Business Case Acd l'Oreal

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The LOreal ACD Supply Chain Puzzle

The LOreal ACD Supply Chain PuzzleDiagnosing the root causes of supply chain underperformance

Written by: Richard Markoff, LOral

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The LOreal ACD Supply Chain PuzzleContext

The December 2010 meeting in Paris to discuss the customer service level crisis at LOreals Active Cosmetics Division (ACD) had just wrapped up. Jean-Philippe Blanpain, LOreals COO, and Laurent Datrier, the companys Corporate Supply Chain head, had heard clearly from the Executive VP of the global business unit that the service level provided by the division to the market was not meeting expectations. The service in 2009 was disappointing, particularly in the latter half of the year, and 2010 was shaping up to be more of the same. Jean-Philippe and Laurent spoke to Henri Masel, the Operations Director of Active Cosmetics, and together they tried to identify the root causes. Henri was convinced the problem was downstream in the supply chain, in the many countries around the world that were supplied from the lone Active Cosmetics factory in France. The problem is fundamentally one of demand, insisted Henri. The factory is achieving its production plans successfully. Its too easy to always point the finger at the factory, but they cant react immediately to all of the changes in demand. Laurent wasnt convinced. When I look at the forecast deviation rate, it seems like the forecasts are very good in ACD. They are better than those of our other business units. If it isnt the demand, it has to be the supply. Jean-Philippe believed the problem went beyond key performance metrics. He wanted to dig deeper and go past the numbers to understand what the real fundamental issues were. He knew the factory in Vichy was a good factory that had historically performed well, and that the supply chain was capable of meeting the service level requirements the business needed to grow. Something didnt add up, and he wanted this resolved quickly. We arent going to get to the bottom of it this way, he said. I suggest we have someone from Laurents staff spend a few days down at the factory to see what they can discover. Well do a supply chain diagnostic analysis. It will be objective and sponsored by senior management. Laurent suggested Richard Markoff, his corporate head of Manufacturing Supply Chain. Very newly arrived from the LOreal USA affiliate in New York into the position, Richard had 17 years experience in LOreal in supply chain from factories to distribution. Laurent figured this would be a good way to get his feet wet in France quickly, and since he hadnt ramped up yet on ongoing projects he could head to central France right away to begin. The three senior managers agreed to the plan, and approached Richard to get the process started.

BackgroundLOreals Active Cosmetics Division was composed of 5 brands (Exhibit 1), but the bulk of the sales were of the brands la Roche Posay and Vichy. Long renown for the beneficial effects of its waters, the Vichy brand was founded in 1937 by a local dermatologist, the company was acquired by LOreal in 1955. Complemented with other brands offering to bring medical advances to cosmetics, the Active Cosmetics Division unit of LOreal was created in 1983. The La Roche Posay brand was added in 1989, offering dermatologist-recommended skincare made with the famous water from the town of La Roche Posay. The CAP factory was comprised of 2 production sites, both of which were in France. Each was linked to the source water that was a key ingredient, one site in the city of La Roche Posay and another in the city of Vichy (Exhibit 2). The Vichy factory was completed in 1969 and covered 50,000 m of developed installations. The La Roche Posay site was just over 10,000 2 m , and was completed in 1976. Between the 2 sites CAP employed 450 people in operations and administration.2

ACD supply ChainThe ACD supply chain was truly a global web. The pillar ACD brands, La Roche Posay and Vichy, were strongly associated with the water that bubbled up from the springs by the towns of the same name. This water was a key ingredient for the products, and the factory was built up in close proximity to the water sources. With a business model that promoted and marketed the brands over 20 countries, Henri Masel had built a global supply chain to manage the physical and information flows between the countries and the factories. In charge of this supply chain was Jean-Francois Moulin. He had direct authority over the International Supply Chain team, and dotted line authority

