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L’OREAL

L’OREAL. Aurélien FATTORE - Pieter HOFSTRA Kenza OUAZZANI - Carsten SIEBERT 1- Value Chain and Organization 2- General data 3- Cost estimation and allocation 4- Activity-Based Costing 5- Cost-Volume-Profit Model 6- Investment analysis. 1- Value chain and organization. R & D.

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L’OREAL

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  1. L’OREAL Aurélien FATTORE - Pieter HOFSTRA Kenza OUAZZANI - Carsten SIEBERT 1- Value Chain and Organization 2- General data 3- Cost estimation and allocation 4- Activity-Based Costing 5- Cost-Volume-Profit Model 6- Investment analysis

  2. 1- Value chain and organization R & D Design Supply Production Marketing Distribution Customer service Determined by segment Core Process Each plant produces for its geographical area Receiving Raw materials and packaging B2B & B2C 30,1% of Sales Creating new formulas

  3. 2- General data: from the Income Statement… Consolidated Income Statement 2006 15,790.1 -4,569.1 11,221.0 -4,783.0 -3,309.4 -532.5 2,540.9 -60.8 In Million € Net Sales Cost of sales Gross Profit Distribution Costs Admin. Expenses R & D Operating profit Other Inc/Expens. 2005 14,532.5 -4,347.3 10,185.2 -4,367.2 -3,009.3 -496.2 2,266.0 9.3 Product Cost Period Cost

  4. …to some examples of costs Direct Costs : Direct Labor: machine and quality control workers Direct Material: raw materials, packages Manufacturing Overhead Costs: Indirect Labor: plastic purchase manager (packaging) Indirect Material: power supply for whole plant Cost Hierarchy: Unit Level: cream Batch Level: packaging for delivery Product Level: composition of the cream Customer Level: key account managers Facility Level: building, accounting activities

  5. 3- Cost estimation and allocation • Appropriated Product-Costing Systems: Process costing: relevant for making the mixture; we consider equivalent units of mixture to evaluate the costs. Job costing: appropriated for packaging • Appropriated cost allocation: ABC: within jobs and processes, in order to get inside view of costs

  6. 4- Activity Based Costing Steps to take for Activity Based Costing 1) Identifying the major activities that take place in an organization; 2) Assigning costs to cost pools/ cost centers for each activity; 3) Determining the cost driver for each major activity. 4) Assigning the cost of activities to products according to the product’s demand for activities We used this approach for L’Oréal for a plant with two main products. All costs in the next slide are estimated.

  7. 4- Activity Based Costing (2)

  8. 5- Cost-Volume-Profit model Total revenues = 15355,1 Mil € Operating profit = 2482,6 Mil € Total costs = 12872,5 Mil € Variable and total costs Revenues Administration Costs Estimated Fixed Costs Marketing & Promotion Costs R & D Costs Due to very high fixed costs in the R&D, advertising and administration division the volume must be high in order to make a profit. Increasing the volume was one major reason for the increase of the operating profit by 9,6% in 2006!

  9. 6- Investment analysis & Capital budgeting decision • In 2006, L’Oréal announced it would buy « The Body Shop » company for two main strategic reasons: - strengthening the distribution network - obtaining a more ‘ethical’ image. Some days before L’Oréal made this announcement, The Body Shop published its annual results:

  10. ANY QUESTION ? 6- Investment analysis & Capital budgeting The investment is profitable. Moreover, L’Oréal wants to strengthen ‘The Body Shop’ results. What does L’Oréal expect, in addition to strategic plans ? Most competitors of ‘The Body Shop Company’ have margins twice more important. L’Oréal expects to improve the margin of ‘The Body Shop’, thanks to synergies in production (gains in the value chain), marketing and overheads.

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