Sephora: Retail logistics evolution

When the high-end beauty retailer Sephora began working with inventory management specialists Slimstock, it was facing a unique challenge. It had experienced extremely rapid growth over the last five years that had put its Middle East supply chain under pressure.

“We have several million stock keeping unit (SKU) location combos and in the last five years that has increased five times over,” explains Sandeep Walia, head of supply chain for Sephora Middle East. “To put that in perspective, our Dubai Mall flagship store alone now sees five times more product sales than some of our national European markets.”

On top of this, it had also launched omni-channel retail operations, with two new online stores and a number of new stores across the region. The company, then, was looking to not only consolidate its logistics operations but also make its supply chain more proactive, rather than reactive to demand trends. “If you fail to plan, then you’re planning to fail,” is how Walia puts it.

“Sephora required new state-of-the-art demand planning, forecasting and inventory optimising tools for end-to-end collaborative planning,” says Sadi Abdel Kariem Hassouneh, director, Middle East and Africa at inventory management specialists Slimstock.

To keep up with demand and ensure on-shelf availability of its products, Sephora had expanded its workforce and 3PL arrangements but found this wasn’t providing optimal efficiency. “We had been using old-fashioned supply chain planning processes that were time consuming and labour intensive. They were also inaccurate and couldn’t be adapted to changing market dynamics,” says Walia. “Our teams currently spend a lot of time doing store transfers or express shipments to ensure that there is on-shelf availability, which increases supply chain costs. We needed a partner that could help us overcome these issues.”

Management by exceptions
During the first half of last year, Sephora Middle East undertook a major market analysis of inventory partners, ultimately preferring Slimstock’s inventory experts and automated inventory optimising solution, Slim4. “By investing in this planning technology we’ll be able to execute our logistics operation more efficiently,” says Walia. “Slim4 is an automated forecast and demand planning tool that utilises multiple algorithms to ensure the availability of every SKU at every store and distribution centre. This automated statistical modelling through Slim4 will enable us to cut down on supply chain costs by as much as 25 percent.”

Hassouneh says that this new technology imports customer demand, allowing them to plan ahead more effectively. “Slim4 analyses the data in terms of normal distribution, seasonal distribution, lumpy distribution and one-off spikes, and creates a forecast using the appropriate algorithm for each specific distribution pattern.”

The system automatically calculates buffer stock and optimal stock on hand, and plans for any events or promotions. For the retailer, it also calculates the presentation stock. It takes into account economic order quantities as well, so for example if the usual order volume for Chanel No.5 is 200 units but there’s an economic order quantity of 400 pieces, it will calculate that into the order form. When it is time to order, it will show up in the planners’ daily tasks.

“All of this automation leaves the user free to focus on what is important, the unusual demand patterns and how to plan for them. This is what we call management by exceptions and this is where we know planners in the region, (like Sephora’s) need to be focusing their time,” adds Hassouneh.

So what previously required a dedicated team of more than a dozen supply-chain professionals several hours to plan will now take just a few minutes, according to Walia. “This solution is a good fit for Sephora’s operations because as a retailer we face three key challenges, that are often at odds,” he says.

“Firstly, we want to ensure maximum on-shelf availability, so we want to eliminate out of stock, but we also want to avoid overstock. And at the same time we want to reduce express loads that are costly and free up supply-chain staff for more value added tasks rather those that could be automated and updated on a minute by minute basis.”

Avoiding out-of-stock
A common tendency across the Middle East is to employ more labour when demand goes up, but Hassouneh thinks this isn’t necessary if you utilise the right automated technologies. “It’s not just hands, we need its brain as well,” he says. And it’s in Sephora’s ambitious expansion plans that the Slim4 solution really packs a punch.

“If Sephora is opening a new store, such as its new outlet at La Mer in Jumeirah, it can simply copy the demand profile of another branch,” says Hassouneh. “The system then creates the initial stock levels and then adapts to the unique demand dynamics of that location on a day-by-day basis.” According to Hassouneh, the system adapts daily for every SKU within every location.

For a retailer like Sephora, the most critical issue, the worst case scenario in any supply chain operation, is running out of stock of a particular product. “For a retailer the main focus is eliminating out of stock, or reducing it as much as possible because it carries a financial implication, not only in that you lose revenue from that lost sale, but also because it undermines brand loyalty and could lead to a lost customer,” explains Walia.

“We want availability at 99 percent and we can really only do this cost effectively with a product like Slim4. Retailers often choose to overstock instead, which drives up logistics costs and has P&L implications, but is the lesser of two evils,” he says. “So Slim4 will reduce the risk of out of stock by increasing availability and also pick up on all the spikes in the past sales behaviour of a product to avoid overstock.”

This close attention to spikes in past sales behaviour is particularly important in the UAE retail market because of the huge impact of Ramadan and the holiday demand phenomenon, adds Hassouneh. “During these holidays, millions of Saudi Arabian nationals will come to Dubai to shop,” he explains. “Retailers stock up for this because of the massive spike in demand. Slim4 will help Sephora plan for and automatically execute the boost in inventory requirements during these events and subsequently bring the levels down after the events, ensuring that Sephora customers visiting the store will find the items they need while Sephora keeps its total inventory costs down.”

Sephora can now plan for event-based spikes

Walia says that analysing future needs based on turnover statistics from previous events allows them to refine their offerings. “Ramadan, for instance, is the major sales event in the Middle East. Slim4 will tell us what needs to be shipped when to handle that demand.”

Protecting data
In this globalised economy of IoT and the threat of constant cyberattacks, however, it must be asked what security measures Slimstock has in place, considering the sensitive nature, and vast volume, of data involved. Sadi Abdel Kariem Hassouneh, director, Middle East & Africa, Slimstock, is unphased by the question. “The Dutch Ministry of Defence uses Slimstock,” he quips, and indeed this does provide an indication of the integrity of the system. But according to Hassouneh, there is a more important question: how secure are the clients’ servers or cloud partners?

“The system can be installed on the clients’ local sever, via the customer’s cloud partner or Slimstock can host the system for the customer, but most clients install the system wherever their ERP environment is, so it’s really a question of how secure their hosting environment is,” he says, adding that, despite the characteristic reluctance of the regional logistics market to adopt new technologies, “now is the perfect time to be here in the Middle East.”

Sandeep Walia, head of supply chain for Sephora Middle East, agrees. “The market has taken a hit since the oil prices fell, but most companies are looking at optimisation and this is what Slimstock does. When you’re experiencing slowing growth and potential cashflow problems, this is when you need to optimise your supply chain,” he says.

As Walia mentions at the beginning of our interview, if you fail to plan, you’re planning to fail, and unlike many UAE retailers, Sephora aims to transform its supply chain into a value-adding partner that contributes positively to P&L right across its business. “We are deploying this software in Southeast Asia, but we’ll go live with it in the Middle East first and then in March this year we’ll begin integrating this system with our operations in Europe,” he says.