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End Term Assignment
Louis Vuitton Moët Hennessy
vs
Gucci
For requirements of the course
Systems, Strategy and bottlenecks
Date of Submission: 04th
August 2014
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Table of Contents
LUXURY GOODS INDUSTRY ............................................................................................ 4
CHOICE OF THE TWO FIRMS ............................................................................................ 4
LOUIS VUITTON .................................................................................................................. 5
EIGHT DIMENSIONAL ANALYSIS OF LOUIS VUITTON ............................................. 6
SALES, MARKETING AND DISTRIBUTION IN LVMH .................................................. 7
AUTOPOEISIS IN LVMH ..................................................................................................... 7
BOTTLENECK ...................................................................................................................... 8
GUCCI .................................................................................................................................... 8
EIGHT DIMENSIONAL ANALYSIS OF GUCCI................................................................ 9
SALES AND MARKETING IN GUCCI ............................................................................. 11
AUTOPOEISIS IN GUCCI .................................................................................................. 11
BOTTLENECK .................................................................................................................... 11
COMPARISON OF LOUIS VUITTON AND GUCCI ........................................................ 11
CONCLUSION ..................................................................................................................... 13
REFERENCES...................................................................................................................... 14
EXHIBITS ............................................................................................................................ 15
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EXECUTIVE SUMMARY
Luxury Industry is unique in the sense that it is highly driven by image, exclusivity and
high price. Luxury brands have to deliver on high levels of quality. However, there is a
great variability in demand across seasons. At the helm of any leading fashion house, the
designer is the creative force that provides the kick to the autopoeitic system of fashion
house. This deviation amplifying loop in the form of his creations/designs is then brought to
reality by a supply chain network.
In this report, World‟s leading luxury brands - Louis Vuitton and Gucci have been analysed
to identify the various deviation amplifying and deviation counteracting loops in action.
Even though both firms emerge to be artists, the mechanism of deviation counteracting
loops are different. Louis Vuitton has vertical integration whereas Gucci has an outsourced
agile supply chain network that enables the deviation counteracting loop.
Because of this inherent difference in the counteracting loops, it has been concluded that
Louis Vuitton is a “bull elephant” and an “Artist”. On the other hand, Gucci is a “cheetah”
and an “Artist”.
Further, it has been recommended that choice of bottleneck for both firms be capacity as
this would maintain the aura of exclusivity without leading to brand dilution. Also, for
Gucci to achieve its mission of becoming the leading luxury brand, it has to expand to other
categories.
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LUXURY GOODS INDUSTRY
The luxury goods differentiate themselves from other products by their extraordinariness,
symbolism, quality, aesthetics, rarity and high price. This lends uniqueness to the luxury industry as
it has to rely on marketing and promotion to sell products to a specified group of people. It is also an
industry that has high margins, domination by few players and is shrouded with very few insider
information in public domain. Although only a select few can afford luxury goods, the vast majority
of people who are exposed to advertisements for certain products generally have aspirations of
being able to own these products someday.
The target customers in this industry are high net worth individuals. Globally, China is witnessing
the highest increase in the luxury goods market (around 20% as per Euro monitor 2013). Leading
luxury brands like Hermes, Louis Vuitton, Gucci have opened up stores in China.
Luxury industry is led by fashion houses from Italy, France where they have access to highly skilled
craftsman. Apparel wear sales takes place seasonally wherein every fashion house would unveil
their design samples in fashion fairs. Based on the feedback, the creative team modify their samples
and unveil their collection in a sales campaign which lasts for 4-6 weeks. Within this period, direct
orders from key shops or distributor is received. The orders are delivered after around six months to
the shops, distributors and boutiques. Because of raw materials mismatch between forecasted and
actual orders, most of the times delivered quantity is always lower.
CHOICE OF THE TWO FIRMS
Louis Vuitton and Gucci are among the most widely respected brands in the luxury business. Louis
Vuitton group has been stable under stewardship of the Arnault family. Gucci on the other hand had
a tumultuous history when the group was negatively affected by family in fighting and had lost
strategic direction. It was only under the leadership of Tom Ford that the group had a resurgence
that was hailed as one of the biggest turnarounds in the fashion industry. Gucci also had faced the
threat of acquisition by LVMH which dragged in the court in the early 2000‟s.
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Today, the LVMH group commands eight times higher revenue than Gucci group, however in terms
of consumer perception of high end luxury, both are similarly positioned and face similar
challenges. In terms of advertisement campaigns, LVMH focuses on universal themes like the
adventure, travel, journey, time while Gucci focuses on imagery of raw sex appeal. Gucci scores
brownie points for its resilience. It has managed to rise above the factors that tormented it, and has
continued being one of the leading luxury brands in the world. In the highly dynamic environment
of luxury business, where these two firms currently stand in direct competition, this report seeks to
explore the strategies of both the firm.
