The Use of Operations Management by FMCG Companies - Research Paper Example

Use of operations management by FMCG companies to improve competitiveness Table of Contents Executive Summary 2 Case Study 5 About the Organisation 5Recent Developments 7 Area-wise performance of L’Oreal 8 References 10 Executive Summary The following report focuses on operations management and its impact on building the competitive edge for a company. The proper management of the core operations of a company is crucial to enhance its position in the industry. Keeping this in mind the report emphasises on the three broad divisions of operations management (managing raw materials, producing finished products and distribution of products) and thereby brings together practical relevance with the help of a case study. This report focuses on the cosmetic industry with L’Oreal as the target company. It aims at presenting the various operations management techniques adopted by the company over the years and focus on the area of supply chain management. Supply chain management is an important domain of operations management and effective implementation of SCM strategies can help companies not only in saving millions of dollars but also put in place a seamless manufacturing and distribution process. The analysis of the report shows the absolute advantage of L’Oreal in terms of its sale and market share in the industry. To emphasise the competitiveness, the report presents a comparative study of L’Oreal with some of its rival companies. Introduction Operations Management involves the managing of a company’s core operations. In a broader sense these operations can be classified into three categories: Purchasing the required raw materials and other supplies Converting the obtained raw materials into finished good And finally, distributing the finished products to the consumers or customers. To a major extent the profit of a company depends how aptly the aforementioned tasks are carried out. If the effectiveness of the company in managing these operations is more then it will cost less and consequently it will reap a larger profit. And this entire mechanism once done helps a company to achieve a distinct competitive advantage with lower costs and better quality. This study is confined within the cosmetic industry since it is one of the burgeoning industries in today’s world. The cosmetic industry today is a $29 billion business whose aggressive marketing and advertising efforts have forged a powerful trajectory of continued growth. According to the manufacturing census data on toilet items, “sales of cosmetics in 1900 stood at about $100,000.” Thereafter, the cosmetic industry emerged and rapidly expanded, as “women’s growing interest in beauty products coincided with their new sense of identity as consumers.” Around mid-1920s, retail cosmetics sales were estimated at about $125,000,000 per year and about $150,000,000 in 1940. (Daum C.M.L., May 2006) The target company taken for analysis is the world’s largest cosmetic company L’Oreal. With top cosmetic brands like Garnier, Maybelline, Lancôme, Ralph Lauren, Cacharel and Matrix in its portfolio, L’Oreal stands as a notable brand. Its only hurdle was to penetrate in the Indian market where Lakme enjoyed a monopoly, but has managed to cross that hurdle with ease. Literature Review Operations management plays a key role in making an organisation’s potential to grow evident in any industry. It is the area that is concerned with the efficiency and effectiveness of the core operations of an organisation to support strategic goals of its business. Operations management also forms an important area in the academic field of business management. This field of study has been gaining tremendous attention and development for the last couple of decades. Supply chain management decisions constitute a crucial part of a company’s. long run planning. Understanding of the domain and carrying out an analysis of a company, demands a brief literature review on supply chain management. Theories of Halldorsson, Ketchen and Lavassani on SCM provide a base for further research and study in this area. The Resource Based View (RBV) theory is one of the eralieat theories on SCM. It takes an organisation as a bunch of productive resources and states that the sustainable competitive advantage of a firm comes from how it is obtaining the critical resources and then utilising them productively. The theory starts with two crucial assumptions: 1. Organisation in a given industry might have resources that are heterogeneous. 2. The resources used are imperfectly mobile. Considering the above stated assumptions, an organisation will greatly realise the values of resources if they are possessed by a few competitors only. In this way the organisations will gain a competitive advantage over its counter parts. (Won D., 2004) The RBV theory contained limitations to explain supply chain management as a source of rents and thus the RV theory was developed. This theory is an extension of the RBV theory and takes into account the issue of knowledge sharing among partners that might reduce costs internally. Thus the new theory includes the economic perspective in the RBV theory. (Miguel P.L. and Brito L.A., May 2008) Gradually the election of a governance structure also gained importance and it was considered to play a crucial role in the firm’s inter-organisational strategies. Hence, there is a move from the comparative advantage emerging out of independent firms to relational view of the inter-organisational advantage. (Perez A.M.G. and Martinez M.G., February 2006) In the relational view approach the governance structures play a vital role. The next theory named Transaction Cost Analysis stated that the firms must adopt effective governance mechanism so as to minimise the transaction costs incurred between the firms. According to this theory, a firm’s trade-off between the production cost and transaction cost indicates the appropriate mechanism of governance