Subcontracting at LVMH brand categories (Part 2 of 2)

LVMH category sales 2011

The levels of subcontracting varies by products and is mainly dictated by factors such as governmental regulations, production processes, availability of raw material and the brand image/policy planned for a particular product. Since these can vary by company to company across geographies let us look at some of the categories of LVMH which can be considered as representative of absolute luxury.

Wines and Spirits:

Inclusive of champagne, cognac and other liquers this category is strictly bound by unique regulations like geographic indicators (Appellation d’Origine Contrôlée, for champagne) which limits the production area and the amount of subcontracting that can be done given the need to procure produce from this limited supply. LVMH like most luxury houses sub contracts only the bottle handling and storage operations. The blending of the stock based on harvests allocated to the company will be done inhouse

Fashion and Leather Goods:

The defining feature of the fashion and leather goods market is its seasonality and …. Everyone wants next season’s bag or dress. This decreases the lead time available for the retailer, increases cost of inventory and high product variation leads to lost sales if the right merchandise is not available at the store. Although this would indicate all out subcontracting as a policy, the importance of quality and brand guidelines for luxe products prevent 100% subcontracting. LVMH follows a judicious strategy with all design and distribution being kept in-house to ensure strict compliance to quality and brand image of the product.  Production on the other hand varies by brand with an average of 45% being sub contracted. The difference between mass merchandising and luxe retailers are that this sub-contracting is usually done in the country of origin (Italy, France and Spain in the case of LVMH) and not in China! The variation in level of sub-contracting would depend entirely on the brand strategy for that particular product (Refer post Outsourcing)

 

Perfumes and Cosmetics:

A proliferation of brands and very high volumes define the perfumes and cosmetics industry. These factors make economies of scale an attractive proposition for support functions such as distribution and logistics. LVMH has centralized its production of perfumes to two centers in France but leverages a shared service center for all brands at Saint-Jean de Braye (France) and currently subcontracts only 9% of manufacturing. The large number of SKUs is managed by using postponement techniques (but not incorporating mass customization – Refer: mass customization in the perfumes industry)

 Watches and Jewelry:

Production of watches is in the stronghold of Swiss workshops with little of over 10% sub-contracting.  Though some design is outsourced to other studios, LVMH retains much of the design process within its studios. This low figure may also be due to the acquisition of ArteCad and Profusion (Swiss manufacturers of watch components) recently. Since LVMH does not represent the big names in luxury watches or jewelry this category may not reflect industry attitudes to subcontracting. 

Thus though the level of subcontracting depends strongly on the brand strategy for the particular product, other factors such as seasonality, statutory regulations, lead times, volume of business all play an important part. Even where sub-contracting is used extensively (Fashion, Leather goods) a modified and much finer version is used vis-à-vis traditional sub-contracting. i.e more control, local sub-contractors and iron clad contracts are used.