LOUIS VUITTON
Louis Vuitton Moët Hennessy, referred to as Louis Vuitton is a French fashion house founded in
1854 by Louis Vuitton. Louis Vuitton is one of the world's leading international fashion houses; it
sells its products through lease departments in high-end department stores, standalone boutiques and
through its website. For six consecutive years (2006 – 2012), Louis Vuitton has been named the
world's most valuable luxury brand. Its brand valuation in 2013 was 28.4 billion USD with a sales
of 9.4 billion USD.
To maintain its aura of exclusivity. Vuitton has constantly pushed the limits. While it sells limited-
edition runway pieces, priced at thousands of euros, its iconic brown and gold monogram bags and
wallets is owned by millions of women. LVMH has also forayed into a wide category of products
ranging from designer apparel to super premium beauty and personal care, luxury jewellery and
timepieces and fine wines and spirits.
Mr Arnault is the chief executive, chairman and controlling shareholder of the LVMH group, the
world's largest luxury group. Over the past quarter-century he has transformed a small, almost
defunct clothing manufacturer into a conglomerate with control more than 60 luxury brands.
In Japan, where 15% of the group's sales were generated a decade ago, a startling 85% of women
own a Louis Vuitton product. Louis Vuitton is not set its sight on the emerging markets like China
where luxury market growth is expected to be around 20 %.
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EIGHT DIMENSIONAL ANALYSIS OF LOUIS VUITTON
Capacity: Based on extensive forecasting models, the production quantity is decided much prior to
sales campaign. There will be variations in demand from season to season which results in supply
chain problems.
Facility: The Company owns 17 factories that manufacture bags and accessories. Twelve factories
in France; in addition, there are three factories in Spain and two in California. The company only
manufactures components such as zippers in Asia.
Technology: Vuitton developed a computer program to help leather cutters identify the flaws in
the skins they receive. The program determines where to cut out the dozens of different pieces of a
bag, a process that has drastically reduced the amount of wasted leather.
At Vuitton's shoe factory in Italy, instead of workers walking back and forth from their workstation
to the shelves, now robots fetch the foot molds. The use of robots resulted in a "considerable"
reduction in production time.
Production Planning: Based on the forecasted demand by the logistics department, production
commences. Currently, LVMH is facing extremely high demand in many of its product wherein it is
losing a large number of potential sales. It has however been conservative in increasing its capacity
and opted for growth in small chunks.
Quality: Vuitton remains known for high quality, but the work isn't all artisan. Indeed, last year
two of its ads showing workers making things by hand were banned by Britain's advertising
watchdog for potentially misleading consumers.
Vuitton has implemented production improvement measures like reorganizing teams of about 10
workers in U-shaped clusters, which freed up 10% more floor space in its factories. This allowed
Vuitton to hire more production workers. It had also implemented a lean production process,
inspired by Japanese car makers.
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Further, it has undertaken quality focused initiatives
Extensive laboratory equipment test products (e.g. opening and closing zippers 5,000
times).
Leather is sourced from Northern Europe, as they tend to have fewer insect bites, thus are
less blemished.
The company offers a lifetime repair guarantee.
Integrate manufacturing initiatives such as “quality circles” in the production process.
Workforce: Majority of the workforce is composed of skilled operators called “maroquiniers”,
which represents the direct workforce. Traditional craftsmanship is one of the mainstays of LVMH.
Organisation: The Company is decentralized by design and has very small cadre of managers.
There is mix of centralised system and individual independence with each brand within LVMH fold
being stand-alone and autonomous.
Scope: Vuitton has vertically integrated towards suppliers and customers. Further, the scale in
production is matched by the demand through a wide-ranging category focus from designer apparel
to super premium beauty and personal care, luxury jewellery and timepieces and fine wines and
spirits.
SALES, MARKETING AND DISTRIBUTION IN LVMH
As of 2011, Vuitton had 456 stores around the globe, over 100 more than rival Gucci. Its
omnipresence has pushed it to be more selective in its openings.
AUTOPOEISIS IN LVMH
The mission statement of the LVMH group is to represent the most refined qualities of Western "Art
de Vivre" around the world. LVMH identifies itself synonymous with both elegance and creativity.
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Through their products, and the cultural values they embody, they want to blend tradition and
innovation, and kindle dream and fantasy.
