Inventory Management at Sephora

✓ Paper Type: Free Assignment	✓ Study Level: University / Undergraduate
✓ Wordcount: 1998 words	✓ Published: 4th Nov 2020

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“We belong to something beautiful” is Sephora’s tagline and manifesto. (Sephora, 2020). Sephora is a dream come true for makeup addicts like me. A store filled with racks of cosmetic products and tools and shelves stacked with fragrances. The makeup industry has undoubtedly become a significant player in today’s market with about 7.3 billion in sales. The name Sephora comes from a contraction of two names, the Greek word Sephos which stands for beauty and the name Zipporah who was the beautiful wife of Moses in the book of Exodus. (Sephora, 2020). Sephora is a multinational chain of personal care and beauty stores. They operate over 2,600 stores in 34 countries worldwide which include France, Spain, Portugal, Italy, Turkey and England. They have over 706 stores in the USA and retain over 39,000 employees. Sephora carries 65,000 products from over 250 beauty brands and generates over 4 billion a year in revenue. (Hopp, 2019). They also launched their own private label known as the Sephora Collection which is an affordable line that offers about 500 products which include makeup, skincare, fragrance, beauty tools, and, etc. They offer products from categories in cosmetics, skincare, body fragrance, nail color, beauty tools, and haircare. (Sephora, 2020). The company was founded on August 14th, 1969, by Dominique Mandonnaud in Paris, France. They are a leader in prestige Omni-retail and have a powerful presence in the beauty market across the world. They were acquired by LVMH Moet Hennessy Louis Vuitton, who is the world’s leading luxury goods group in 1997. (Sephora, 2020). The first Sephora store opened its doors in New York in 1998. They also partnered with J.C. Penney in 2006 and opened about 660 boutique stores located inside of J.C. Penney. Sephora currently has five distribution centers located in 4 states: Maryland, Mississippi, Nevada and Utah. The distribution centers help to replenish their retail stores as well as e-commerce orders. Their distribution centers have helped Sephora immensely to not only speed up replenishment of inventory at their retail locations, but it has also helped to reduce their cost per unit shipped. The centers are over 300,000 square feet in size and hold over 14,000 products. Their retail stores typically carry over 100 beauty brands and are generally 5,500 square feet. They offer a full range of beauty services which include custom makeover sessions and manicure stations with video tutorials. “Sephora has captured more than 20% percent share of the cosmetic and fragrance market in the United States.” (Loeb, 2013). “Their website Sephora.com is one of the largest North American Beauty shopping stores when it comes to sales and selection of products and brands.” (Napolitano, 2011).

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A business success depends on their inventory because it is the most significant part of the supply chain. The beauty industry has an unpredictable demand, so inventory management is important. “The objective of inventory is to strike a balance between inventory investment and customer service. A low-cost strategy can never be achieved without good inventory management.” (Heizer, Render & Munson, 2017). Inventory management helps to manage and control products or inventory that will be used in production. In the beauty and cosmetics industry, it’s extremely critical because these products can cause a direct effect on a person’s health due to the ingredients being utilized in them. Therefore, it is vital that quality management be consistent so that purchasing, climate storage conditions, hygiene in production and treatment of raw materials be frequently reviewed. Sephora was experiencing a challenging time with their inventory. They discovered they were carrying an excess amount of inventory at the wrong time and location, which meant they were stocking inventory for longer periods of time which in itself is a problem due to products expiration dates and the chance of items going bad due to storage conditions. The reason they were encountering these issues was because of their inability to accurately forecast demand.” (N.A, 2017). To address these issues, Sephora implemented some changes to eliminate the bottlenecks they were experiencing with inventory. One step they took was to eliminate their monthly open to buy (OTB) to a bi-weekly (OTB) schedule. “They also moved to restocking stores three times a week with smaller shipments rather than 80% of shipments arriving in the first week of the month.” (N.A, 2017). “They also rolled out a TXT forecasting and replenishment software which has helped their stock rotation to carry less stock in each store and has reduced stock-outs and obsolescence rates.”(N.A, 2015). There are four types of inventory that firms maintain. “Raw material inventory which is when materials are usually purchased but have yet to enter the manufacturing process. Work-on-process (WIP) inventory are products or components that are no longer raw materials but have yet to become finished products.

Maintenance/repair/operating (MRO) inventory which is maintenance, repair and operating materials, and finally Finished-goods inventory which is an end item that is ready to be sold but is still an asset on the company’s books.” (Heizer, Render & Munson, 2017). The beauty and cosmetic industry inventory consist of “raw materials and stocks bought by an organization and finished products.” (N.A., 2016). In Sephora’s case their inventory is only Finished Goods Inventory. Cosmetic brands like Estee Lauder and Clinique sell their manufactured products to wholesalers and retailers like Sephora, Ulta and department stores to make money off them. Sephora and other retailers make money from other brands products because they generally purchase the finished goods at a discounted rate and then sell it for more. An example of this would be Sephora purchasing a product from Estee Lauder at a cost of $30 and then selling it to customers at $60. They just generated a profit of $30 on just one customer. There are different ways that companies can use their inventory, just like companies have different kinds of inventory. There are six ways of using inventory: Safety or Buffer Inventory, Raw Materials Inventory, Anticipation Inventory, Cycle Inventory, Finished Goods Inventory and Decoupling Inventory. Sephora utilizes Anticipation inventory. “Anticipation Inventory is when a business anticipates an event that will require more inventory than usual, it acquires anticipation inventory.” (Heizer, Render & Munson, 2017). In the case of Sephora this happens when there are exclusive product launches which create excitement and hype. They know when this happens, they must stock accordingly to handle the demand that will be coming with it. This is also accomplished by beauty influencers which are the makeup artists who do makeup tutorials on YouTube. When an influencer has a large following and they promote a product on their channel, it will create a demand that Sephora knows they will have to accommodate. Sephora holds their beauty insider sale twice a year which offers a discount of 10% for beauty insider members, 15% discount for VIB members and 20% discount for Rouge members. I am one of those customers that anxiously awaits this sale to stock up on makeup products as well as fragrances. This is an event that Sephora prepares for because they recognize demand will be at an all-time high. The identical thing happens during the holidays. Consumers are out shopping for Christmas gifts, and this is a peak period for Sephora.

The bar graph shows the spikes in sales during peak periods for products launches when demand was at an all-time high.

Sephora is a retailer that offers numerous products in many different categories. Since we are working on our inventory management and we want to be certain that items with the highest demand are replenished efficiently performing an ABC analysis will help us. “An ABC analysis divides on-hand inventory into three classifications on the basis of annual dollar volume.” (Heizer, Render & Munson, 2017). The idea is to focus and monitor high-priced items versus inexpensive items that are not in high demand. Therefore, it’s essential to identify which product categories provide the most revenue.

Items A=Hair care & Skin Care

Items B=Cosmetics & Other

Items C=Perfumes & Colognes, Deodorant’s, antiperspirants, feminine cleaning & Oral Hygiene

As you can see from the chart items in category A which produced the most revenue, followed by items in category B which were the second highest in consumption and finally category C which was the lowest revenue producing items. Now that they have their inventory under control, there’s no stopping them. They possess a strong presence throughout the world and continue to induce excitement and intrigue in their consumers. It’s a one-stop shop for all of one’s beauty needs. What else can a person ask for?

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