The Direct Sales Supply Chain: Where There’s a Will There’s Amway

Tags: Inventory Management, Retail, Supply Chain Management, Global Logistics, Specialized Logistics

doorbell to the world

George Calvert, chief supply chain and R&D officer for Amway, calls on Inbound Logistics to talk about the direct sales business and how Amway's supply chain is adapting to globalization, new technology, and changing consumer behavior.

The days of Avon ladies and Fuller Brush men regularly showing up at customers' doorsteps are long past. But their entrepreneurial spirit is alive and well. Today's direct sales business is changing with the times. Social media connections and web conferences are replacing door-to-door handshakes. A new generation of marketing—broadcast across social media, and consummated with the personal touch of a one-on-one infomercial—delivers where e-commerce and brick-and-mortar end.

"Direct selling is a cultural norm; in essence, it's the first social network," says George Calvert, chief supply chain and R&D officer for Amway, a leading direct sales company based in Ada, Mich.

It's also profitable. In 2012, direct retail sales grew 5.9 percent to $32 billion in the United States, and the number of people involved in sales grew two percent to nearly 16 million, according to figures from the Direct Selling Association. Amway totaled $11.3 billion in sales in 2012, topping Avon ($10.7 billion), Herbalife ($4.1 billion), Vorwerk ($3.3 billion), and Natura ($3.2 billion), among others (see chart, page 124).

But the real growth opportunity lies outside the United States. Global direct sales hit $167 billion in 2012, according to the World Federation of Direct Selling Associations. Amway, which was founded in 1959, currently distributes products in 100 countries and territories around the world.

Growing consumption in emerging economies has stoked demand for new products. Economic liberalization and empowerment has similarly created opportunities for ambitious self-starters. Independent business owners (IBOs)—today's equivalent of door-to-door salespeople—are tapping into a sophisticated supply chain, replete with innovative new products. The world is literally at their doorstep.

In a recent interview with Inbound Logistics, George Calvert discusses Amway's success as the largest direct selling company in the world, and how its supply chain strategy is evolving to support this unique business model.

IL: Describe direct selling in today's consumer-driven world.

Calvert: It's selling to people you know: your community, friends, and family. Direct selling goes back to the Fuller Brush man showing up at a customer's door with his leather case—even though very little of our business starts that way now.

Amway is a direct selling company. The day we lose sight of that is the day we're done. We will never go around our IBOs. What trust, what integrity do we have then?

Our products have to be appropriate for this business model; we can't sell just commodities. Amway needs some meaningful differentiation, so we have to invest in research and development, training, and tools such as mobile technology that empower the distributor.

But that investment is also the advantage of this business model. If consumers go to the store shelf, they can scan a product and pick up some information. But direct sales affords us the chance to talk to the consumer about a product.

Amway is also expanding into markets where the concept of free enterprise is new. Our Vietnam business, for example, is growing fast. Why? People there are industrious. They're looking for a chance to build a business, and we're teaching them how to do that by becoming an IBO.

IL: How does Amway's business model fit with e-commerce and omni-channel management?

Calvert: E-commerce allows an Amway IBO to showcase the product. Because of our business model, we're not going to put our products into an e-commerce channel just so customers can go online and place an order. Instead, e-commerce enables Amway and its IBOs to be more efficient.

In markets such as China, we operate hundreds of storefronts. But those stores don't compete against our IBOs. Instead, the IBOs use these 'experience centers' as places to bring prospects and showcase products.

These brick-and-mortar storefronts serve many purposes: To talk about and demonstrate products, train IBOs on how to sell the products, and even prove to doubters that a real company stands behind all this.

One of our shops in Shanghai is no bigger than an average conference room. A warehouse in the back is maybe twice that size. Amway does $100 million in sales annually out of that shop.

IL: What types of products does Amway sell?

Calvert: Many people think of Amway as a U.S. soap company, doing door-to-door sales like Fuller Brush, Avon, and Mary Kay. The truth is, Amway is an Asian health and beauty company. Look at the statistics: we reached $11.3 billion in sales for 2012, and our top 10 markets all grew. This was our seventh consecutive year of increased sales.

Our biggest product line is Nutrilite, a brand of nutritional supplements sold around the world. We also maintain very strong sales in skin care and durables, which include water and air treatment systems, and cookware.

Home care products, while a smaller slice, is still a growth area of our business. This line includes everything from cosmetics to personal care products such as shampoo.

IL: Are Amway's products agnostic or unique to different countries?

Calvert: While we aim for uniformity where we can, we do tailor our products to different markets. In Europe, for example, we have a few standard SKUs. But nutrition products have to meet local regulatory requirements; there are some ingredients you can and cannot use. For those products, we almost always need separate SKUs.

We can often get away with having a single SKU for skincare products. For example, we will soon launch our new Artistry Youth Xtend skincare collection globally. The tube, ingredients, formulas, and fragrance are all the same, but we'll have different SKU-level labeling and cartons to meet individual country requirements.