In this regard, LVMH has given complete freedom to the creative directors and considers that
creativity should not be hampered by the short term view of profits. Further, to realise the vision of
creative team it has located its most of factories near France, where excellent craftsmen are
available. To steward the whole group together along the group‟s mission, Mr Arnault has designed
a system where both creation and execution work in tandem.
The autopoeisis of LVMH lies in creating an aura of exclusivity around its products that allows it to
command high margins from its products. This high margins allows the group‟s creative team to
innovate (deviation amplifying loop) along with an execution team of highly skilled craftsmen to
realise the creative vision (deviation counteracting loop). Further, autopoeisis for the group also
includes the acquisition of rival brands for consolidation and act as avenues for survival and growth
in case its flagship brands fails.
BOTTLENECK
Louis Vuitton has chosen capacity as its bottleneck by being extremely conservative on capacity
expansion despite the huge surge in demand. Many of its stores had to shut shop before closure of
season. This choice of bottleneck is appropriate as the autopoeisis of the group maintained through
an aura of elusiveness would remain unaffected. If LVMH tries to boost capacity, there is a
possibility of brand dilution which can jeopardise the autopoeisis of the system.
GUCCI
Gucci was founded by Guccio Gucci in Florence, Italy in 1921. Gucci generated about € 4.2 billion
in revenue worldwide in 2008 according to BusinessWeek magazine and was ranked 38 most
valuable brand in Forbes list 2013. Gucci is also the biggest-selling Italian brand. As of September
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2009, Gucci operates about 278 directly operated stores worldwide and wholesales its products
through upscale department stores and franchisees. In the year 2013 the brand valuation climbed to
$ 12.1 Billion USD with sales posted at $4.7 billion USD.
However, the company was perilously close to bankruptcy during the 1980‟s, plagued by years of
infighting among the Gucci family members. Recklessly selling goods, the once glamorous brand
name was .almost tarnished. Production deadlocks were aplenty, suppliers were lining up for
pending payments and the workforce was demotivated. When Domenico De Sole took the reins in
1994, the Gucci Group, soon staged the biggest brand renaissance and company turnaround in high-
fashion history within a very short span of time. Even two decades after, Gucci continues to be a
highly desired exclusive luxury brand.
EIGHT DIMENSIONAL ANALYSIS OF GUCCI
Capacity: Almost 90% of Gucci products are new each season in comparison to 70 % of the
competitors. The company develops 18,000 prototypes/year and manages some 4,000 different
stock keeping units (to facilitate distinctions to be made between product ranges, materials and
colours). To deal with this, Gucci has outsourced all its production. The supply network comprises
more than 600 firms providing employment to roughly 4,000 people. Gucci has more than 80 other
leather goods suppliers who provide the flexibility to increase and decrease production capacity
(and output) as necessary.
Facility: Gucci has assigned the operations task to a dedicated company - Gucci Logistica which
employs 320 people and is structured around five major areas: materials research & development,
operations, technical management, production and costing. While most production activities are
outsourced, production department plays a key role in monitoring workflow progress across the
supply chain. The department is responsible for order handling, procurement.
Technology: While such a decentralised network allows Gucci a high level of flexibility, it requires
significant coordination efforts. This is enabled by an MRP system via which planners can check
availability of components and processing times at suppliers, and then define production quantities.
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Loading at suppliers can subsequently be changed by up to ±15%. Gucci has also installed systems
to keep in track with its top ten suppliers. This has resulted in accuracy and speed in the distribution
process.
Production Planning: Once the customer order is received based on the seasonal trends, Gucci
purchases the raw materials including the hardware and stocks it at its own warehouses. Materials
are then checked and distributed to the various suppliers according the allocated production order.
Gucci retains ownership thus outsourcing only the pure production activities. With strong focus on
„craftmanship‟, product engineering is carried out in a detailed way in terms of both measures and
materials merging.
Quality: Gucci quality has to be consistently achieved from each of the 600 Gucci suppliers. In
order to help suppliers to comply with Gucci standards, there are technical advisors (that support the
supplier network in the definition and the start-up of the new collections. In addition to these
advisors acting at the beginning of the cycle to prevent defects, there are also QC inspectors that
check the quality of the finished products.
Workforce: Gucci Logistica employs 320 people and has five subdivisions: materials research &
development, operations, technical management, production and costing. It has incorporated
practices such as 360-degree feedback and coaching programme.
Organisation: There is tighter centralised control in Gucci relative to LVMH. All design related
issues have to be approved solely by the creative head.
Scope: Gucci supply network has two kinds of partnership - 70 first tier suppliers and roughly 500-
600 second tier companies. First tier relationship is governed by formal contracts. The suppliers
have to meet the standards as required by Gucci. Gucci also enjoys wide level of trust with suppliers
and involves in developing their production capabilities. This arrangements enable Gucci to respond
to the variable demand across seasons in agile manner without compromise on quality.
