Cosmetics Supply Chain Puts Its Best Face Forward
Countless SKUs, fickle consumers, and multi-channel distribution drive cosmetics companies to take on a supply chain makeover.
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Rick Milligan discovered the impact that image, trends, and social media have on cosmetics brands during a trade show conversation with a representative of a hip cosmetics company that caters to teens and millennials.
The company, says Milligan, director of supply chain solutions at Inmar Inc., a Winston Salem, N.C.-based technology solutions provider, had a marketing agreement at the time with teen reality TV star and model Kylie Jenner. With her 100 million-plus social media followers, 19-year-old Jenner has serious clout with the makeup company's target market.
"'When Jenner says she hates a product on social media, the company can't give it away,' the representative said. But when she says she loves a product, they can't make it fast enough," Milligan says. "For example, they had one nail polish shade that was hardly selling until Jenner tweeted about how much she loved it—then it sold out in two days." Jenner has since launched her own makeup brand, Kylie Cosmetics.
The power of high-profile influencers such as Jenner, combined with consumer tastes that change as quickly as Lady Gaga's hair color, are just two factors that differentiate cosmetics supply chains from those of other consumer products categories. Cosmetics companies must also deal with multiple distribution channels that include online and brick-and-mortar stores, climate control and Food and Drug Administration (FDA) requirements for certain ingredients or products, and product disposal regulations that vary from state to state and often require special handling.
In addition, the cosmetics business is seasonal, with new collections introduced two or three times every year. With makeup in particular, products are manufactured in a wide range of colors or shades, so a plethora of SKUs is linked to any given product line. The products are also small, so they can't be handled the same way as other fashion-driven items such as apparel and shoes.
There's a lot at stake, too. The U.S. cosmetics industry was expected to exceed $62 billion in 2016, MarketLine reports, while U.S. prestige beauty products—high-end makeup, skin care, and fragrances— increased 7 percent in 2015 to $16 billion, according to the NPD Group.
"One of the biggest differences in the cosmetics business is the complexity of the market," says Karin Bursa, executive vice president of Logility, an Atlanta-based supply chain software solutions provider. "Consumers are comprised of different color spectrums, so the products serving them are produced in a wide variety of colors and shades, too."
Some product variations are also driven by seasons. There are different shades and product weights for different times of the year and for new collections.
Cosmetics also are subject to consumer preferences that can be hard to anticipate because they are often influenced by unpredictable tastemakers who include celebrities such as Jenner and her Kardashian sisters, as well as beauty bloggers such as Lisa Eldridge.
Put simply, cosmetics is an image-driven category in terms of what the end customer wants to project through product association, and the brand imagery that attracts those customers.
Forecasting the Future
One big supply chain challenge is making sure that the right product mix is available in the right distribution channels at the right time. It starts with forecasting the demand that will determine everything from ingredients purchasing to inventory to placement at retail locations.
Cosmetics forecasting takes into account historical sales of existing product lines, planned advertising and promotion, seasonality, syndicated data available on category or similar product sales, customer demographics, and, sometimes, intuition. Companies have to factor in regional differences, as well.
"Cosmetics companies often plan product assortments around specifics such as whether a region has more fair-haired or dark-skinned people," Bursa says.
A strong human element is involved in forecasting, too. "We derive a lot of intelligence from channel buyers," says industry consultant Sonia Summers, CEO of the Beauty Strategy Group and Beauty Barrage in southern California. "They tell us how many products they need based on their experience."
Summers also cautions against discounting intuition. "Forecasting is data plus some gut instinct," she adds. "That's how brands hit home runs."
There is a need for human talent in the mix. "Demand forecasting isn't defined only by software," says Jim Barnes, senior managing partner of Carmel, Ind.-based consulting firm enVista Corporation, which works with several major cosmetics brands, including Sephora. "You also need good sales operations, planning, and analysis processes in place."
At L'Oréal's Lancôme brand, the forecasting process is multi-faceted.
"It's important for us to become students of the market," says Courtney Armstrong, assistant vice president of demand planning for the luxury brand. "We work closely with the marketing department and talk frequently with the sales representatives who work with the retailers."
