Vantage Point: Understanding the State of TPO
Much of the technology buzz in the Consumer Products (CP) industry today revolves around the notion of Trade Promotion Optimization (TPO). Trade magazines, the press, business consultants and analyst firms continue to extol the potential virtues of optimization and predictive analytics tools, yet few take the time to clearly define what this means or more importantly what it requires to achieve success. On the surface the promise of TPO, which is defined as the ability to predict which promotions will work and each will affect business results, can sound extremely compelling. However, the true usage of TPO, even among large enterprises, remains extremely limited. In fact, nearly 60 percent of CP companies are still relying primarily on spreadsheets or other desktop tools to collect and harmonize data to calculate promotion effectiveness. If most aren't even using enterprise software for post-analysis, few are in a position to perform good pre-campaign predictive analysis and "what-if" scenarios. Further, market indicators have shown that the vast majority of manufacturers still have a long way to go to get there.
Trade Promotion Optimization Defined
Despite the constant buzz about TPO, there remains a general lack of consistency in the definition of the term. According to leading independent research firms, optimization typically involves some combination of predictive simulation and math-heavy what-if analysis. In essence, optimization takes the human guesswork out of the equation by using advanced algorithms to crunch large volumes of data to provide likely outcomes. The process is actually not that different from the weather models meteorologists use to predict hurricanes.
A look at the various business consulting firms will show a slightly more process-oriented approach to the problem. Rather than concentrating on the technology and math, the consulting firms generally describe TPO as an overarching set of processes that tie demand and supply together to ensure the right products are promoted and available on the shelves. This brings up the obvious point that optimization isn't purely an exercise in implementing advanced statistical models but also an enterprise-wide agreement on processes on metrics.
Lastly, a number of independent software vendors have emerged to help address optimization, and most focus on the data consolidation and aggregation as the crux of the issue. After all, much of the demand data required to feed the hungry statistical models comes from the deep recesses of ERP applications, various data warehouses, and syndicated data stores.
If we were to try to consolidate all these various definitions, TPO is best defined as a framework that applies advanced predictive models to multiple downstream data sources to shift the promotion planning process from an art to a science such that supply and demand can more effectively be met.
TPO Takes Time (Not To Mention Planning)
Assuming we agree on this consensus definition, it becomes clear that a number of key prerequisites must be met before a CP company can really move to true TPO. So, before even thinking about trying to achieve TPO one must make sure their organization has already established basic components which include:
1. A solid Demand Signal Repository (DSR) where various downstream data sources can be collected, rationalized, and normalized. The downstream data sources most commonly cited by companies performing TPO include:
- POS data
- Syndicated data
- Loyalty data
- Customer order/shipment data sourced from their Enterprise Resource Planning (ERP) system
- Cost data from ERP
- Data from Trade Promotion Management (TPM) and Customer Relationship Management (CRM) systems
- Warehouse withdrawal data
2. An advanced analytics or Business Intelligence (BI) framework
3. An established centralized TPM execution platform
4. A centralized ERP system, or an enterprise service bus integrating multiple ERP instances together
5. Enterprise-wide agreement on process and metrics
Given the sheer number, not to mention cost of the five criteria that must be in place to get to TPO, it's not surprising that few companies are there today.
Survey Says: TPO Is Harder Than One Thinks
Because TPO has received so much attention in the past few years, a number of different market surveys and research studies have been conducted on the topic. Most of the data can be readily accessed on the Internet, and most are in lock-step with their findings. Basically, promotion optimization and what-if analysis is only in place at between 10 percent and 14 percent of CP firms today (depending on which survey you look at). A bit surprisingly, most of the available studies also focus heavily on the Global 2000 CP firms, which would indicate optimization is in play much less in smaller organizations where syndicated data, POS data, or even a data warehouse may be financially out of reach. As a result, they face some significant challenges when managing spend and even more obstacles to that elusive goal of TPO.
A Closer Look at the TPO Truth
Despite all the buzz, the reality is that TPO is held as the technology that will finally take trade promotions to the Promised Land, but too many companies have failed to achieve the expected benefits from their more traditional TPM projects. What the "academics" extolling the virtues of TPO don't take into account is the sheer number of barriers for most large CP companies, let alone the smaller ones who lack resources and have less advanced technical capabilities. The truth is that for many firms the business initiative to move to TPO would involve years of effort, and could reach the tens of millions of dollars in total project cost. TPO represents a far bigger challenge than just changing the way a company views trade spending and measures success. It involves investing in many prerequisites that many champions haven't fully thought through, or aren't prepared to tackle.
CP firms need to have a solid long-term strategy to move toward TPO, and to do so with eyes wide open. A solid foundation of ERP plus Trade Promotion Management for budgeting, planning, executing, and settling trade promotions must be in place along with a solid set of historic data and downstream data sources. Otherwise you are just putting the horse before the cart.
The fact remains that most organizations don't have a clear understanding of the costs and effort behind the movement to TPO. The volume of press and discussions around the topic demand that a software or technology provider can answer questions about optimization and in fact should be an ongoing "check box" item in any request for proposal (RFP). Even for many Tier-1 CP firms, TPO is still years away as the prerequisites to being able to perform predictive analysis on various scenarios are daunting. Elements such as a good demand signal repository a strong analytics framework, a well adopted TPM system, an even the right metrics for success all have to be in place before optimization can even be attempted. As a result both large and small CP companies want to feel that the software investment that may be making today will serve as a foundation, rather than a limitation toward TPO down the road.
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About the Author
Lorne Schwartz is chief executive officer of MEI Computer Technology Group, Inc. -- a developer of trade promotion management and retail execution solutions for the Consumer Packaged Goods industry. For more information email him at [email protected] or visit http://www.meicpg.com.