Avon 2006 Annual Report Download - page 5

ELEVATE ORGANIZATION
EFFECTIVENESS
The successful launch of direct-selling in China
in 2006 refl ected a close partnership between
local management and our newly established
Global Direct Selling function, which brought
oversight and world-class expertise to this
priority market. In a similar manner, our new
Global Marketing function is working with
markets around the world to optimize our
brand investments. The Global Supply Chain
team is driving an integrated manufacturing
and distribution strategy to deliver cost
benefi ts by leveraging our global scale.
In addition to this new, matrixed operating
structure, the company’s organizational
effectiveness has been enhanced by reducing
management layers from 15 to eight, and by
the elimination of 25% of our management
positions. This “delayering” of the organization,
which was substantially completed in the fi rst
half of 2006, has brought our senior leaders
closer to markets, and our markets closer to
our Representatives and our consumers. This
helped us streamline the fl ow of information
across the organization, and is enabling faster
decision making and quicker response time to
changing market conditions.
RADICALLY TRANSFORM
THE COST STRUCTURE
Delayering was also a major part of the
restructuring plan we announced at the
end of 2005 to radically transform Avon’s
cost structure. As part of this plan, we said
we would spend $500 million to implement
restructuring and this would yield in excess
of $300 million in annualized cost savings
that could be reinvested in the business. We
are on track to achieve this, and in 2007 we
expect to realize approximately $200 million
in savings from delayering alone. Other
restructuring programs include realigning
our North American distribution network,
several regionalization, centralization and
outsourcing initiatives, as well as exiting
some unprofi table businesses.
In addition to this original restructuring plan,
we launched two new initiatives in late
2006—Product Line Simplifi cation (PLS) and
a Strategic Sourcing Initiative (SSI)—that will
further reduce our cost base.
PLS, in particular, promises to be a “game
changer” for Avon. It will help us defi ne a
smaller range of better performing, more
profi table, high volume products—and provide
us the processes and disciplines to maintain
the right assortment.
The benefi ts of a less complex product
offering should be felt throughout our
organization, from product development to
sourcing and manufacturing. In addition, for
our Representatives and consumers, it will
make Avon easier to sell and shop.
SSI will change how we buy direct and
indirect materials, goods and services around
the world. Led by a global sourcing team,
purchasing will be centralized. We’ll buy on
a supplier basis, not on a component basis,
working with a reduced number of suppliers
to increase their scale of business with us and
provide us with the greatest leverage.
Taken together, PLS and SSI should yield
over $400 million in annual benefi ts upon
their full implementation. The combination
of restructuring, PLS and SSI should deliver
over $700 million in total annual benefi ts to
the company, giving us adequate resources to
continue to invest in growth while also helping
improve profi t margins over time.
2006 Annual Report