Henkel Iberica

Submitted to:

Professor L S Murthy
Indian Institute of Management Bangalore

Submitted by:

Group 8

Anirudh Banerjee 1611082

Neha Arolkar 1611088
Jonaki Biswas 1611105
Rahul Saxena 1611127
Vaibhav Varkhede 1611140
1. Introduction
Henkel Iberica, a subsidiary of Henkel KgaA, has 4 key business segments: Laundry
and Home Care, Adhesives, Henkel Technologies and Cosmetics/Toiletries. For the
laundry/home care area, it owns 6 production plants for manufacturing powders,
liquids, and bleaches along with 3 distribution centres in the Iberian Peninsula.
Home care constituted 58% of the sales of all Henkel subsidiaries in Spain.

2. Competitive scenario in the Household Care Industry

Henkel Iberica faced competitions from two key areas:
1. Other national brands: P&G with strong brands in laundry (23.3% market
share Exhibit 5 of case), Reckitt Benckiser with competitive prices, and
Unilever provided stiff competition to Henkel. Henkel was viewed as trustworthy
but did not have as high a level of consumer acceptance as these competitors.
2. Private labels: These companies sold their products 50% below Henkels price.
Hence, they eroded Henkels market share by 3-4 points each year.

Prior to 1995, the different players in the industry competed on price which led to
price wars resulting in significant losses for the independent retailers. The Law on
Commerce was established in 1995, which prohibited retailers from selling at a loss,
except in liquidation cases. Therefore, retailers could not sell branded products
below the wholesale price or cost of procurement. However, private labels used
discounts and gradually increased their market share to 13.4% in 2001. Non-
branded products too leveraged this channel. Hence, retailers began to rely heavily
on the lower prices of non-branded and private label products to boost sales.

Henkel, like the other national brands, was compelled to use product variants and
special promotions to differentiate itself. Each retailer also demanded a unique
promotion in order to have an edge over other retailers. Some of the promotional
offers used by Henkel were: more quantity of product for same price, specially
bundled products, coupons and free goods attached to the package, and gifts at
checkout counter. This resulted in Henkel having a large number of SKUs and
effectively increased the complexity of forecasting for both Henkel and the retailers.
Henkel Ibericas sales reduced to 651 million euros in 2001 from 764 million euros in
2000. Although, the sales volume were higher, the value was eroded because of
cost of product complexity at warehouses and stockouts at retailers points of sale.

3. Key issues for Henkel Iberica

The issues facing Henkel Iberica can be broadly divided into the following:
1. SKU proliferation due to product variants and promotions: 96 SKUs per
month were made at the Montornes plant. The number of SKUs escalated from
250 to 800 during 1995-2001 with 60% of new SKUs being introduced each year.
These high number of SKUs led to 15-30 line format changes per month in the
plant which resulted in increase in the production costs.
2. Bullwhip effect: Due to the lack of a centralized forecasting system, Henkel
experienced the bull whip effect which led to instances of overstocking and
understocking. When product replenishment was not coordinated between plants
and warehouses, the company had to spend up to 450,000 on transportation
and handling.
3. Increased production costs: Increasing number of SKUs and complex product
portfolio led to increased production costs resulting from frequent set ups,
overtime etc.
4. High packaging lead time and large number of suppliers: There were 55
and 65 suppliers for raw materials and packaging respectively. While some of
these suppliers delivered just-in-time, the general lead time for the packaging
suppliers was high. As a result, the frequently changing packaging requirements
with every new promotion led to higher lead times.
5. Obsolescence: Obsolete items can only be sold at 20% above the
manufacturing cost, or as a special promotion, or clubbed with another
promotion, or scrapped resulting in understocking being more expensive than
overstocking. Obsoletes constituted 30% of the 800 SKUs, with 8% of the stock
in warehouses were obsolete on average.

