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Copyright 2005 by The McGraw-Hill Companies, Inc. Click here for terms of use.
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every new market would be expensive and unwieldy. The bottom line: Avon couldn t achieve its aggressive growth target with its existing supply chain. Explains Bob Toth, executive vice president, Ten years ago we operated country to country, with a very decentralized financialholding-company model. You just can t compete that way now, especially if you re a fast-moving consumer-goods company.
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The first problem was a fundamental mismatch between the company s selling cycle and its supply chain cycle. In most European markets Avon begins a new sales campaign complete with a new brochure, fresh product offerings, and promotions every three weeks. This short selling cycle is a cornerstone of Avon s direct-sales model. By regularly offering new products and promotions, the company gives its sales representatives a reason to call on their customers more often, strengthening those relationships and driving sales. A short selling cycle demands a flexible, responsive supply chain. Here, Avon fell In most European short, especially as the company s European markets, Avon operations grew larger. Avon s factories manufactured everything to forecast and begins a new sales then shipped inventory to the country warecampaign every houses before the start of each three-week selling campaign. Inevitably, certain prodthree weeks. ucts would be big hits, and the branches would send rush orders back to the factories to make more inventory. 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. This timing mismatch led to on-the-fly solutions and enormous inefficiencies during the course of each sales campaign. 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. The rush orders destroyed manufacturing efficiency too. Since 40 to 50 percent of the items offered in any campaign sold more than expected, the factories were constantly interrupting their manufacturing schedules to
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switch from one product to another. Changeover costs were high especially since the factories were set up for high-volume production. Slow-selling 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. This was becoming increasingly complex and wasteful. Avon often would have demand in one country that couldn t be filled because the only containers on hand were printed in another language. Fixing these problems and transforming the supply chain would be an enormous undertaking, one that needed support and a big financial commitment from corporate management.
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It required a lengthy, detailed analysis to prove that Avon s supply chain wouldn t be able to handle the projected growth of the business. Even then, it took 18 months to build the business case and get executive buyin to move forward with the far-reaching changes needed. Convincing the organization to invest money that wouldn t be recouped until the later years of the transformation was a tough sell. In fact, the first two years would result in a net loss. This delayed payback was an uncomfortable notion, especially given that Avon had never invested much in the supply chain before and wanted quicker results, explains Michael Watson, director of Avon s supply chain transformation. It was very difficult getting that initial momentum going. By the time Avon started the project, however, corporate buy-in was absolute, and management had committed an extraordinary level of resources. Notes Watson, We took 45 of our best people in Europe out of their existing positions and put them into the project full time for 18 months. Removing these people from day-to-day operations was extremely
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