Byline: Pete Born
NEW YORK — After years of wary anticipation, the computerized inventory management revolution has finally taken root in the prestige cosmetics industry.
Major manufacturers have begun plugging into their retailer customers’ electronic inventory systems, or Electronic Data Interchange. But many have discovered that stepping into cyberspace has its problems.
As expected, the early results from switching to automatic merchandise replenishment systems has yielded a bounty of information and speeded the sales reporting process. Some vendors have already seen a reduction in returns.
But there are also snags, some of them short term. Industry executives estimate that at least initially, a vendor’s shipments to a store can be reduced by the equivalent of one month or more of orders if the computer points out that the brand is overstocked, while making the transition to EDI.
In addition, manufacturers have been forced to change how they are prepackaging their goods for shipment, and the babble of differing computer systems used by various retailers can make sales forecasting a murky process.
“It’s a constant, ongoing education process,” said Kathryn Meals, vice president and national sales manager at Calvin Klein Cosmetics, which is one of the first cosmetics companies to embrace EDI.
“The biggest challenge we have with EDI is being able to forecast efficiently,” Meals said. “We are at 85 percent efficiency and we would like to be hitting 95 percent or above. If this is supposed to generate an order of two million units for Dillard’s and it’s 1.5 million units, it’s a big loss. We’ve gotten better.
“The difficult thing is that everyone’s system is different,” Meals said.
When a retailer switches to a new system “a lot of time is spent establishing the integrity of the [generated] information,” Meals said.
Meals acknowledged that it is common for a vendor to lose a month or more of shipments in making the transition to EDI. The heat of salesmanship is suddenly replaced by a computer’s cool calculation. Orders dwindle for items that the system deems too slow moving and cease altogether for goods that the computer reads as overstocked. New orders for the overloaded items are not generated until the excess is burned off.
“The slow-turning items don’t have a place anymore,” Meals said, recalling an extreme example of what technology can uncover. Carter Hawley Hale discovered a four-year supply of Klein’s scented hair hold, an item in the Obsession fragrance line that had been piling up.
Victor A. Gaudet, executive vice president of the Americas at Elizabeth Arden Co., noted, “Once you start using the technology, the results can be unsettling because you now know what the customer is buying.”
Meals added that there is no problem with quick sellers, such as body lotions and spray colognes. Moreover, Klein has seen a drop in returns with the retail accounts that have been on the system the longest.
Lisa Lichenberg, vice president of merchandise technology and vendor standards at Federated Department Stores, said, “The most astounding thing we found out is that we’re getting 80 percent of our sales from less than 20 percent of our sku’s. If we have a lip color that only sells one piece every month, do you want to have six of them because they come in a minimum pack of six?”
Andrew Philip, director of strategy services at Kurt Salmon Associates, said EDI is forcing manufacturers to ship fewer items more often, raising handling and shipping costs. What this also means is a crackdown on generous inventory policies of the past, where stores maintained three months’ supply of a brand, with a fourth month on order.
“Those days are over,” Philip said. While noting that the markup on cosmetics is frozen at 40 percent, he added, “The only way to improve margins is to increase turns.”
According to National Retail Federation figures, all merchandise in department stores turned 2.6 times during 1993. Women’s apparel, which generates 50 to 60 percent of a retailer’s overall volume, turned 2.9 times that year. The rate for cosmetics was only 2.2.
Philip added that Inforem, the computer program widely used by department store retailers, is not an ideal system for dealing with beauty. “The program the stores are using doesn’t have the sensitivity to deal with the low-volume sku’s that the cosmetics industry is built on,” he said. Another widespread problem is the frequent number of seasonal items, such as cosmetics shades, and one-shot promotional items, like gift-with-purchase giveaways, that thrust spikes into the otherwise even flow of basic goods.
Salmon has developed its own format, the Dynamic Replenishment System, that is designed to compensate for the special problems that cosmetics pose.
The Estee Lauder Cos. seized the high ground in the struggle over inventory control by building its own mountain top. During the last three years, Lauder developed its own computer program. Instead of leaving it up to the stores to generate repurchase orders, the company issues its own, based on sell-through data sent from retailers.
John Corrigan, senior vice president of global information services at Lauder, said the firm is collecting sell-through data from about 80 percent of its distribution of over 2,000 department store doors. Lauder’s computer in the company’s plant in Melville, N.Y., now issues replenishment orders for 40 percent of the Clinique business and over 20 percent of Lauder orders, Corrigan estimated.
The company adapted the typical retail system by building a 52-week business profile based on the undulations in the rate of sale, including promotions. Products were organized in groups, based on sell-through, to take into account various rates of sale.
“We felt that we wanted to invest in the business and make it precise, but this is a painful process,” Corrigan said, referring to the hugeness of the undertaking and the resultant changes in corporate culture. “Either we do it,” he added, “or they do it to us.”
The wealth of precise sell-through information gives stores the ability to prune inventories, but retailers and their vendors do not envision an editing frenzy.
“We’ll do what is right to generate the business,” said Pat Galliers, vice president of replenishment at Federated.
Alfonso Lopez, president of Tsumura International, based in Secaucus, N.J., agreed.
“What a department store offers is broadness and selection,” he said. “If you try to go narrow and deep and carry four sku’s, you will damage your business. Part of the excitement is in the flavoring. It’s a delicate balance.”
Philip Shearer, general manager of Cosmair’s LancOme division, observed that many of the slow-moving sku’s, particularly shades with low consumer demand, are necessary to help form the “attitude” of the brand.
“The overall palette is the attraction,” he said. “Otherwise we would all end up in the middle.”
Mastering the new technology will be a long and laborious process, he said, adding, “We are moving forward cautiously.”