SUPPLY CHAIN & OPERATIONS

IN EMERGING MARKETS
www.cel-consulting.com

SCMISSION 2018
THIRD ROUND CASE STUDY
INTRODUCTION
The company was founded in 2013 by Ms. Bich Phuong, the actual CEO. Based in Ho Chi Minh City, it manufactures and sells cosmetics products
derived from traditional Vietnamese herbs. After spending some years testing the market and consolidating its position, the company is today facing
new critical challenges that will determine its prosperity...or failure.

1. MARKET
In the first years, the company focused on the market close to the manufacturing plant in Ho
Chi Minh City to get strong hold before reaching out the rest of the country.
Today’s company products are well known in Ho Chi Minh City, Can Tho and Vung Tau,
where customers can find them in large retail stores and in small specialized beauty
shops. In the past year, Da Lat and Da Nang where chosen as pilot cities to test the
market reaction and the same distribution model used in the South, and results have
been promising with interesting sales growth.
The company is making a great revenue, sales are booming both in the established
and in the new markets. The board is enthusiastic and now aims to fast achieve
national coverage. In this sense, it has decided to continue the expansion to North
Vietnam with the same channel strategy that has been proved successful in actual
regions, making new contracts with large retail stores and small specialized beauty
shops in Ha Noi and Hai Phong, as well in other medium size cities through all the
country.
In addition, the company decided to expand the distribution channels through the
implementation of an e-commerce platform that will allow customers from all over the
country to receive the online ordered products directly at their home.
No matter how fast the growth can be, the company still positions itself as a niche
market player pursuing a focus strategy – choosing a niche market of cosmetics made
by traditional methods. Within the niche market chosen, they separate their customer
base into two segments: one is Mass Range, which has a relatively low price, and the
Premium Range, which is more expensive.
2. CUSTOMER AND PRODUCTS
Quality at reasonable price was the core value of the company since its beginning. The company started up their business by producing and selling good quality cosmetics at
reasonable price, aimed at middle income customers. Soon, the company gained market share for its good quality products, competing well against other brands. Since then, the
company has developed the new premium brands, reasoning that this is a potential market where high value customers seek for something worth their money.

The company’s customers are people who look for natural products and want something that can help them inside out rather than just outer appearance. Based on the data from the
Marketing Department, customers can be segmented into two main groups: premium and regular.

PREMIUM CUSTOMERS REGULAR CUSTOMERS

The premium customer group is characterized by those who are between 30 and 55 The regular customers group is much larger than the premium one. Although it
years old, or as the Marketing Vice President has put it – the young to middle-aged encompasses the same young to middle-aged customers as the premium
ones. Monthly income of this group of customers lies at the upper-middle to high level. segment, people in this cluster largely have middle income.

To meet the higher quality requirements of the premium customer group, the company
introduced a premium range of products covering a wide collection of all types of
cosmetics like skincare, perfume, deodorant, shampoo, conditioner and body wash.
Each of these includes several versions with different smells and is bottled in different
sizes, combining to some 100 different SKUs.
Due to the current strategy of the company, the premium range is continuously revised
and developed in order to provide the market with new versions or enhancements every
semester.
This customers group seeks a good product at an affordable price. When
compared to the premium customers, they are less demanding in terms of
product quality and variety.
Therefore, to keep the price reasonable so as to be able to compete with a lot
of rival companies in this segment, the company has to spend less R&D and thus
less variety is offered. Though not many, this set of products still gains big
market share thanks to its good quality and competitive price (20 SKUs).

‘Since our premium customers are very fashionable, they usually take the new models
as they emerge’ said Bich Phuong, CEO of the company. However, to attract more
market, the company offers a very diverse range of products when introducing new
models; just a few of them are really accepted by the market, the others fail to do so.
Because of this, demand forecast of each of the new model introduced every
semester is far from accurate. Demand pattern for a particular product usually goes
up and down as customers switches between many new models and as they move
from the old versions to the new launches.
Demand patterns for this product group, are usually referred to as stable and
predictable, making it easier to manage forecast and inventory levels.
‘Customers in this segment rarely switch between types and models within the
company’s offers because there are in fact not many variants of products for
them to do so. However, as there are a lot of competitors providing similar
products, customers are easy to be persuaded to substitute them for our
products if competitors options are not available in the stores’ said Xuan Thanh,
the company’s Vice President of Supply Chain (VoSC).

‘Despite all of these, they are high value customer who bring a substantial revenue Taking into consideration the fact that this segment of customers is highly price
for our company.’ said Phuong, ‘Also, they are loyal customers, thanks to the fact sensitive, the company makes effort to be more efficient in producing and
that they are very quality sensitive and currently our premium range is standing out shipping the goods.
as the best in the market which faces few competitors.’