I was recently in Brazil to visit Nutura, a personal care company that makes products with Brazilian scents, colors, and rain forest material. Nutura's business model works in Brazil, but I'm not sure you could export it to France and be successful.

Home care products vary greatly, depending on the country. In France, you might sell a high-efficiency steam washer. That's a very different product than what you will find in China, where there are no steam washers. So we have certain SKUs that are common, and some that are tailored to local needs.

Amway features more than 450 unique products carrying its name. Top-selling brands include Nutrilite, Artistry, and eSpring. In 2012, sales across product categories were aligned accordingly.

IL: Amway's name is a contraction of "American Way," yet you label it as an Asian health and beauty company. Explain.

Calvert: Amway is still a U.S.-based company. Up until 1989, we were predominantly domestic; today, however, more than 90 percent of our sales are international.

Our single biggest market is China, and that's where we've seen phenomenal growth in the last five to seven years. Amway operates a complete business model, beyond even supply chain. We grow, harvest, and process our own crops; deliver to our manufacturing centers; and dispatch through our DCs. We own the sales side, too. Companies such as Procter & Gamble are often held up as examples of companies that operate an end-to-end supply chain. But they don't have their own retail stores.

Amway manages the upstream side, too—whether it's farming; printing for high-end skincare cartons, labels, and catalogs; or our plastic blow mold operation that produces 88 million bottles annually.

IL: How has Amway's manufacturing and sourcing strategy changed?

Calvert: Until about 2010, most of our supply chain and manufacturing was U.S.-based. That has now changed. Amway has been moving home care manufacturing closer to the point of sale in different regions. We're making product in Belgium for Europe and Russia, and producing in China for Southeast Asia.

We discovered that on some of our products, duties and transportation were the predominant drivers of supply chain cost. Manufacturing and labor overhead were not as influential as they might be for a clothing manufacturer, for instance. Now we're moving our durable goods production to Malaysia, and our home care production to other regions closer to demand.

It is inexpensive for us to ship a $60 bottle of Nutrilite vitamins. But taking an $8 bottle of concentrated home care product—which is still liquid—and sticking it in a container? That's inefficient. I hate putting water on water. Air in air is even worse.

As testament to Amway's shift in supply chain strategy, the company is in the middle of a $375-million manufacturing and R&D overhaul. The expansion includes four facilities in the United States that will support different aspects of its Nutrilite brand, as well as a new manufacturing center in India, and second sites in both China and Vietnam.

Additionally, Amway is building a $10-million botanical research and experience center in Wuxi, China, near Shanghai, to integrate scientific knowledge used in product development with the historic use of traditional Asian plants.

IL: Knowing you had a market in Asia, why didn't you move production there sooner?

Calvert: It was a simple matter of inertia. It's difficult to take an entire durables assembly and move it from one spot to another. Change is bad, right? Making changes to a durable goods product, or manufacturing it differently, leads to production problems, maybe even consumer problems. It requires a lot of resources. If there aren't significant financial and efficiency gains, it's not worth doing. For example, we're not moving cosmetics or nutrition products manufacturing, because those products don't cost much to ship.

It's also a marketing advantage. Consumers in Malaysia would rather buy vitamins that say Made in the USA versus Made in Kuala Lumpur.

Home care products are different. Consumers care only about price, value, and performance; they don't necessarily look at where a TV comes from. But they do care where a nutritional product comes from.

So we looked at our supply chain to see what we could do to bring down transportation and distribution costs. We put together a list of 40 projects. When we went to get the baseline analytics to justify these projects, it turns out the data drove a different conclusion.

The numbers said it's not about labor and it's not about overhead. Those aren't drivers for us. Amway's distribution and duties costs are three times those of labor and overhead. That is not true of many industries.

We then looked at the overliers of unique business requirements. You don't want cosmetics from China—unless you're in China. You want them from France, New York, Japan, or Korea. That's where the centers are. So we cross-referenced those locations, and came up with our list of potential options. We've been executing against that plan since May 2010.

IL: Is it fair to say you have regionalized your supply chain?

Calvert: No, but that's an interesting question. We have regionalized some areas, such as home care. Why? Because transportation costs for home care products are so high that it would knock the price/value down. And it's pretty easy to manufacture home care products in a lot of different areas globally. It's mix liquid, fill. And our home care business was spread out enough that it made sense to transfer manufacturing to different regions.

But we have a U.S.-centric supply chain for nutrition and cosmetics products, which are globally supplied from Michigan. We also used to source our durable goods line out of the United States. But we decided to stop manufacturing in Michigan; we make those products elsewhere now. We didn't regionalize that business line because we didn't split it up. Rather, we moved it to where 90 percent of our sales are located.

