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 Marketing Production Distribution Customer service Creating new formulas Determined by segment Receiving Raw materials and packaging Core Process B2B & B2C 30,1% of Sales Each plant produces for its geographical area

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 2005 14,532.5 -4,347.3 10,185.2 -4,367.2 -3,009.3 -496.2 2,266.0 9.3 In Million € Net Sales Cost of sales Gross Profit Distribution Costs Admin. Expenses R & D Operating profit Other Inc/Expens. 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) ActivityActivity costsActivity cost driverQuantity of activity cost driverAcitivity cost driver rate Production activities Machining: activity centre X700000000Number of machine hours5000000001,4 Machining: activity centre Y800000000Number of machine hours6000000001,333333333 Mixing fluids X4000000Number of machine hours20000002 Mixing fluids Y5500000Number of mixing hours25000002,2 Materials procurement activities Purchasing raw material100000000Number of purchase orders1000000100 Receiving raw material60000000Number of materal receipts500000120 Disburse materials20000000Number of production runs30000066,66666667 R&D activities Analysing Fluids20000000Number of research hours25000080 Experimenting Fluids15000000Number of experimenting hours30000050 Testing Fluids (before production)6000000Number of test hours15000040 Marketing activities Advertisement25000000Number of advertisements50000500 Commercials130000000Number of commercial minutes1000013000 Promotion (shows, etc.)10000000Number of promotional hours100001000 General factory support activities Production scheduling200000000Number of production runs400000500 Set-up machines70000000Number of set-up hours200000035 Quality inspection60000000Number of first item inspections300000200

8. 5- Cost-Volume-Profit model Administration Costs Marketing & Promotion Costs R & D Costs Estimated Fixed Costs Operating profit = 2482,6 Mil € Variable and total costs Revenues 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! Total revenues = 15355,1 Mil € Total costs = 12872,5 Mil €

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. 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. ANY QUESTION ?