History of Avon Avon was founded in 1886 as the California Perfume Company by a book salesman named Mr.

David McConnell. He got the idea of opening this company when he discovered that the rose oil perfumes he was giving away with the books were the primary reason people were buying his books not the book it self. In 1914 the first international office opened in Montreal, Canada and in 1916 California Perfume Company first incorporated in New York State and by 1964 Avon stocks have been listed on New York Stock Exchange. The company changed its name to Avon products, Inc., in 1939 by the new president of the company the son of the founder after the river that runs through Stratford-On-Avon in the English Midlands. The name is a tribute to McConnell's favorite playwright, William Shakespeare, who hailed from the town. From only $500 revenues a day, which was recorded for the first time in December 1897, in 1920 the company s revenues reached $1 million a year and by 1972 it reached $1 billion for the first time. In 2004 the total revenue of Avon was $7.7 billions!! In 1999Avon names its first-ever female CEO with the appointment of Andrea Jung in November and in 2001Avon s Board of Directors elected her as the company s first female Chairman of the Board. She is one of five female chief executives of Fortune 500 companies, and is one of three holding the titles of chairman and chief executive. Facts about Avon: Avon is the world's leading direct seller of beauty and related products. It markets to women around the world through 4.9 million independent sales representatives a number that has grown 11% from 2003. In addition to be the leading direct seller, it is the sixth largest global beauty company in term of size with total assets equals to $4.2 billions in 2004. Moreover Avon is expanding in the global market rapidly and it has business operations in 60 markets conducting over 1 billion customer transactions every year. Avon is achieving notable strategic and financial successes. In 2004 Avon has generated $7.7 billion in revenues with a grow rate of 13% from 2003. Avon is expecting even more grow in the coming years and expects a total revenue to be around $10 billion by the year 2007. In addition, Avon is achieving even higher success in term of grow in net income and shareholders wealth. In 2004 Avon has generated net after tax income of $846 million, 27% more than 2003. Furthermore stock price reached $38.70, which is 15% more than 2003. Avon product categories include Beauty, which consists of cosmetics, fragrances, skin care and toiletries; Beauty Plus, which consists of fashion jewelry, watches, apparel and accessories; and Beyond Beauty, which consists of home products, gift and decorative products, candles and toys. Avon product lines include such recognizable brand names such as Avon Color, Anew, Skin-So-Soft, Advance Techniques Hair Care, Avon Naturals, Mark and Avon Wellness. Avon is included in fortunes ((most admired companies)) list for over a decade, selected by business week as one of the ((Top 100 Global Brands)) and honored by fortune as one of the ((50 Best Companies for Minorities)). In addition, Avon is a world leader in anti aging skin care products. Avon is a corporation that is owned by approximately 20,000 record holders who hold 728.61 million common shares valued at $38.7 each in the last day of 2004. Its stocks are listed on New York Stock Exchange. Avon believes that there are many additional shareholders who are not shareholders of record but who beneficially own and vote shares through nominee holders such as brokers and benefit plan trustees. Avon has a total of 47700 employees around the world, 8900 of them in the USA and 38800 in other countries. Its chairman and chief executive officer is Ms.Andrea Jung, who has born in Canada and rose in the US but with Chinese roots. (see her photo) US Cosmetics, Fragrance and Toiletries market size in the year 2000 was $32.5 billion and was expected to be $39.8 billion in 2005. The size of the global market was $140 million during the same period. Major competitors for Avon are: L,Oreal of France as the leader in the industry, Procter and Gamble, Estee Lauder, Intimate Brands and Alberto-Culver all from the USA. Marketing Channel Avon is very unique among its competitors in the way that it markets its products. As I mentioned above Avon is the largest direct seller of beauty and related products in the world. Avon uses direct channel for distributing products that are normally marketed through exclusive distribution in longer channels.

Avon products can not be found in beauty shops, fragrance stores, drug stores, supermarkets or any other types of retailers that its competitor products are normally stocked on their shelves. Rather, Avon sells its products directly to its consumers all over the world through its 4.9 million representatives. As the chart illustrate, the distribution system of Avon is based on employing representatives all over the world, training them and providing support and incentives to them to sell the company s products. Those representatives, who are mainly housewives looking for extra income by selling Avon s products to their friends and neighbors, are working on commission based payment. Those representatives can contact Avon for getting products and for training and support through their wholly owned subsidiaries in the major markets all over the world. Therefore we can conclude that the channel length of Avon is short (direct distribution) because the firm sells its products through its own representatives, and its channel width is intensive distribution, since anyone can become a representative for the company.