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SALES AND MARKETING IN GUCCI
Gucci operates more than 680 boutiques worldwide and wholesales its products through franchisees
and high -end department stores.
AUTOPOEISIS IN GUCCI
Gucci autopoeisis lies in its core competency of handling an agile supply chain system where in it
has outsourced all its production. However, for this autopoeitic system a kick in the form of
inspirational leadership at the helm is required. LVMH had the benefit of stable leadership. In
contrast, after years of identity crisis, Gucci got the strong vision of Tom Ford and Dominic De Sole
in 1990‟s that provided the kick to create revamped identity.
BOTTLENECK
Gucci right now faces growth bottlenecks in terms of capacity as well as number of categories. It is
recommended that Gucci also increase its product categories so that the sole bottleneck remains
capacity which is preferable in luxury goods industry. Gucci had been vulnerable to hostile takeover
by LVMH. Expanding product category wise with capacity as bottleneck can be a sustainable
strategy to attain its goal of being the leading luxury brand.
COMPARISON OF LOUIS VUITTON AND GUCCI
Louis Vuitton Gucci
Capacity Currently facing supply shortage due to
demand upsurge post-recession; however
LVMH conservative in capacity addition
Agile supply chain system to meet fluctuations in
demand
Facility Owns 17 facilities (12 in France, 3 in Outsourced all its production
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Spain and 2 in California); Located
mostly near centres of skilled
craftsmanship
Supply network of 600 firms mainly based in Italy
known for high quality artisanship
Technology Process layout improvements such as U
shaped layout; Use of robots to reduce
time
Interlinking with its top ten suppliers to revamp
production with accuracy and speed
Production
Planning
based on volumes forecasted by the
logistics department
based on volumes forecasted by the logistics
department
Quality Lean production processes; quality focus
circles; Process layout improvements
Quality checks and monitoring of suppliers
Workforce Craftsman, highly skilled;
Design decided by the creative
team/stylist
Production Coordination by Gucci Logistica with hr
practices such as 360 degree feedback; Outsourced to
highly skilled craftsmen in Florence ; Designs
decided by the creative team/stylist
Organisation Greater degree of independence to the
managers
Tighter centralised control
Scope Vertical integration towards both
suppliers and customers; Owns factories
and sells only via directly operated stores
Outsourced production and sells via directly operated
stores, franchisees, departmental stores
Bottleneck Capacity as demand is outstripping supply Capacity
Presence in limited product categories relative to
LVMH
Recommende
d Choice of
Bottleneck
The choice is apt. Gucci should increase its product categories and
choose capacity as the sole bottleneck to become
leading luxury brand.
Bottleneck Capacity as demand is outstripping supply Capacity
Presence in limited product categories relative to
LVMH
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CONCLUSION
LVMH can be considered as a bull elephant as it is extremely conservative on capacity
addition and has achieved economies of scale via both forward and backward integration.
At the same time, it has expanded itself in wide range of product categories. By delivering
highest levels of quality at the highest price it is one of the highest levels of artist.
Gucci on the other hand because of its agile supply chain and lower fixed costs can be
considered a cheetah. It is also an artist.
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REFERENCES
“Managing exclusivity and availability of fashion products: a supply chain perspective” -
Vittoria_Veronesi, http://aisberg.unibg.it/bitstream/10446/912/1/Vittoria_ Verone_PhD _Thesis .pdf
“Agile Supply Chain in the Fashion Business” - Corrada Cerruti, http://www.littoralis.info/iom/s
ecure/assets/iom20061030.372121_4545a4f9d571.pdf
Supply Chain Management, http://guccippr.blogspot.in/p/supply-chain-management.html
“Gucci – A case study” http://innovatingsustainablefashion.files.wordpress.com/2012/07/group _1_gucci. Pdf
“LVMH Supply Chain” - Dow Jones News Service, http://online.wsj.com/ad/upsarticle-2-7-4.html
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Media coverage of the show Valuable – cost of show
$500,000 with value of
media coverage into
millions of dollars
Special pre collection
briefing for the department
stores
Medium – useful for brand
promotion and aspiration
Brand associated products
like ready to wear and
accessories like shoes and
bags
Possibly highest value
added here
Service – exclusive and
discreet level of service to
the wealthy clients
Additional and important
service for clients wishing to
purchase
Through ownership of retail
outlets
High but small number of
clients for Haute Couture
Greater number of clients
for ready to wear
Source : Business of fashion
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Exhibit 2:
Exhibit 3:
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Exhibit 4:
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