Business Case Acd l'Oreal

The L’Oreal ACD Supply Chain Puzzle

page 1


Diagnosing the root causes of supply chain underperformance

Written by: Richard Markoff, L’Oréal


page 2

Context

The December 2010 meeting in Paris to discuss the customer service level crisis at L’Oreal’s Active Cosmetics Division (ACD) had just

wrapped up. Jean-Philippe Blanpain, L’Oreal’s COO, and Laurent Datrier, the company’s 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. It’s too easy to always point the finger at the factory, but they can’t react immediately to all of the

changes in demand’. Laurent wasn’t 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 isn’t 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 didn’t add up,

and he wanted this resolved quickly.

‘We aren’t going to get to the bottom of it this way’, he said. ‘I suggest we have someone from Laurent’s staff spend a few days down at

the factory to see what they can discover. We’ll 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 L’Oreal USA affiliate in

New York into the position, Richard had 17 years experience in L’Oreal 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 hadn’t 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.

Background

L’Oreal’s 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 L’Oreal in 1955. Complemented with other brands offering to bring medical advances to cosmetics, the Active Cosmetics

Division unit of L’Oreal 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 m2 of developed installations. The La Roche Posay site was just over 10,000

m2, and was completed in 1976. Between the 2 sites CAP employed 450 people in operations and administration.

ACD supply Chain

The 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


page 3

over 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 L’Oreal as a whole, and exerted a dotted line influence on the operational supply chains such as ACD’s. (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 factory’s 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 visit

In 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 ACD’s 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 weren’t happy, but the reason for their frustration wasn’t 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 factory’s approach. ‘Every time we try to explain to them that our service is suffering, and our

customers are unhappy, we’re 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 can’t do.’ The rest of her team agreed with

Sandrine’s assessment.

‘We’re told by the plant that they will produce a key SKU, and then at the start of the month they change their plans. But I’ve 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 can’t seem to get any straight answers’.

‘It doesn’t help me if the factory completes their production plan if I can’t service the customer. The factory doesn’t have to deal with

dozens of frustrated subsidiaries that can’t reach their sales targets because they don’t have the products they need ’


page 4

Richard went to see Jean-Francois Moulin, the head of the ACD Supply Chain. Jean Francois believed the problem was not in the sales

forecasts sent to the factory. ‘We measure the sales forecasts deviation rate each month. When we compare the actual sales to the

forecasts at the start of the month, we are only off by 35% or so (see Exhibit 6). The problem is at the factory, they are not making the

SKUs we need.’

Jean-Francois’ boss, Henri Masel, was less convinced. He shared with Richard the production achievement and production adherence. The

achievement compared the total units produced in the month to the total units planned, and the adherence measured the compared the

units produced of the SKUs that were originally planned in the month to the original plan (Exhibit 7). Therefore, the production plan

adherence would not give credit to overproduction of references that were not needed. Historically, L’Oreal factories that were not

experiencing service issues would attain 100% plan achievement, and 92% plan adherence. The next step was to spend a few days at the

factory to try to get the whole story.

The factory visit

The visit began with an interview with the factory director, Philippe DeQuincey and the Manufacturing Supply Chain manager, Francois de

la Masseliere. Francois had recently joined CAP, arriving 6 months before from Sandrine’s International Logistics team.

They shared the recent history of the CAP factory, and their perspective on the current service crisis. ‘The problem is clearly one of

forecasting,’ asserted Philippe. ‘They may say that the forecasts are good, but it seems like we are always dealing with demand increases’.

(Exhibit 8)

Francois explained that the key packaging component vendor for the factory was their tube supplier, and this supplier was very unreliable.

They would not accept increases when provided with less than 3 months notice. To the factory, this supplier was the second cause for

headaches. ‘If it isn’t the demand exploding, it’s the tube vendor not being to make what we need.’

