I. Company Overview
a) LVMH (Louis Vuitton Moet Hennessy)
LVMH is one of the most successful luxury goods conglomerate, headquartered in Paris, founded in 1987. Well-known luxury goods group, Christian Dior is the main holding company of LVMH, owning 43% of its share. The company holds about 60 subsidiaries world-wide and some are managed independently. The Group is active in five different sectors; Wine & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry, and Selective retailing. There are more than 3,000 retail stores worldwide. By looking its financial data, it has achieved significant growth over the last 5 years. Sales in 2010 have been improved by 32% since 2006. We would like to focus on Fashion & Leather Goods business sector, which is represented by Louis Vuitton. LVMH fashion and leather goods line is gaining the largest revenue from Asia market and it represented 46% of the aggregate revenue in 2009.
b) Louis Vuitton (LV)
Louis Vuitton, a trunk-maker in Paris since 1854, became a legend in the art of travel by creating luggage, bags and accessories. LV is now active in other creative spheres: ready-to-wear, shoes, watches and jewelry. Under the artistic direction of Marc Jacobs in 1997, the new collections met with immediate success and renown. Continually expanding, LV today boasts 17 production workshops, an international logistics center, and exclusive shops worldwide. In 1987 LV became a subsidiary of LVMH, the world’s leading luxury goods group.LV has 456 stores around the globe, over 100 more than rival Gucci. Its omnipresence has pushed it to be more selective in its openings
c) Key Success Factors of LV
There are three eternal values of LV’s success. Those values are ‘original know-how’, ‘craftsmanship’ and ‘icons’. Firstly, in order to sustain its ‘original know-how’ and the finest quality, LV has never depended on outsourcing concerning manufacturing and procurement even if there are chances for LV line either to cut down its cost or to take advantage of geographical merits. Secondly, ‘craftsmanship’ means offering every customer every flawless product through hand-made manufacturing of skillful craftsman. To maintain this principle, LV is focusing on lean production of small units. Lastly, ‘icons’ can be stated as a sort of differentiation. LV goods are striving to assign significant shapes and color so as to retain its identity.
d) Outstanding Growth of LV
Despite the latest global financial turmoil, LV turned in a remarkable performance for the year, again recording double-digit revenue growth based on published figures. The brand has made outstanding headway in Asia and continues to benefit from strong momentum in Europe. Fendi and Marc Jacobs also confirmed their potential, showing a good level of resilience to the economic slowdown in Europe and reporting strong revenue increases in Asia.
II. LV Operations System
How Louis Vuitton is relying on operations to support its growth
LV’s tall task is how to grow sustainably without diluting its image. LV is operating its international stores by themselves without any franchising agreement. The reasons that it is not allowed for franchisee to manage a store of LV is related to its management philosophy. Even though, this strategy requires high management cost and might have a weakness in terms of setting up localized specific plans, this action enables LV to manage quality control and exclusiveness of its brands directly. Besides, this action can also give loyal customers more satisfaction since LV is able to reinforce a consistent brand image. LV has grown significantly and is now much bigger than rivals such as Gucci. That raises some interesting challenges as it tries to keep up its growth while maintaining its exclusivity. Part of the way it is trying to optimize all of its operations. LV’s growth over the years means it is constantly bumping up against its full production capacity. The company currently owns 17 manufacturing factories. Also, the increased productivity from lean operations allows LV to keep so much of its production in high wage locations and “Made in France” is enough signals to the market about the brands inherent quality.
III. Overall Production Processes:
The production processes usually begin with a sketch. However, before any drawings can move into production, designers need to meet consumer demands, such as the latest trends. After drawings are finished, the materials and colors must be selected so that supply chain managers can make procurement plans. It is important to manage the procurement of leather, and about 70 percent of leather goods are produced in France. After leathers are arranged for cutting, workers cut them into different shapes and sizes depending on the design. The next step in making a handbag is gluing, sewing, and stitching. Leathers are either hand stitched or stitched with a sewing machine. The job requires the utmost craftsmanship to be able to stitch fine, straight seems on leather. The more details the handbag has, the more complicated the fabrication process. The final quality of a handbag is determined during this stage of the process. The next step is the finishing. During this process, each handbag is inspected for defects and all hardware is added. The leather handbags are now ready for shipping. Each handbag is individually wrapped in a cloth bag ad shipped to the distribution centers.
IV. The Flow of Materials :
There is a basic sequence to make a product: cutting, preparation, assembling. The figure below shows a 3 week production lead time. All the raw material is supplied from the warehouse.
The flow of material could be described as a “Pulled” flow. It is pulled by sales: the quantities that the factory must produce are decided according to sales previsions. However, the flow can be defined as “Pushed” internally. It uses the system of Work orders. Each Work Order defines the quantity to produce, and the week the product has to be shipped. Starting a WO in the factory initiates the Cutting process. From that moment, the material is pushed through the preparation and assembling units. That is why the production process could be defined as “pushed” within the factory, even though it is pulled by sales.
