Supply chain ‘goes rouge’: Inside Coty’s makeover

Among tens of thousands of products, millions of customers, and an infinite number of outside forces shaping demand, how does one identify the next “it” beauty product—and get it in shoppers’ hands as quickly as they want it?

While those questions were top of mind for Coty before the COVID-19 pandemic, the company first had to contend with stagnating revenues, inefficient operations, and runaway costs. The international beauty business—which owns and licenses dozens of prestige and mass beauty brands, including Burberry, Chloé, and COVERGIRL—announced its turnaround plan in 2019, promising investors that it would “rediscover growth” and “regain operational leadership,” according to a press release at the time.

Coty’s revival didn’t come easy; it included a corporate restructuring and leadership transitions. Four years on, the company has posted net revenues of $5.6 billion for fiscal year 2023, up 5 percent from the previous year. While the pandemic beauty boom may have helped buoy sales of cosmetics, fragrance, and skin care at Coty in the short term, the company is planning to grow well into the future. In part, these plans require transforming the beauty company’s supply chain, using digital and AI tools to do so.

Graeme Carter, Coty’s chief global supply chain officer since 2022, sat down with McKinsey senior partner Pierre de la Boulaye and partner Jan Hartmann at Coty’s headquarters in Amsterdam to discuss the company’s supply chain upgrade. Carter, an alumnus of Avon, Amazon, Procter & Gamble (P&G), and Unilever, also explained Coty’s financial recovery, how its employees use AI, and moving from “tribal knowledge” to digital knowledge. The following is an edited transcript of the conversation.

McKinsey: Let’s set some context. Coty has experienced a significant financial turnaround. What’s been driving this recovery?

Graeme Carter: As the business has developed these last three years, particularly under CEO Sue Nabi’s leadership, we’ve gotten better at connecting with consumers and showing them the magic, the passion, and the emotion that comes with our products. We’re building revenue and starting to grow as a business.

At the same time, we’re being smart about how we spend money. We’re cutting costs where it makes sense. We’re taking out waste and finding more efficient ways to do our work across the whole of the company—and particularly in the supply chain.

McKinsey: Part of this turnaround has included a supply chain transformation, right? What are some of the challenges you’re trying to address within that transformation?

Graeme Carter: I joined Coty a couple of years ago while the business was turning around. The progress had started. But service—the processes that ensured we delivered products and services to customers in a timely and efficient way—needed to be improved. And inventory was too high. Costs were better but not good enough.

We started by addressing service, which involved making our teams more tactical. To do that, Coty created several cross-functional teams that met in scrum formats to keep our work agile. These teams concentrated on key areas, such as long-term forecasting, short-term inventory allocation, and innovation sizing. Additionally, we used what we call “swat teams” to deploy orders and supplies.

While these interventions were successful, they also underscored the challenges associated with operating diverse systems and standards across the organization. We knew we had to complete a transformation with digitalization at its core. The objective was to elevate Coty’s supply chain by modernizing our operating model and incorporating advanced capabilities, such as machine learning and AI.

Beyond that, we also sought to find sustainable sources of all our materials to deliver the products we needed. And we very quickly, across the team, delivered a much-improved service performance.

The next thing we addressed was inventory. Now we’re getting into savings. We’re working on the foundational elements of the supply chain, which are service, inventory, cost, and sustainability, by modernizing our operating model and incorporating advanced capabilities.

But that wasn’t enough for me and the team. We wanted to create the future. So we’re now working on our transformational vision: simplifying, standardizing, and centralizing the supply chain at Coty so that we can create scale and develop the cutting-edge, digital solutions that we know we’re going to need in three or four years’ time.

I firmly believe that the supply chain plays a key role in driving value across our entire business ecosystem. We’re committed to fostering close collaboration with our partners to enhance transparency, streamline operations for efficiency gains, and ultimately elevate customer service standards.

Forecasting beauty’s buzziest brands

McKinsey: From one transformation to the other, let’s talk about Coty’s digital transformation, which is closely linked to its supply chain transformation. Is there anything about undergoing a digital transformation that’s unique to the beauty industry?

Graeme Carter: If I compare it with the fast-moving consumer goods [FMCG] industry, which is where I have the most experience, the difference is in the consumers and the channels. Our consumers at Coty don’t buy just because of the quality and value of our products but because of emotion, passion, and magic, and that’s difficult to predict. A lot of it is driven by social media. We don’t know when there’s going to be a big buzz around one of our brands. We have thousands, tens of thousands, of products. Which one is going to be the next big thing on social media that we’ll need to support with inventory and be able to deliver good service for? The complexity’s high.

The consumer-centric nature of our business is essential. In FMCG, the “bullwhip” can be a small change at the shelf, resulting in major differences in supply base. But the beauty industry might experience major differences in demand, which causes astronomical changes further up the supply chain, such as in raw material procurement or manufacturing processes. These upstream changes have a direct impact on our ability to deliver products efficiently and affect our overall lead times and cost structures.

McKinsey: Complex indeed. With all of that said, what will it take to succeed on this front?

Graeme Carter: First, we’ll need to understand our consumers as best as possible. And then, we’ll need agility. A lot of my discussions with my team are about responsiveness, agility, and being able to change our production plans at short notice and to work upstream with our suppliers so that they can be flexible. Consumption has changed how our manufacturing suppliers work too. They need to make sure they can deliver what we need when we need it, not with mountains of inventory on their end or ours.

