Avon 2007 Annual Report Download - page 11

• Continuing the roll-out of our Sales Leadership Program,
which offers Representatives an enhanced career opportunity;
• Strategically examining the fee structure and brochure costs to
enhance Representative economics;
• Recalibrating the frequency of campaigns to maximize Repre-
sentative selling opportunities; and
• Applying the optimal balance of advertising and field invest-
ment in our key markets.
While the reward and effort equation will be different within our
global portfolio of businesses, we believe that web enablement
is a key element to reduce Representative effort worldwide. We
will continue to focus on improving Internet-based tools for our
Representatives.
In 2006, we launched a product line simplification (“PLS”) pro-
gram, which included an analysis of our product line, to develop
a smaller range of better performing, more profitable products.
The overall goal of PLS is to identify an improved product
assortment to drive higher sales of more profitable products.
During 2007, we completed the analysis of our product portfo-
lio, concluded on the appropriate product assortment going
forward and made decisions regarding the ultimate disposition
of products that will no longer be part of our improved product
assortment. There will be no further PLS inventory charges.
Additionally, during March 2007, we launched the first phase of
our strategic sourcing initiative (“SSI”). This initiative is expected
to reduce direct and indirect costs of materials, goods and serv-
ices. Under this initiative, we are working towards shifting our
purchasing strategy from a local, commodity-oriented approach
towards a globally-coordinated effort which leverages our vol-
umes, allows our suppliers to benefit from economies of scale,
utilizes sourcing best practices and processes, and better
matches our suppliers’ capabilities with our needs. Beyond lower
costs, our goals from SSI include improving asset management,
service for Representatives and vendor relationships. We have
also begun the implementation of a Sales and Operating Plan-
ning 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 institutionalized a zero-overhead-growth philosophy
that aims to offset inflation through productivity improvements.
These improvements in productivity will come primarily from SSI,
described above, and our restructuring initiatives, described
below.
Additional information regarding our inventory is included in the
“Provisions for Inventory Obsolescence” and “Liquidity and
Capital Resources” sections within MD&A on pages 24 and 33
through 37 of this 2007 Annual Report on Form 10-K.
Restructuring Initiatives
In connection with our four-point turnaround plan, in November
2005 we announced a multi-year restructuring plan under which
we expected to incur total restructuring charges and other costs
to implant our restructuring initiatives in the range of $500.
During the fourth quarter of 2007, we announced the final ini-
tiatives of our restructuring plan. We now expect to record total
restructuring charges and other costs to implement our
restructuring initiatives of approximately $530 before taxes, of
which we have recorded $443.6 through 2007. We expect to
record a majority of the remaining costs by the end of 2009. We
now expect to achieve annualized savings of approximately $430
once all initiatives are fully implemented by 2011-2012, com-
pared to our original estimate of in excess of $300. We expect
the savings to reach approximately $300 in 2009. Specific
actions approved as 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
finance, information technology, human resource and
customer service processes, and the move of certain services
from markets to lower cost shared service centers;
• the restructure of certain international direct-selling
operations;
• the realignment of certain distribution and manufacturing
operations, including the realignment of certain of our North
America and Latin America distribution operations;
• the automation of certain distribution processes;
• 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 66 countries and terri-
tories, including the U.S., and distribute our products in 48
more. Unlike most of our competitors, which sell their products
through third party retail establishments (i.e. drug stores,
department stores), Avon primarily sells its products to the ulti-
mate consumer through the direct-selling channel. In Avon’s
case, sales of our products are made to the ultimate consumer
principally through the direct selling by approximately 5.4 million
active independent Avon Representatives, approximately
459,000 of whom are in the U.S. Representatives are
independent contractors, not employees of Avon. Representa-
tives earn a profit by purchasing products at a discount from a
published brochure price directly from us and selling them to
their customers, the ultimate consumer of Avon’s products. We
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