International Logistics Business Plan by MonaJohanna

UNIVERSIDAD DE LAS AMÉRICAS, PUEBLA

International Business Studies Final Project in International Logistics

Vitorinox Mexico Completed by: Sylvia Bäuerle - 400377 Gabriela Calzado - 134121 Marcos Escobar Millet - 135995 Stella Engels - 400684 Rebecca König - 400688 Mona Nonninger - 400689 CHOLULA, PUEBLA, 2010

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

Executive Summary In the context of our course, we were supposed to collaborate with a company based in Mexico, that features an international logistic problem and to elaborate an adequate solution to this issue, taking the knowledge we gained during the semester, into account. We worked together with the Swiss manufacturer Victorinox that exports its quality watches to the Mexican market. In the following report we firstly want to give a short overview on the company Victorinox, its current product lines and activities. Then we want to focus on the current situation by analyzing the supply chain structure concerning the watches being exported to the warehouses in Mexico. In the course of the supply chain analysis the physical flow of the merchandise, the information flow and the IT systems that support the flows will be discussed. Further the organizational and the management structure that control the supply chain will be elaborated on the basis of the interviews, we made with the Victorinox logistics responsible. In the second part that treats the major issues and problems we devised, we initially want to define the most paramount problems and then to prioritize and then concentrate on the major problem we want to focus on. We selected the time and place utility issue as our main problem we want to zoom in on and to analyze its causes and effects. With the following fish bone diagram we illustrate these causes and effects in regards to the IT system, the organization itself, the HR, logistic and finance department and as the external component the consumer. Having framed the major problem, we now want to exemplify alternative options and solution to this issue. In order to recuperate improvement for the time and place utility of the mentioned products, we emphasized on three possible solutions. Our approaches concentrate on the forecast system and on the inventory IT systems that require improvements and on the transportation mode that is used for the exportation to Mexico.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

The evaluation of the options, that follows takes the different criteria of operational requirements, time, costs and benefits into consideration. To sum it all up, we selected the solution of the improved forecast system that in our opinion promises the highest benefits and the greatest improvement to the international logistic system of Victorinox. With the recommendation that is justified through the analysis of the benefits and costs that have to be considered for the implementation process we want to draw briefly a conclusion.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

Content Executive Summary ................................................................................................................ 2 Overview on Victorinox: ......................................................................................................... 5 Current Situation .................................................................................................................... 6 Supply chain structure .................................................................................................................... 6 Physical flow of goods ................................................................................................................. 6 Graph: Physical flow of goods ..................................................................................................... 6 Information flows and systems that underpin the flow of goods............................................... 8 Organizational and managerial structure that control the supply chain .................................... 9 Supply chain performance .............................................................................................................. 9 Overall performance ................................................................................................................... 9

Major issues and Problems .................................................................................................. 10 Definition of the problem ............................................................................................................. 10 Analysis of Causes ......................................................................................................................... 12 Selection of main cause ................................................................................................................ 17

Alternative options ............................................................................................................... 17 Option 1......................................................................................................................................... 17 Option 2......................................................................................................................................... 18 Option 3......................................................................................................................................... 18

Evaluation of the options: .................................................................................................... 19 Recommendations ................................................................................................................ 21 Selected solution ........................................................................................................................... 21

Analysis of benefits and costs of recommendation ............................................................. 22 Conclusion ............................................................................................................................ 22 References ............................................................................................................................ 23

Fina Case Study Sylvia Bäuerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca König, Mona Nonninger

Overview on Victorinox After his studies in Paris and Tuttlingen, southern Germany, Karl Elsener opened his own cutlery factory in Ibach-Schwyz. In 1891 the first supply of knives to the Swiss army soldiers took place. As protection against unauthorized copies, the founder of the company started to use the label of the cross with a shield, which is still used today by Victorinox. After the death of Karl Elsener’s mother Victoria, the founder chose her name in combination with the abbreviation of stainless steel “inox” as the name of the business. To strengthen and expand the brand, Victorinox developed a line of watches that are manufactured under strict quality criteria. After a large expansion of the facilities, the production area, offices and warehouses now comprise the size of 27,000 m². Today, 730 employees work in the company that has a sales figure of more than 65 million Swiss francs. In 1989 the Swiss army watches were launched with success in the U.S. Years later its first branch in Japan opened, followed by the ones in Mexico, Brazil, Poland, China, Vietnam and Chile. In 1999, with the foundation of Victorinox Watch SA, in Bonfol, the company expanded into the watch segment. Today, the six categories of products offered by Victorinox, Swiss army knives, cutlery, watches, luggage, clothing and fragrances are gathered in one single store. Victorinox has become the sole shareholder of Swiss Army Brands Inc. U.S. and therefore, its net sales exceeded CHF 500 million for the first time in 2009. Current Events The company has been very successful in global business expansion and has experienced rapid growth nationwide. Victorinox Mexico nowadays has 30 stores operating in the country. The company distributes its products through the most powerful department stores of the country such as Liverpool and Palacio de Hierro, but also has single brand stores, catalog sales and supplies to recognized jewelers.