Avon As of November 1999, Avon was experiencing economic troubles. Avons growth rate of annual sales was less than 1.5 percent during the greatest economic boom in history. This prompted a transfer in leadership which appointed Andrea Jung as CEO. Since that time, Avon has experienced remarkable growth. Under the direction of the new CEO, a new strategy was developed to reinvent Avons image, improve customer satisfaction, and to increase profit margins and market share. Avon has gained an outstanding reputation as the best direct seller of beauty products. Through the continued efforts and achievements of its sales representatives, Avon is now known worldwide. Avons core competence has mainly been its direct selling busniess model. This led Jung and the management team to implement a Sales Leadership program that provided incentives to acquire, train, motivate, and retain the number of active sales representatives it needs to sustain significant growth. Avon also has a representative development program that focuses on the professional training of representatives. This enables the representatives to provide valuable information on Avon brand products. Avon also keeps its superior customer service in other ways of distribution such as the Internet and in the department store sales by having a timely and correct order delivery, one on one information exchange and personalized professional advice. Forces of Competition Rivalry among competing sellers in the CFT industry is strong. The creation of innovative products is crucial to success. This industry focuses on continually developing cutting edge products using the latest science and technology. Rivalry is stronger when customers costs to switch brands are low. Switching costs in the CFT industry are very low, due to the large amount of different brands of similar products. This cost is due to the higher number of competitors in the CFT industry and their tendency to copy new products in order to stay competitive.

Another Avon objective that aims to alleviate pressures coming from competing sellers includes consists of reinventing their antiquated image. The organization had been a major player in the CFT industry for decades. However, Avons management took a reactive approach and failed to evolve with the changing times. Because the CFT industry centers on mage conscious consumers, Jung determined this to be a fatal mistake. The major segment of the CFT market is comprised of women/girls less than 30 years of age. Realizing this, Jung endorsed the Williams sisters. Venus and Serena Williams were popular teen icons that portrayed the image Jung hoped to achieve for Avon; young, powerful, and ambitious. Avon is highly backward integrated, self-manufacturing many of the items that they sell. This causes the competitive pressures of suppliers to be weak. Avon can get supplies from many parts of the world because they have entered foreign markets and produce products in different countries. A lot of Avons supplies such as packaging, may be easily substituted if a supplier raised prices. Competitive pressures stemming from customer buying power is moderate because switching costs are low and customers have the ability to fulfill their needs by switching brands. Buyers tend to be well informed about Avons product prices and costs largely due to the Internet and this puts customers at a position of higher bargaining power. Customers do not pose a threat of integrating backwards, because it would not be easy for women to develop their own make-up, perfume or skin care products. Due to the dirct selling business model, there is an extremely large number of buyers. Losing one will not significantly impact the companys market share or financial position. While there is strong competition in the CFT industry, there is a weak threat of new entrants and an even lesser threat of substitute products. The market is comprised of major players who have the ability to invest millions in marketing and R&D. This makes keeping up with innovative products extremely difficult. These organizations also have established relationships with retailers and suppliers and hold a certain amount of leverage within the industry. New company products are viewed as fads and are short lived. Small companies cannot compete in store with the bigger companies for shelf space. To sell products in department stores or specialty store, the product must have a favorable quality image. New firms will have trouble entring the CFT industry due to the high learning curve. Avon would be able to produce products in the same product line for a lot less due to their acquired expertise and experience they have gained by being in the business for over a century. New entrants will have a hard time competing with the prices, advertising, loyalty of customers, and the years of experience that firms like Avon have acquired over the years. Incumbent firms may not pay much attention to a new entry until it survives for a period of time or if they launch an innovative product that needs to be copied under the larger name. As for substitute products, women might switch to different brands of cosmetics but it is doubtful that a replacement short of surgery will substitute cosmetics