Premium products are highly profitable and due to their high margin, stockouts
are to be carefully avoided. On the other hand, the demand per SKU is relatively
low and very unpredictable, resulting in high inventory levels.

In addition, new premium products often cannibalize sales from existing items within
the same family, which have to be quickly discontinued. When it happens, unsold
stock is offered to the retailers at promotional discounts and, ultimately, destroyed.

Actual and future demand:

Annual Sales 2017 Forecast 2020 Uncertainty Range

Region Product (million units) (US$ million) (million units) (±%)

Regular 4.8 14.4 9.6 5%

South
Premium 1.2 10.8 2.4 10%

Regular 0.4 1.2 0.8 10%

Central
Premium 0.1 0.9 0.2 15%

Regular N/a N/a 1.9 20%

North
Premium N/a N/a 0.5 25%

TOTAL 6.5 27.3 15.4

3. CHANNELS
A diversified channel strategy was studied to better penetrate the market and achieve premium and regular customers.

Small Specialized Stores Large Retail Stores

Premium products are available in small specialized high tier shops, located in well Both premium and basic products are sold in large retail stores, available in multiple
known malls and streets, targeting customers that specifically look for best products for areas of the cities – targeting customers that are more price or time concern, looking at
their well-being and beauty. a one-stop shop where they can find easily everything they need.

Because of the small size of the stores many of them cannot offer all the premium portfolio Supply Chain department enjoys the regular weekly larger orders, as they are easy to
mix, and they order multiple times per week to avoid stockouts of their best sellers. plan and fulfill. However, required service level is very high, on the order quantity
Shops owner are enthusiastic of the customer reception of the brand, but Supply Chain delivered and strict time window to unload the product.
struggles to continuously replenish them with a wide variety of products in such small
quantities. Marketing and Sales also face with many demands by the customer purchasing teams,
especially in terms of merchandising, trade marketing and promotions.
Marketing and Sales, on the other hand, put a big effort to make sure that every store
has all the product mix available at sale and to keep shop owners and employees
updated with the latest product launches.
 E-commerce
Online sales is a brand new channel for the company, with no previous experience. Mr. Bich Phuong knows e-commerce can be dramatically powerful to increase sales nationwide in
the fastest way, but it has also drawbacks that have to be considered carefully:

• IT department will need to select and implement a good, functional and secure electronic platform, as well to review and adapt internal end to end processes within current ERP;
• Marketing is thrilled with the idea of using technology to promote and boost product sales, but new digital marketing skills are needed;
• Sales department is concern of losing market share (and sales commissions) of the traditional channels;
• Finally, the close relationship with the consumers has a massive brand impact that can boost company sales through all channels, but unsatisfied customers can put in danger
the company reputation itself.
• Supply Chain has not yet developed a plan on how to deliver single items to individual consumers virtually on every corner of the country;

During its first years, the e-commerce implementation will cover premium products only, reducing the initial complexity to start online sales operations. This because, by targeting
more high-income customers, the demand tends to be more concentrated in medium-large cities. In addition, the sales volume share of the premium product is inferior than the
regular one, hence allowing the company to gain some operational expertise before reaching the larger regular customer market. A 3 business days delivery policy was decided, to be
gradually reduced up to 1 day (“next day delivery”).

When the new e-commerce operation will proven to be stabilized and robust, the plan will be to expand the digital platform to all product portfolio nationwide.

Distribution channel by share*:

6
14 12 Channel
Small specialized stores**

Large retail stores

86 82
E-commerce**

*Consider same channel share in all the regions

2017 volume share 2020 forecasted volume share **Only for Premium products
(%) (%)

4. DISTRIBUTION
Sales are already increasing in the prevailing markets, and with the future expansion to the North Region combined with the e-commerce channel implementation the company must
assess its current distribution strategy

Nowadays, all products are shipped directly from the factory warehouse in HCMC and without the use of distribution centers. The company uses its own truck fleet to replenish both
large and small specialized retail stores directly from their factory in HCMC.

Unit pick and door to door delivery typical of e-commerce will drastically increase the complexity of the warehousing and transportation operations. Therefore, SC team have decided
to outsource the full e-commerce operation to a third-party logistics provider, taking advantage of their actual assets in the whole country and expertise in such operation.

On the other hand, the possibility to hire the same 3PL to serve the other channels is still under evaluation. One of the main reason is that, with the business expansion to the rest of
the country, vehicle fill rate for long distance deliveries is very low and the empty backhaul became an issue, increasing drastically the transportation costs.