among three broad types of inter-organisational coordination; market, hierarchy, and hybrid. (Park S.Y. and Yun G.W., November 2004) These theories experienced a complete spin-off through the development of Knowledge based view which centers on the fact that wisdom is a strategic resource in the supply chain. (Ketchen Jr. D.J. and Hult G.T.M., June 2006) The theories of supply chain have encountered several developments with the passage of time. Newer and finer models have been created to make the supply chain of an organisation more effective in the times of globalisation. Case Study About the Organisation For over a century L’Oreal has been catering to the daily needs of the consumers around the world. With 23 global brands, L’Oreal has been able to touch the lives of one and many. It has employee strength of 67,662 working in 130 countries around the world. In 2008 the company had filed 628 patents outperforming its competitors. In the year 2008 L’Oreal recorded a net sale of $23.625 billion. (Internal Social Audit Programme, 2006) Way back in the year 1907 in France, L’Oreal was incorporated. The company started making its way in the market of United States in 1953. Later in 1990, the company expanded radically with the acquisition of other U.S. brands. The brands were then renewed and were presented as international brands. Presently the company has developed a portfolio of European and U.S. brands and all the brands are marketed globally. Analysis For L’Oreal which is into manufacturing of cosmetics, supply chain management plays a significant role. The company needs to link the sales forecast with its supply chain operations very efficiently. Even the slightest mismatch between these two elements can raise serious issues. If the forecast is too low the company will lose market share while too high a forecast will run the risk of holding excess inventory. (Nowak R. and Sobotka B., 2003) The company requires a wide range of raw materials (Polymers, Fats, Natural Product, Sunscreens, and Vitamins etc.) for manufacturing its products. The raw materials are blended in the unique formula to produce the products. Hence the company partners directly with the suppliers who specialise in these raw materials (L’Oreal Network for Suppliers, 2009). It was necessary for the company to harmonise the business processes within its packaging and raw material supply base following the launch of a European e-Supply chain program. The task was flawlessly completed by Accenture whom the company outsourced and presently L’Oreal connects over 100 suppliers through web and ERP systems. (L’Oreal: High Performance Delivered, 2004)   The logistics of the company is responsible for the smooth flow of information and physical objects during the productions and distribution process. The company faced certain challenges regarding the issue of inventory management. The main cause of this challenge was the lack of visibility in regards to the issue of inventory and stock at the customer sites. The result of this poor forecasting caused shortages to meet up unexpected large demands. The company realised this shortcoming and introduced new business processes improving the insight into customer’s inventory. The streamlining of the company’s production and distribution processes was the key to success in better control of supply chain logistics. After following a rigorous investigation on this issue the company identified vendor-managed-inventory as the solution. (Sap Case Study, 2004) Manufacturing products of highest quality has always been the top priority for L’Oreal. The company puts its customers as connoisseurs of cosmetics and thus targets to offer the best in terms of quality. The company has strict strategies in manufacturing its products. It has employed nearly 3000 scientists in 10 research centers situated in Europe, Japan and United States. The company prioritises Research and Development to innovate and bring newer techniques of producing products by investing 3% of net sales in R&D. L’Oreal registers more than 500 patents a year. In order to have a greater control on the quality the company manufactures 95% of the products in its own plants. (Why LOreals Jean-Paul Agon Believes He Is on the Winning Team, March 2005) In distributing its products, L’Oreal follows and maintains the global selling strategy. All the 23 brands of L’Oreal are marketed and available globally. To keep parity between the diverse beauties among the countries of the world, the company has a diverse portfolio of brands in terms of brand origin. This strategy is adopted with the view to offer consumers all over the world a choice between diverse visions of beauty. For example: a European vision of beauty can have brands like LOreal Paris, Lancôme or Giorgio Armani; while an American vision of beauty can avail brands like Matrix, Redken, Ralph Lauren, Kiehls, Maybelline or Soft Sheen-Carson. Currently, L’Oreal products are found in more than 160 countries. LOreals acquisition of leading U.S. cosmetics brands, include Maybelline, Redken, and Kiehls. (Jones G.G., Kiron D., Dessain V. and Sjoman A., April 2005) Recent Developments The company is re-organising the production of its European (Northern France) luxury products after the takeover of Yves Saint Laurent Beauté. The objective of this re-organisation is to build a European centre of excellence in the northern France. The job of production will be shared amongst a unit at Lassigny in the Oise department (already produces the YSLB range), another unit in Caudry in the Nord and the last unit in Gauchy in the Aisne. A new logistics centre will be installed at Roye to distribute the products produced at Lassigny, Caudry and Gauchy to the world market. (LOréal reorganises luxury production in Europe, March 2009) Area-wise performance of L’Oreal The company has performed remarkably in China where its core brands are now fully installed and the company is enjoying more than 69.3% growth rate. (L’Oreal’s sales growth affects