Herbalife Works to be a ‘True Logistics Company’
Cover Story
By Joanna Miller   
Monday, 14 March 2005
smc Many companies have stories of humble beginnings and the hard work it took to become successful. Herbalife's story begins in 1980 with co-founder Mark Hughes selling nutritional products out of the back of his car in Beverly Hills.
Many companies have stories of humble beginnings and the hard work it took to become successful. Herbalife's story begins in 1980 with co-founder Mark Hughes selling nutritional products out of the back of his car in Beverly Hills.
Many companies have stories of humble beginnings and the hard work it took to become successful. Herbalife's story begins in 1980 with co-founder Mark Hughes selling nutritional products out of the back of his car in Beverly Hills.

Like most entrepreneurs, Hughes had visions of something bigger and remained focused on that goal.
Today, 25 years later, Herbalife distributes a wide range of products in the weight management, nutrition and personal care markets in 59 countries. Despite the growth, the company says, its basic premise has remained the same. Direct-sale, independent distributors sell the products person-to-person, but unlike Hughes in the company's early days, they each are backed by the strength of a billion-dollar worldwide company. The company has more than a million distributors globally.

Herbalife says its mission is to “change people's lives by providing the best business opportunity in direct selling and the best nutrition and weight management products in the world.”

Global Opportunities
Herbalife says it is committed to continuously offering the best and latest products to its customers. The company's products are developed by scientists, doctors and nutritionists, it says. These products, Herbalife says, not only allow consumers to improve their well-being, but they also promote the financial success of its distributors.

According to Dave Kratochvil, chief logistics officer, the company's dedication to quality products as well as its loyalty to its distributors have made it successful.

“What’s really kept it going is the convergence of a great business opportunity for people to improve their financial health, along with great products that we say are ‘bringing health to the world,’” he says.

As a global company, he says, Herbalife works diligently to meet the quality standards of every country where it operates. “From a product standpoint, we've gone beyond the quality efforts required by our industry,” he explains. “We have to meet health requirements of all international agencies separately. All those requirements make us do the same things for all the products that we have, regardless of the country. We're at the highest level.

“I think that's what has made us successful,” he continues. “Every time a regulation is changed, we put another requirement into what we have to do. We go ahead and do it all to meet everybody's requirements.”

The company has grown much and expanded to many countries, Kratochvil says, and continues to look for future opportunities for global expansion and expects to continue its growth.

Logistics Evolution
As the company expands globally, product availability and accessibility have become increasingly vital, Kratochvil says. When customers want to order a product, they want it right away.

“You can't tell someone to go on a weight management program and say you don't have the inventory,” he notes. “With that as one of our objectives, we have established same-day shipping in the U.S. Orders that are taken today are shipped today. I don't think a lot of companies do things like that.”

This program has different models in various markets around the world, he says. “We have truly focused on logistics – it's been a kind of evolution,” he explains. “Our policies spin off two objectives: availability and accessibility. We have to have products available to distribute at all times.”

This emphasis on logistical expedience must start with the manufacturing operations, he says. “Manufacturing has become part of logistics, which is something different for this industry,” he says. “It has always been something talked about in the past. Industries like the auto industry have long been concerned with the flow and management of inventory. We work to keep back orders down and be a true logistics and planning company.”

This is important in terms of distributor satisfaction, Kratochvil notes. If the company successfully manages its inventory, he explains, distributors can be reliable sources for their customers. “The logistics side of the business is an entity of its own,” he says. “We're really proud of it and have won awards for our efforts. It's always been our objective to excel in this area. We want to become the best at supply-chain management, and we are getting that reputation. We are also keeping people here as a result of what we have done. It's nice to be able to take the supply-chain management theory and put it into practice and realize it really does work.”

Herbalife primarily contracts its manufacturing operations through exclusive partnerships but also maintains its own plant in China, which it built four years ago. It does business with 22 manufacturing companies around the world – in India, Japan, China, Korea, Italy, Germany and the United States.

“Our first company-owned and operated plant is in China and is state-of-the-art,” Kratochvil says. “We have 70 employees there. If you look at the plant, it's a global plant, not just a China plant. It is designed to meet the standards of the whole world. We've consolidated all the requirements of companies all over the world and put them into that facility.”

He says Herbalife has had great success in finding and training qualified employees in China. “We have put together a group of very well-educated people,” he emphasizes. “Our facility is located in a very high-tech industrial area and our facility fits in perfectly.”

Herbalife’s quality-control lab and product certification labs are in China. Its R&D facilities are located in Los Angeles.

