Avon Case Analysis

What do you do when you have an enormous growth opportunity but can't capitalize on it because your supply chain is in the way? If you're Avon, you embark on a radical transformation-a high-risk venture with no guaranteed returns.

Avon is the world's leading direct seller of beauty products, with $6.8 billion in annual revenues. In addition to cosmetics, skin-care products, fragrances, and personal-care products, the company offers a wide range of gift items, including jewelry, lingerie, and fashion accessories. Avon sells to customers in 145 countries through 3.9 million independent sales representatives. More than $1.2 billion of Avon's sales come from its Europe region, which serves 32 countries in Europe, the Middle East, and Africa with more than one million sales reps. But in the 1990s the region's strong growth threatened to overwhelm its supply chain organization.

With its primary focus on marketing and sales, Avon had neglected its supply chain for years. Back in the 1980s, Avon Europe had branches in only six countries, each with a separate factory and warehouse supplying the local market. The branches operated independently, with separate information systems, no overall planning, and no shared manufacturing, marketing, or distribution.

On a small scale, this worked quite well. Each entity could be very responsive to local needs. But in the early 1990s the company began globalizing its key brands and modernizing its image through the launch of new products, packaging, and ad campaigns aimed at younger consumers. Avon planned to double sales revenue in the Europe region from $500 million in 1996 to $1 billion in 2001. The company realized that replicating its country-based supply chain model in every new market would be expensive and unwieldy. Explains executive vice president Bob Toth: "Ten years ago we operated country to country, with a very decentralized model. You just can't compete that way now."

The first problem was a fundamental mismatch between the company's selling cycle and its supply chain. 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 customers often, strengthening relationships and driving sales.

A short selling cycle demands a flexible, responsive supply chain. There Avon fell short. Its factories manufactured everything to forecast and then shipped inventory to the country warehouses before the start of each three-week selling campaign. Inevitably, certain products would be big hits, and the branches would rush orders back to the factories. However, it took an average of 12 weeks for products to cycle through Avon's supply chain from sourcing to manufacturing to distribution.

The timing mismatch led to on-the-fly solutions and enormous inefficiencies during the course of each sales campaign. Avon relied on the heroics of employees to meet customer needs-regardless of cost. But as the business grew, keeping up with 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% of the items sold more than expected, the factories were constantly interrupting their schedules to switch from one product to another. Changeover costs were high-especially because the factories were set up for high-volume production. Slow-selling products also were costly. In every selling cycle some products would sell less than forecast, so Avon had a growing amount of unsold merchandise. Inventory levels ran as high as 150 days.

Language posed another 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 before it knew what its sales volumes actually would be in the different markets. Avon often would have demand that couldn't be filled because the only containers on hand were printed in another language.

Fixing those problems and transforming the supply chain would be an enormous undertaking, one that needed support and a big financial commitment from top management. It required a lengthy, detailed analysis to prove that Avon's supply chain wasn't capable of handling the projected growth of the business. Even then, it took 18 months to build a business case and get executive backing. Persuading 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. "It was very difficult getting that initial momentum going," says Michael Watson, director of Avon's supply chain transformation.

But by the time Avon started the project, management had committed an extraordinary amount of resources. Says Watson: "We took 45 of our best people in Europe out of their positions and put them into the project full-time for 18 months." Removing those people from day-to-day operations was painful, costly, and risky, but it was absolutely critical to success. Adds Watson: "If we had tried to do this on the side with a small project team, it would never have worked-and we'd never be seeing the benefits we are now."

Avon began by creating a centralized planning function-a critical priority. Explains John Kitchener, head of the supply chain in Europe: "There was no way Avon would achieve its growth targets without a centralized planning group that could see demand and inventory levels across the region and react quickly." First, Avon had to create a common database. The team spent many months putting in place standardized product codes, descriptions, and other information so that all the countries were speaking the same language. The database gave Avon visibility into sales trends and inventory so that managers could look across the region and view both supply and demand. The company also installed a supply chain and scheduling system to support planning and coordination across the region. To manage the growing complexity of the business, it put in place a regional planning group to make decisions about service levels, inventory, and costs based on a bird's-eye view of the whole supply chain.

The next critical step was to redesign the supply chain in a way that made sense operationally. Avon kept a manufacturing plant in Germany but consolidated other production