from a different industry. The only substitute products are similar products from another company within the CFT industry. Because there are no true substitute products from a different industry the threat of substitutes is very weak. Driving Forces In order to analyze how the CFT industry is changing and how competition might change over the next 3-5 years it is important to discuss the driving forces relevant in this case. The most important driving force in the CFT industry is the growing use of the internet and emerging new internet technology applications. For example, Avon improved its web site under Perrin by making it easier for customers to purchase products online and began testing a Web-based ordering system for the companys sales representatives in Japan. Most if not all major competitors have also been focusing on the internet as a distribution channel; an example is Estee Luader marketing its products through www.Gloss.com. Product innovation is also a major driving force in the CFT industry. Avon, as well as its competitors, has been focusing on product innovation to increase their market share. For example, Cover Girl and Max Factor both offered highly popular Outlast and Lipfinity products that contained Permatone, a semipermanent lip color that kept lipstick in place for up to eight hours. New hair care products also benefited from innovations. Products that touted aromatherapy, herbal ingredients, or other natural aspects; products that protected colored or highlighted hair; and products developed to enhance volume and body. Growing buyer preferences for differentiated products instead of standardized commodity products is also a driving factor within the CFT industry. African American and other consumers with dark complexions had skin care and cosmetics needs that differed substantially from those women of European nationality or descent. Research has proven that anti-aging products that were being marketed were of less importance to women with darker complexions since the higher melanin and oil content found in dark-colored skin naturally discouraged wrinkles. In addition, Asian women demanded different products that would meet their needs, mainly maintaining natural or pale skin tones. Key Success Factors The CFT industry has several key success factors, the most important being brand image. The CFT market is saturated with products; therefore if a companys image is not strong it will not be able to hold on to its customers who will immediately look into substitute producers. Another key success factor in the CFT industry is cost. The producer has to analyze its position in the market and price its products appropriately. A company such as LVMH

can price its products high and market them through limited channels at a high price and achieve excellent sales. Procter and Gamble on the other hand distributes its products through discount stores, supermarkets and drug stores. Clientele of these stores generally dont buy makeup for example at Neimann Markus, therefore P & G prices its products appropriately. Without product innovation capabilities, a CFT company will surely lose market share. For example skin care products are constantly being improved and new substances are discovered to have effects on the skin. Large CFT companies not only capitalize on this information, many times they are the ones who make these discoveries by funding extensive research projects. Global market coverage and sufficient financial resources are essential to supporting extensive advertising. Sufficient financial resources are necessary to take on any sort of expansion, whether it is local, national or international. The distribution network is another important success factor. An appropriate distribution network is necessary to get the product to the final consumer efficiently and effectively. Some companies may need an extensive distribution network while others may be successful with a limited distribution network. Companies that market highly differentiated products tend to be very successful with these limited distribution networks. Financial Performance Since Andrea Jung was promoted to CEO in 1999, Avons operating profits have increased in North America and in most international markets (exhibit 1). The European market has been one of the most successful. Sales between 1996 and 2002 have grown by 55% annually. Susan Kropf reconfigured the value chain thereby cutting costs of non-value adding areas. In 2003 $225 million was saved and in 2004, $400 million was saved. This business process redesign enabled Andrea Jung to increase spending for R&D by more than 50% and advertising by more than 50%. The new business process management also improved efficiency in ordering from an order fill rate of 68% in 2000 to an order fill rate of 90% in 2004. Overall since Andrea Jung has taken over as CEO of Avon, sales have increased over 10% annually, order efficiency has increased, and the sales force of Avon Representatives has increased 2-3% with a growth in earnings of 25-30%. Competitive Strategy Andrea Jungs vision of what she wanted to accomplish as CEO of Avon included a strategy to; improve brand image, introduce new products, increase use of the internet as a

channel of distribution, provide greater incentives and opportunities for the sales force, reduce unnecessary costs in the value chain, and continue to expand into global markets. Between 2000 and 2002 Avons brand image index increased by 25 points. (Exhibit 2) That is considerably more than LOreal, the industry leader or Mary Kay, a company with a similar business model. This increase is partially attributed to Andrea Jungs Lets Talk advertising campaign where she signed tennis stars Serena and Venus Williams to endorse Avon products and also by updating the catalog format and product package design. Product innovation was a large part of Jungs strategy for Avon. In fact, in 1999 she challenged Avons R&D team to develop a new product within two years. In less than one year Avon introduced Anew Retroactive, an anti-aging skin cream. It achieved record sales for Avon and led to the development of other successful lines of business. For example, Avon Wellness products exceeded sales estimates by 300%. The new improved product development process has reduced breakthrough innovation frequency from every three years in 2000 to every two years in 2004 and average product development time from 88 weeks in 2000 to 50 weeks in 2004. With the growing popularity of the internet as an outlet of commerce, Jung was compelled to implement internet sales into her strategy. Realizing that the Avon Lady is the distinctive core competency for Avon, Jung incorporated the use of Avon representatives at Avon.com. Within the first 9 months, almost 12,000 of Avons 500,000 sales representatives paid $15 per month to be eRepresentitives. ERepresentatives receive 2025% commission on internet orders sent directly to the customer and 30-50% on internet orders the representative personally delivers. Global expansion was a key component to Jungs strategy. In China the number of Avon outlets grew from 3,463 in 2000 to 6000 in 2004. Furthermore, global brands represented 11% of Avons sales in 1993 and 70% in 2000. In Central and Eastern Europe alone, Avon sales grew 55% between 1996 and 2000. Avons market position is unique. The companys market research shows that their primary customers are working-class and middle-class. Therefore, according to this information and analysis using a strategic group map (exhibit 3), it is apparent that Avon is strongly positioned in their market. Recommendations Based on demographic data, China holds 20% of the worlds population. This represents a vast market of which Avon has only begun to cover. Avon should continue to focus on the expansion of retail outlet sales in China. Also, because the only sales in

