L’Oréal: A Gorgeous Supply Chain Makeover
L’Oréal, the world's largest cosmetics company, is a global leader in operational innovation and digitalization to serve their ever-evolving fashion customers worldwide.
L’Oréal: A Gorgeous Supply Chain Makeover
L’Oréal, the world’s largest cosmetics company[1], remains an acclaimed winner on the annual Gartner’s Top 25 Supply Chains[2] ranking and a global leader in embracing operational innovation and digitalization. What you may ask, is the secret sauce to this beauty company’s story of supply chain success?
Understanding the Basics
L’Oréal’s operations are highly complex – with business across 140 countries, 150+ distribution centers, 42 factories, 34 brands, and 8 distribution channels (including hair salons, mass-market retailers, department stores, drugstores, e-commence, etc.)[3]. L’Oréal’s growth strategy requires a commitment to new product innovation (up to 50% of products refresh annually[4]) focused on new and emerging markets, expansion across e-commerce channels, and widened diversity of distribution. These unique challenges, present L’Oréal’s supply chain leaders with the need for great agility and adaptability to serve their ever-evolving customers worldwide. Leading industry transformation, L’Oréal has invested in cutting-edge technology solutions and supply chain automation.
Progress Through the Years
In 2014 Emmanuel Plazol, L’Oréal’s head of supply chain, told press “our current approach of segmenting by distribution channel needed to evolve”[5]. Therefore, L’Oréal re-designed supply chain capabilities and implemented a world-class integrated information system that provided collaborative compilation of volume forecasts across sales, marketing, supply chain, and finance teams, which were then shared worldwide with their factory and distribution centers[6].
The results[5], improved sales forecast accuracy rate of 60% to 71%, while logistics costs decreased, and shipments increased 40%+ over five years from 2009 to 2014. Intended to improve order precision and responsiveness across the supply chain, even L’Oréal customers at shelf noticed the more efficient stock management[7] and in 2016 retailer’s saw improved customer service levels by more than 2%, while holding inventory constant[4].
Emmanuel Plazol said, “We thought the transformation would come only if our supply chain was close to the markets and customers, and was end-to-end. And for this to happen our supply chain had to cover from the customer to the factories”[5].
Beyond inventory management, L’Oréal has felt the significant operational impact of e-commerce and “change in order profiles” says Erik Rodriguez, director of supply chain for L’Oréal Americas. “The sheer volume of orders has increased, but the lines per order has decreased. Additionally, there’s pressure from our retail customers to reduce our lead times and improve our delivery times because they are running leaner inventories”[8].
To meet the needs of the dynamic market, L’Oréal leverages automation like robotics and slotting software to mechanize their distribution centers globally[8]. By implementing these new solutions, L’Oréal has stayed competitive in order fulfillment speed, reduced labor cost, continuous quality improvement, and meeting the surges during demand peaks. Now, what’s ahead for L’Oréal supply chain innovation?
Strategy Recommendations
Without a doubt, L’Oréal will continue to feel the pressure from the competitive landscape. L’Oréal’s 5%+ annual growth rate has caught the attention of small independent make-up labels piling into the market, noted in The New York Times[9]. Their supply chain transformation and digitalization most empower the company’s success!
As a power-house marketing company, L’Oréal must put the customers need at the center of their supply chain strategy. They must observe, analyze, and predict consumer trends so they can quickly monetize the beauty industry’s impulsiveness and spontaneity. I recommend:
1. L’Oréal should use scarcity to their advantage! If L’Oréal approached each product line as a test-and-learn model, for instance, launching only twenty thousand units of the exclusive Gigi Hadid Maybelline Mascara in USA Target stores; they could predict sales forecasts by region, consumer target, color palette, etc. before launching globally. This fast-fashion apparel business model[10] applied to the beauty industry means less inventory, more collections, and greater flexibility to react to the changing tastes of fashion consumers.