IL: Has Amway's early penetration in some of these global markets provided a competitive advantage in terms of its direct selling approach?

Calvert: Our early penetration into global markets makes absolutely zero difference. I'll give you three examples why. First, our oldest international market is Australia (Amway started there in 1971); it's also our least well penetrated. In terms of growth, it's one of our few markets that shrank in the past few years.

Second, China is one of our fastest-growing markets. We hold a significant share of the nutrition business—a 90-percent top-of-mind favorable reputation. We've been in the China market for about 10 years, and only started growing significantly there since 2003.

A third example is Vietnam. Amway has been there for about six years. Avon was in Vietnam well before us, and it just closed up business.

In those markets, being the first mover is not the difference. The difference is our business model.

Calvert holds a Ph.D. in chemistry, and formerly was responsible for product development, design, formulation, package engineering, and process engineering, among other functions. So he brings a unique perspective to his role as Amway's chief supply chain and R&D officer.

In the consumer goods industry, quality and safety are paramount considerations. And because Amway owns the means of production on through to sales—in many cases, raw material sources as well—sustainability and product lifecycle management are fundamental concerns.

Amway's sustainability footprint is firmly entrenched. The company's original product line was Liquid Organic Cleaner, one of the first concentrated, biodegradable, and environmentally friendly cleaning products. But, as Calvert explains, Amway is in the business of meeting consumer demand—and green science doesn't always resonate.

IL: The consumer goods supply chain is sensitive to product quality and sustainability. How does Amway embrace green?

Calvert: Amway's foundation is in home care, so we've always been an environmentally friendly company. Our nutrition line is the best of nature and science. We do organic farming on 6,000 acres, and our Artistry products include spinach concentrate.

Yet we never talk about it. The truth is, being environmentally friendly is not our business. Our business is empowering people in Asia to start a business of their own.

IL: Do you think that's because you're selling product where sustainability has not gained as much traction?

Calvert: All our home care products are designed for the environment, so we've already gone through that vetting process. That's a big part of our home care line's heritage. But ultimately, if consumers can't get their clothes clean with our product, they won't want it.

A certain group of consumers won't care if their clothes get clean; all they're looking for is the lowest carbon footprint, the lowest environmental impact. But that's a fraction of the market.

We don't generally base our business model on a fraction of the market. Seventh Generation and some of Clorox's new product lines are trying to attack a large market cap within that smaller market. But that's not us. Amway's job is to appeal to a broad-based audience. I'm sure you can find a lower carbon footprint water treatment system. But you won't find one that works better against virus bacteria—which, if you're living in Malaysia, is more important.

IL: Is there any advantage to pairing R&D and supply chain disciplines?

Calvert: Yes. Take free trade agreements as one example. We just moved our water treatment system production from Michigan to Malaysia. This gets it closer to the point of sale, and reduces transportation costs, carbon footprint, lead time, and inventory. Pairing research and development with supply chain allows us to develop secondary sources. If I can substitute some source materials for others, and not have to pay duties, that's a huge financial advantage.

The same applies to home care. When we moved production to Europe, we were able to qualify new materials. It's not just a supply chain matter; R&D is involved as well. One material may have a different chemical makeup than another one. But if we modify the formula slightly, we can get a $2 per pound difference in the finished goods price.

IL: In terms of global transportation, what are you doing to help streamline your supply chain?

Calvert: We moved 1,700 air shipments last year. Few of those were planned. On the ocean freight side, we moved almost 10,000 containers. If we have regular demand and supply, we prefer to use ocean freight.

As we bring home care and durables closer to the point of sale, we'll move fewer containers, but the value per container increases. So we are looking to rationalize movements. As one example, our luxury cream sells for $250. Would the value of the inventory alone be worth always shipping that product by air in lieu of holding more expensive inventory? We're also trying to find different ways to bring product into port—and through different ports.

We constantly model our network, and identify opportunities for volume leverage. But we also recognize that last-mile moves are often regional.

Why don't we just run all our freight through FedEx and UPS in the United States? Because it's more expensive than working with regional carriers that are very good at what they do. That doesn't mean we won't work with FedEx and UPS in different parts of the world. We try to combine those volumes to find economies and efficiencies.

Top Global Direct Selling Companies

Amway was named the 2013 top direct selling company in Direct Selling News' Global 100 ranking.

2013 Rank Company Name 2012 Revenue Country
1 Alticor (Amway) $11.3B USA
2 Avon Products $10.7B USA
3 Herbalife $4.1B USA
4 Vorwerk Co. KG $3.3B Germany
5 Natura Cosmeticos SA $3.2B Brazil
6 Mary Kay $3.1B USA
7 Tupperware Brands Corp. $2.6B USA
8 Nu Skin Enterprises $2.2B USA
9 Oriflame Cosmetics SA $2.0B Luxembourg
10 Belcorp $1.9B Peru

Source: Direct Selling News