CAP felt that a good tube supplier should be able to accommodate changes in tube demand quantities with only 2 months warning. In

order to be sure the tube supplier understood how important it was to CAP that these increases be accepted, even if the tube supplier

informed the factory that the new demand could not be met, CAP did not alter their production plans. ‘We have to show the tube supplier

we mean business’ was the explanation one of the planners provided. ‘By leaving the order in our production plan, our MRP will continue

to show the tube supplier that we need the tubes.’ When the planner was asked what happens when it came time to start the monthly

production at CAP and the tube supplier still had not confirmed that they could supply all the tubes that were asked of them, the planner

explained that at the start of the month they removed the production that had generated the MRP increase in tube demand. ‘It doesn’t do

us any good to leave the order in our production plan if we aren’t going to get any tubes to fill the order, that will just lower our production

achievement and adherence’ rates’.

The problems with the tube supplier didn’t stop there. ‘There have been a series of quality issues and late deliveries. We work on just-

time delivery releases here, and if the tubes don’t arrive as promised or are damaged, then our entire shop floor schedule is thrown off.’

Francois explained that he recently changed the organization of his department, into one that allowed for better management of his

suppliers. The previous organization had the team that prepared the production plan separate from the team that worked up the MRP and

shared the requirements with the plant’s suppliers. The MRP cells were divided roughly along the technologies of the packaging

components they planned. The new organization split the planners into two cells that aligned with the internal production departments,

and each cell did the vertical planning, from production plan to MRP, for each of the departments (Exhibits 9 and 10).

Francois explained the motivation behind the change. ‘In our previous organization, the production planners were not sensitive enough to

the considerations of our suppliers. Even if we had parameters in our planning tools to capture the production plan frozen horizon, we still

sometimes asked the supplier to try to accommodate increases within their stated lead times. This meant the production planners had to

check with the MRP planners, who had to check with the vendors. With this long communications flow, the information would sometimes

get lost along the way, and our production plans were not feasible since we didn’t have packaging component availability.’

‘By combining the two functions, the person who does the production plan is also managing the person who calculates the MRP and

collaborates with the vendors. They take full responsibility for the feasibility of their production plans. And as for our production units,

they now have a dedicated cell planning only for them, making it easier for them to know who to speak to if there are any problems’.


page 5

Richard and Francois explored this further, since this was the first time a L’Oreal factory had tried this sort of organizational structure. In

the classical organization, the MRP planners were usually structured around key vendors, but in the new structure they were organized

around production lines. Francois confirmed that there were now 11 MRP planners working with the tube supplier, up from 3 before. ‘But

this doesn’t create a communication problem,’ explained Francois. ‘Since this tube supplier is critical, I’ve asked one of the MRP planners

to coordinate our issues across the factory and manage the problems with the tube supplier.’

Richard sought out one of the most seasoned planners at the CAP factory, Fred, and they had a long chat over coffee. Fred shared his

frustration over the approach the International Logistics team. From his perspective, whenever he provided bad news about a service

issue, the International Logistics team would pepper him with questions and offering unsolicited ideas on how to resolve the problem of

the moment. ‘I don’t need them telling me how to do my job. If I’m calling them to tell what’s the best we can do, it’s because I’ve already

considered all of the options.’

With the revamped organization, Fred was newly in charge of a stable of MRP planners. Fred felt this new organization had a lot of

potential, though he hadn’t gotten involved in the problems with the tube supplier. He felt he had little experience in the way vendors

worked, since his specialty was planning internal production, the step before MRP. He clearly shared Francois’ frustration with the tube

supplier: ‘We ask them to increase the tube supplier for a SKU that is selling well, and they refuse! We’ll have to keep applying the

pressure, since it’s the only way we are going to get what we need from them. They need to understand that we are the customer’

This approach was echoed by other planners. Stated Nathalie, a long-time CAP planner, ‘I can’t trust the tube supplier at all. They don’t

deliver what we need. We’re the customer, and I feel sometimes that they forget that.’

The tube supplier

Since the tube supplier came up in each discussion at the factory, Richard invited their Supply Chain head to Paris to discuss their relations

with the CAP factory. He met with Nelly, the supply chain manager for the L’Oreal account. Her frustration at the situation with the CAP

factory was palpable. She was very aware that the CAP factory was not satisfied with the service she and her team were providing, but she

insisted that she was doing what she could to be transparent. Whenever increases were transmitted by CAP that the tube supplier couldn’t

accommodate, they would reply right away that there was a problem.

