MANUFACTURING
The Group’s strong growth in 2006 was supported by robust increase Italian and China’s production. Having its origins in what has become the global center of eyewear manufacturing, northeast Italy, Luxottica Group has produced prescription frames and sunglasses for over 40 years, controlling every phase of the production process, from raw material procurement to manufacturing of the finished frame. Its manufacturing process is the product of decades of careful honing, along a path of constant research and development. In 2006, this involved rationalization, reorganization and specialization of facilities in order to continue to achieve maximum efficiency and quality across the entire manufacturing base.
In 2006, investments in manufacturing, from materials and machinery, to design and programming, totaled Euro 70 million, reflecting the Group’s policy of building on achievements, rather than merely showcasing them. Luxottica is committed to keeping its manufacturing platform the most efficient, flexible and creative in an industry for which it already sets the benchmarks.
MANUFACTURING PLANTS AND PRODUCTION
Production is concentrated mainly in six plants in Italy, mostly in the northeast. Of these, the Sedico plant, near Belluno, was expanded in 2006 and now covers approximately 30,000 square meters. Given the growth in the business, the Group also decided to expand the Lauriano plant, which specializes in glass and plastic sun lenses, by 11,000 square meters. The Group also has two wholly-owned plants in China. One plant with 26,000 square meters started operations in 2006. The Chinese plants handle the more labor-intensive lines of production, while the Italian facilities concentrate on «Made in Italy» production, which has very high value-added qualities. Consumer demand for such products is strong, driving the Group’s development of premium and luxury products, both directly through its stores and indirectly through its wholesale customers. In 2006, with this increased level of market demand, the Italian plants stepped up the production of luxury brands and premium products in general.
On the materials front, 2006 saw an increase in the production of metal parts to meet demand for metal detailing, even in plastic frames, while production with other materials, including injected plastic and acetate, remained stable.
VERTICAL INTEGRATION
Over the decades, Luxottica Group has vertically integrated every phase of the production process in order to achieve the efficiency goals of each type of product and service it offers. Control of the various phases of production makes it possible to monitor the quality of products and processes, introduce new operating methods and exploit synergies. It also enables production time and costs to be kept under control and optimized. In addition to having efficient plants, the Group utilizes a centralized system for monitoring inventory and orders. Daily analysis of this information, especially from its retail business, provides data to support projections of demand, making it possible to plan production and other necessary tasks in advance. The coordination of supply and demand reduces potential problems in inventory and raw materials sourcing. This is a major competitive advantage.
Coordinating the production of the manufacturing plants with precise monitoring of the market makes Luxottica Group efficient and puts it in the best possible position. The Group is able to effectively meet its wholesale customers’ demands and adapt to changing trends in the market and fashion in terms of both type and quantity of products.
Over the years, Luxottica has brought both retail and wholesale distribution into its vertically integrated system. This enabled it to become a global leader in eyewear and one of the leading manufacturers of premium prescription frames and sunglasses with the most efficient cost control and highest profitability.In 2006, Luxottica Group continued its commitment to improving the efficiency of its manufacturing platform. It carried forward the process of optimizing production lines along with rationalizing and specializing plants. Injection molding was concentrated at the Pederobba plant, production of metal frames at the Agordo and Rovereto plants, lenses at the Lauriano plant and acetate at the Sedico plant, except for frames in acetate for Persol, which are produced at Lauriano. At the same time, in recognition of the upgraded production process, each plant’s internal organization structure put in place new operating roles, such as controllers, industrial area managers, human resources managers and quality control managers.
2006 also saw the completion of weekly production programming projects at Sedico and Pederobba. A similar project is scheduled for the Agordo plant in 2007. When fully implemented, these projects will significantly reduce production program times. This will result in reduced program lead time and program time and fewer project errors with less stock obsolescence. The Matrix project is a new initiative that will enhance systematic measurement of standard production times. It will be implemented by the end of 2007 and should result in more efficient production time monitoring and analysis and space requirements. It will also help calculate standard costs with greater reliability. Luxottica’s program of strategic integration will further improve the planning of new collection launches. For example, over time the product department will increase its control over the engineering department’s capacity to make new models for a given season. This will enable greater coordination and effectiveness in the study, selection and launching of new collections, using either internal production or external sourcing.
