THE ANALYSIS OF THE LOGISTICS SYSTEM - SC AVON COSMETICS (ROMANIA) SRL

THE ANALYSIS OF THE LOGISTICS SYSTEM - SC AVON COSMETICS (ROMANIA) SRL

CHAPTER 1: Introduction

Avon Cosmetics Romania was registered on September 4, 1997. It operates in 96 areas throughout the country, with three main locations: the head-office- Avon Cosmetics (Romania), Ermil Pangrati no. 30, sector 1, Bucharest; one express delivery center in Bucharest, Lahovari Square, no. 36-40 and the Operational Center, Chiajna, No 13bis.

From the very beginning until now, Avon Romania has built and consolidated its strategic position on the market of direct selling of cosmetics. Today, Avon's role is even more important, since it also functions as a distribution center for the South-Eastern part of the Europe: Bulgaria, Moldova, Albania and Macedonia.

Nowadays in Romania over 125,000 women sale for Avon and over 6000 women already have coordination activities in the selling process. Avon Brochure is the most read beauty magazine in Romania, with over 800,000 printed copies every three weeks.

Even so, due to the economy crisis Avon suffered a considerate loss in profit, sales and income.

Avon products net profit fell 30% in the third quarter at 156 million U.S. dollars from 222.6 million U.S. dollars in the same period in 2008, under a revenue decline of 4% to 2.55 billion U.S. dollars according to data released by the company.

Avon, the largest cosmetics company specialized in direct sales, worldwide, has maintained tight control over costs and increased the number of staff by 10%, but sales continued to decline due to reduction of consumer spending.

In the first nine months, net profit fell by 45% to 356.4 million U.S. dollars from 642.9 million U.S. dollars.Revenues were contracted by 9% to 7.2 billion U.S. dollars, 7.88 billion U.S. dollars compared with a year ago.

Direct competitors:

AMWAY: One of the best known direct sales companies in the world, entered the market in Romania in 1997 and took the advance in recent years, reaching the second position, as turnover, after Avon. The company achieved in 2007 a turnover of 125 million lei (37 million euros), up about 20% over 2006.

FABERLIC: entered the Romanian marketing 2004. Originally from Russia, the country where the cosmetics market experienced a real boom after 2000.

ORIFLAME: It was the first direct sales cosmetics company that entered Romania in 1995, but it was surpassed by Avon in 2001. Subsequently, the distance between the two competitors has steadily increased.

OTHER COMPETITORS: Even though there is a strong competition on the cosmetics market, the main competitors of Avon are the other direct sellers; apart from the presented ones, companies like Federico Mahora, R& L International, D&P also fight for a market share, even if it's a minor one.

Since the purpose of this paper is to analyze and evaluate the logistic activities of Avon, the following lines will provide some additional information about the order-purchasing-delivery system.

Avon's strategy regarding the logistical functions relies on the assumption that a well defined territorial distribution can ensure a high level of efficiency at all levels.

Given so, Romania has been divided into 7 strategic divisions, which have been attributed one of the following colors: red, green, pink, yellow, white and violet. Every division comprises a variable number of areas, so that, at the whole country's level, there are 96 areas (compared to only 6 areas, in 1997). Such unit is subdivided into groups and subgroups and this territorial arrangement is important not only for an efficient management, but also for the logistical activity, since every area has a certain schedule for orders and deliveries.

One selling cycle (also known as a campaign) lasts for three weeks, enough for each area to place two standard orders: usually in the first and the last week of the campaign.

Because Avon Romania doesn't produce, but imports and delivers cosmetics to its consumers or sales representatives, a major risk would have been not to adjust the offer to the demand. In order to prevent situations of surpluses or complete lack of products, Avon uses an own forecast tool: trend-setter areas. Five randomly chosen areas in Romania are given the possibility to order from the brochures with three months in advance, so as to have a right measure of the demand and to be able to import just the right quantity of products. In this way, the orders placed in the national campaigns can be fulfilled in due time and important financial resources are saved since no surplus stock requires warehousing.

The following chapter will provide detailed information about each component of the logistic activities.

CHAPTER 2: Identification of the logistic activities

Every company that aims to survive on the market needs a well-defined logistics system, given the fact that the way the consumer requirements' are fulfilled can make the difference in favor or against one company or another.

According to the scientific theory[1], logistics is the management of the flow of goods, information and other resources, including energy and people, between the point of origin and the point of consumption in order to meet the requirements of consumers. Logistics involves the integration of information, transportation, inventory, warehousing, material-handling, and packaging, and occasionally security.