The brand's forecasters also monitor the social media accounts of influencers such as celebrities and top makeup artists, and stay current on trends the beauty blogs cover.
Forecasters blend this awareness with analytics from hard sales data and customer information that includes demographics and preferences acquired through its website. "It comes down to big data," Armstrong says.
One forecasting-related challenge that impacts all aspects of the supply chain is the time it takes to bring a new product to market. Product formulation is a complex process that involves sourcing and testing pigments and other ingredients that change as preferences for products change.
Forecasts can change during the one- to two-year development timeline that's typical for established, successful brands. "Lead times have a direct impact on forecasting accuracy," says Barnes. "If I can compress that lead time, I can improve that accuracy."
"Getting to the market faster is one of our biggest challenges," agrees Armstrong. "All partners in the supply chain are thinking about it."
Reading the Labels
Having a firm understanding of the formulation and manufacturing timeline is essential, because ingredients for some products are perishable and therefore have expiration dates. Some also need special handling to protect them from contamination.
"When we received one of our ingredients in a soiled box, we had to decide whether to use what was inside or wait three weeks for another shipment," says Kelly Barker, co-founder of PREP Cosmetics, a Texas-based skin care brand for girls. "That would delay manufacturing, but we also couldn't risk incorporating a contaminated ingredient."
So much care is taken with ingredients that sample supplier Chemical Marketing Concepts in Connecticut packages pigments, waxes, and stabilizers in a white room before sending them to manufacturers for use in trial formulations. When shipped in bulk for use in the final product, the company has to give extra care to the equipment it uses.
"Cosmetics ingredients often require temperature control and prior cargo restrictions," says Glenn Riggs, senior vice president of corporate logistics operations and strategy at Chemical Marketing's parent company, Odyssey Logistics and Technology Corporation. "We even have to know what commodities were in the shipping containers previously. Cosmetics handling is specific and more challenging than other commodity products."
Larger brands often manufacture products going to multiple countries with different labeling requirements as well, so manufacturers have to make sure they comply with local government agencies.
In the United States, the FDA imposes requirements on companies that manufacture products categorized as over-the-counter (OTC) drugs. These include makeup and skin care products that promise sun protection. FDA-regulated cosmetics must also be stamped with an expiration date. The contracted manufacturer for PREP Cosmetics stamps the date on the tubes holding the skin care products that contain sunscreen. OTC products must also be stored in a climate-controlled facility.
FDA compliance is particularly important to brands that are cosmeceuticals—a class of cosmetics with medicinal or drug-like benefits that include reducing the signs of aging on skin. Meeting FDA requirements requires a carefully controlled, monitored, and registered manufacturing environment. In addition, because these products have a limited shelf life, Dermelect Cosmeceuticals, a small, downstate New York-based brand, uses a just-in-time manufacturing schedule.
"We try not to stock up on inventory so we don't have products sitting in the warehouse for long periods," says Amos Lavian, president. "Having just the right amount of products based on our forecast keeps them fresh and relevant."
PREP Cosmetics, a small, specialized brand, applies that philosophy to packaging inventory, as well. Barker relies on a single trusted vendor for the boxes that hold her company's tube products. That puts that piece of the supply chain at risk if there's a problem with the manufacturer, but it's a risk she has to live with.
"I'd like to have another carton company in my back pocket, but maintaining a backup inventory of 25,000 cartons just ties up our money in boxes sitting empty in a warehouse," she says.
Still, packaging is such a key component of the company's supply chain that Barker stopped buying tubes from China—"China does tubes really well," she points out—and shifted to a supplier in neighboring Mexico. Production problems in China and a port strike at one point made it impossible to get the tubes when needed, so working with a supplier on the same continent makes sense.
Packaging was the bottleneck several years ago when Dan Avila, senior vice president of customer solutions at Kentucky consulting firm LeanCor Supply Chain Group, worked on a project with an edgy cosmetics brand while at another firm. Targeting millennials with provocative product and shade names, the brand's unusual and complicated packaging was as much a part of the product as its pigments and textures. Repeated creative changes often meant that the packaging wasn't done in time to get products into retail store displays timed to special promotions.
