Business Value Chain The chain of operations or events used to meet customer needs is the fundamental success factor for any firm. The value chain or supply chain is the set of interrelated tasks or processes by which companies achieve their business strategy. Brand-New Bag Louis Vuitton Tries Modern Methods On Factory Lines By CHRISTINA PASSARIELLO October 9, 2006; Page A1 Copyright © 2006 Dow Jones & Company, Inc. All Rights Reserved PARIS -- A year ago, it took 20 to 30 craftsmen to put together each Louis Vuitton "Reade" tote bag. Over the course of about eight days, separate workers would sew together leather panels, glue in linings and attach handles. Then, inspired by car maker Toyota Motor Corp. and egged on by outside management consultants, the venerable French luxury-goods house discovered efficiency. Today, clusters of six to 12 workers, each of them performing several tasks, can assemble the $680 shiny, LV-logo bags in a single day. The factory-floor changes are part of a sweeping effort by Louis Vuitton to serve customers better by keeping its boutiques fully stocked with popular merchandise -- to operate, in other words, more like a successful modern retailer. Its supply-chain overhaul includes changes to its distribution system and to the way salespeople serve customers in its tony stores. Louis Vuitton is revamping production techniques for products like the Reade bag. For years, high-end fashion houses like Louis Vuitton -- best known for its expensive brown-and-gold logo bags -- paid far more attention to product design, craftsmanship and image than to the mechanics of keeping their stores stocked. When new designs caught on, they often sold out and the companies were often ill-prepared to speed up production and distribution. Chic but less-expensive fashion labels such as Zara and H&M have thrived by spotting trends quickly and filling shelves with new products every fortnight. Their success has forced higher-end rivals to rethink how they do business. After decades of relying solely on their designers' instincts, for example, some luxury fashion houses, including Italy's Gucci Group, are now using focus groups to find out what consumers actually want. Louis Vuitton, a unit of LVMH Moët Hennessy Louis Vuitton, the world's largest luxury-goods company, is pursuing a more-fundamental overhaul. With help from management consultants at McKinsey & Co., Vuitton set out to make its manufacturing process more flexible, borrowing techniques pioneered by car makers and consumer-electronics companies. "Behind the creative magic of Louis Vuitton is an extremely efficient supply chain," boasted Yves Carcelle, the brand's chief executive officer, at a recent news conference. Tampering with Vuitton's production poses a risk to the brand's image. Customers pay hundreds of dollars for its logo canvas bags, for example, partly because they have bought into the notion that skilled craftsmen make them the old-fashioned way. Although ...

1. Business Value Chain
The chain of operations or events used to meet customer needs
is the fundamental success factor for any firm.
The value chain or supply chain is the set of interrelated tasks
or processes by which companies achieve their business
strategy.
Brand-New Bag
Louis Vuitton Tries Modern Methods
On Factory Lines
By CHRISTINA PASSARIELLO
October 9, 2006; Page A1
Copyright © 2006 Dow Jones & Company, Inc. All Rights
Reserved
PARIS -- A year ago, it took 20 to 30 craftsmen to put together
each Louis Vuitton "Reade" tote bag. Over the course of about
eight days, separate workers would sew together leather panels,
glue in linings and attach handles.
Then, inspired by car maker Toyota Motor Corp. and egged on
by outside management consultants, the venerable French
luxury-goods house discovered efficiency. Today, clusters of
six to 12 workers, each of them performing several tasks, can
assemble the $680 shiny, LV-logo bags in a single day.
The factory-floor changes are part of a sweeping effort by Louis
Vuitton to serve customers better by keeping its boutiques fully
stocked with popular merchandise -- to operate, in other words,
more like a successful modern retailer. Its supply-chain
overhaul includes changes to its distribution system and to the
way salespeople serve customers in its tony stores.