‘I raise the flag immediately when I can’t answer a requirement,’ said Nelly, ‘but it’s like I’m talking to a wall. The next month the

requirement hasn’t gone back down. It’s almost as though they feel that if they keep asking the same question the answer will eventually

be what they want to hear.’

Nelly pointed out that the vendor landscape had changed over the past few years. Private equity ownership had entered the realm of

packaging suppliers, and they understood how to maximize the bottom line. Suppliers like them were now saturating their production

equipment to nearly 100% on a 24-hour/5-day schedule. They couldn’t accommodate increases like they used to, even for long-standing

customers like L’Oreal. Tubes that used to have a lead time typically on the order of 3 months was now more like 4 months, and the

situation wasn’t likely to revert to old ways any time soon. To Nelly, the rules of the game were changing, and L’Oreal wasn’t adapting to

the times. ‘The CAP factory has recently changed its supply chain structure. We receive requirements from several people. I understand

there is a new Manufacturing Supply Chain Manager at the factory, but we haven’t had occasion to meet yet. We’ve had some quality

issues recently, to be sure, but execution problems and structural lead times are two different things’.

The International Logistics team

Another piece of the puzzle was the inventory levels of the finished production held by the International Logistics team. The monthly

planning rhythm meant that the usual practice was to target a stock on one month of cycle stock, in addition to a safety stock. The safety

stock was meant to handle increases in demand from the subsidiaries that may occur within the lead time of the factory to schedule new

production. The lead time of the factory was largely a function of the lead time of key packaging components like tubes.

Sandrine explained her approach to defining safety stocks. The safety stock levels are defined at least twice a year. The last ‘reset’ was

only a few months ago. There are 3 important variables that the International Logistics team uses in determining the safety stocks: ABC

class, forecast deviation rate and factory lead time.


page 6

Using a classic Pareto ABC class definition, the planners would try to be as careful as possible with ‘A’ class SKUs. ‘These are the SKUs that

most affect our inventory level’, one of the International Logistics planners explained. ‘If we are not careful, we’ll exceed our inventory

targets because we have too much safety stock on these high-value, high-volume products’. The ACD supply chain had begun a strong

push two years ago to optimize inventories, and planners were evaluated in large part on their ability to maintain service and lower

inventory at the same time (recent ACD inventory level results are shown in Exhibit 11).

The forecast deviation rate and factory lead-time was also important in defining the safety stocks. The more volatile the demand for a

product, the higher the risk that there will be a forecast oversell before the factory can recover and schedule a new batch. This meant

SKUs with better forecasts should need less safety stock, and SKUs with lower factory lead times should need less safety stock. Since

L’Oreal factories prepared a production plan every month, this lead time is measured in months.

Sandrine provided Richard with a summary of the safety stocks by ABC class and factory lead time (see Exhibit 12).

The next steps

Richard had spoken to the factory management, to the International Logistics team, the ACD operations management and even met with

the key tube supplier. It was time to sit down and try to understand where things were going wrong in the ACD supply chain. Mr.

Blanpain, Mr. Masel and Mr. Datrier were expecting answers that provided insight and a path forward.

What should Richard present to his senior management?


page 7

Exhibit 1 – The L’Oreal ACD brand portfolio

Exhibit 2 – The CAP Facilities in France

VICHY

LA ROCHE POSAY

Exhibit 3 – Operation Hierarchy Chart

Exhibit 4 – L’Oreal Planning Cycle

Exhibit 5 –ACD Service Performance

ACD Operations DirectorH. Mas

ACD Supply Chain Head

J. F. Mouiln

Executive VP ACDB. Lieberman

CAP Factory ManagerP. DeQuincey

CAP ManufacturingSupplyChain Manager

F. De La Masseliere

ACD International Logistics Head

Sandrine Torandell


ACD Subsidiary SupplyChain Heads


COOJ.P. Blanpain

Global CorporateSupplyChain Director

L. Datrier

Chain Manufacturing SupplyChain Head

R. Markoff

ACD International

Torandell



page 8


page 9

Exhibit 6 – ACD 2010 Forecast Deviation Rate

Forecast Deviation Rate is defined as:

%��|units sold in M � units forecast start M|

��

86%

88%

90%

92%

94%

96%

98%

100%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Pe

rce

nt

Month

ACD Service Level 2009-2010

2009 2010

39%

38%36%

33%

39%

43%

37%

41% 40% 40% 40% 41%

0%

10%

20%

30%

40%

50%

60%

Year 2010 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Pe

rce

nt

Month

ACD 2010 Forecast Deviation Rate


page 10

Exhibit 7 – ACD 2010 Production Plan Achievement and Adherence

Production Plan Achievement is defined as:

%�� !"� �� #��$ �

�� %��"� %� ��% � �& #��$ � &� ��

Production Plan Adherence is defined as:

%�� !"� �" ��%� �� #��$ �

�� %��"� %� ��% � �& #��$ � &� ��

Exhibit 8 – Evolution of ACD demand forecast

Exhibit 9 – Former CAP Manufacturing Supply Chain Department Structure

70

75

80

85

90

95

100

105

110

115

AVG 2009 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Pe

rce

nt

Month

CAP Factory Production Performance

Production Plan Adherence Production Plan Achievement

6/2010 7/2010 8/2010 9/2010 10/2010 11/2010 12/2010 1/2011 2/2011 3/2011 4/2011 5/2011 6/2011 7/2011

forecasts end 5/2010 13 205 10 759 9 859 11 596 10 484 9 286 8 287 16 232 12 406 12 842 8 566 6 839 0 170

forecasts end 6/2010 12 042 9 733 12 121 10 569 9 485 8 476 15 710 16 845 14 721 9 912 8 609 7 842 251

forecasts end 7/2010 11 899 12 258 10 386 9 966 9 915 17 382 18 160 13 362 10 681 9 220 8 591 6 458

forecasts end 8/2010 13 179 10 340 10 445 10 780 17 976 18 640 13 979 11 493 9 731 9 383 7 273

forecasts end 9/2010 11 997 10 763 11 131 19 799 18 365 14 356 12 594 10 660 10 271 9 100

forecasts end 10/2010 12 725 10 692 18 366 18 095 15 269 13 694 11 000 10 533 10 123

Actual Shipped 11 337 11 043 9 839 11 944 9 883 10 589

values in thousands of units

MRP PlannersMRP Planners

Master Production Scheduler 1

MRP Supply Cell 1 Head

Manufacturing SupplyChain Manager

Master Production Scheduler 2

MRP Supply Cell 2 Head

MRP Planners MRP Planners


page 11

Exhibit 10 – New CAP Manufacturing Supply Chain Department Structure

Exhibit 11 – Evolution of ACD Inventory Level

Exhibit 12 – Safety Stocks of ACD basic catalogue

Planning Cell 1

Manufacturing SupplyChain Manager

Planning Cell 2


MRP Planners


MRP Planners

10

20

30

40

50

60

70

80

90

100

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

M€

Month

ACD

Monthly inventory in M€

2010 2009

Safety Stock LT=0 LT=1 LT=2 LT=3 LT=0 LT=1 LT=2 LT=3 LT=0 LT=1 LT=2 LT=3

0 days 37 39 49 2 18 18 38 5 14 50 133 14

between 0 and 15 days 3 74 54 7 2 36 38 3 1 14 57 4

between 15 and 30 days 14 7 1 8 17 1 9 23 2

between 15 and 60 days 2 3 3 1 3 1

between 60 and 90 days 5 3

greater than 90 days 2

Total 40 129 113 10 20 65 93 6 15 73 223 19

LT = CAP factory Lead Time in months

Class A Products Class C ProductsClass B Products

Business Case Acd l'Oreal

Documents

Transcript of Business Case Acd l'Oreal