Fina Case Study Sylvia Bäuerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca König, Mona Nonninger

Current Situation Supply chain structure In this paragraph the supply chain structure of Victorinox will be explained. There will be a description of the physical flow of the watches, the information flow and systems that underpin that flow as well as the organizational and managerial structure that controls the supply chain.

Physical flow of goods The following graph summarizes the physical flow of the watches from the production to the end consumer.

Graph: Physical flow of goods

Source: Own elaboration based on interviews

1. Fixed points in the chain: Primary manufacturer: The products are produced by the Victorinox manufacturing site in Switzerland. Upstream parts: We don´t have information on the upstream part of the supply chain, as Victorinox was not willing to provide it.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

Downstream parts: The products are moved from Switzerland to the four central warehouses in Monterrey, Guadalajara, Puebla and Mexico City. From there they either go on to Retail or Brand stores like Palacio de Hierro. There they are transferred to the end customer.

2. Movement patterns along chain Picture: Movement of products from Switzerland to Mexico

Source: Google maps Graph: Movement patterns of watches along the chain

Sea transportation from Europe to Veracruz, Mexico

Road transportation from Veracruz to Warehouses

Road transportation from the Warehouses to Retail stores

Source: own elaboration based on interviews

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

As shown in the graph above, the watches are first transported by truck to a European port. From there they go on by boat to Veracruz, Mexico. In Veracruz they are loaded to a truck and delivered to the four different warehouses. When the orders are placed the personalized watches are transported from the warehouse to the retail stores.

Information flows and systems that underpin the flow of goods 1. Order processing information The orders are placed by the customer through retailers and brand stores. The stores have access to a database where they can see how many watches are on stock in which of the four warehouses. The retailers and brand stores can enter the order in the system only if 50% of the price has been paid. The watches then appear as sold in the information system. The following graph summarizes the ordering process: Graph: Order processing

Source: own elaboration based on interviews

2. Demand forecasting information The demand is forecasted on the base of estimations made by the Mexican managers. There is no customer relationship system in place that would allow accurate forecasting based on statistical analysis. There is no clear responsibility by one department for forecasting. 3. Mangement information There is no system of collecting management information in place.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

4. Computer Systems Victorinox uses the system SOLOMON in order to manage its logistic system. Orders are placed trough this system. The warehouses are as well managed by it. Every warehouse is equipped with computers and the stores can place orders by telephone, fax or email.

Organizational and managerial structure that control the supply chain Graph: Organization of management that controls supply chain

Victorinox Switzerland

Mexican Manager

Source: own elaboration based on interviews

As described in the graph above, the different managers controlling the supply chain in Mexico report directly to Victorinox Switzerland. There is no centralized supply chain function in Mexico. All managers are competing with each other on sales levels and at the same time are responsible for the supply chain.

Supply chain performance Overall performance 1. Customer service Generally Victorinox tries to focus on high customer service through adaptation to their needs.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

The level of customer service is low as the orders can only be logged when 50% of the price is paid by the customer. Due to this fact it can be that a customer wants to place an order, comes back to the store the next day and then has to be told that the product wanted is no longer available. He then is offered a substitute but obviously experiences disappointment as the original product is no longer available due to the missing option of making reservations in the computer system. Additionally the lead time is quite high with 4 to 6 weeks and the adaptation to customer wishes and change in demands is slow as there is no adequate forecasting system in place. Due to the fact that the planning and ordering is done last minute by the Mexican managers there is a high level of stock out leading to unsatisfied customers.