2. Louis Vuitton is revamping production techniques for products
like the Reade bag.
For years, high-end fashion houses like Louis Vuitton -- best
known for its expensive brown-and-gold logo bags -- paid far
more attention to product design, craftsmanship and image than
to the mechanics of keeping their stores stocked. When new
designs caught on, they often sold out and the companies were
often ill-prepared to speed up production and distribution.
Chic but less-expensive fashion labels such as Zara and H&M
have thrived by spotting trends quickly and filling shelves with
new products every fortnight. Their success has forced higher-
end rivals to rethink how they do business. After decades of
relying solely on their designers' instincts, for example, some
luxury fashion houses, including Italy's Gucci Group, are now
using focus groups to find out what consumers actually want.
Louis Vuitton, a unit of LVMH Moët Hennessy Louis Vuitton,
the world's largest luxury-goods company, is pursuing a more-
fundamental overhaul. With help from management consultants
at McKinsey & Co., Vuitton set out to make its manufacturing
process more flexible, borrowing techniques pioneered by car
makers and consumer-electronics companies. "Behind the
creative magic of Louis Vuitton is an extremely efficient supply
chain," boasted Yves Carcelle, the brand's chief executive
officer, at a recent news conference.
Tampering with Vuitton's production poses a risk to the brand's
image. Customers pay hundreds of dollars for its logo canvas
bags, for example, partly because they have bought into the
notion that skilled craftsmen make them the old-fashioned way.
Although the company has been modernizing gradually for some
time that reputation is still vital to the company's success.
The public image of Louis Vuitton, which was founded in 1854,
has been shaped by celebrity advertising, lavish fashion shows

3. and the star-power of its top designer, Marc Jacobs. (Its spring
collection was unveiled at a show yesterday in Paris.) Although
it designs apparel, the bulk of its sales come from accessories
such as handbags, wallets and suitcases. The company has long
regarded limited-edition products as a way to bolster its cachet.
As a result, customers often found themselves on waiting lists
for popular merchandise.
That thinking is changing. "What do our clients want? Products
that are always available in stores," said one company document
outlining the changes.
The new factory format is called Pégase, after the mythological
winged horse and a Vuitton rolling suitcase. Under the new
system, it takes less time to assemble bags, in part because they
no longer sit around on carts waiting to be moved from one
workstation to another. That enables the company to ship fresh
collections to its boutiques every six weeks -- more than twice
as frequently as in the past, according to one Vuitton official.
"It's about finding the best ratio between quality and speed,"
says Patrick-Louis Vuitton, a fifth-generation member of the
company's founding family, who is in charge of special orders.
Other luxury-goods companies are taking similar steps. Versace
SpA recently hired a division of Computer Sciences Corp. and
Giorgio Armani SpA hired Oracle Corp. to help make their
supply chains more efficient. Burberry PLC, Cartier and Prada
SpA have retained German software firm SAP AG for the same
purpose.
Many high-end fashion houses "had the image, but they couldn't
compete on execution," says Rick Chavie, SAP's senior vice-
president for retail and wholesale. Adds Gladys Lau, Oracle's
senior industry director for retail: "Like Zara, luxury brands are
all about speed-to-market."

4. For years, luxury-goods makers have thought about supply and
demand differently than do other consumer-goods companies. In
most sectors, running out of a product when demand is strong is
considered disastrous. But production is limited for some high-
end fashion items. A waiting list for the Paddington bag made
by French fashion brand Chloé created such an aura of
desirability last year that it became a cult item -- and
established Chloé as a hot brand.
The industry has begun to rethink that approach. French fashion
house Hermès International has hired another 300 factory
workers to reduce waiting lists for best sellers like its $7,000
Kelly bag, named after the late actress Grace Kelly. Hermès
craftsmen still stitch most of its bags by hand, signing them
when they finish.
To increase production, Gucci recently took on more suppliers
near its Florence headquarters. Gucci and Prada are among the
brands that rely on outside suppliers to produce much of their
merchandise.
Louis Vuitton, which has annual sales of nearly $5 billion,
hopes the supply-chain changes will help it meet a goal of at
least 10% annual sales growth for the next several years. That's
important to its publicly traded parent company, LVMH, which
is dependent on the Vuitton brand for more than half of its
profit. LVMH does not break out income from its various units.
In the first half of this year, LVMH's net income climbed 46%
to $1.03 billion on sales of $8.78 billion.
Louis Vuitton expanded internationally in 1978 when it opened
stores in Tokyo and Osaka to sell its LV-logo trunks, suitcases
and handbags. By the late 1970s, its sole factory in Asnières,
near Paris, where the Vuitton family began making trunks in
1860, wasn't big enough to sustain the growth.