4. Alternatives Available
1. Special promotions (Status quo)
To tackle the rising competition from low cost private labels and increased
competition from existing users in the already saturated market, Henkel resorted
to policies like special promotions where offers were different for different
customers. Pros and cons of these policies are as follows:

Pros (Special promotions) Cons (Special promotions)

Ensures differentiation from Increased number of SKUs
competition Increased inaccuracy in
Made offer attractive for the forecasting resulting in
retailers and the customers overstock/understock
leading to increased sales Increase in production and
packaging costs

2. Everyday Low prices (EDLP):

Everyday low price (EDLP) is a strategy that promises consumers a low price
each day without the use of any other special discount. Traditionally retailers
offer special discounts, gifts or some form of incentive to increase footfall in their
store. Manufacturers may offer products at discounted price to increase sales
volume or increase attractiveness of the product in the eyes of consumers,
because of which many customers delay their purchase decisions in the
expectation of better deals. As a result, promotions and special discounts lead
fluctuations in demand. Fluctuations can be difficult to predict if we dont have
good consumer behavior insights with uncertainty giving rise to bullwhip effect.

These issues can be addressed with the help of EDLP. By offering fixed low prices
every day, any incentive to delay the purchase is removed, leading to a more
uniform demand which is easier to forecast with more accuracy. This will reduce
stock-outs as well as overstocking. Furthermore, by cutting down promotional
expenses, we can pass on that benefit in terms of lower prices to customer.

However, lower prices may affect long term profitability of business. Some
consumers may perceive low prices as an indicator of low quality and can be
 detrimental to the brand. Consumers may start comparing private labels with
Henkel which is also not desirable. EDLP can also reduce responsiveness to
competitor and external environment.

Pros (EDLP) Cons (EDLP)

Assured customer base Lower margins
because of low price Lower perceptions of product
guarantee quality and brand (consumers
Less variation in demand, may interpret low price as an
leading to better forecasting indicator of lower quality)
Reduced incidences of stock- May not be sustainable in the
outs/overstocking long term
Reduced costs in terms of Reduces responsiveness to
promotional expenses competitor and external
environment
3. CRP and Demand Planning
Continuous Replenishment Planning (CRP) is an inventory/logistics management
initiative which aims to eliminate inefficiencies in the process of replenishment.
It is a method of real time replenishment of products which aims at reducing
inventory levels with minimized chances of stock-outs. In case of Henkel Iberica,
customers negotiate and set a trigger point for replenishment based on historical
data. Once the trigger point is reached, a reorder request will be automatically
sent to Henkel. The advantage of CRP is that it streamlines the ordering process
as well as provides more visibility to Henkel about the stock levels of their
products at the customers warehouse. To make the customers accept the CRP
model, Henkel guarantees service level of 99.8% downstream. Although CRP
streamlined replenishment, separate forecasting plans for suppliers,
manufacturers and retailers created problems for the supply chain.

4. Collaborative Planning, Forecasting and Replenishment (CPFR)

In order to improve the forecast accuracy, a new method known as Collaborative
Planning, Forecasting and Replenishment (CPFR) can be implemented. Using
CPFR, the various stakeholders, namely the supplier, manufacturer, distributor
and retailer join hands in planning, forecasting and replenishing consumer
products. In the traditional method, the retailers and the manufacturers use their
individual forecasting systems in order to ensure supply of products to the
respective customers. The retailer generally uses Point of Sales (POS) data,
desired inventory, desired customer service levels and historical information to
forecast and set reorder points to the manufacturer. Once the inventory level
drops, such reorder points are triggered to the manufacturer. The manufacturer
on the other hand, uses its own individual forecasting method based on previous
retail orders and historical information. This independent planning often results
in increased lead time, decrease in customer service level along with inefficient
use of working capital.