"The company needed a disciplined product development process with tollgates that were completed steps; you didn't go through the tollgate until certain things were done," Avila explains. "Then, once the approved design was sent to the packaging manufacturer, there would be no more changes." With this problem solved, a global cosmetics manufacturer later acquired the brand.
Packaging for shipping is also a key supply chain element, as Barker learned through the company's e-commerce sales. By shifting from an 8-inch by 6-inch by 4-inch box to one that's 6-inch by 6-inch by 3-inch, the company saved one ounce and eight cents on every shipment.
MacFarlane Packaging, the largest protective packaging distributor in the United Kingdom, works with cosmetic company clients selling online to ensure that they have the right packaging configuration for e-commerce fulfillment. That requires evaluating a company's picking and packing area and order configurations to make sure the right packing box and envelope selections are on hand.
"These operations have to get products out the door quickly, especially during the holidays, so we determine what packaging options help them do that while protecting the brand experience," says Laurel Granville, MacFarlane's marketing manager.
To maximize fulfillment center space, MacFarlane holds client packaging inventory, delivering only what's needed daily from one of its 26 warehouses throughout the UK. Supplies ranging from boxes to strapping tape to tissue paper are never more than one hour from any of its clients.
Cosmetics products are also significantly smaller than many other consumer goods, so cartons holding bulk products are both lighter and smaller.
"The general trend in the cosmetics industry is shipping smaller orders more frequently to stores or distribution centers. Even large orders don't take much space," says Eric Lamphier, senior director, product management, at Manhattan Associates, an Atlanta-based supply chain commerce software solutions provider. What's shipped to a distribution center or store might require just a few cardboard boxes. Because of that, shipping is often on the small parcel level, he notes.
Itores selling cosmetics range from specialty retailers such as Sephora and Ulta to department and big box stores and drugstores. Many of these retailers also sell online. Cosmeceutical brands such as Dermelect are also sold in catalogs, doctor's offices, and spas.
At the same time, brands that distribute to retailers such as Sephora, which have brick-and-mortar stores plus strong e-commerce platforms, are also selling one or two products at a time directly to consumers from their own websites.
"There's an increasing amount of e-commerce and drop ship activity," says Lamphier. "Shipping channels are becoming increasingly complex."
"Guidelines for every retailer are different, too," adds Summers. "Some want orders all packed together while others want them in individual boxes. Mistakes can cost brands money."
Cosmetics retailers return products to manufacturers, too, making reverse logistics an integral part of the supply chain. Inmar, with its 27 regional return centers, processes products that don't sell or are returned for other reasons.
About 95 percent of cosmetics products that are returned end up being liquidated, according to Curtis Greve, Inmar's vice president of liquidation. That's usually because of changes in consumer preferences, store re-sets that involve replacing current inventory with newer items, or an oversell to a retailer.
"Sometimes, the manufacturer encourages the retailer to take more product than the retailer wants," Greve notes. "They might negotiate a compromise that involves giving the retailer the option to return anything over an agreed volume level that doesn't sell."
Inmar is often responsible for keeping that excess inventory out of primary retail channels by selling it to secondary market retail chains.
Returned products might also be shipped back to manufacturers or destroyed. Destroying cosmetics requires special care because many ingredients, particularly those in nail polish and hair coloring products, are considered hazardous materials. Inmar has developed proprietary software that assesses products and separates them according to whether or not they're hazardous. Inmar also takes state regulations, which vary, into account.
"We waste-categorize, process, handle, and dispose of products properly according to local, state, and federal guidelines," says Inmar's Milligan. "This protects manufacturers and retailers from making mistakes, which is important because the fines for disposing of hazardous products incorrectly are steep."
Beauty trendsetters help reverse logistics providers such as Inmar stay in business while they nudge manufacturers to either give certain products more marketing support or develop new ones to meet demands. Whether it's British model Cara Delevingne, whose thick eyebrows encouraged an entire generation to invest in eyebrow pencils, or Beyoncé's makeup artist Sir John using Instagram to show how he transforms Queen Bee, these role models, and others like them, keep manufacturers focused on their supply chains while keeping consumers beautiful.