V. Challenges of Louis Vuitton
As a fast growing fashion brand, Louis Vuitton has faced two main challenges: 1. Increasing high demand in overall
2. Stock caused by the unpredictable demand of seasonal products. 1. How to increase the productivity?
Since Louis Vuitton manufactured all items by hand, inefficiencies were resulting in long customer waiting lists. With increased competition, Vuitton needed to increase sales to continue growth. So, main goal was to gain high productivity in production processes. So, how was Louis Vuitton getting more out of its existing factories? First, workers are cross-trained to enable them to do several different assembly tasks. It helps them to minimize the waste time and allocate the task so that each worker would need the same time to complete the task. Second, Louis Vuitton had to find other ways to increase its production instead of opening a new factory. So, it implemented a lean production process, inspired by Japanese car makers. Essentially, lean is centered on preserving value with less work. By reorganizing teams of about 10 workers in U-shaped clusters, Vuitton was able to free up 10% more floor space in its factories.
They were able to hire 300 new people without adding a factory Third, Production cells increase operational flexibility and allow flaws to be recognized earlier and fixed more easily. The production process used to be inflexible and certain products required extensive rework. Lastly, the traditional technique of handcrafting each piece has been modified. The special order department continues to follow the old methods of producing each item from start to finish by hand. Many of the accessories produced by the firm, however, are made with a modified machine production technique. Louis Vuitton applied CNC (Computer Numerical Control) to the Cutting process. A leather cutting machine controlled by lasers cuts the leather pieces and thus reduces the amount of wasted leather and increases efficiency. Additionally, in a shoe factory, robots fetch the foot molds around which a shoe is made instead of workers walking back and forth from their workstation to the shelves. The use of robots resulted in a considerable time gain.
2. How to minimize the stock caused by the unpredictable demand? a) What Caused Unpredictable Demand
Before we starting the analysis, let’s understand what caused the unpredictable demand. a) Demand uncertainty is a direct result of the increasing rate of change in the market and ever-shorter product-life cycles. b) Bullwhip effect that turns small demand variations close to the customer into great variations upstream in the supply chain.
This is particularly true in the fashion industry such as Louis Vuitton’s and explains well how supplies could be left over after production. Therefore, let’s start to analyze how Louis Vuitton can minimize the stock caused by the unpredictable demand.
b) Where is the stock
All the raw material is supplied from the warehouse. A number of parts or sub-assemblies (handles, zips, etc.) are outsourced. These parts are sent to the preparation and assembling units from the “outsourcing” area (which is equivalent to the warehouse) As the flowchart shows, there are several types of stocks in the factory: * – Raw material: material in the warehouse + outsourced components * – Work in Progress: in the Cutting, Preparation and assembling processes * – Safety stocks
A main safety stock is created at the end of the preparation area for each line of product. Its role is to quickly provide the assembling and preparation unit with cut components in case of variations such as, on the one hand, delayed supplies, shortages or, on the other hand, over-consumption due to scraped parts. On average, the size of the safety stock is made of the amount of material equivalent to 20 products
i. The first solution to cut the stock in the warehouse is that shorter purchasing lead-times would help coping with these unstable production forecasts. With the improved productivity, now the factory is able to review the production plan weekly, instead of monthly. ii. The second solution to cut the stock of this process is that all the Work In Process belongs to Work Orders. Any part on the production line can be allocated to a Work Order. ii. The third solution is to suppress remaining stocks on the production line, the main effort is to send back to production the excess on the lines (all the stocks out of work orders: Safety stock and others) before the last orders are sent.
VI. LV Going Forward:
Remaining Tasks for LV
There still remain several critical tasks for LV to going forward for its sustainable growth. First, serious financial crisis over west Europe may affect on LV’s sales in future. Europe continent accounts for approximately 30% of the whole sales of LV. As Italy and Spain have a strong purchasing power of luxurious brands, the expecting sales of LV largely will be affected by crisis prevalent in Italy and Spain.
Secondly, Japan, the largest market of LV in terms of revenue, is also struggling serious financial turmoil nowadays and there are worries over the long-lasting stagnation of Japanese economy like 90’s. Japanese consumers tend to keep away from the luxury brands due to shame, guilt and fear of arrogance. Thus, LV should pay more attention and set up new expansion plans both to alleviate the dependence on the Japanese market and to diversify major markets to tackle the economic downturns of the current main markets.
Finally, counterfeit products dilute the market share and harm the brand integrity of LV. The factories and merchants in Asia are becoming more sophisticated in counterfeiting, enabling them to penetrate and sell many of their products all over the world. This cause fearsome problems since LV generates about 46% of its profit in Asia including Japan. Unfortunately, studies show that LV is the biggest quantity (65%) of counterfeit products. To alleviate this issue, LV should take measures concerning distribution channels in order for counterfeit manufacturers to reduce the proximity for the raw materials of it. In addition, exclusive retail stores, it is important for LV to limit the use of vendors and suppliers. Otherwise, LV could integrate the distribution channels vertically by acquiring the suppliers companies directly. This should be able to reduce the availability of its raw materials in the market significantly. Increased brand promotion and product advertising would also be essential to create the demand for the real commodities. This can be assisted by personalization of the products and warranty provision to make clear distinctions between real and copied products. To this end, customers would be much aware of the significance in buying the true brand to the counterfeits.