China are generated through retail outlets, Avon should further develop their Beauty Advisors training. Europe should also be a continued focus for Avon. Industry leader, LOreals attributes 50% of their total sales to the European market. Avon has had a successful growth rate in Europe but only 23% of the total 2003 sales came from Europe. There is still room to expand in this market. Based on one of the industrys key success factors, product innovation, Avon should focus even more resources on R&D especially in the areas of anti-aging products and teen products. Because 23 million teenagers have an average weekly disposable income of $85, Avon should continue with innovative teen marketing such as the current mark brand but also work on products for problem teen skin. Being ahead of the industry in introducing new products combined with the companys already strong market position could further improve Avons brand equity and therefore revenues. In particular, Avon should continue to integrate sales representative into all aspects of sales. This is Avons own key success factor and what sets them apart from their competitors.

Avon Products, Inc. (Avon) is based in New York. The firm engages in the manufacture and marketing of beauty and complimentary products primarily in North America, Latin America, Europe, and Asia Pacific (Yahoo Finance, 2005). Avons products are classified into three product categories: Beauty, Beauty Plus, and Beyond Beauty. The Beauty category consists of cosmetics, fragrances, skin care, and toiletries; Beauty Plus includes fashion jewelry, watches, apparel, and accessories; and Beyond Beauty comprises home products, gift and decorative products, candles, and toys (Ibid). The company sells and markets its products through a combination of direct selling, marketing by independent Avon representatives, and via its consumer Web site, avon.com. This paper will explore how the company is fairing under the leadership of its current CEO, Andrea Jung. There are two opposing views regarding the companys current and future success. One group feels that the firm has a promising future with Jung at the helm while the other group does not. This paper will analyze the pros and cons uncovered by each team member and discuss which view prevailed in the debate and why. Pros and Cons Pros of Jung and Avon Andrea Jung became president and CEO of Avon in 1999 and has totally revamped the company. Under her leadership, the company has updated its product line, launched new advertising, and created a new image (Fact Monster, 2005). Avons sales have increased by 30 %, profits 40%, and the stock price has dramatically improved (Ibid). Jungs has been able to align the firms core capabilities with its strategic targets which has lead to phenomenal results. It appears that Jung has been able to establish a clear vision for the firm that has been incorporated in every aspect of the firms operating system. This vision is shared by all employees and representatives of Avon priming the company for continued success. Under Andrea Jungs direction, Avon is focusing on developing nations especially China. Many developing countries are more receptive to direct selling by women since jobs with Avon are opportunities for women who want to be independent in the male dominated cultures. Avon has also recognized that the demographics has changed and recruiting younger women to sell to the younger customer base. Other strategies of Jung include cost cutting by reducing number of raw material suppliers, shifting production from smaller plants to larger ones, moving manufacturing from high cost nations like Great Britain to lower cost countries such as Poland (Tarquinio, 2004). As mentioned in the Avon case study, the e-representative initiative also has helped Avon cut costs. The direct sellers are asked to fill in the order online. This would save the company 60 cents per order (Pearce & Robinson, 2004). As a result of