5. PRODUCTION
Producing and processing high quality cosmetics requires strict procedures including
mixing, bottling, packaging and labelling and several strict QA tests. Production capacity and costs:
1.36
Today factory is capable of producing the two ranges, although on different specialized
lines by product family. Marginal cost of producing a product of the two ranges are
somehow similar: labor, ingredients or fixed cost are not much different, the critical
distinction lies in the R&D and formula cost. 0.80 0.79 0.78 0.78 0.78

Production volume has almost achieved today’s maximum capacity, resulting in low 12.3 3.81
3.71
production schedule flexibility and, most important, endangering business growth.
3.42 10.6
3.13
To support its growth strategy the company must quickly decide how to expand its current 9.0
production footprint. In this sense there are different available options:
8.2
2.45
1. Expansion of the current factory production capacity, which would take 6.8
approximately 6 months to be completed;

2. Brownfield project installing new production operations in the proximity of

HCMC, Da Nang, Hanoi. On average each factory would take 1 year from base
project until ramp-up production to full capacity. At the moment there are
studies for 3 manufacturing facilities types, each one with different maximum
production capacity.
Factory
3. Outsourcing production to co-manufacturers. Market studies found abundant
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manufacturing plant can be dismissed or relocated. Every owned factory has a

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warehouse attached, that can store and ship its production to other facilities or directly
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a manufacturing facility or 3PL DC before shipping to the customers.
 6. TASK
The SC Vice President has to present the new Supply Chain strategy that will enable the
new growth corporate strategy, in which the company intends to increase its market
Answers has to be made following the template below, make sure you answer
share by expanding the geography while investing in a new distribution channel.
all the questions listed in a exhaustive but concise way. Be knowledgeable that
not one particular answer is optimal, many answers may be accepted
The SC strategy will be deeply questioned by all members, which will look at the impact
depending on your reasoning. Therefore adding details and reasoning to
into their own area (i.e., Finance, Sales, Marketing, …). As part of the SC team, you will
support your conclusions are necessary to correctly evaluate your answers.
have to design the new manufacturing and distribution footprint, taking into account
the present situation and the future requirements as illustrated in the case.
The submission has to be written in English and in pdf format. The assessment
rubric is given to you so that you can plan your paper accordingly. Remember
Note that while designing the supply chain network, you should consider several factors
that top performing teams will win a chance to present your work before the
such as implementation complexity, operational costs, and service level. Moreover, there
board of examiners and the audience in the Gala night of the SCMission
can be more than one supply chain configuration for the short, medium and long period.
Competition 2018.
Besides, you should elaborate on the strengths/advantages, weaknesses/disadvantages
The Power Point presentation for the Gala night will be a summary of the
and risks of your supply chain strategy compared to the other potential alternatives,
paper you submit for this round, focusing on visual medias more than pure
highlighting why you have chosen your particular design for the company.
text. You only need to submit the paper in pdf for this round, the Power Point
slides are needed only when you have won a place in the final Gala.
Finally, suggest appropriate metrics that will allow to track the operation performance
and adjust the strategic decisions in the forthcoming years.

1. Summary of corporate and supply chain strategy:

1.1 1.2 1.3

Describe in few words What is the company's competitive strategy Considering the corporate and competitive
the company’s corporate growth for regular and premium products? strategy of the company,
strategy in terms of: Please select the appropriate answer and briefly justify. which supply chain strategy(ies) you would
decide for your Supply Chain and why?

Market: Channels: Products: Regular products: Premium products: Collaborative supply chain
Cost leadership Cost leadership Lean supply chain
Cost focus Cost focus Agile supply chain
Differentiation Differentiation Campaign supply chain
Differentiation focus Differentiation focus Fully flexible

2. Supply chain network design

2.1 2.2 2.3

Present your supply chain network
design for 2020:
• Graph representation of the network
(arcs and nodes)
• Description of the nodes (factories, warehouses,
distribution centers): location (HCMC, Ha Noi or Da
Nang), type, product family, max capacity and
expected volume, ...
Describe the implementation roadmap from the actual network (1 Do you think the 2020 manufacturing and
factory in HCMC) to the proposed 2020 SC network, considering distribution network will be adequate for 2024?
the evolution in demand volumes and the time to open new Describe major drivers/events that would lead to
operations (factory, distribution centers). the review of the suggested 2020 network.
• Represent in a graph the 2018 SC network configuration and,
if different from the 2020 network, explain why.
• Represent in a graph the 2019 SC network configuration and,
if different from the 2020 network, explain why.

• Description of the arcs (transportation flows): type

(B2C delivery, B2B delivery, internal transfer),
expected volume, product family, ...

• Justify the SC network designed considering its

strength and weakness

3. Supply chain metrics

3.1 3.2

Which metrics are important to measure the performance of the Supply Considering that each channel has different requirements,
Chain network and eventually trigger network review? which KPIs should be implemented to monitor the performance of each of them?