There is a logistic function in every step of the commercial act and this function administers either the material flow (goods, products) or the immaterial one, which is related to the information and financial circuit. According to the direction of the flow, we can distinguish three basic components of the logistical activity:

the upward logistics

the downward logistics

the inverse logistics

As we have already mentioned, AVON Romania doesn't produce, but imports the products and delivers them to the sales representative or to the final consumer. Given so, we will evaluate the following processes:

Proceses belonging to the upward logistics: procurement, purchasing and boundary operations for the flow of the goods towards the warehouse

Proceses belonging to the downward logistics: warehousing, co-packing, labeling, order preparation and transport towards the sales representative

The only process that belongs to the inverse logistics :return

Procurement. Purchasing. Boundary operations.

Given the fact that the commercial agreements between Avon Romania and Avon Poland are treated like confidential and strategic information, we couldn't obtain any detail about the purchase process.

However, it is certain that the cosmetics commercialized by Avon Romania are produced in Poland and transported in trucks towards the Chiajna Warehouse.

The Procurement process is always related to the forecast of supplies and it is mandatory for both parts to respect the specific quality standards, the boundary regulations and the international commercial laws

Warehousing. Co-packing. Labeling. Transport.

On a surface of 11.355 square metres, the Operational Center in Chiajna processes the orders for Romania, Bulgaria, Macedonia, Moldova and Albania. In this center work over 350 employees that receive, prepare and deliver the orders, summing up an average volume of 9 millions products per month. This investment comprises all the departments involved in the operational flow: warehousing, co-packing, labeling, transport, customer service and IT.

The products are received in the dock's region, where the infrastructure allows unloading four trucks simultaneously. Then it is transferred into the warehouse region that lays on a surface of 3300 sq. m and a warehousing capacity of 4100 pallets. According to the number of orders that are asked for daily, the products are transferred to the region of co-packing.

The way the products are arranged in this region is changed every three weeks

because according to the promotions and offers in the brochure, the volume of ordered products is subject to change every campaign.

Before reaching the packing region, appropriate labels have to be stuck on the containers. At the very beginnings of Avon Romania, the containers were printed directly, which was a great disadvantage because a product in a bottle printed in Romanian language couldn't be delivered in another country, due to the commercial regulations.

After the products are packed, the boxes (carton boxes of different dimensions) are arranged according to volumes, type of delivery and destinations and go forward towards the delivery docks.

All the regions involved in the processes of product handling are strongly supervised to respect the temperature and humidity conditions, as well as specific hygiene requirements.

Not mentioning the external deliveries (towards the Balcan's region), the products are delivered either to the Express Center (in Lahovari Square) or towards the sales Representatives. The last destination is reached by Avon's partner, Fan Courier[3], according to the scheduled delivery dates, inside or outside the geographical area the sales representatives (SR) develops their activities, free of charge or paid by the SR.

The delivery company is chosen every year, after an auction process. Every delivery has to be proven with the signature of the Sales Representative on the delivery documents and the obligation of the courier is to try the delivery at least twice before returning the package to Avon.

Returns

Avon cosmetics are accepted to be returned within 3 months of the date of purchase. Products must have at least two thirds of the original content and be sent in original packaging. Avon will replace the product or will refund its value. Non-cosmetic products for long term use (ex. clocks, scales, hair dryer, etc..) can be return within stipulated by law for their category of products to be repaired or replaced. If repair or replacement is not possible, Avon will return their value.

The following products can't be returned:
- Brochures, samples, demo products offer, and any other product that is aimed to promote and support sales
- Products that support various social campaigns (ex. silver badge Breast Cancer). Funds from the sale of these products are intended to support the social campaigns.
- Goods received as a result of errors in placing the order. Exceptionally, all the above products can be returned only to be replaced, if they are defective.

Full returns:
Returns are considered full returns if the boxes haven't been unpacked, packages that weren't delivered to or raised by the representative in the delivery time.

Sending the returned products to the Operational Center Chiajna:
Returned products will be sent by each representative through the Romanian Post (only at post offices that have Messaging) or any other courier service which package allows the declaration of value, necessarily accompanied by a return form.

Receiving returns:
The Department of Operations will receive the returns every working day from the Post Office Chiajna and forms will be processed within 3 working days of their receipt on the operator.

