Luxottica Group, S.p.A. (LUX)

VERTICAL INTEGRATION

One of the competitive advantages underpinning the Group’s past and future successes is the vertically integrated structure that Luxottica has built over the decades.

The Group’s present structure, covering the entire chain of value, is the result of a far-sighted choice made by the Company’s founder and current chairman, who had understood the potential of the “vertical” strategy ever since deciding to make entire frames rather than just components. Vertical integration of manufacturing was gradually accompanied by expansion of distribution, first wholesale and, from 1995, retail also, and without forgetting its key presence in the high value-added business of lens finishing. In terms of manufacturing, the Company has, over decades, vertically integrated all the phases of the production process to attain a level of efficiency in line with the quality of products and services it intends to offer. Direct control of the entire production platform makes it possible to verify the quality of products and processes, introduce innovations, discover synergies and new operating methods, and optimize times and costs at the same time. The Group also has a centralized warehouse management and orders system that processes data from the wholesale and retail structures to make demand projections and plan production in advance, thereby reducing raw materials inventories and purchasing.

Direct control of distribution thus enables Luxottica to stay in touch with end users and understand their tastes and tendencies, but it is also perceived as a strength by the stylists and fashion houses who come to Luxottica to produce their eyewear collections and who are guaranteed genuinely global and capillary distribution.

Further key synergies between production and retail distribution stem from assortment choices in stores, which tend where possible to privilege Luxottica products and increase their degree of penetration far more than is normally seen in business between manufacturers and independent retailers.

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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.