Avon 2006 Annual Report Download - page 11

• Improve customer service;
• Reduce complexity and confusion of our offering to customers
and Representatives;
• Simplify our product line for effectiveness and efficiency;
• Impact the new product development decision-making
process;
• Improve life cycle management procedures;
• Improve inventory management; and
• Drive improved Supply Chain utilization.
Additionally, we are embarking on a strategic sourcing initiative
(“SSI”) to reduce direct and indirect costs of materials, goods
and services. Under this initiative, we will shift our purchasing
strategy toward a global supplier orientation from one that is
more local and component oriented. Beyond lower costs, our
goal for this initiative is to improve asset management, service
for Representatives and vendor relationships. We have also
begun the implementation of a Sales and Operating Planning
process that is intended to better align demand plans with our
supply capabilities and provide us with earlier visibility to any
potential supply issues.
We have begun to institutionalize a zero overhead growth
methodology (“ZOG”) in which inflation is offset by improve-
ments in productivity. These improvements in productivity will
come primarily from previously announced initiatives such as our
restructuring program, PLS and SSI.
Restructuring Initiatives
In connection with our four-point turnaround plan, in November
2005 we announced a multi-year restructuring plan. We expect
to incur total restructuring charges and other costs to implement
our restructuring initiatives in the range of $500.0 before taxes.
Specific actions during 2005, 2006 and January 2007 for this
phase of our restructuring initiatives included:
• organization realignment and downsizing in each region and
global through a process called “delayering,” taking out layers
to bring senior management closer to operations;
• the phased outsourcing of certain services, including certain
key human resource and customer service processes, and the
move of certain services from markets within Europe to lower
cost shared service centers;
• the realignment of our North America distribution operations;
• the exit of certain unprofitable operations, including the clo-
sure of the Avon Salon & Spa, the closure of our operations in
Indonesia, the exit of a product line in China and the exit of
the beComing product line in the U.S.; and
• the reorganization of certain functions, primarily sales-related
organizations.
Distribution
We presently have sales operations in 63 countries and terri-
tories, including the United States, and distribute our products in
51 more. Sales are made to the ultimate customer principally
through a combination of direct selling and marketing by
approximately 5.3 million active independent Avon Representa-
tives, approximately 446,000 of whom are in the United States.
Representatives are independent contractors, who are not
employees of ours. Representatives generally purchase products
at a discount from a published brochure price directly from us
and sell them to their customers. Representatives are typically
our customers and we generally have no arrangements with end
users of our products beyond the Representative, except as
described below. Generally, Representatives are invoiced for their
orders and are responsible for payment to us, regardless of
whether or not the Representative sells the products to an end
user. No single Representative accounts for more than 10% of
our net sales.
A Representative contacts customers directly, selling primarily
through brochures, which highlight new products and special
promotions for each sales campaign. A Representative may also
use sales tools such as product samples, demonstration products
and selling aids such as make-up color charts. Sales campaigns
are generally for two-week duration in the United States and
two-to-four week duration for most markets outside the United
States. Generally, the Representative forwards an order for a
campaign to us using the mail, the Internet, telephone, or fax.
This order is processed and the products are assembled at a dis-
tribution center and delivered to the Representative usually
through a combination of local and national delivery companies.
Generally, the Representative then delivers the merchandise and
collects payment from the customer for his or her own account.
A Representative generally receives a refund of the full price the
Representative paid for a product if the Representative chooses
to return it.
We employ certain electronic order systems to increase Repre-
sentative support, which allow a Representative to run her or his
business more efficiently, and also allow us to improve our
order-processing accuracy. For example, in many countries,
Representatives can utilize the Internet to manage their business
electronically, including order submission, order tracking, pay-
ment and two way communications with Avon. In addition, in
the United States, Representatives can further build their own
Avon business through personalized web pages developed in
association with us, enabling them to sell a complete line of our
products online. Self-paced online training also is available in
certain markets, as well as up-to-the-minute news about Avon.
In the United States and selected other markets, we also market
our products through consumer websites (www.avon.com in the
U.S.). These sites provide a purchasing opportunity to consumers
who choose not to purchase through a Representative.
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