eye candy

PUT any woman into a Sephora shop and it’s like watching a kid in a candy store. If that woman happens to be a cosmetics junkie, watch out! The response may be overwhelming.

What is Sephora? It’s a leading beauty retailer that offers over 250 name-brand cosmetics, skin-care items, fragrances, and other beauty products to a growing number of consumers. Defying the glass counters and vendor-subsidized sales staff of the traditional department store, Sephora merchandises its products by category in an open environment. Lots of testers are available, allowing customers to freely compare the offerings of the leading brands side by side. The product assortment includes all of the conventional makeup and fragrance items you’d expect, along with a wide range of items you might not expect, such as brown sugar body polish, lip plumpers, and heated eyelash curlers. Sephora also offers an arsenal of skin-care products from leading dermatologists, such as Dr. N.V. Perricone and Dr. Howard Murad. Product consultants provide shoppers with sound beauty advice (as opposed to attacking them with the latest perfume), creating a shopping environment that seduces even the more reluctant cosmetics consumer.

Sales figures show that the concept is catching on. Comparable store sales increased by 21% in 2000 and 23% in 2001 — and an impressive 25% in 2002, a year when many retailers struggled to show any growth at all. With more than 80 locations nationwide, Sephora, with help from parent company LVMH Moët Hennessy Louis Vuitton, continues to add 10 to 12 stores a year.

But the outlook was not always so bright for this entrepreneurial company. After bringing the concept from Europe to the United States in 1998, Sephora struggled with in-stock issues and inventory inaccuracies. The rapid expansion that involved opening over 60 stores in its first two years proved too much for the company’s operational infrastructure to support, and store replenishment came, essentially, to a screeching stop. The merchandising approach was also unforgiving, with stock shortages creating empty spaces in the gondolas that served as a constant reminder of the retailer’s operational challenges.

Prestige cosmetics vendors that had initially welcomed the concept as an avenue to a new consumer base were growing skeptical. Sephora executive Laura Wilkin recalls all too well the challenges the business faced. “About a week after I joined the company I remember thinking, ‘What have I gotten myself into?’” recalls Wilkin, who was named senior vice president of supply chain in May 2000 and had responsibility for turning around Sephora’s logistics operations. With the holiday season approaching, the pressure was on to get store shelves filled by early November, yet store in-stock rates hung at a dismal 70%.

Sephora.com, today the company’s number one “store” in terms of sales, faced obstacles as well. In addition to having a comparable 70% in-stock rate online, roughly 10% of online orders had to be cancelled because the item ordered wasn’t actually available at the time of picking. Internet and store orders were both being filled from a single inventory, but the warehouse management system had no ability to reserve inventory for Web orders, and the inventory information that online customers saw wasn’t updated in real time. As a result, the stores absorbed all available inventory, and the Web site would show product as being available when, in fact, it was out of stock.

A large number of factors contributed to these challenges. When Sephora brought the concept to the U.S., the company selected a third-party logistics provider to perform store replenishment. Unfortunately, the 3PL, which had previously worked primarily for consumer products firms that shipped in full-case and full-pallet quantities, was ill-equipped to support the intensive each-pick operation of specialty retail. The small, high-value products lent themselves to theft, and the 3PL used a workforce that consisted entirely of temporary agency employees. Sephora had taken over management of the facility, which is based outside of Baltimore, MD; however, new terms allowing Sephora to manage its own operation within the third party’s facility were never agreed upon, and lawsuits were being threatened on both sides. It became clear that to get the required product into the stores for the 2000 holiday season, it would be necessary to expand Sephora’s space within the facility, segregate the online store’s forward-pick inventory from that of the retail business, install new material handling equipment, and implement a new WMS. It was May 2000, and peak receiving was expected to hit as early as August.