McKinsey: How are digital and AI tools helping you along this journey?

Graeme Carter: Digital and AI are helping us clean the data and find ways of getting information. In the near future, when a consumer buys a lipstick, they want to know—and regulators will require beauty brands to disclose—every single one of the ingredients, where it was made, the materials that went into the ingredients, and where they came from. All of that needs to be tracked, traced, controlled, and managed so that the consumer can find the source of everything and that we can measure the carbon footprint of that individual item.

That’s only going to be doable with digital and AI tools. If you think of our 10,500 SKUs and the tens of ingredients and the tens of packaging components that go into each of them, you can’t possibly track, control, and monitor that. Our retailers will also want to know, “What’s the carbon footprint of everything you’ve sent us?” We need digital and AI tools to be able to meet these requirements.

And in the future, we’ll be able to ask a ChatGPT-equivalent interface, “Can you give me the full carbon footprint for Marc Jacobs products in Sephora from January to June last year?” We’ll get it broken down in graphical form so that we’ll know what the cause of the carbon footprint is and therefore be able to start addressing and taking actions to improve it. So that’s the future state. Are we there yet? Not at all. Do we have the vision? Absolutely.

McKinsey: We’ve heard you talk about moving from tribal knowledge to digital knowledge. What do you mean by that?

Graeme Carter: Here’s an example. One of our general managers rang me from a retailer’s offices and said, “The buzz on that brand is enormous. You need to increase the forecast.” That’s tribal knowledge. We need to find ways of turning that tribal information, that word of mouth, into something digital.

That isn’t just so we can forecast more accurately and create our demand plan. It’s also so we can go back, using AI tools, and ask, “Were we right?” and “What are the other signals we should be looking out for and using in our forecasting methodology?”

Training talent on AI

McKinsey: How have you thought about talent along this journey, both in onboarding people and developing capabilities?

Graeme Carter: Talent is a real challenge as we look at digital and AI. But the good news is we have a very talented team stepping into this space.

A lot of the tools that we’re using and have developed now are actually easier to use than the tools we were using ten years ago. For example, typing a prompt into ChatGPT is so much more straightforward than writing macros for Excel. So our team members aren’t necessarily deep into the tech. They’re much more into thinking about what the tool can do for them and for their consumers and customers, not trying to work out whether you need a double backslash, a colon, a semicolon, or whatever. You can tell my programming language isn’t very good.

McKinsey: It sounds like there’s a lot of learning by doing. What are some of the measures you’ve taken to drive learning and capability building?

Graeme Carter: We’re encouraging users to get involved in the design of the digital tools and programs we’re bringing on board. We’re allowing them to work directly with the providers so that they can have input and discussions about it.

And we’re encouraging the use of ChatGPT. Anybody who wants to sign up and start using that, we’ll fund it. We say, “Don’t worry if you’re asking about the weather in Thailand or where you should go on your holiday or which pubs are the best ones in Amsterdam—it doesn’t matter. The point is that we want you to use the tool. We want you to start practicing.” Like any tool, there’s a skill in using it well. I want my team to pick up those skills.

Solving for sustainability

McKinsey: When describing the objectives of your supply chain transformation, you’ve mentioned to us that they include “efficiency, effectiveness, and enabling growth.” How does sustainability fit into the transformation?

Graeme Carter: Sustainability for the supply chain is one of our four core pillars. As I mentioned earlier, the other three are service, inventory, and cost.

Today, 50 percent of our sites are carbon neutral and we are actively working on making the remaining 50 percent carbon neutral as well. We are committed to investing in sustainable energy to achieve this goal.

We’re finding ways of justifying the investment in more green solutions. And we’re working with the teams to ask, “What are the other options?” We’re working with procurement and with R&D to think about packaging and technical solutions because 82 percent of our carbon footprint is in packaging and 14 percent is entirely in the supply chain. Of that, the biggest contributor—which we’ve more than halved—is air freight.

Occasionally, particularly during the COVID-19 crisis, we didn’t have products in the right markets at the right time. We ended up using air freight to get the product to consumers faster. I want that to be unnecessary in 2027. By that time, nothing should need to be flown for Coty other than our staff when they’re going to build relationships and cocreate. So we’re changing the way we do business. We’re changing our inventory strategies.

Looking back to look ahead

McKinsey: You bring experience from Amazon, P&G, and Unilever to your role at Coty. What did you learn from each of those experiences?

Graeme Carter: At P&G, I learned how to create structure and processes and how to define methods and ways of working. I also learned the value of the talent in your organization. At Unilever, it was about relationships. It was about connecting. It was about knowing the who and the how and what motivated everyone. Amazon, meanwhile, was about the numbers. That company handles millions and millions of deliveries a day and considers every possible data point you can imagine. I learned how to keep the numbers relevant in everything we do.

McKinsey: If you had to give another supply chain leader advice about how to embark on a bold transformation, what would that advice be?

Graeme Carter: Write what I call your “working-backward document.” Write what your supply chain will look like in three years’ time, covering manufacturing, distribution, planning, customer service, and process assurance. Describe what it would look like and how you’d get there. That exercise quickly showed us the tools, capabilities, and support we needed in order to get to that space.

Engage your team, engage those who can help you, and reach out to the other functions—digital IT leadership, finance, and commercial teams. They can give feedback about what is affordable, what is technically possible, and what is needed to focus on and improve the relationship with customers. That input from colleagues in the other functions is key.