Insights -- November 2005
Many trade promotion management (TPM) articles have bemoaned the fact that billions of TPM dollars are spent annually with few Consumer Products companies perceiving adequate return on investment. Most of these articles issue a similar call to action to Consumer Products manufacturers: Spend the money more effectively. In trying to assess how to accomplish this, Consumer Products manufacturers face three challenges:
TARGET - What does "effectiveness" really mean and what action steps should companies take in order to achieve it?
DATA - CPG companies can gain advanced analytical capabilities by using the abundance of data that is available: e.g., point-of-sale (POS), syndicated data, demographic data and other sources. This data is used to "analyze" and predict volume lift for a given spend; determine the right price point; figure out what stores to target and so forth. Most companies, however, are not able to capture information on what was planned and offered to a customer, nor do they capture the actual result of what was paid or shipped. Without this fundamental internal information, assessing "lift" via marketing coefficients or other conducting advanced analysis is impossible.
HOW TO GET STARTED - How does an organization figure out what steps are involved with this type of initiative, how long it will take and what is needed to support making effective spending decisions? Mid-level managers within many CPG companies procrastinate because they are unable to establish this as a priority with upper management. Most feel like they will never be able to fix the problem and thus resign themselves to the continuation of poor spending practices. Given this dilemma, in order to get started, there needs to be a focus on something everyone can come to terms with -- compliance.
A Big Problem
Trade promotion is the second largest line on the P&L (assuming that sales and cost of product sold are larger), ranging ranges between 15 percent to 25 percent of gross sales. These figures only take into account the dollars transacted through promotions or deals that have been captured between the manufacturer and other parties (retailers, distributors, wholesalers, operators and end users). This does not factor in other significant costs. For example, there are substantial costs incurred within the supply chain organizations of many CPG companies due to a lack of visibility to customer product demand and timing of that demand. These costs manifest themselves in either excess inventory produced in anticipation of demands or excess costs (changeovers, expediting, etc.) incurred to produce unplanned demand. Other opportunity costs of ineffective trade promotion management include: 4Cost of processing and resolving deductions over 60 to 90 days or more.
Lost opportunity to coordinate efforts with marketing campaigns.
Lack of available product to support a big promotion.
Lack of coordinated new product introductions, and ability to analyze if the promotion actually occurred before paying the funds.
Into the Unknown
Most companies are still trying to get a handle on how much money they are actually spending in total on trade promotions, as well as the breakdown of tactics were used (ads, growth programs, end of aisle, EDLP, etc.) to get their product to market. Without this granular, event-level information, they certainly do not have visibility to these measures at a customer level (the cost of doing business and margins achieved). Occasionally, dedicated account teams develop an ad-hoc method to track some of these components. However, since most companies are operating in a world where their sales people use ad hoc spreadsheets, homegrown solutions that are not integrated, paper and pencil or their "gut" to develop trade promotions, they are lacking the fundamental foundational data to make informed decisions, let alone migrate to advanced capabilities.
Wrong Lens
On top of these challenges, most companies view trade very narrowly as the money being spent by the sales people. They do not look at trade promotion and effectiveness from a "global" or "horizontal" view. Their view should encompass their total organization across the value chain (sales, marketing, supply chain, finance, customer service, procurement and human resources), as well as the external view of each channel they supply and the customers within those channels. This all becomes overwhelming and is perceived to be so big and complicated that most CPG companies are not sure where to start. Therefore, they don't.
Feeling Paralyzed
Unfortunately, year after year many manufacturers spend trade money the same way because they do not have the tools to gain insight to support making a different decision, or they acquiesce to requests from the retailer/distributor and just hand over the money. Over the last several years, there has been a common dialogue with a number of CPG companies as they offer many reasons to stall or refusing to take action -- "you do not understand our business, we have to pay this money in order to maintain our position in the channel," or "we cannot disrupt the sales organization for fear of losing customers and revenue." Continuing to stall or refusing to take action is no longer an option.
