“Beauty is a very personal thing. People don’t want to be told. They want to choose what looks good.” – Nhu Le, Founder of Finding Ferdinand
The face of the beauty industry has been changing drastically over the past twenty years. In the makeup industry, a 7.3B market, we’ve seen an increase in the diversity of products offered, the need for trial-ability, and the emergence of increased customization .
In 1998 Sephora, a subsidiary of the French luxury conglomerate LVMH and the no.1 beauty retailer in the world, launched its North America presence. In 2014, the company had 343 North America stores with 3 regional centers supplying all locations . In 2016, these distribution centers stocked over 14,000 SKU’s to replenish stores and additional SKU’s to fulfill online orders. Each store had, on average, 9,000 unique SKU’s. 
Given the high SKU count and variability in demand, Sephora’s distribution network faces many challenges. Sephora is often carrying excess inventory in its distribution centers and retail locations because of its inability to accurately forecast demand and its reliance on a monthly ordering schedule . In 2016, Sephora’s planning team used average store demand and average forecast to determine the orders they placed. This rolled up average had an accuracy that was less than 55% from vendor to distribution channel and 80% from distribution channel to store.  Coupled with 14 day lead times, this results in an incredibly inefficient distribution system; a system where it could take 16 days to put an SKU back on the shelf . Analysis of Sephora’s distribution system by Envista in 2016 highlighted operational bottlenecks at distribution centers due to the system of monthly buys and labor cost inefficiency due to lack of visibility on inbound transportation . This fragmented, assumption driven system is a major weakness for Sephora.
Paradoxically, the retailer has heavily invested in building a high tech in-store and online experience to meet the rising trends of customization and enforce its “try more buy more ethos” . Sephora has launched Color IQ in store- a technology that allows customers to scan their faces and receive a reference color to find products that match their skin tone . In addition, customers can answer a series of questions in an in-store iPad to receive a set of recommendations on bundled products that they can add to their shopping cart. Sephora has also launched an augmented reality app that allows customers to virtually try on various shades of lipstick in store. All this technology enables Sephora to bring real-time customization to the hands of its customers and drive product purchases.
In contract to Sephora’s emphasis on trial-ability, competitors have emerged focusing on creating a highly customized one product fit. One such company, Finding Ferdinand, creates custom lipstick shades. A customer can visit their website and select a series of color combinations for their custom shade of lipstick. This order is then sent to their Santa Monica fulfillment center and within minutes the color is blended and ready for shipping . Finding Ferdinand has grown 150% annually in the last three years with plans for product expansion underway . With competitors like these in the market, Sephora cannot afford to have an inefficient inventory management system that could easily drive customers away when the products they want to try aren’t available in store.
A digitized supply chain would enable Sephora to be more efficient in the following ways:
- Creating automated warehouses that provide continuous information flow will allow Sephora to better forecast demand and determine the optimal levels of inventory for each store.
- Autonomous transportation would enable transparency into transit updates and reduce the labor costs associated with uncertain drop-off volume and times.
- Distribution centers with weight sensors will enable the company to predict inventory needs and improve the cycle time from vendor to distribution center to store shelf.
In order to address these challenges in the short and medium term, Sephora’s management has implemented the following:
- Moved from monthly OTB to a bi-weekly OTB schedule .
- Three times a week store re-stocking with smaller shipments rather than 80% of shipments arriving in the first week of the month .
In addition, I’d recommend the organization’s management also take the following action:
- Utilize IoT technology in individual stores to track real-time inventory changes and communicate inventory needs to their distribution centers. This will allow them to better predict demand and create a profile of their customers purchasing behavior in each market.
- Use the data gathered from their in-store tech experiences to predict customer demand and better inform their ordering and inventory management.
- Sephora’s new facility in Maryland has provided 610 full time job opportunities for the locals of Harford County. What degree of digitalization can we justify at the cost of taking away people’s jobs?
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