Avon 2006 Annual Report Download - page 25

Avon Crystal Aura fragrance, Avon Blue Rush fragrance and
Derek Jeter DRIVEN fragrance. In 2007, we expect to implement
a comprehensive strategy to reposition and rebrand our color
line, including product innovation, upgrading packaging, a sig-
nificant increase in advertising, improved merchandising and
new brochure executions. We are forging alliances for our color
line including alliances with a color make-up artist and an inter-
national fashion designer. In 2007, we also plan to launch a
global integrated marketing campaign, called Hello Tomorrow,
supporting both the brand and the direct selling channel. Addi-
tionally, we expect to continue to reallocate the time our
research and development department spends toward
innovation and away from promotional items.
We are also investing in our direct selling channel to improve the
reward and effort equation for our Representatives
(Representative Value Proposition). We have accelerated the roll
out of our Sales Leadership program and have undertaken
extensive analysis to better understand the drivers of value for
our Representatives. In 2007, we will continue to look for ways
to improve the earnings opportunity for Representatives through
various means, including the following:
• Evaluating optimum commissions in select markets;
• Continuing to roll-out our Sales Leadership Program, which
offers Representatives an enhanced career opportunity;
• Strategically examining fee structure and brochure costs to
enhance Representative economics; and
• Recalibrating the frequency of campaigns to maximize Repre-
sentative selling opportunities.
While the earnings and effort equation will be different within
our global portfolio of businesses, we expect that web enable-
ment will be a key element to reduce Representative effort
worldwide. We will focus on improving Internet-based tools for
our Representatives. We will also focus on enhanced training of
Representatives and field management.
As part of our focus on brand competitiveness during 2006, we
sought to reduce brand and margin dilution from the sale of
heavily discounted excess products. As a result, we incurred
higher inventory obsolescence expense of $20.5 during the first
quarter of 2006, as it made more sense to discontinue selling
these products rather than sell them at deep discounts and
adversely affect sales of more profitable products.
As the year progressed, we also launched our product line sim-
plification program (“PLS”), which includes an analysis of our
product line to develop a smaller range of better performing,
more profitable products. This program is designed to improve
the shopping experience, our brand image and Representative
experiences by reducing the number of SKU’s overall, which is
expected to have significant savings implications. Over time we
expect this initiative will:
• 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.
We incurred $81.4 of costs related to our PLS program during
2006, primarily incremental inventory obsolescence expense of
$72.6. Depending on the results of additional PLS analyses that
will be performed to identify the optimal product assortment
over the next three years and timing of any resulting decisions,
we may incur future costs related to PLS in the range of $100.0
principally in the form of inventory obsolescence charges. We
expect to realize annualized benefits from PLS in the range of
$200.0, with benefits building progressively over the next three
years.
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 expect to real-
ize initial benefits from SSI beginning in the second half of 2007,
with annualized benefits from this initiative in the range of
$200.0 by the end of 2009. We do not expect to incur any sig-
nificant costs associated with this initiative. 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.
We have incurred total costs to implement, net of adjustments,
A V O N 2006 19