2. Logistics costs Logistic costs are high and unpredictable as controls are made by the government without announcement leading to additional costs through fees and storage required during customs clearance. Moreover orders cannot be modified in the system leading sometimes to additional shipping costs due to wrong delivery of modified orders.

Major issues and Problems In this paragraph the major and minor problems that Victorinox faces in their logistics system are described and analyzed.

Definition of the problem As mentioned earlier, the company has experienced a successful business expansion in Mexico. In 2008, Victorinox Mexico had only 20 stores operating in the country after more than 15 years of having entered the market. Now the company has 30 stores. This means that in less than two years the company grew by 50%.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

This is definitely an achievement that the company values, but at the same time it entailed many problems. Out of all the distinctive problems the company is facing in regards to its wide range of products, we chose to focus on the supply problem of the watches, in particular the line named "Corporate". This product line is targeted primarily on large national companies that offer Victorinox brand watches to their workers and corporate groups. In this line there is often a huge lack of product supplies. In short this means that customer satisfaction suffers from the core problem of the company which is wrong place and time utility.

Problem

The Corporate Line customers can not have the desired products at the right time. â&#x20AC;&#x201C; Missing time place utility

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

Analysis of Causes In the following, the main problems and minor issues, categorized by time urgency, are explained and analyzed:

Major problems 1. Wrong place and time utility As mentioned above, wrong place and time utility presents the companyâ&#x20AC;&#x2122;s major problem since it is the root for almost every minor issue described below. 2. Imprecise forecasting There a problems in forecasting the right amount of watches, especially as they are innovative and fashionable products. This makes forecasting a quite difficult task and therefore the company must find a way to balance out inadequate forecasting through right inventory levels. The tradeoff between inventory aggregation and changing the mode of transportation to a more expensive one like planes has to be considered. Even though wrong forecasting may evoke wrong place and time utility, we still identified it later as the most important problem that needs to be solved, since forecasting for innovative products as described above is not an absolute reliable source. That means even if forecasting is improved through better IT systems, it may still not always be accurate and therefore not allow complete elimination of wrong place and time utility. It is therefore crucial that inventory stock does not only rely on correct forecasting. Wrong place and time utility can, for example, also be improved through the use of a more appropriate transportation mode, that would reduce delivery time and allow spontaneous orders as well as modification of orders.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

Minor problems 1. Inappropriate transportation mode As the orders most of the times arrive late in Mexico, we assume insufficient logistics within the company. It takes up to 6 weeks for shipments of the innovative product. This is a long time period considering that Victorinox features four new collections per year as well as many possibilities for customization of certain attributes of the watches. Therefore this mode of transportation restricts the addictiveness to the customer and increases the lead time. Additionally orders cannot be modified in the system or placed spontaneously reducing the customer adaptation further. In addition the orders cannot be tracked with the existing system leading to the fact that the customer cannot be informed when exactly his product will arrive. The store often has to order additional amount due to this fact as well. Due to the reasons stated above it shows that there is an urgent need of a precise forecasting system in order to increase the customer adaptation and reduce unnecessary cost. Furthermore Victorinox Mexico has insufficient knowledge on the different regulations and how to avoid them when importing. This often leads to the fact that their products are stuck in customs longer than necessary causing additional costs and customer dissatisfaction.

2. Stock out Due to stock out problems many times the company has a high inventory of the wrong products. They order products in larger quantities, when required by customers but due to the long lead time they are often no longer required as the customer demand has changed.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

3. IT System One of the main problems is the missing proper implementation of an IT logistics system. Therefore there is no tracking of orders, forecasting of inventory CRM and HR management. The IT system provides the bases for all those activities. If it is not implemented or elaborated well, the whole process will not function adequately. The company has severe problems with ordering the right amount, these points to a lack of an adequate forecasting system. Managers of each brand keep track of existing products and sales through their IT system SOLOMON. This system generates reports and also the forecasting on the basis of the last 6 months. That means that seasonal demand is not taken into consideration. Thus, the company faces the risk of lagging behind seasonal trends. Also there may be a high stock of the wrong products and a lack of products customers require. Besides a change in the system itself, awareness amongst the staff for specific system requirements as well as involvement in forecasting needs to be raised. In addition, when orders are made from the stores they only have information about stock in each of the four warehouses but they do not see any changes in stock until 50% payment is made by the customer that placed the order. Sales representatives may therefore offer and promise wrong amounts to customers.