these strategies, Avon had a 27.3% gain in earnings in 2004 and the fourth quarter profit increase of 10.5% (Derby, 2005). Cons of Jung and Avon There are a number of missteps that Avon has taken under Andrea Jungs leadership. They include partnering with companies that image does not adequately match Avons and the companys problems with launching its online business segment. Recently, Avon announced plans to partner with Sears and JC Penneys. One of the potential negative aspects for Avon partnering with JC Penny and Sears would be the possible lowering of brand name for Avon. As stated by Pearce and Robinson (2004), considered to be the weakest portion of brand retail market, the company ran the risk of possible further reduction of its brand name. Since its inception Avon has worked very hard in tailoring its niche market towards women. Avons brand has definitely resonated for women through the years. However, as noted in Datamonitor (2004), during the 1980s, the company began to diversify by investing in retirement properties and healthcare products, and launching catalogs for men and children. During the initial stages of this strategy, Avon started to remove itself from its core market of selling to women. The results were downward revenue trends and slow growth throughout the 1990s which resulted in several takeover bids. Unfortunately, Sears Roebuck and JC Penny do not really resonate well with being a carrier of womens beauty supplies. The name Sears have been associated with appliance and not beauty products. The move of aligning with this companies and trying to sell higher end beauty products will only push Avon in the opposite direction that it should be heading, which is to move back towards tailoring to women domestically and globally. Over the years, Avon has experienced several problems leveraging its brand in many of its product lines. As a result, positive net sales and earnings growth for the past five years have been in single digits and steadily declining year after year (Pearce & Robinson, 2004). Specific problem areas are stagnated sales, slow earnings growth, limited distribution capabilities and shift in personal care preferences and spending habits. Andrea Jungs proposal to expand into certain retail markets will only perpetuate Avons trend of declining net sales. The proposed plan will indeed create an additional distribution outlet and cater to this market segment. However, the question to examine is at what expense or cost will Avon endure making this decision? Avon has faced tremendous pitfalls marketing its product lines to effectively increase brand loyalty and recognition. Examples of this include the hair care product line. Avon did not effectively develop products for ethnic hair types. Additionally, Avon did not have a hair coloring product line. As a result, Avon suffered in building brand awareness and loyalty

with the younger generation as well as the older generation that also demanded this product. Avon has lost loyalty and brand recognition as a result of its decision to diversify into different industries and different product lines. This has resulted in a loss of market share drastically affecting annual profit margins. To examine the previous question of what cost will Avon endure deciding to move into the retail markets? It is clear and evident; the cost will be a further extension of the existing internal problems that Avon faces. Deciding to move into the retail market to create a store inside a store is not in Avons best interest. This move would be a further expansion of Avons previous decisions to diversify into markets that do not have synergy and thus will hurt the overall branding of the company. Finally, implementing Andrea Jungs proposal to enter the retail market would be detrimental to the already fragile state of Avons brand awareness, recognition and loyalty. Another factor for the underperformance of Avon in the late 1990s is its failure to develop the online business. For the fear of alienating its labor force, Avon downplayed the importance of developing the e-business. A company cannot ignore the environment and expect to be successful in the long run. Due to its internal struggle with the internet strategy, Avon fell behind other less established companies in taking advantage of the explosive growth of the internet (Pearce & Robinson, 2004). Debate Results After careful review of each team members analysis of the pros and cons relative to the Avon case study, the team decided that the cons outweigh the pros. It appears as though the firm is currently moving in too may directions to effectively capitalize from its branding efforts. Targeting too many demographics may cause the firm to lose sight of its core market. In addition, partnering with firms that are not held in high esteem when it comes to health and beauty products could hurt Avons image. However, there are steps that the firm can take to avert some of the pitfalls of the past. Strategy Avons approach should build on original direction and implementations however expanding as necessary to fit current trends and environmental assessments. The focus should be on existing internal structures to build, create and advance current product lines. Avons focus should also exist in the field of technology to increase online selling opportunities, update internet technology and to re-brand themselves to be a leader of online sells. To accomplish this, strategy should focus on expanding kiosks globally and domestically. The expansion will leverage Avon by appealing to the market segment requesting additional distribution channels. This strategy will allow for trained beauty consultants to offer advice, education and samples thus increasing brand awareness and