“I think that I was too busy and too determined to consider the possibility that it couldn’t be done,” recalls Wilkin, who spent the next four months working with lawyers, IT professionals, consultants, engineers, and recruiters to make the necessary changes. By the end of August, the team was successful in getting a new contract in place with the 3PL, doubling Sephora’s space within the facility, completing a $5.5 million building renovation, conducting a full physical inventory, and installing a new WMS. Completing this work within the four-month time frame proved difficult enough, but reconfiguring the company’s only distribution center while continuing to run operations was particularly challenging. “I described it to people by telling them to imagine fixing an airplane’s engine while it was in-flight,” Wilkin says.

In the end the team met its goal — just in time. After reconfiguration, the facility increased its through put by over 300% and by the first week of November the stores were filled with sufficient product to support the 2000 holiday selling season. But in many respects this was when the real work began. With the pressure of the holiday season behind it, Sephora needed to focus on fine-tuning the mechanics of the new system, building the right team, standardizing processes, driving up productivity, and reducing total logistics costs. The retailer was still far from meeting profitability objectives, and reducing logistics costs would prove to be critical to the company’s efforts to meet its financial goals.

Key to the logistics initiative was the appointment of Martin Flaherty as vice president of logistics, charged with running the company’s day-to-day operations. Human resources manager Ted Wasielewski took on the task of completing the transition to a Sephora workforce and building an effective management team. (The facility now employs 115 full-time workers and over 100 temps during peak season.)

Over the next two years the team pursued a number of programs aimed at improving service levels, increasing productivity, and reducing logistics costs. Flaherty and his staff focused on initiatives such as standardizing work methods, developing associate training programs, and implementing productivity standards as well as an employee incentive program. Another area of focus was inventory accuracy. Inventory manager Joe Zarzycki instituted rigorous cycle counting programs and worked with corporate IT personnel to ensure that the various systems were in sync and updated in real time. By the 2001 holiday season, the fulfillment operation was filling store and Internet orders with a 99.8% fill rate and a 99.9% accuracy rate. Inventory accuracy improved dramatically; a physical inventory conducted in January 2002 showed gross and net variances both below 1%.

Flaherty also initiated a grass-roots continuous improvement program in which distribution center managers facilitated brainstorming sessions with employees on the floor to identify ways to increase productivity and lower operating costs. “Our associates have been instrumental in helping us to meet our budget objectives,” says Flaherty. “In the first round of brainstorming sessions alone, the team generated over 160 ideas for how we could improve productivity or lower costs. Many of these ideas were implemented immediately.” A four-step decision-making model underlies the continuous improvement program. “One of the difficulties in implementing continuous improvement programs is teaching facility managers how to facilitate decision-making rather than to be the decision maker,” says Flaherty. “This decision-making model was a valuable tool to ensure that associates were appropriately involved in the process and that their ideas and contributions were sought out and welcomed.”

While Flaherty focused on efforts within the four walls, Wilkin, at Sephora’s San Francisco headquarters, led a number of strategic initiatives aimed at driving further productivity improvements and reducing distribution and transportation costs. Most of these initiatives involved system changes, including the implementation of EDI, ASN receiving, an electronic UPC catalog, and vendor partnership programs. In addition, the transportation function, previously managed by a third party, was brought in-house, domestic freight was re-bid, and new carriers were put into place.

All of these efforts have had dramatic bottom-line results for the company. Productivity has increased 47% over two years, transportation costs have dropped by as much as 36%, and distribution costs as a percentage of sales have decreased by a whopping 50%. According to Sephora CFO Patrick Murray, the cost reductions achieved in the supply chain were critical to the company’s ability to meet its profit improvement objectives.

And there are more improvements to come. For the past year the company has been working to develop the capabilities required to support cross-docking so that store demand can be fulfilled directly from vendor inventory, packed by store, and then cross-docked through the Sephora distribution center. The company expects to see significant savings on an annual basis when the concept is fully implemented. More important, cross-docking is expected to substantially reduce the company’s lead time for introducing new products. That’s good news for the woman who just can’t get her edible body powder fast enough!

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