A supply chain is a network that demands from all parties that are involved to satisfy the customer’s request. As a rule, every single stakeholder, starting from suppliers and product developers up to warehouses, investors and customers, is taken into account when developing a supply chain network for a particular company.
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Traditionally, a supply chain is supposed to function as the tool for new products and services development and promotion, production process improvement, supervision and operation, customer service facilitation, marketing development, financial strategies creation and supply processes improvement.
This paper focuses on Louis Vuitton and attempts to cover three critical business factors. This paper is also aimed at mapping out Louis Vuitton’s supply chain, at identifying and making recommendations for addressing the most significant problems in the management of Louis Vuitton supply chain, and calculating the losses that the company incurs due to unsold products and from sold-outs, and defining the net gains that the company can expect from adopting air freight for the shipping of all its products.
Mapping the Supply Chain of the Company. Product Flows and Lead Time
Mapping the supply chain is significant in a number of ways. It aids the company in clarifying to its employees their specific responsibilities. Supply chain mapping makes it clear that performance received from the completion of tasks does not depend on an individual.
It also helps to create a baseline that the company can use as a means to measure the effects of any new enhancement effort (Lichocik & Sadowski 2013, p. 10). The company’s supply chain structure comprises of manufacturing, logistics, distribution, and marketing, sponsoring and communication.
Louis Vuitton has split its business into four key product lines: leather goods, shoes, designer clothes and accessories. Leather goods include mainly bags and luggage, the majority of which were not made primarily using leather. Leather goods are at the core of the company business. The shoe designs produced by the company are vastly seasonal, and most of the shoe models had to be redesigned frequently, in some cases almost twice a year.
The model clothes produced by the company come in two collections annually. One collection is specifically designed for the winter, and the other one is for the summer. The company is highly diversified and ventures into the production of accessories such as watches, jewelry, perfumes, eyeglasses and writing accessories.
The accessories produced, though admittedly versatile, have a very short lifecycle. Out of its 17 factories, Louis Vuitton uses 7 of its factories to manufacture leather goods. Five of these factories are located in France. The other two are in the United States and Spain (Moatti, & Dussage 2007, p. 50).
A single Louis Vuitton warehouse located in Cergy-Pontoise, France is the centralized logistics base for all the plants. All the goods manufactured in the company’s plants, in Europe, are forwarded to this logistics center. These products remain in Cergy-Pontoise for about a month. This logistics center takes care of all the organization management and flow of inventory. It also handles damaged, faulty, out-of-fashion and unsold products.
Louis Vuitton relies on a restricted number of highly specialized suppliers for most of their raw materials. They are mainly based in France, and few of them are from neighboring European countries. The key raw materials are leather and canvas. The time needed to deliver the raw materials varies from 6 to 8 weeks depending on the distance to be covered.
The company avoids delays caused by long transportations by maintaining a 2 ½ month supply inventory of raw material. Most of the manufacturing is retained in France because of the label “made in France,” which is thought to be considered as very valuable by some customers, especially those who reside in Asia.
The factory in the US caters for the domestic market (Moatti, & Dussage 2007, p. 52). However; most of the Louis Vuitton products sold in the US are still imported. The company occasionally outsources when capacity is exceedingly tight.
In the supply chain, the stores owned by Louis Vuitton control the largest share of the company’s sales. These stores have all the major product categories. Although their products can be found in all over the globe, most of the company owned retail stores are located in Europe, US and Japan. The total number of Louis Vuitton outlets grew from 240 in 1998 to 340 in 2005. The company also leases specific sections to departmental stores.
The company has been expanding its retail network to new geographical locations. In 2004, it opened stores in Russia and India, and launched a 900 square meter Louis Vuitton store in Tokyo.
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In 2004, it expanded to Africa and opened a new store in South Africa. This was closely trailed by the addition of new stores in China and Japan. Subsequently, the following year, in 2005, the company launched new stores in Las Vegas, Hong Kong, Okinawa and Beijing and expanded its leading store in Paris to 1,600 square meters (Karen 2014, p. 30).
On a monthly basis, all the store managers come up with an estimation of the replenishment requirements and place orders with the company’s chief logistics center. The orders are then recorded and processed, and the availability of the requested products and accessories is checked. After confirmation, shipping is organized. Traditionally, all the shipping requirements used to be carried out using boats. Recently, the company has started to resort to using airfreight in an attempt to speed up delivery (Moatti, &Dussage, 2007).
Marketing, sponsoring and communication
Since Louis Vuitton deals with luxury goods, the company requires significant investment in their marketing, media coverage and sponsorship. In 2005, the company increased the marketing budget by 20%. Overall, the expense incurred from advertising accounted for only 5% of the sales. 70% of the adverting was spent on image enhancement. S marketing strategies that went on advertisements featured celebrities as the brand managers.
The company was also involved in sponsoring prestigious events as a part of their advisement campaign. The remaining percentage of the advertisement capital was directed towards supporting the introduction of new Louis Vuitton products into the market.
This was vital for the firm, especially in the promotion of new seasonal products that need vigorous marketing in order to maximize sales during the first months following their introduction to the market. Louis Vuitton has also invested heavily in fighting illegal imitation of its products (Moatti, &Dussage 2007, p. 60).