2. L’Oréal should improve their direct-to-consumer sales channel! Today, L’Oréal across its 34 brands, relies on the majority of sales to come from department stores, mass-market retailers, and drugstores. L’Oréal’s predominant e-commerce strategy has been sending consumers from their websites to Amazon.com, Walmart.com, or Target.com to purchase online – but as a result L’Oréal forfeits control of the consumer experience, potential of higher margin, and strategic data analytics. L’Oréal should make strides for a best-in-class e-commerce and omnichannel user experience, driving direct online sales for a stronger customer relationship and better data insights.
3. L’Oréal should build localized, entrepreneurial capabilities! The simple fact is Chinese beauty consumers demand something very different than Americans. L’Oréal must react to regional differences in consumer preferences, while using the same foundational supply chain capabilities. I believe, segmented innovation and regional agility must be at the core of L’Oréal’s organizational culture. Therefore, L’Oréal must build a supply chain for smaller production runs, quicker leadtimes, and more volatile demand cycles for localized market needs.
Key Outstanding Question
How do you manage costs and margins against the chase for customization, speed, and flexibility in L’Oréal’s global supply chain?
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SOURCES
[1] “L’Oréal – Statistics & Facts.” Statista Inc., The Statistics Portal, www.statista.com/topics/1544/loreal/.
[2] “Gartner Announces Rankings of the 2017 Supply Chain Top 25.” The Supply Chain Top 25, Gartner, Inc., 25 May 2017, www.gartner.com/newsroom/id/3728919.
[3] “L’Oréal Key Figures.” L’Oréal Group, www.loreal.com/group/our-activities/key-figures.
[4] “The 2016 Supply Chain Top 25: Lessons from Leaders.” Supply Chain 24/7, 19 Sept. 2016, www.supplychain247.com/article/the_2016_supply_chain_top_25_lessons_from_leaders.
[5] Marle, Gavin Van. “L’Oréal Completes Five-Year Supply Chain Transformation – ‘Because We’re Worth It’”. The Loadstar, 9 Oct. 2014, theloadstar.co.uk/loreal-supply-chain-transformation/.
[6] “Improving Supply Chain Efficiency.” L’Oréal Group, www.loreal-finance.com/en/annual-report-2015/supply-chain.
[7] “L’Oréal’s Supply Chain Make-Over.” PYMNTS, 15 Sept. 2014, www.pymnts.com/in-depth/2014/loreals-supply-chain-make-over/.
[8] Trebilcock, Bob. “L’Oréal: To Automate or Not to Automate.” Supply Chain 24/7, 6 Oct. 2016, www.supplychain247.com/article/loreal_to_automate_or_not_to_automate/forte_industries.
[9] “Luxury Cosmetics and Chinese Demand Drive Sales Bounce at L’Oréal.” The New York Times, 2 Nov. 2017, www.nytimes.com/reuters/2017/11/02/business/02reuters-loreal-results.html.
[10] “Zara’s ‘Fast Fashion’ Business Model.” The Wharton School, The University of Pennsylvania, 18 Feb. 2016, kwhs.wharton.upenn.edu/2016/02/zaras-fast-fashion-business-model/.
This is great Darrin! Profitability and customer promise are usually trade-offs, especially in the short term!
I believe the giant beauty conglomerate L’Oréal is losing certain share to the small premium personal care brands boosted by digitization, such as Dollar Shave Club. To regain its share, as you wrote, L’Oréal must put consumer at the center of its supply chain strategy. Meanwhile, they must continue to invest on innovation and R&D. They must invest on building eCommerce as well – benefits include hugely valuable consumer data and higher margin. All these investments might hurt bottom-line in the short term, but it will bring sustainable growth in the long term, which L’Oréal must be able to convince its shareholders, bring them on board and ask for their patience. But this will be challenging undoubtedly.
Thanks for your write-up Darrin!