5. "When the first electrical sewing machines arrived 30 years ago,
people saw it as the devil," says Mr. Vuitton, who abandoned
his veterinary studies to work at Asnières in 1973.
The company started buying up factories, or ateliers, across
France. Over the years, on average, it opened a new one every
two years. Today, there are 13 factories producing accessories.
Thanks to a big marketing and store-opening push in the U.S.
and Asia, annual sales rose to about $3.2 billion in 2000 from
about $760 million in 1990.
In 1998, the fashion house moved into the ready-to-wear apparel
business by hiring Mr. Jacobs, an American designer. Mr.
Jacobs's production of a new Louis Vuitton clothing line each
season prompted the company to reconsider its approach to
accessories. In addition to classic designs such as the LV-logo
shoulder bag, Vuitton began producing bags like the graffiti bag
and the cherry-print bag, which were in stores one season and
gone the next.
The Sept. 11 attacks, the SARS virus in Asia and the onset of
war in Iraq together cast a three-year pall over the luxury-goods
industry, in part by crimping global tourism. When the recovery
began, Louis Vuitton launched an advertising campaign
featuring celebrities such as Jennifer Lopez and Uma Thurman
and opened stores on Manhattan's Fifth Avenue and elsewhere.
Vuitton was releasing a new handbag each season. But the
factories, which were working on long-term schedules,
remained out of step. If a seasonal bag became a hit, the
company wasn't capable of ramping up production. When a
denim monogram bag caught on last year, for example,
customers cleaned out store shelves, and would-be buyers were
turned away.
Vuitton executives grew intrigued with the lean production

6. process developed by Japanese car makers, which enabled their
factories to react quickly to changes in vehicle orders. The
Japanese approach seemed to offer a way for Vuitton to shift
production to the handbags that were selling best, senior
Vuitton executives say. The "zero-defect policy" of the car
makers -- all problems are supposed to be corrected before cars
left the factory -- also seemed appealing.
But Vuitton's manufacturing procedures weren't conducive to
such flexibility. Each factory had about 250 employees, and
each worker specialized in one skill such as cutting leather and
canvas; preparing, gluing and sewing it; making pockets and
stitching the lining; and assembling the bag.
Specialists worked on one batch of bags at a time. Half-
completed purses would sit on carts until someone wheeled
them to the next section of the assembly line. Because
craftsmen were specialized, it was nearly impossible for Vuitton
to quickly switch workers from one type of handbag to another.
In early 2005, Vuitton hired consultants from McKinsey to help,
according to people familiar with the matter. After visiting
several factories and measuring lag times between production
phases, the consultants arrived at a simple conclusion: there was
too much wasted time.
The consultants helped Vuitton draft its Pégase plan, which the
company began to roll out in factories in November 2005, these
people say. The first step was to train workers to handle
multiple parts of the assembly process. Gluing, stitching and
finishing the edges of a pocket flap, for example, became the
job of one worker, not three. To minimize wasted time, the
production process for each product was divided so that each
worker would need the same amount of time to complete his or
her allotted tasks.
The factory floor was reorganized accordingly. Mimicking the