The Most Important Problems in the Supply Chain Management
There are various significant problems that plague the management of the company. The first and the most important issue is the delay in the supply of the key raw material, i.e., leather. It takes about 6-8 weeks before major supplies can be delivered. This means that the company has to maintain an inventory of 2 ½ months of raw material (Moatti, &Dussage, 2007).This is a significant problem since the company incurs extra cost in maintaining and storing such vast amounts of inventory for long periods.
On various occasions, the availability of the products was down. This is at times good news if it is a direct reflection of the successful nature of the products. However, when the company is not able to fulfill demands in the market, it runs the risk of incurring losses and losing its customers to fellow competitors. This is especially problematic when dealing with a specific product that is on very high demand compared to the other products on sale.
This problem trickles back to the logistic department and manufacturing. The tight demand becomes difficult to fulfill as the plants are not able to respond adequately (Michael Burke talks The Louis Vuitton ‘Experience’ 2013, p. 10). Subsequently, there is curtailing of other products in the manufacturing line. This problem is also related to the company’s stores. Since most of the stores have a limited storage and shelf space, placing large orders for a specific product leads to the displacement of other products.
Over the years, the cost of shipping has risen sharply. The rise in the cost of shipping has also been enhanced by out-of-stock problems. When the stocks levels are critically low at a particular store, the goods have to be transported to various locations as an emergency response. This increases the cost of shipping since airfreight charges are high compared to the traditional boat shipping that Louis Vuitton uses.
The cost of storage has also risen sharply, because inventories tend to grow in specific retail outlets, exceeding the amount of storage space originally designated for a certain product.
In order to counter the extra cost incurred due to additional charges in the storage, various retail consultants recommend that Louis Vuitton stores should convert some of their existing storage space into additional shopping area. This will make better use of the available overall store space. This is an effective strategy as it is projected to allow for about 3% increase in sales, keep up with the demand and keep the store’s surface regularly stocked (Ghosh & Varshney 2013, p. 20).
When it comes to defining the further course of actions or the company, one must keep in mind, though, that the demand forecast, which a number of specialists suggest as the first logical step for the company to undertake, may trigger even more deplorable outcomes. Indeed, seeing how the company is suffering impressive challenges at present, making a mistake in the demand forecast and, therefore, coming up with the product design that the customers may consider pointless is lethal for Louis Vuitton.
Hence, it would be much more reasonable to utilize the method of a sticker shock. The anticipation of the company’s opening new shops and introducing its new brand, which it has been working on over the past few years, will become even tenser and, therefore, attract even more customers (Radón 2012, p. 107). Louis Vuitton can use the concept of exclusivity as the method of selling its new collection for a higher price (Radón 2012, p. 108).
It would be wrong to claim that the strategy described above is going to be a doubtless success for the company; quite on the contrary, such a decision as raising prices in order to stir the public’s excitement and, therefore, gain more weight in the customers’ eyes is extremely risky. However, the effects that the chosen method will have once it is successfully implemented are far too impressive to discard this strategy. Taking both external and internal factors into account, the company may succeed in getting its clients excited and ready to pay more.
Counting the Losses and Choosing the Transportation Source
Losses incurred due to sold-outs and unsold product deals a major blow to the company. Louis Vuitton does not organize any sales or price promotions geared to sell off any of its unsold articles. Sometimes, the staff at LVMH is offered the items at 70% below their list price (LVMH Moet Hennessy 2013, para. 1).
On average, it is estimated that about 2% of all the fashion-related items produced by Louis Vuitton as short-cycled products are disposed of each year (Fashion Scoops 2013, p. 13). This portrays a negative image to the company that prides itself in manufacturing high-end and high quality products. It leads to waste of resources and leads to losses.
It is also estimated that, typically, out of every 100 customers that intend to make purchases in any of the Louis Vuitton store, 8 of the individuals found the item they wanted was sold out. Out of these 8 individuals, 10 % ended up purchasing a different item from the store immediately. 20% of the disappointed individuals put off their purchases and came back at a later date. The rest either turned to other brands or settled for a totally different gift.
Fashion Scoops 2013, WWD: Women’s Wear Daily, vol. 206, no. 38, pp. 6-1.
Ghosh, A, & Varshney, S 2013, Luxury goods consumption: a conceptual framework based on literature review. South Asian Journal of Management, vol. 20, no. 2, pp. 146-159.
Karen, D 2014, ‘New age of luxury at Louis Vuitton,’ Evening Standard, March 5, p. 3.
Lichocik, G, & Sadowski, A 2013, ‘Efficiency of supply chain management. Strategic and operational approach,’ Logforum, vol. 9 no. 2, pp. 119-125
LVMH Moet Hennessy 2013, LVMH Moet Hennessy Louis Vuitton SA SWOT analysis, pp. 1–8, <https://www.researchandmarkets.com/reports/1816395/lvmh_moet_hennessy_louis_vuitton_se_mc>.
Michael Burke talks The Louis Vuitton ‘Experience’. (2013). WWD: Women’s Wear Daily, vol. 205 no. 83, pp. 3-1.
Moatti, P V &Dussage, P 2007, Louis Vuitton: new product introductions vs. product availability, European School of Management, Paris, France.
Radón, A 2012, ‘Luxury brand exclusivity strategies – an illustration of a cultural collaboration,’ Journal of Business Administration Research, vol. 1, no. 1, pp. 106–110.