4. Competition amongst sales representatives The salary of the sales representatives is largely based on commission payment which triggers competition over amounts of products in stock. A competitive attitude dominates instead of working as a team together. There are a lot of problems due to this competition as everyone wants the required watches on stock. There is as well little communication that would be necessary between the representatives.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

5. Decreasing customer satisfaction Due to problems within the IT system, payment regulation of sales staff and stock out problems, orders may be delivered incomplete or asked to be modified by the company. Customers then tend to cancel orders. This may entail negative word of mouth.

6. Communication problem A lack of effective communication can be detected between sales staff and store manager. This leads to even higher stock out levels that could be avoided by better communication between the different staff members. As well in the part of forecasting the lack of efficient communication and cooperation between the representatives is obvious.

7. Organization The lack of proper organization contributes as well to the lack of time and place utility. We see a lack of communication between the different subsidiaries and departments, insufficient planning of the order system which involves a lack of structured ordering and an inflexibility of the system regarding orders, transportation and distribution.

The following fishbone gives an overview on the different sources of the missing time and place utility described above:

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

Selection of main cause Alternative options Having elaborated the main issues and problems and then prioritized them according to their urgency, we now want to generate alternative solutions and improvements to our main problem. The most paramount challenge that we identified is the time and place utility connected to the stock out of inventory in the warehouses. We now want to focus on this main issue in order to solve all of the other minor problems that are closely linked to it, using the synergies that are caused by our possible solutions. In our solutions we take the specific functional level and also the corporate context into account. Option 1 The first solution is linked to the improvement of the forecast system. One the one hand the forecast IT system has to be changed so that the consumer demand can be quantified in a better way and on the other side the qualitative demand forecast has to be ameliorated too. The SALOMON software as IT support is already a good implementation to forecast the demand, but the way it is rendered is unsatisfactory. The method of only using the last six month in order to predict the future demand cannot be seen as appropriate since seasonal changes in the yearly demand cannot be identified and therefore satisfied adequately. The system should take at least the last twelve month into consideration when conducting a proper prediction of the future order amount. In addition to the technical issue and in order to improve the forecast even more, the communication between Switzerland and the Mexican Victorinox employees should be fortified. The unpredictable demand of new launched products that after a little retardation should be introduced as well into the Mexican market could be better prognosticated with facts and figures of the European division where the products are already on the market.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

With the better performed forecast the stock out problem can be improved and the long shipments no longer represent a major problem, because spontaneous orders are no longer that important. The trained Marketing personnel then can elaborate the order plans for the next season on the base of the figures generated by the improved software and the figures and qualitative information of the European (especially the Swiss) corporate divisions. As well they will have to maintain closer contact to consumers in order to derivate their demands and tastes. This solution is seen in the functional level with the improvement of the IT system and the corporate context concerning the Marketing that should use better forecast methods in order to support the logistics to deliver the right amount at the right time.

Option 2 The second solution is again linked to an improvement of the IT system, but this time in regard to the stock and inventory level system. With this solution we want to focus on the functional level of retailers. The sales personnel has to be provided with the adequate and right information about the inventory and stock levels in the four warehouses in Mexico. The IT system has to be modified in the way that the employees see exactly the time when an order has been placed and not when the order is deposited by fifty percent. This is unacceptable and the software has to be precise on the status of every product in stock. This measurement avoid that the sales employees get into an uncomfortable situation when they want to sell the same watch twice, because they do not see that this watch has been already sold. The end consumer can be served better with the products he desires.

Option 3 The third solution in order to avoid stock outs is to get more responsive to spontaneous orders and modifications. Since Victorinox do not possess the knowledge and the

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

resources to change the transportation mode by itself, the only possible termination is to outsource the transportation process out of the company's own value chain. The watches of Victorinox are innovative products and therefore their demand is not easily predictable. The corporation has chosen the less cost intensive transportation mode: oversea shipments that take four to six weeks. An external transportation operator might be able to provide air transportation for an adequate price that is affordable and at least appropriate for the special customized watches where the demand is almost unpredictable and Victorinox Mexico has to be highly responsive on this type of product. The base line can continue to be sent by ship, but the corporate line or the new fashion lines should be transported via air transportation.