loyalty. Kiosks will have minimal start up cost and lower overheads. Focusing on product lines and catering to the needs and wants of each demographic group will prevent the previous pitfalls of lack of integration and decreased brand awareness and loyalty. Keeping Avons product offering separate and distinct will help existing challenges of branding. Focusing on technology improvements and online sales, Avon will have an opportunity to emerge as a leader in this area, thus adding additional channels of distribution and appealing to the overwhelming need. Conclusion Under Andrea Jungs leadership, Avon has faced a number of challenges. Some of these challenges were addressed successfully and others were not. In the early part of 2000, the management team had the daunting task of choosing an appropriate strategy for the immediate and long-term future for the company. One setback was a decrease in the firms growth rate to single digits and stagnated earnings. Avons CEO, Andrea Jung, was presented with a multitude of options that ranged from distributing through other departments stores, establishing kiosks, to overhauling the firms e-business. Jung was right in acknowledging that Avons core competency is direct selling and its major strength is its brand name. By refocusing on the core competency, improving efficiencies, and adapting to the environment with new initiatives, Avon could overcome the hurdles of the past and turn the company in the new direction. References Datamonitor (2004). Retrieved August 12, 2005 from http://80-dbic.datamonitor.com. ezproxy.apollolibrary.com/companies/company/?pid=E8B585DB-3BF6-488280B3-CB8A102DDAE8 Derby, M. (2005). Avon profits surge in quarter, year. Womens Wear Daily 189(22), 12. Fact Monster (2005). Profile of Andrea Jung. Retrieved on August 13, 2005 form http://www.factmonster.com/ipka/A0880008.html Pearce & Robinson (2004). Strategic management (9th ed). New York: McGraw-Hill. Tarquinio, J.A. (2004). Aging gracefully at AVON. Kiplingers Personal Finance, 58(9), 49. Yahoo Finance (2005). Profile for Avon Products, Inc. Retrieved on August 13, 2005 from

http://finance.yahoo.com/q/pr?s=AVP

What do you do when you have an enormous growth opportunity but can't capitalize on it because your supply chain is in the way? If you're Avon, you embark on a radical transformation-a high-risk venture with no guaranteed returns. Avon is the world's leading direct seller of beauty products, with $6.8 billion in annual revenues. In addition to cosmetics, skin-care products, fragrances, and personal-care products, the company offers a wide range of gift items, including jewelry, lingerie, and fashion accessories. Avon sells to customers in 145 countries through 3.9 million independent sales representatives. More than $1.2 billion of Avon's sales come from its Europe region, which serves 32 countries in Europe, the Middle East, and Africa with more than one million sales reps. But in the 1990s the region's strong growth threatened to overwhelm its supply chain organization. With its primary focus on marketing and sales, Avon had neglected its supply chain for years. Back in the 1980s, Avon Europe had branches in only six countries, each with a separate factory and warehouse supplying the local market. The branches operated independently, with separate information systems, no overall planning, and no shared manufacturing, marketing, or distribution. On a small scale, this worked quite well. Each entity could be very responsive to local needs. But in the early 1990s the company began globalizing its key brands and modernizing its image through the launch of new products, packaging, and ad campaigns aimed at younger consumers. Avon planned to double sales revenue in the Europe region from $500 million in 1996 to $1 billion in 2001. The company realized that replicating its country-based supply chain model in every new market would be expensive and unwieldy. Explains executive vice president Bob Toth: "Ten years ago we operated country to country, with a very decentralized model. You just can't compete that way now." The first problem was a fundamental mismatch between the company's selling cycle and its supply chain. In most European markets, Avon begins a new sales campaign-complete with a new brochure, fresh product offerings, and promotions-every three weeks. This short selling cycle is a cornerstone of Avon's direct-sales model. By regularly offering new products and promotions, the company gives its sales representatives a reason to call on customers often, strengthening relationships and driving sales. A short selling cycle demands a flexible, responsive supply chain. There Avon fell short. Its factories manufactured everything to forecast and then shipped inventory to the