As a response to its need to improve efficiency as production times continue to shorten, Luxottica Group upgraded the buyer structure both in Italy and at the Group’s wholly-owned Chinese production company, Luxottica Tristar Optical.
In 2006, the Group started acquiring certain suppliers of components (e.g., Bottega S.r.l., a temple production specialist).
Over the year, procurement’s success in generally reducing the costs of lenses, cases and packaging offset rising metal prices, including both noble and base metals.
In order to stabilize finished and semi-finished product prices, the Group conducted an analysis of suppliers. Some were eliminated, and partnerships were formed with others that in turn became more closely involved in the model design and development stages.
A project was launched to integrate the Italian and Chinese procurement structures so that the Group’s Italian and Chinese buyers will collaborate more closely in order to improve their results. Integration also continued in the IT area to further improve the exchange of data between the two countries. This is particularly vital in the engineering and product development areas.
Knapp, a logistics project, was started to introduce a new automated warehouse and shipment system. By the end of 2006, 40% of the inventory was tracked using the new system. The project will be fully implemented in 2007.
QUALITY: A KEY ASSET
Product quality has always been Luxottica’s main focus and has led to the integration of every phase of production. Quality is the critical factor in the premium and luxury segments for both wholesale customers and end consumers. Quality and process control teams regularly inspect semi-finished products during various phases of production: verifying the feasibility of a prototype in the design phase, controlling standards across the spectrum of products during the production phase, and subsequently checking for resistance to wear and tear and reviewing optical properties in relation to type of use. The manufacturing processes and materials used by primary suppliers are also controlled and certified. Thanks to ongoing verification of precision and expertise in all phases of production, the quality of the Group’s end product is always of the highest level. The effectiveness of this quality system is reflected by both the relationship of trust that the Group enjoys with independent optical store operators, both large and small, and the low levels of returns.
In 2006, research and development projects in both manufacturing processes and materials continued and included collaboration with major Italian universities. In the field of materials, the focus was on the problem of degradability (“sfogliature”) of injection molded plastic and how to significantly reduce waste by optimizing molding parameters. Research to achieve higher uniformity in sun lens tinting followed two paths: collaboration with suppliers and the University of Venice in order to develop a special colorable lacquer and the use of advanced high-pressure injection molding.
ANTI-COUNTERFEITING POLICY
Luxottica Group believes that the most effective strategy to counter the widespread phenomenon of counterfeit goods is to attack it at the source. Therefore, Luxottica will concentrate its efforts on identifying the main flows of fraudulent goods and to organize brand protection strategies accordingly.
It has been established that most counterfeit eyewear products come from China. Luxottica Group is therefore concentrating its efforts on constant monitoring of production sites and customs offices in collaboration with investigation agencies and market watchdogs, such as the Administration for Industry and Commerce (AIC), the Chinese agency responsible for business registration. This has led to the seizure of vast quantities of counterfeit eyewear in production facilities and the identification of the major perpetrators that export them to the West. Strict controls are also in place in the main shopping centers in Beijing, where most of the demand from European and American counterfeit dealers is handled.
On a parallel front, Luxottica is implementing a system of customs and market surveillance in strategic areas, using customs control services already established by law (e.g., EC 1838/2003, Customs authority intervention against goods suspected of intellectual property rights infringement). The Group also lobbies government entities for their support.
In cases where Luxottica believes customs control to be inadequate against particularly large flows of counterfeit goods, it has initiated investigation programs to identify the main suppliers and distributors.
In 2006, brand protection activities as a whole led to the seizure and destruction of over a million pairs of counterfeit eyewear compared with 430,000 in 2005. Of that total, 350,000 came from operations involving Chinese producers, and 500,000 from a single, highly successful operation in July 2006, when Greek customs authorities detected large shipments of counterfeit goods from the port of Piraeus and the Athens airport.
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