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The LOreal ACD Supply Chain Puzzleover the Subsidiary Supply Chain groups in each affiliate, as well as the Manufacturing Supply Chain team at the factory through his International Logistics team. The corporate supply chain group, headed by Laurent Datrier, served as a functional hierarchy providing guidance in best practices and innovation for LOreal as a whole, and exerted a dotted line influence on the operational supply chains such as ACDs. (Exhibit 3). The supply chain cycle began in each country, where the Subsidiary Supply Chain teams would prepare monthly demand plans for all of the SKUs in the catalogue. The demand plan was prepared for each SKU each month over 15 months. For basic sales items, this demand plan was then sent to the International Logistics team, but for promotional products and launches the countries prepared monthly orders that were frozen several months ahead of time. The International Supply Chain team, based in Paris, would collect these demand plans from the countries all over the world just before the end of the month and consolidate the requirements. This step had to be done with care, since the high level of product turnover (about 30% of the ACD business was on products launched in the previous 12 months) meant that sometimes launches were placed in the wrong month, or the internal product codes had changed or the data was incomplete in some other way. The last week of the month was key for the team, they had only a few precious days to sift through the demand for a catalogue of 2,300 finished good SKUs from dozens of markets in order to consolidate them into one demand file to send to the CAP factory. At the factory, once the demand file was received, the Manufacturing Supply Chain group went into action. The opening inventory at the international DC was matched against the demand file, and the factory had to determine a monthly production plan over the next 12 months. They had to balance the demand against the production capacity of the factory and the reactivity of their material suppliers. The monthly cycle led to a planning policy of keeping one month of inventory plus a safety stock to buffer demand variations. Production occurred in two steps: first the bulk product had to be blended in large mixing vessels that ranged from 100 liters to 10,000 liters. Once the bulk product was made, it had to be quickly filled on the packaging lines into glass jars, bottles, tubes and sachets. In addition to driving the capacity decisions for 54 filling lines and 19 mixing vessels, the plan was needed to communicate packaging and raw material requirements for the factorys vendors. CAP managed 2,800 packaging material SKUs from 84 vendors and 900 raw material SKUs from 148 vendors. The moment the production plan was validated by plant management, the MRP was run and the planners began looking over the results to share the packaging and raw material requirements with the vendors. The production plan was also shared with the International Logistics team. Any projected stock shortages had to be examined, and the results were communicated to the different customer supply chain groups. The quantities that they had asked for were either confirmed, or in the event of a shortage they were informed of the share of the stock they could expect. The entire planning cycle took almost a month to complete, and was repeated each month (see Exhibit 4).

Preparation for the factory visitIn order to prepare for his trip to CAP, Richard began by looking at the recent service performance history of the supply chain. He started by looking at the service (Exhibit 5). Measured as the percentage in value of unserved orders to ACDs customers, it did seem to be telling the story of a third straight year of degrading service levels. But still, while the service was low, it was not catastrophic. In fact, each of the three previous summers had seen the service drop below current levels. Still, he knew service to be a matter of perception on the part of the customers, both internal and external ones. They clearly werent happy, but the reason for their frustration wasnt in the charts. Next step was to meet with some of the key actors in the ACD supply chain. Sandrine Torandell, the head of the International Logistics team, was deeply frustrated with the CAP factorys approach. Every time we try to explain to them that our service is suffering, and our customers are unhappy, were always told that they are achieving their production plans. The problem is that the factory always lowers their production plan at the beginning of the month, and removes productions that they cant do. The rest of her team agreed with Sandrines assessment. Were told by the plant that they will produce a key SKU, and then at the start of the month they change their plans. But Ive already told all of the countries to count on a shipment! We try to get to the bottom of why the plan has changed, but we cant seem to get any straight answers. It doesnt help me if the factory completes their production plan if I cant service the customer. The factory doesnt have to deal with dozens of frustrated subsidiaries that cant reach their sales targets because they dont have the products they need

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The LOreal ACD Supply Chain PuzzleRichard went to see Jean-Francois Moulin, the head of