7. small-team format used by Japanese electronics makers, Vuitton
organized workers into groups of six to 12, depending on the
complexity of the bags or wallets they are making, according to
Vuitton officials and company documents. For maximum
efficiency, Vuitton arranged the groups in clusters of U-shaped
workstations that contain sewing machines on one side and
assembly tables on the other. Workers simply pass their work
around the cluster.
Because workers are less specialized now, they can make more
types of bags, which gives Vuitton more production flexibility.
Last month, for example, the company shifted more workers to
its new $770 Lockit bag, which was selling faster than
expected, to boost production.
The system also has enabled workers to detect flaws earlier. At
one factory, under the old production system, one of every two
$1,240 Tikal shoulder bags had frayed inside seams and needed
to be repaired, according to a company document. Under the
new production system, those flaws are recognized earlier and
can be fixed more easily.
Stitching problems on the credit-card pocket of Vuitton's
Viennois wallet used to mean that 4% of each batch of pockets
had to be discarded, another document indicates. Under the new
cluster format, that problem has been fixed.
At Vuitton's Issoudun and Condé plants near the Loire Valley,
returns of faulty handbags and wallets fell by two-thirds last
year, a company document indicates. The company's goal this
year is to reduce returns by at least another 50%, according to
the document.
The production changes left some workers concerned that
efficiency improvements would eventually lead to job cuts,
workers say. "Pégase has caused job insecurity," says one

8. worker. "Already they are limiting hiring." Vuitton currently
employs about 12,000 people world-wide, 4,000 of them in
production. Mr. Carcelle, Vuitton's chief executive, has met
with hundreds of factory team leaders to explain the company's
efforts to improve efficiency and quality. Vuitton executives
use the Japanese word kaizen, which means "continuous
improvement," to describe their training of factory managers.
The reorganization extended beyond the factory floor. A
distribution center in France used to send products directly to
Vuitton's stores around the world. Now, the company is building
a global distribution hub outside of Paris that will ship to six
regional distribution centers: two in Japan, two elsewhere in
Asia, one in the U.S. and one near Paris for European orders.
Within a week of a product launch, stores around the world feed
sales information to France and production is adjusted
accordingly. Factories work on a daily schedule, compared to a
weekly one before the reorganization.
The reorganization's final stage -- named Keepall after a
Vuitton duffel bag from 1930 -- unfolded in the stores. In the
past, salespeople advising customers would disappear into
stockrooms when products weren't available on the shop floor.
McKinsey consultants saw this as a waste of time.
"The boutiques could be twice as effective if instead of the
salesperson disappearing to get a bag for a customer, you
separate the task," says Concetta Lanciaux, executive vice
president of synergies at LVMH.
Now, Vuitton assigns a few employees at each store to the
stockroom. At a large new store on Paris's Champs-Elysées,
items are sent via service elevator from a basement stockroom
to the cash register. They arrive wrapped in tissue paper.
Early indications that the reorganization is working have
prompted LVMH officials to consider extending the new factory

9. format to other divisions.
"There are ways in which we can cross-fertilize," says LVMH
Chief Executive Bernard Arnault. "One of the major advantages
of the group is that everything we learn at Vuitton, we also use
with the other brands."
Questions:
· From the point of view of the customer, describe what is the
problem? From the point of view of Louis Vuitton business
processes what is the problem?
· Why did the problem exist?
· Based on the information that is in the article, diagram the old
business processes and identify which areas were emphasized.
· Describe what action(s) did Louis Vuitton take?
· Based on the information that is in the article, diagram the
new business processes and identify which areas were
emphasized.
· Page 11 of the textbook describes “Process Management”.
Which of the two methods described best fits the process
management method used by Louis Vuitton? Briefly describe
the process management method.
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Writing a Research Paper Workshop Plans for the week of /
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Connection
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Mini-Lesson
Active Engagement
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End of Workshop
Share
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Mon.
Handouts, powerpt.,
Etc.
Examples: Prior Knowledge
K-W-L
Questioning
Build Background
Connect to other readings
Direct Instruction/Modling
Skill:
Strategy:
Reinforcement skill & strategy

11. Practice
Science
Social Studies
Music
Etc.
What strategy?
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