profit, January 2004) L’Oreal has performed equally well in Central and Eastern Europe where the growth rate was as high as 26.2%. (L’Oreal’s sales growth affects profit, January 2004) In Russian Federation the company has been noticed to be performing better after three years of fast growth with the growth percentage of 38.8. (L’Oreal’s sales growth affects profit, January 2004) In Western Europe, the company’s growth has been seen to rise to 4.9%, with 12.5% growth rate in Great Britain and 11.6% rise of growth rate in Spain. (L’Oreal’s sales growth affects profit, January 2004) In North America the growth rate of L’Oreal is 6% up over the whole year. The company has been found to achieve higher rates than the previous two years. (L’Oreal’s sales growth affects profit, January 2004) Conclusions The report clearly states how management of operations by L’Oreal has made it hit the cosmetic industry at the top level. Through strict ethics in raw material procurement from suppliers, using optimum logistical means, apt manufacturing technique and global selling strategy the company has reaped cumulative profits every year. It has also shown its aggressive selling strategy in the time of recession. The company had innovated new products that the consumer will be forced to buy even during the hard times of recession. The management of the core operations of L’Oreal is worthy of appreciation in the cosmetic industry. It has managed to put itself in the highest position in the cosmetics industry through its various management techniques. Despite the success enjoyed by L’Oreal over the past few years, there is still room for improvement for the company as it thoroughly takes up the strategy of bringing into the market mass products. With the emerging middle class in the market the company is expected to grow further reaping more profits than before. L’Oreal has set itself as a supreme example of efficient operations management and its effect of bringing a healthy competitive edge to the company. L’Oreal uses its operations very effectively so as to respond to the growing demands of its consumers. The deft management of the company is the only reason of leaving behind the rest of its competitors in the industry of cosmetics. References Daum C.M.L., 2006, Self-Regulation In The Cosmetic Industry: A Necessary Reality Or A Cosmetic Illusion? Harvard Law School, [Online] Available: http://leda.law.harvard.edu/leda/data/764/Daum06.html [April 5, 2009] Internal Social Audit Programme, 2006, Diversity is a Priority, Suppliers, L’oreal – Our Company, Newsletter, [Online] Available: http://www.loreal.com/_en/_ww/html/our-company/our-suppliers/internal-social-audit-programme-2006.aspx? [April 5, 2009] Jones G.G., Kiron D., Dessain V. and Sjoman A., April 2005, LOreal and the Globalization of American Beauty,Harvard Business publishing, [Online] Available: http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=805086 [April 5, 2009] Ketchen Jr. D.J. and Hult G.T.M., June 2006, Toward greater integration of insights from organization theory and supply chain management, Journal of Operations Management, Michigan State University, [Online] Available: http://global.broad.msu.edu/hult/publications/JOM07a.pdf [April 5, 2009] L’Oreal: High Performance Delivered, 2004, Client Successes- Accenture, [Online] Available: https://www.supplychainservices.accenture.com/web/public/client_successes/loreal.htm [April 5, 2009] L’Oreal Network for Suppliers, 2009, L’Oreal – Suppliers, Newsletter, [Online] Available: http://www.loreal.com/_en/_ww/html/suppliers/network/network-raw-materials.aspx [April 5, 2009] LOréal reorganises luxury production in Europe, March 2009, Cosmetics Business, [Online] Available: http://www.cosmeticsbusiness.com/story.asp?sectioncode=1&storycode=3526&c=1 [April 5, 2009] L’Oreal’s sales growth affects profit, January 2004, Financial- Cosmetics Design, [Online] Available: http://www.cosmeticsdesign.com/Financial/L-Oreal-s-sales-growth-affects-profit [April 5, 2009] Miguel P.L. and Brito L.A., May 2008, Supply Chain Management And Its Impact On Operational Performance: An Empirical Analysis Of Brazilian Companies, POMS 19th Annual Conference, La Jolla, California, U.S.A., [Online] Available: http://ebiz.uoregon.edu/poms2008/FullPapers/008-0435.pdf [April 5, 2009] Nowak R. and Sobotka B., 2003, Merck Indonesia – The Asian Demand Chain Challenge, Wuhan University, [Online] Available: http://www.whu.edu/cms/fileadmin/redaktion/LS-IntMan/Fallstudien_Abstracts/2004_Abstracts_Cases.pdf [April 5, 2009] Perez A.M.G. and Martinez M.G., February 2006, The Agri-Food Cooperative Netchain: A Theoretical Framework to Study its Configuration, 99th EAAE Seminar ‘Trust and Risk in Business Networks’, Bonn, Germany, [Online] Available: http://ageconsearch.umn.edu/bitstream/7747/1/sp06pe01.pdf [April 5, 2009] Park S.Y. and Yun G.W., November 2004, The Impact of Internet-Based Communication Systems on Supply Chain Management: An Application of Transaction Cost Analysis, Bowling Green State University, [Online] Available: http://jcmc.indiana.edu/vol10/issue1/park_yun.html [April 5, 2009] Rusciano G., 2004, Case Study—L’Oréal-USA, Clark, New Jersey: Building Team Support for Waste Minimization in the Manufacturing Industry, [Online] Available: http://aesop.rutgers.edu/~envpurchase/loreal.htm [April 5, 2009] Sap Case Study, 2004, mySAP™ Supply Chain Management at L ’oréal Germany, Supply Chain Management- SAP, [Online] Available: http://www.sap.com/usa/solutions/business-suite/scm/pdf/CCS_Loreal.pdf [April 5, 2009] Why LOreals Jean-Paul Agon Believes He Is on the Winning Team, March 2005, Special Report-Wharton University of Pennsylvania, [Online] Available: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1127 [April 5, 2009] Won D., 2004, Competitive Advantage in Intercollegiate Athletics : A Resource-based View, The Ohio State University, [Online] Available: http://www.ohiolink.edu/etd/send-pdf.cgi/Won%20Doyeon.pdf?acc_num=osu1095694860 [April 5, 2009] Read More