The CPFR method attempts to eliminate such inefficiencies by bringing all the
stakeholders in the supply chain to a common platform where they can share
real time data on the internet and use a common forecast. Henkel can
coordinate with its suppliers and the customers (retail businesses) and create a
 joint business plan with specific focus on aspects such as desired service level,
inventory level targets, production plans etc. CPFR will help especially useful for
Henkel as it operates in an industry where special promotions are frequent and
the forecast of demand does not follow patterns. Moreover, with the uncertainty
associated with special promotions, exceptional demand forecasting can
become more accurate.

Pros (CFPR) Cons (CFPR)

Integration between different High costs associated for
stakeholders across the entire implementation
supply chain Difficult to implement,
Centralized forecasting resulting dissimilar data standards
in better accuracy Significant changes
Improved forecasting for required in the working
exceptional style of various
Reduced out of stocks and stakeholders
optimum inventory levels
Improved customer service levels
Intangible benefits such as better
relationships with suppliers and
customers

5. Recommendations
It is clear that the special customer specific promotions followed by Henkel is
leading to an increased number of SKUs and reduced accuracy in forecasting. From
the data given in the case, we can see that the sales decreased by around 14.79%
(from 764 million euros to 651 million euros) in 2001 and at the same time the costs
increased significantly. The increased cost is mainly due to rising number of SKUs
and the difficulty in forecasting resulting in over stocking or understocking (lost
sales). Hence in order to improve the situation going forward, we can think of
recommendations both from the long term perspective as well as the short term
perspective.

Short term recommendation:

Since implementing CPFR will take considerable time, some of the problems
identified below could be solved using a combination of the below mentioned short
term recommendations:
1. Improved branding: In order to stay ahead of competition, Henkel can look
towards improved branding and advertising in order to differentiate the product.
2. Reducing the number of SKUs: Large number of SKUs add variability and
complexity into the planning and production process. Henkel should consider
consolidating the requirements and see if it would be possible to reduce and
consolidate the number of SKUs.
3. Collaboration with larger retailers: Henkel can collaborate with the larger
retail chains in targeted geographic regions so as to reduce the number of
retailer specific promotions that they need to work on.

Long term recommendation:

1. Implement CPFR: From a long term perspective, keeping in mind that Henkel
operates in an industry where special promotions and offers are followed to
differentiate from the competitors, Henkel can implement the CPFR system
which will result in increased accuracy in forecasting. With CPFR, there will be
increased coordination between the supplier, Henkel, distributors and
retailers and real time sharing of data with common forecasting. The
high cost needed to implement CPFR will be recovered in the longer
term due to the various cost saving opportunities that come along with the
CPFR.
On the other hand, following EDLP will not be sustainable for Henkel in the
longer term. The effectiveness of EDLP depends on the financial capabilities of
other competitors to sustain a price war. In Henkels case, competitors like
P&G, Unilever and Reckitt Benckiser are more than capable to compete
on price. Furthermore, the increased costs resulting from the complex product
portfolio reduces the effectiveness of EDLP. Unlike companies like Walmart,
there are no cost benefits that could be passed on to the customers. Hence, we
feel that Henkel should implement a CPFR system for long term benefits. The
decision to implement could be corroborated by conducting a pilot study in
order to show the benefits of CPFR to all the necessary stakeholders in the
supply chain.

2. Rationalize and collaborate with suppliers: Henkel also has a large number
of suppliers which allows Henkel to have a high responsiveness to the material
and packaging requirements. However, it also requires more coordination effort.
Henkel should study if they require such a high number of suppliers and if they
can consolidate and reduce the number of suppliers. It will also lead to better
prices being obtained by Henkel for the raw material. Furthermore, Henkel can
help to develop some of their major suppliers to build a more collaborative
relationship with them. This may help to reduce the lead time for the packaging
and raw materials.
APPENDIX A

Price competition from private labels + Competition from national brands (new product launches/new variants)

Need for differentiation

Large number of SKUs (product variants) + unique, retailer-specific promotions

Complex forecasting lower accuracy Lack of common forecasting sys

Over-stocked Under-stocked Unsteady operations

Sell at reduced price

Obsolete stock Lost sales High cost

Lower profit