Evaluation of the options The following table aims to demonstrate the three realistic alternative solutions that are briefly described with a title and then evaluated by criteria in terms of operational requirements which means how intense the organizational effort will be, the time in which the solution can be implemented and compared with the urgency of the solution, the costs and benefits that derivate from the selected solution.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

Time and place utility Solution 1:

Solution 2:

Solution 3:

of products

inventory IT system

outsource

forecast system

transportation Operational requirements

Time

Costs

Benefits

Of course all these solutions cannot be seen completely independently and in order to solve all the major issues and even the minor issues that have been stated in the chapter before all of these solutions should be implemented over the time. Solution 3 is the most delicate one, because the outsourcing decision cannot be made alone by the Mexican Victorinox division. To give a complete value chain exercise out of the company's hands has to be discussed in the headquarters and even when the Mexican division prefers the flexibility that can be achieved by implementing this solution; it is most likely that Switzerland is not willing to give the transportation out of its hands. The organizational effort can be seen as relatively low, because there are many operators that offer and are specialized on the service of transportation, so an adequate service provider should be found easily and even fast. The most decisive factor, considering this solution is definitely the costs that are relatively high in the air transportation sector.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

The Solution 2 requires some organizational effort concerning the training of the staff and the implementation of the new IT system. An advantage is the short time of implementation of IT systems and software and of course the costs that are limited to the training and the software itself. The benefits are closely linked to the customer's satisfaction and therefore highly to consider. Not to sell the same product twice is definitely in the interest of the sales employees and the end consumer, so this solution has to be taken into consideration at the long run.

Recommendations Selected solution We chose the Solution 1, because we think that the most urgent problem of the time and place utility and the stock outs that go in line with it can be improved with the better management of the forecast and a better IT solution to this important problem. The operational requirements will be the highest of all solutions, but it is definitely worth it and sometimes one has to put initial effort into a project in order to achieve grand effects. Even the time that the company has to calculate will be one of the longest among the other solutions, but this forecast system is such an important aspect of a company's performance that it is indispensable to work on it. It will take time to train all the Marketing personnel to handle the better IT forecast program and of course to encourage them to communicate with the European Victorinox employees in order to get the qualitative information on the product figures, but this is everything an internal issue and therefore is not highly cost intensive as the switch of the transportation mode to air transportation.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

The benefits will be incomparable because if there is now the right amount of products in the warehouses due to a better forecast, the sales employees will not have to fight over the inventory in order to receive the commission. The benefits will be eminent, because the main target of a company in order to generate profits is to satisfy the customer at the highest level possible. Solving the time and place utility will directly attach to this core exercise of a corporation.

Analysis of benefits and costs of recommendation Changing the forecasting system and processes implies medium cost as the current system will have to be analyzed in deep and then a new system with processes etc. has to be designed. This takes time which represents cost. Additionally the representatives will have to be trained, representing additional cost. Also when changing the organizational and working structure it will take some time till all employees will be able to work efficiently again. Taking together all the cost, they are offset by the benefits of implementing a working forecasting system. The most important point, customer satisfaction, will increase significantly, as they then can receive their products with a much shorter lead time. Additionally the general cost of inventory for Victorinox go down as they donÂ´t have to carry high amounts of inventory nor store the products ordered and not sold due to wrong forecasting. The tension between the different sales representatives will also decrease, leading to more efficient work and so to cost reduction.

Conclusion Victorinox has severe problems with its stock control. This stock control has different sources like a missing IT-System which facilitates a proper forecasting. Another source is their policy of a 50% paydown, before watches are marked as sold within the inventory system. Furthermore the salary of sales representatives is dependent on commissions which increases competition between stores and weakens communication.

Fina Case Study Sylvia BĂ¤uerle, Gabriela Calzado, Stella Engels, Marcos Escobar, Rebecca KĂśnig, Mona Nonninger

It is not possible for a company to solve all problems at once. We consider the forecasting problem as the most important one and recommend focusing on this first. We think that the implementation of a new IT-System will be cost intensive in the first place. Costs will accrue for the new System itself, the implementation and the staff training. Moreover there will be costs for failures within the first period of time. But in medium term, the benefits will exceed the costs, because sales will increase as well as the customer satisfaction.

References Lorena Perez (2010, September 24). Interview by Stella Engels. Puebla, Mexico. Lorena Perez (2010, November 3). Interview by Stella Engels. Puebla, Mexico. Lorena Perez (2010, November 23). Interview by Marcos Escobar. Puebla, Mexico.