Chapter 3- Classification and evaluation of the logistic services

Given the fact that the main logistic activities have already been described, this chapter is aimed to provide a more structured perspective over them.

As such, we have considered that a classification of the processes according to the logistic function fulfilled would be useful, since it both emphasizes the chronological order of the sequences and the importance of every step in the supply chain:

Processes that belong to the industrial logistics:

a)       The purchasing and procurement of raw materials- as it has already been stated, Avon Romania doesn't import raw materials, but finished products that are ready to be sold on the direct market. This is undoubtedly one of the most important processes, since it lays the basis of the whole activity developed by Avon.

b)       The transport of the products within the deposit is realized on wheels, from the dock's region ( where the trucks are unloaded) towards the warehousing area.

c)       Warehousing processes- are developed on 3300 out of the sq. m. The maximum capacity of 41 pallets is almost entirely used, especially during the peak-seasons, due to large amounts of quantity ordered during the winter holidays and later on for the Valentine's day, and the 8^th of March.

Processes that belong to the storage logistics:

a)       The transport of the finished goods

b)       Replenishing the distribution platforms

c)       Storing the finished goods

The three above processes are strongly connected one another, mainly due to the aggregate character of the machinery. Items in the order fulfillment area are picked and replenished in one of two ways:

Items can be picked from a machine called an A-frame, which dispenses items into containers

corresponding to each order. This machine can process about 40 orders a minute, so the

supply of items stored there can be quickly depleted. Because of this, cases of each item picked from the A-frame are stored in flowrack located near the machine; this supply is used to replenish the A-frame.

Items can be picked by workers who visit an item's storage location.

Processes that belong to the distribution logistics:

Given the character of the selling process, as a direct activity, the distribution logistics only comprises the transport from the warehousing area, where the orders are waiting to be delivered, towards the loading region. That is the point where the strategic partner- Fan Courier -starts to assume responsibility for the ownership of the packs.

Even if the above classification offers an overview of the main processes, it is a functional one and its role is to clearly distinguish the limits of the logistic functions. Moreover, we have considered that all the mentioned processes are essential for the business itself and their impact over the activities performed by Avon is a critical one.

For this reason, the following chapter will focus on the way the processes can be improved so as to bring even more results with fewer resources.

Chapter 4

Logistics is a real source of competitive advantage, a key component of the organization. By reconsidering the strategy of logistics services for customers, the organization can meet in greater demands in terms of target market segments.

Giving the fact that Avon processes every three weeks thousands of orders summing more than 9 million products, we believe it is a priority for Avon to reduce the cost of processing orders. At the same time, they should make significant investments in new equipment. They should identify ways to reduce the cost of processing orders given the existing layout in the order fulfillment area.

They should improve two aspects of processing orders: picking items from the storage modes in which they are kept, and replenishing the supply of those items in the storage modes.

Every three weeks, Avon must decide which items should be picked from the A-frame and which should be picked manually. Items picked from the A-frame have a very low cost-per-pick, but the cost of restocking the supply is relatively high, because the A-frame is depleted quickly. Items picked manually have a higher cost-per-pick, but they are cheaper to restock, because they are stored in greater volumes. In addition, Avon must decide how much space each item should occupy in its assigned pick area: if an item is given more storage space, it will need to be restocked less frequently, but other items will then have less space and thus incur more restocks.

They should determine

which items should be stored in each storage mode, and the quantities in which they should be stored, in order to minimize the total cost of picking and restocking the order fulfillment area.

the process of assigning items to storage modes and determining the quantity in which they should be stored is called slotting the warehouse.

It should be developed a method for slotting the warehouse by modeling the operations in the order fulfillment area.

Avon inventory system is equivalent to a multi-mode inventory system. Avon should divide the total supply of flow rack in the warehouse between the storage mode that supports the A-frame and the storage mode where skus are picked manually; they should determine the optimal proportion of the total flow rack that should be assigned to each area.

They also should extend the model of the Avon inventory system to inventory systems with an arbitrary number of storage modes, and paths between the storage modes.

Bibliography :

https://avoncosmetics.wordpress.com/

https://avoncosmeticsiasi.blogspot.com

https://www.capital.ro/ moneyexpress.money.ro/articles/pdf/12390

Logistica si Distributia Marfurilor, C.Vasiliu, M.Felea Ed. ASE, Bucuresti, 2008, page 31

https://oao.ro/oao_ea_avon.html

https://www.avoncosmetics.ro/

https://oao.ro/oao_ea_avon.html