Henkel Iberica (A) - Case Solution

INTRODUCTION – Henkel Iberica

Henkel Iberica was the Spanish household care division of Henkel KgaA. The increasing number of promotions and the complexity of the company portfolio seriously taxed Henkel Iberica’s sales, production, and distribution systems.

The sales due to promotions were extremely difficult to forecast and caused frequent problems of stock out or under-stocking. Moreover, private labels were sold at a significant discount, which was diverting away sales.

Many in the organization believed the company should abandon or cut back promotions and adopt an everyday low-pricing strategy (EDLP).

However, to solve the problem, Esteban Garriga brought forth a new initiative called collaborative planning, forecasting, and replenishment (CPFR). CPFR looked promising but was never implemented completely in practice.

INDUSTRY LANDSCAPE

The household care industry was extremely competitive, mature, and saturated. Companies depended on promotion, advertising, and new product introduction to improve top-line and restructuring and cost-cutting to increase margins. New product launches had only a 15% success rate.

Hence, companies focussed on price competitiveness prior to 1995. But, to protect small retailers from losses, the Law of Commerce prohibited any selling at a loss except liquidation.

Subsequently, the business landscape changed with the arrival of large discount retailers, white labels, and private labels. They were able to offer a substantially lower price and good quality products.

To counter this, companies resorted to promotions. The promotions, however, were not based on price. Companies bundled products, provided coupons or free items attached to the package, contests, and gifts at check out.

The promotion was becoming an increasingly difficult task due to changing consumer preferences and non-overlapping offers with other competitors.

This astronomical growth in promotions and depth in product assortment caused forecasting to become extremely difficult. This caused improper demand planning and, hence, higher instances of obsolete items or understocking. This resulted in Henkel Iberica not realizing the margin on its sales.

Problem faced by Henkel Iberica

The increasing number of special promotions and the complexity of the company portfolio adversely affected Henkel Iberica’s sales, production, and distribution systems. An increase in SKUs was due to several new product launches, special product packaging, and brand variations.

Obsoletes accumulate for 10-15% of the time, which at times are more costly than out-of-stock. Sales and marketing demanded more flexibility from manufacturing. At the same time, manufacturing managers demanded accurate long-range forecasts from the sales & marketing division.

Root Cause Identification:

• Lack of viable long-range forecasts – Leads to high production costs and Increases over-stocking and under-stocking.
• The complexity of product portfolio – Forecasting of packaging material became tough.
• Increase in sales promotion and new product launch – Change of packaging for promotion and new product launches required some lead time.
• Competition from retail discount chains
• Competition from private label products.

ALTERNATIVES AVAILABLE

Henkel Iberica seeks to address the following issues:

• Should it abandon its promotional pricing strategy and instead adopt EDLP, coupled with the rationalization of SKUs?
• Should it maintain the promotional pricing and instead adopt CPFR?

O PTION A – ADOPT EDLP INSTEAD OF PROMOTIONS AND RATIONALIZE SKUS

Everyday Low Pricing Strategy (EDLP):

Everyday low pricing works best when …