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In 2002, Esteban Garriga, the director of customer support at Henkel Iberica, asks the question of whether Collaborative Planning, Predicting, and Replenishment (CPFR) would enable Henkel Iberica to better manage its retail promotions and limit their effect on stock-outs and obsolete inventory. Describes the problem facing Henkel Iberica, the Spanish subsidiary of the German consumer items enterprise Henkel, regarding the management of retail promotions. The growing quantity of promotions and the complexity of the organization's portfolio seriously taxed Henkel Iberica's sales, production, and distribution processes. Many employees believed the organization should abandon or at least reduce promotions and adopt a day to day low pricing strategy. Garriga is convinced that CPFR is the way to go forward.
F. Asis Martinez-Jerez; V.G. Narayanan; Lisa Brem
Harvard Business Review (105023-PDF-ENG)
March 23, 2005
Case questions answered:
- Industry landscape
- Problem identification
- Alternatives available (Adopt EDLP instead of promotions and rationalize SKUs vs. maintain promotion based pricing and adopt CFPR)
- Which option is better? EDLP vs. CFPR
- Implementation strategy of a better option
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Case answers for Henkel Iberica (A)
INTRODUCTION – Henkel Iberica
Henkel Iberica was the Spanish household care division of Henkel KgaA. The increasing number of promotions and the complexity of the company portfolio seriously taxed Henkel Iberica’s sales, production, and distribution systems. The sales due to promotions were extremely difficult to forecast and caused frequent problems of stock out or under-stocking. Moreover, private labels that were sold at a significant discount which was diverting away sales.
Many in the organization believed the company should abandon or cut back promotions and adopt an everyday low pricing strategy (EDLP). However, to solve the problem, Esteban Garriga brought forth the new initiative called collaborative planning, forecasting, and replenishment (CPFR). CPFR looked promising but was never implemented completely in practice.
The household care industry was extremely competitive, mature, and saturated. Companies depended on promotion, advertising, and new product introduction to improve top-line and restructuring and cost-cutting to increase margins. New product launch had only a 15% success rate.
Hence, companies focussed on price competitiveness prior to 1995. But, to protect small retailers from losses the Law of Commerce prohibited any selling at a loss except liquidation. Subsequently, the business landscape changed with the arrival of large discount retailers white labels and private labels. They were able to offer a substantially lower price and good quality products.
To counter, companies resorted to promotions. The promotions, however, were not based on price. Companies bundled products, provided coupons, or free items attached to the package, contests, and gifts at check out. The promotion was becoming an increasingly difficult task due to changing consumer preference and non-overlapping offers with other competitors.
This astronomical growth in promotions and depth in product assortment caused forecasting to become extremely difficult. This caused improper demand planning and hence higher instances of obsolete items or under-stocking. This resulted in Henkel Iberica not realizing the margin on its sales.
The increasing number of special promotions and the complexity of the company portfolio adversely affected Henkel Iberica’s sales, production, and distribution systems. An increase in SKUs was due to several new product launches, special product packaging, and brand variations.
Obsoletes accumulated for 10-15% of the time which at times are more costly than out-of-stocks. Sales & Marketing demanded more flexibility from manufacturing. At the same time, manufacturing managers demanded accurate long-range forecasts from the sales & marketing division.
Root Cause Identification:
- Lack of viable long-range forecasts – Leads to high production costs and Increases over-stocking and under-stocking.
- The complexity of product portfolio – Forecasting of packaging material became tough.
- Increase in sales promotion and new product launch – Change of packaging for promotion and new product launches required some lead time.
- Competition from retail discount chains
- Competition from private label products.
The company seeks to address the following issues:
- Should it abandon its promotional pricing strategy and instead adopt EDLP, coupled with the rationalization of SKUs?
- Should it maintain the promotional pricing and instead adopt CPFR?
OPTION A – ADOPT EDLP INSTEAD OF PROMOTIONS AND RATIONALIZE SKUS
Everyday Low Pricing Strategy (EDLP):
Everyday low pricing works best when …
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