverts them to the markets that need them once sales trends become clear. In the old world, Avon pushed products out to country warehouses in the different markets before knowing what demand actually was. Avon is working on a container to reduce the cost by standardize it and in this way it can increase the efficiency. Once it is convinced that every product should have the distinguish bottle so the Avon now realized that the shape of cap label and color can be the source of differentiation too. As a result, Avon has cut back sharply on the number of bottle styles and sizes it uses. Manufacturing can be far more flexible because changeover time is often zero from product to product. Product costs are lower because of standardization. Avon has been able to reinvest savings in improved product formulations and leading-edge package design and marketing activities. For years, Avon was unable to cost-justify these types of changes. Presently, with a start to finish perspective on the compromises among various activities, the

organization can see the full impact of pulling at least one switches—and settle on choices that improve the gracefully chain in general.

Collaborating With Suppliers: The company reduced its supplier base by more than half, embraced the concept of supplier partnerships, and focused on lowest total cost instead of lowest price. Dealing with a smaller number of suppliers delivered other dividends as well. Explains Watson, “Because we have longer-term relationships, we can invest together in new, better ways of working.” In the process of standardizing the bottles for its different products, Avon asked its suppliers for help in designing new bottles in the most costeffective way. The suppliers were able to explain why certain approaches were more costly than others—how a lighter-weight bottle saves on materials, for instance, or how a bottle with a specific geometry comes off the production line almost twice as quickly.

BUILDING ON SUCCESS: COLLABORATIVE DESIGN: The company recently conducted a collaborative design workshop that included suppliers, a design firm, and representatives from marketing and the supply chain—40 people in a room trying to design a product. The company was able to design a product with three days that was not only stunning from marketing and design prespective but also saved cost at every step in supply chain. The key process was getting everyone's input. "It’s about making sure that when we design products, we design them

with everyone in mind.” The workshop was a major investment of time and people, but Avon expects to save several million dollars over the next few years because of designing the product right—and another $50 million with ongoing use of the strategy.

REORGANIZATION—AND THE CHANGE-MANAGEMENT CHALLENGE: Once the supply chain processes were redesigned, Avon turned its attention to the new organization—and restructured it around the four key processes of plan, source, make, and deliver. It’s a far simpler model to manage than the old model.” One of Avon’s biggest challenges has been making the concept of a process-driven, collaborative, regional organization in Europe work well on a day-to-day basis. As a result, the metric on inventory days that used to be the general managers’ responsibility now belongs to the supply chain organization, along with the other dayto- day supply chain activities. Notes Toth, “It’s a cultural change—a cultural revolution, really.” Avon did a lot of work to define primary responsibilities, shared responsibilities, and the supporting metrics. By clearly communicating the redesigned structure and accountabilities and defining new performance metrics, Avon began to move the new supply chain organization forward. Toth Explains, “Once you change the roles and responsibilities and set up clear KPIs [key performance indicators] for individuals at the country level and at the regional level, it starts to become institutionalized.” Education and training were another critical piece of Avon’s supply chain

transformation. Avon plans to repeat the program every year with new groups of people to ensure that everyone in the organization understands what a world-class supply chain looks like. Therefore, aside from creating the central data repository and the Web-based system for suppliers, systems upgrades were put on hold— even though Avon’s country-based, entrepreneurial model had resulted in a jumble of systems and no integration. Just as important, Avon Europe is far easier to manage now that it has a streamlined organization, upgraded skills, simplified processes, and the right metrics....