country warehouses before the start of each three-week selling campaign. Inevitably, certain products would be big hits, and the branches would rush orders back to the factories. However, it took an average of 12 weeks for products to cycle through Avon's supply chain from sourcing to manufacturing to distribution. The timing mismatch led to on-the-fly solutions and enormous inefficiencies during the course of each sales campaign. Avon relied on the heroics of employees to meet customer needs-regardless of cost. But as the business grew, keeping up with different markets and accurately forecasting demand for individual products became increasingly difficult, especially since Avon was entering new markets at a rate of two or three per year. The rush orders destroyed manufacturing efficiency too. Since 40% to 50% of the items sold more than expected, the factories were constantly interrupting their schedules to switch from one product to another. Changeover costs were high-especially because the factories were set up for high-volume production. Slow-selling products also were costly. In every selling cycle some products would sell less than forecast, so Avon had a growing amount of unsold merchandise. Inventory levels ran as high as 150 days. Language posed another problem. Avon bought preprinted containers from its suppliers. With new markets came new languages and a growing number of print variants. Given its manufacture-to-forecast approach and the suppliers' lead times, Avon had to order a wide range of preprinted containers before it knew what its sales volumes actually would be in the different markets. Avon often would have demand that couldn't be filled because the only containers on hand were printed in another language. Fixing those problems and transforming the supply chain would be an enormous undertaking, one that needed support and a big financial commitment from top management. It required a lengthy, detailed analysis to prove that Avon's supply chain wasn't capable of handling the projected growth of the business. Even then, it took 18 months to build a business case and get executive backing. Persuading the organization to invest money that wouldn't be recouped until the later years of the transformation was a tough sell. In fact, the first two years would result in a net loss. "It was very difficult getting that initial momentum going," says Michael Watson, director of Avon's supply chain transformation. But by the time Avon started the project, management had committed an extraordinary amount of resources. Says Watson: "We took 45 of our best people in Europe out of their positions and put them into the project full-time for 18 months." Removing those people from day-to-day operations was painful, costly, and risky, but it was absolutely critical to success. Adds Watson: "If we had tried to do this on the side with a small project team, it would never have worked-and we'd never be seeing the benefits we are now."

Avon began by creating a centralized planning function-a critical priority. Explains John Kitchener, head of the supply chain in Europe: "There was no way Avon would achieve its growth targets without a centralized planning group that could see demand and inventory levels across the region and react quickly." First, Avon had to create a common database. The team spent many months putting in place standardized product codes, descriptions, and other information so that all the countries were speaking the same language. The database gave Avon visibility into sales trends and inventory so that managers could look across the region and view both supply and demand. The company also installed a supply chain and scheduling system to support planning and coordination across the region. To manage the growing complexity of the business, it put in place a regional planning group to make decisions about service levels, inventory, and costs based on a bird's-eye view of the whole supply chain. The next critical step was to redesign the supply chain in a way that made sense operationally. Avon kept a manufacturing plant in Germany but consolidated other production at its plant in Poland. That expanded manufacturing capability in the heart of Avon's emerging markets. And it delivered major cost efficiencies, mainly because of the lower cost of labor. Avon also created a centralized inventory hub in Poland-near the production facility-to serve the company's European branches. Once Avon was able to see the supply chain as a whole, decisions that hadn't seemed to make sense from a purely functional standpoint suddenly were shown to deliver substantial-and often unexpected-benefits. For instance, Avon had considered the idea of labeling bottles itself instead of relying on suppliers, so that it could delay final decisions about what language to put on a product until sales trends became clear. For years marketing had resisted the idea, convinced that the look of the products would suffer. Nor did the strategy make sense from a financial standpoint. The added equipment and labor involved in making labels and affixing them to bottles likely would offset any savings. "All the accountants were telling us it was the wrong thing to do," says Watson. It was only when Avon stepped back and looked at the supply chain as an end-to-end process that the true benefits became clear. Avon would have to buy only one plain bottle for shampoo or lotion instead of five or six language variations. Plants could make one long production run without repeatedly switching bottle stock. And customer service would improve because branches could be more responsive to changes in demand. Now, when inventory runs out in a given market, the warehouse can respond quickly by labeling products in the right language and loading up a truck. Very closely linked was a new inventory hub system. Avon's two manufacturing plants supply a single centralized warehouse in Poland, which labels the products and puts together loads for distribution to different regions. Under the old system, Avon pushed products out to country warehouses in different markets before knowing what demand