Committed To Science
Herbalife, like any business, is driven by customer and product trends. In the nutritional health area, Kratochvil says, people are looking to eat the right amounts of protein, fruits and vegetables. In general, he says, customers today are looking at general lifestyle health.

The company's first product, Formula 1 protein powder, continues to be its best seller, he notes. Garden 7 is a more recent development. The one-a-day packet of fruit and vegetable phytonutrient supplements has been a recent addition. “These are things that are missing in everybody's diet,” he says.

As part of the company's commitment to science, it has increased its commitment to science with the development of a Scientific Advisory Board (SAB), Medical Advisory Board (MAB), and Medical Affairs Group (MAG).

“Together, these teams, comprised of distinguished doctors, award-winning scientists and renowned wellness experts, help advance the field of nutritional science, ensure Herbalife products are high quality and educate distributors and customers worldwide on every aspect of good health,” the company says.

The SAB, chaired by David Heber, M.D., Ph.D., conducts research on the use of nutraceuticals for enhanced health and weight control. “Their expertise fuels new product innovation and positions Herbalife at the forefront of the wellness industry,” the company says.

The MAB includes “award-winning doctors dedicated to guiding product research and development, ensuring the quality, benefits and safety of the products,” the company says.

Members educate distributors on product usage and give health news updates through multiple company channels and live training events around the world. The MAB also provides an educational resource for doctors and healthcare professionals, who recommend Herbalife products to their patients.

Record Year
Herbalife reported record net sales for the full year 2004 of $1.3 billion, an increase of 13 percent compared to the prior year as the number of distributor supervisors increased 9 percent compared to 2003. For the full-year 2004, the company's regions – Europe, the Americas and Asia/Pacific – all achieved double-digit net sales growth of 19.6 percent, 10.3 percent and 23.3 percent, respectively, while Japan net sales declined 17.2 percent.

The company opened in its 59th country during 2004, and also introduced a new weight-management program under the Shapeworks brand in many of its markets.

“The company's distributors achieved record levels of net sales in many of our 59 countries, reflecting a unified leadership approach to improve the recruiting and retention of our distributors, and increased distributor retailing of our products,” CEO Michael O. Johnson said in a company statement. “At the highest level of our distributor organization, we added a record 89 new President's Team members and two new Chairman's Club members during the year, reflecting strong vitality within the distributor organization.”

Excluding the effect of recapitalization transaction expenses in 2004, on a full-year basis, the company's net income rose 25 percent to $46.2 million compared to the $36.8 million reported in 2003. Including pre-tax recapitalization expenses of $71.5 million, the company reported a net loss of $14.3 million, or a loss of 27 cents per share, in line with management's expectations.

The recapitalization transactions that occurred in 2004 enabled the company to improve its capital structure and lower the amount and cost of its debt, it says.

Giving Back
The Herbalife Family Foundation (HFF), a non-profit committed to helping children at risk, announced in April that it will launch a new Casa Herbalife program with a donation of $25,000 to Atlanta Children's Shelter (ACS), which offers free childcare and social services for homeless families in Atlanta.

Casa Herbalife, a good-nutrition program for children, will allow the shelter to provide healthy breakfast, lunch and snacks.

At the dedication event on April 13, Johnson presented a check to ACS Executive Director Dr. Jacqueline Brown. The collaboration with ACS is among the first of several Casa Herbalife programs that the HFF plans to launch around the world in the upcoming year to be sure children are being fed healthy and nutritious meals.

The HFF says it will partner with existing charities serving children. This new children's nutrition program is modeled after an orphanage the HFF built in Brazil in 1998. “Herbalife is committed to bringing a positive change to people's lives through good nutrition and Casa Herbalife lets us help the kids who need it most,” Johnson said at the dedication event.

The Atlanta Children's Shelter offers the only free childcare and comprehensive social services for homeless families in the city of Atlanta.

The agency cares for families by providing:
• Quality instructions and activities that are tailored to the particular needs of homeless children.
• Nutritional and balanced breakfasts, lunches and snacks daily.
• Cultural and enrichment activities, including trips to Zoo Atlanta, area theaters and other fun
kids' places.
• Assistance in finding safe, affordable housing.
• Case management, planning and counseling.

Since opening in 1986, the Atlanta Children's Shelter has cared for more than 7,650 children. ACS is accredited by the National Association for the Education of Young Children. ACS is a 501 ( c ) (3) nonprofit organization.

Since 1994, the HFF has donated more than $6 million to help children in need in more than 25 countries by “offering support in overcoming life's most basic challenges, from escaping poverty, hunger and abuse to receiving adequate medical care and education,” the company says.
 
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