You touch on the core issue facing many of the traditional businesses, especially CPG companies. I looked up all of L’Oreal’s brands and was amazed at the breadth and diversity, from Giorgio Armani to Kiehl’s. I think the question is how to best position its suite of brands to face digitization. We saw in the Kiehl’s case that their online website provided the company with detailed information on its customers and allowed the company to better service them and earn a higher margin. Can this direct-to-consumer model also be achieved across the rest of the suite of products? Should it be?
When looking at planned scarcity, I am little doubtful that it can be done at the parent company level. I think it may work at the individual brand level and would require the buy-in of the brands’ management teams. I think L’Oreal needs to be careful that any marketing plan fits the vision and spirit of the brand. Additionally, I think that every brand may have different inventory days with the example of a high-end luxury retailer like Giorgio Armani vs. Kiehl’s.
To me, there are two things happening here. First is the impact of digitization on back-end operations. L’Oreal must leverage digital solutions to continually improve their supply chains. Based on the transformations you highlight (world-class information systems, automation in distribution centers, etc.), they are already making big investments here to stay competitive.
The second impact of digitization is more complex: the impact on consumer behavior and demand-side dynamics. Your strategic recommendations focus entirely on this second point, and rightly so. In today’s world, large incumbents like L’Oreal have to be two steps ahead to compete with tech-based, D2C small premium players like Dollar Shave Club, as Zoe mentions.
I’m not sure how I feel about the scarcity tactic. I agree with the prior comment, that this would need to be considered at the brand-level, as it best fits for higher-end brands but might isolate or frustrate core consumers of lower-end brands that should be focused on reliability and accessibility.
To your second suggestion – the importance of direct-to-consumer sales is paramount, I completely agree. There is enormous potential for margin capture, and more importantly, brand loyalty. Currently only a handful of their brands sell D2C on individual websites [1]. I wonder if there is potential for them to leverage the broader portfolio to create a single platform offering a differentiated customer experience and perhaps loyalty benefits, though. As you stated it, their mission should be to create “a stronger customer relationship.”
[1] https://consumergoods.com/loreal-grows-direct-consumer-channel)
Thanks for the article, Darrin! As its supply digitizes, L’Oréal seems to be facing a core tension around the large-scale implications of a digital supply chain and the small-scale implications of region-specific consumer demand. While L’Oréal has successfully used robotics and slotting software in global distribution centers, it seems challenging to apply these while also increasing the number of SKUs to account for different consumer demands. To some extent, L’Oréal might be motivated to train customers worldwide to have as similar tastes as much as possible, in order to reap the full benefits of digitization for its supply chain.
L’Oréal seems likely to face similar tensions as they develop their direct-to-consumer sales channels. Because their portfolio of brands runs the gamut from extreme luxury to a shampoo I can buy for ten dollars at CVS, they need to be wary of over-affiliating brands that should be kept segmenting. While they should certainly try to own the online consumer experience rather than sending customers to Amazon.com or Walmart.com, they will need to make sure to keep each brand experience individual and unique.
Very thoughtful arguments, Darrin. Thank you. I read it having little familiarity with L’Oreal or the broader cosmetics industry; please contextualize my comments as such.
There were two main points that struck me in your essay and in the comments it inspired. First, I very much agree with you, Zoe, and Lisa on the importance of investing in online direct-to-consumer sales. I appreciate Sarah’s caution about the danger of brand conflation, but I wonder if L’Oreal can mitigate that by investing in a basic e-commerce back-end template that allows them to have distinct consumer-facing experiences across all of their brand websites. Vox Media comes to mind; while not in the e-commerce space, they have basically adopted this approach to managing their complex, varied online footprint. Regardless of the specific solution, I do not think L’Oreal can afford to cede so much value to Amazon and others.
Second, I agree with Sarah’s instincts as they relate to increasing SKUs to accommodate regional tastes. I worry about complicating an improving supply chain system, and I wonder if we can achieve the same ends (happy, satisfied customers) by different means. Is L’Oreal’s brand strong enough that marketing could drive demand towards more consistent choices across geographies? I suspect the answer varies by brand; different brands might have different customer promises and, therefore, different pressures to customize regionally.