actually was. Now it holds them back in the centralized hub and diverts them to the markets that need them once sales trends become clear. Avon is also working to standardize its containers to cut costs and increase efficiency. Once convinced that every product should have a distinct bottle and shape, the company now realizes that cap, color, and labeling can be sources of differentiation too. Manufacturing can be more flexible because changeover time is often zero. Suppliers can now run Avon's containers down more efficient high-speed lines. And product costs are lower. Avon's new end-to-end view also changed how the company works with suppliers. The company used to seek out the least expensive materials and buy in large volumes to keep costs low. But it began to see that the lowest price doesn't necessarily equal the lowest total cost. For instance, Avon found a supplier of inexpensive glass bottles in Mexico, but the delivery time from Mexico to Europe was long-eight to 12 weeks by boat. When product demand was high and bottles were needed, Avon would fly them in, a costly stopgap. Today Avon buys most of its inventory from suppliers close to its factories in Poland and Germany. Although the company may pay a slightly higher price on a per-unit basis, managing fewer relationships with more flexible, responsive suppliers resulted in a lower total cost. Dealing with a smaller number of suppliers delivered other dividends as well. For example, in the process of standardizing bottles, Avon asked the suppliers for help designing new ones in the most cost-effective way. In many cases Avon had to adjust its own approach so that suppliers could manufacture its products more cost-effectively. For instance, the company agreed to change its order patterns to reduce the suppliers' manufacturing setup costs. With some suppliers, Avon has stopped placing orders entirely. Instead it gives them access to production information on a web-based system. Avon plans to extend the concept of collaboration throughout the supply chain organization. The company recently conducted a collaborative design workshop that included suppliers, a design firm, and representatives from marketing and the supply chain-40 people in a room working to design a product. Within three days the team had created a package that was not only stunning from a marketing and design perspective but that also minimized costs at each step of the supply chain. For instance, the right box and bottle designs can optimize the number of boxes in each pallet and the number of bottles in each box. If Avon could increase the number of bottle boxes on each truck by 20%, the company would save hundreds of thousands of dollars in transportation costs each year. Only the people who load the trucks every day know these things, but in the past those people's knowledge wasn't considered in the design process. Rather, product costs were locked in early on by someone making isolated decisions in the design studio.

Once its supply chain processes were redesigned, Avon turned its attention to its organization-and restructured it around four key processes: plan, source, make, and deliver. Now, instead of a large number of people from different functions and countries reporting to him, Kitchener has just four direct reports-the four process heads. "It is a far simpler model to manage," says Kitchener. The redesign completely changed the roles and responsibilities of the general managers across Europe. They once managed the inventory in their own markets, but now that product labeling is postponed until shipment, it no longer makes sense for them to own inventory. Instead, Avon holds it further back in the supply chain to better allocate it where demand is greatest. In the new organization the general managers are responsible primarily for sales. Avon did a lot of work to define primary and shared responsibilities and the supporting metrics. Many of the old metrics were backward-looking. Inventory days, for instance, are a good end-of-month measure, but they don't help in day-to-day operations. Avon developed metrics that are more operationally focused. For example, the company broke down the key drivers of inventory levels. One was supplier lead time, which Avon has taken steps to shorten by giving certain suppliers access to production schedules and making them responsible for delivering materials on time. By clearly communicating the redesigned structure and defining new performance metrics, Avon began to move the new supply chain organization forward. Education and training were another critical piece of Avon's transformation. The company quickly saw that employees' skills had to be upgraded. It analyzed the critical jobs in the new supply chain and the competencies needed to do those jobs. To fill gaps, it partnered with Britain's Cranfield University, one of Europe's leading supply chain business schools, to develop a customized curriculum. Avon put 75 of its key supply chain associates through the program and offered a shorter version to senior executives who weren't involved in the redesign. To introduce new thinking, the program brought in experienced supply chain managers from leading companies in a range of industries. Avon plans to repeat the program every year with new groups of people to ensure that everyone in the organization understands what a world-class supply chain looks like. The leaders of Avon's transformation believe that communication is perhaps the single most critical success factor-and the one they most underestimated. Everyone in the organization has to understand the change and his or her role in the new world. Even with the best-laid plans, though, changing a culture and long-held behaviors doesn't happen overnight. "You always read in books about how tough change management is, but the reality is that it's even harder," says Watson. And what of Avon's supply chain information technology? The company was determined that its supply chain transformation be process-driven, not systems-driven. Instead of overhauling its computer systems, the company wanted to get its processes right first. The leadership team felt that doing both at once would be unmanageable. Aside from creating

the central data repository and the web-based system for suppliers, systems upgrades were put on hold-even though Avon's country-based entrepreneurial model had resulted in a jumble of systems. This lack of integration is starting to cause problems. Given the growing complexity of the business and the need for greater speed and responsiveness, not having an integrated IT system in place is frustrating. Avon has begun designing a global platform to replace the existing system and support the new processes. In the meantime, the company is savoring the results of its transformation. By rethinking the supply chain, increasing efficiency, and taking out costs, Avon will save about $50 million annually-or two gross margin points. Almost half those benefits are a direct result of the company's new approach to working with suppliers: the smaller supplier base, local sourcing strategy, supplier partnerships, and collaboration. Just as important, Avon Europe is far easier to manage now that it has a streamlined organization, upgraded skills, simplified processes, and the right metrics. "This has been the most challenging, the most rewarding, and the most fun thing that I've ever done," says Kitchener, a 30-year veteran of the company. "The journey isn't over, though. It's never over."