Use Compliance to Fix TPM
Today is an ideal time for companies to start a TPM initiative. Many companies (public and private) have completed or are in the process of conducting a Sarbanes-Oxley compliance initiative, and as part of that have mapped their processes around trade promotion management. The organizations should leverage the SOX review and associated documentation to serve as a starting point to assess existing processes and identify opportunities for improvement. Executive leadership has already come to terms with the need to complete compliance work and have been looking for an opportunity to leverage the output of the Sarbanes effort as a basis for defining business improvements. A TPM initiative provides that opportunity.
How to Get Started
For the majority of CPG companies, the first step is to gain an understanding of the current business situation and define areas for improvement. Compliance documentation can be used to review the current processes and identify those needing improvements. Leveraging knowledge of the process changes to support compliance, companies should launch an overall sales transformation initiative that incorporates:
An assessment and potential redesign of current business processes ("how people perform their key activities each day and what needs to change").
A review of the organization ("how to structure the organization so it is aligned to support the objectives defined for the organization"), what technology enablers will support this process and resource transformation, and an understanding of the level of change management effort that will be required across the organization.
It is imperative to consider that each company differs in the pace they can actually absorb and "operationalize" these changes given the scope of other initiatives, the level of capability maturity in the current business processes and the magnitude of the change to be deployed across the organization.
In order to drive sustaining improvement in TPM, there needs to be a careful review of a series of the following elements:
Current and future business strategies (corporate, by channel, product line and customer)
Integrated and robust processes (encompassing all aspects of planning, execution and paying the customer, along with cross- functional coordination), proper set of performance measures (process-based and by customer/product; sales, finance, customer service, etc.)
Appropriate data (captured and summarized in the proper manner
-- defined and aligned customer and product hierarchies, etc.) and system(s) -- to understand where you are today, future opportunities, and begin to define your organization's view of "effective."
A Horizontal Process
This assessment must be focused on the horizontal process of TPM across each area of the value chain -- sales role, finance's role, supply chain's role, the customer's role, etc. Trade promotion is NOT a narrow sub-process that belongs solely to the sales organization. Many companies look at trade promotion initiatives as avenues to reduce expenditures, when in fact it is aligning spending to the organization's objectives and optimizing the "return value" based on those objectives. Am I spending the right amount of money with the right customers? What is needed to promote this category based on the overall objectives/strategies defined? These decisions cannot be optimized until you have visibility as to what is occurring today, comparing that insight to the direction you have outlined, and either taking corrective action or staying the course.
Beware of the "nirvana" promised by implementing a new TPM system. Technology, in and of itself, is not going to solve the problem -- rather, it is an enabler. Much up-front work must be done before automating/ enhancing the process. The last thing you want to do is spend money, time and effort to build and implement a technology solution that merely "paves the existing goat path"!
Identifying And Optimizing
As an organization, understanding your current business processes and controls and how these deviate from your overall objectives, identifying key changes to optimize the value chain and aligning to your objectives are the first steps toward outlining what you need to change. As part of this process, you need to define the current level of capability (people, process, technology) your organization has in order to achieve your "ability to" execute and develop a roadmap to reach the necessary level over time.
This roadmap will encompass understanding of the financial and operational value of each key area of change and the dependencies each change has with others in terms of priority and sequence. These dependencies come in the form of fundamental changes to the business activities, the structure of the organization to support the strategic objectives and business activities and identification of key areas in which technology enablers are required to achieve those results. Creating a strong business case measuring the financial value of these elements of the roadmap, outlining the time horizon to achieve those results, and incorporating the cost of completing those changes will assist in keeping an organization on track to proceed as outlined and focused on the true areas of return. This focus helps fight the desire to "reach the moon" before you can crawl.
Rewards of the Process
As CPG organizations proceed on this path and measure the results versus what they had anticipated, they will achieve value in the form of: (1) improved management controls, (2) increased visibility and granularity of trade spending information and (3) increased ability to be proactive and make "fact-based" decisions. Having such a foundation on which to build and a process-oriented organization enable you to define and focus on what "effectiveness" means for your customer and product objectives. At this point, after building a solid foundation, you are in a position to analyze advanced data and take action on the insights drawn as they relate to your organization.