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Transcript of Getting control and delivering value - IBM control and delivering value IBM Business Consulting...
Trade Funds InvestmentsPage 2
Executive Summary
The cost of trade funds investment has tripled in the last 20 years.
Consumer goods companies are typically spending 15-25% of sales
revenue in this area. While costs in every other part of the business have
been scrutinised for potential savings, many companies acknowledge
that their trade funds are poorly understood and subject to little
planning, monitoring or control. Why haven’t companies tackled such a
big issue? Firstly, it is so complex and hidden that it is hard to know
where to start. Secondly, even if they can gain a clearer view of the
extent of the problem, they are often reluctant to do anything that might
disturb relationships with their most important customers and their
own sales staff. Finally, there is a perception that technology is simply
not advanced enough to underpin a fundamentally new approach to
trade funds investment. But there is a solution. IBM Business
Consulting Services has developed an approach that enables you to view
all of the trade fund elements in one place. We then help you with a
transition plan which emphasises the cultural and organisational
changes required as well as the systems to make it happen. We have also
been working closely with the leading systems vendors to improve the
technology. In the context of ever-increasing retailer power, the
challenge for manufacturers is to use the techniques and tools now
available to regain control so that both the efficiency and the
effectiveness of spend can be improved to maximise return to the
business. Once they have done this, they have to ensure that trade funds
investment continues to be evaluated alongside other forms of
investment for its potential to grow brand equity, and add value to the
business and to their customers.
2 Executive Summary
3 The problem
5 The benefit of tackling this problem
6 What do you have to do?
10 Achieving the vision
12 Where do you start?
12 For more information
Contents
Trade Funds InvestmentsPage 3
The problem
Spending on trade funds is now the second largest area of spend for
consumer goods manufacturers after cost of goods, having tripled in the
last 20 years. It is estimated that, typically, 15-25%1 of sales revenue is
now spent on trade funds (See diagram 1). Trade funds’ relentless
growth over this period is in part a consequence of the changing
balance of power in favour of increasingly large and international retail
customers, but also frequently reflects a lack of visibility and control.
Most companies are painfully aware of this. So why haven’t trade
funds costs been tackled before? There are several reasons. One is that
many companies are worried that any actions on their part could harm
the relationships with their most important customers, who might
resent losing what they perceive as ‘free’ money, as well as with their
own sales staff.
Even more daunting is the sheer complexity of the pattern of spending,
which makes it difficult to obtain a meaningful overview. Usually
represented by only a couple of lines in the P&L, as many as 50 different
types of spend and frequently hundreds of individual events or activities
will be hidden behind those figures.2
The detail of the spend within each customer is a complex mix of
discounting to net price, funding for consumer price reduction and a
huge variety of payments — such as display, listings and joint
advertising, making it difficult to compare across customers, brands
and territories.
As a result, the spending pattern is not only poorly understood but
subject to inadequate controls, weak processes and inappropriate
measures. As customers become increasingly international, they are
also starting to implement Enterprise Resource Planning (ERP)
systems that give them visibility of the significant differences in the
pattern of trade funds investment between countries for a single
manufacturer. This leaves manufacturers at risk to those retailers who
see the opportunity to “cherry-pick” the most favourable terms from
each country.
1 Industry data/IBM Business Consulting Services analysis/(UK CPG Companies).2 At any one time, it is possible for several hundred promotions to be running across all
brands and customers – IBM Business Consulting Services project findings.
Trade Funds InvestmentsPage 4
Diagram 1 – Trade spend as a percentage of revenue over time
Trade funds — facts and figures
• Trade funds investment accounts for 15-25% of sales revenues
• It has tripled over the last 20 years and is now the second largest area of spending after the cost of goods
• Almost two-thirds of sales and marketing spend is now typically channelled via retail customers.
But:
• Manufacturers estimate that only half of promotions are profitable — which is usually an over-estimate
• Only 6% of manufacturers believe themselves to be highly effective in assessing promotional effectiveness.
There is another pressing issue. Given the size of the spend involved,
both audit requirements and interest from investors will increasingly
demand proof that trade funds are under appropriate control, and that
management decision making is fully informed. For example, one CPG
manufacturer discovered a $20m overspend on trade funds, after the
books had been closed for the year-end.
The benefit of tackling this problem
The good news is that there is now a way through. Manufacturers have
an opportunity to reduce business risk, cut unnecessary costs and drive
a better return on trade investment by addressing the processes,
controls and measures for trade funds investment.
Trade Funds InvestmentsPage 5
Through implementation of increasingly rich systems functionality,
companies can gain realtime visibility of trade funds plans alongside
actual spend, promotional pricing that interfaces automatically with
finance systems, promotional funding payments that are approved on
line, and simplified deduction resolution. Our clients generally plan for
payback within 18 months for investments in this technology.
While these efficiencies will bring business benefit in themselves, the
real prize for manufacturers is the ability to distinguish between
activities which will drive profitable growth and those which will, at
best, be a vehicle for “purchasing” volume and share. That is why
leading manufacturers are looking to the systems vendors to provide
them not only with the integration of multiple internal systems —
finance, sales and promotion planning, supply chain etc — but of third
party data such as Nielsen, EPOS and even loyalty card data.
With integrated data in place, advanced analytics products are already
available to help manufacturers get a much deeper understanding of
what is happening to brand performance as the result of promotional
activity. As a result they will be able to make higher quality investment
decisions and the quality of their thinking and recommendations will
enhance their standing and influence with retail customers.
Some of the business benefits
• Transparency of trade funds investment enables manufacturers to redress the loss of power to customers — critical when over 60% of brand investment is estimated to be spent with retailers
• Cut the total budget by up to 10% by decreasing spend in low priority business
• Remove back office inefficiency: up to 40% of back office staff time is with non-value adding activities
• Achieve up to 150% payback from more efficient execution of promotions
• Realise around 2% payment saving through the ability to confirm or reject a retailer’s request for payment through the automation of the compliance and reconciliation process.
Trade Funds InvestmentsPage 6
What do you have to do?
You have to do five things:
1 Get visibility of the funds
2 Align trade funds expenditure with strategyAlign trade funds expenditure with strategy
33 Cut out cross-functional process inefficienciesCut out cross-functional process inefficiencies
4 Execute promotions effectivelyExecute promotions effectively
5 Improve promotion effectiveness by learning from past activityImprove promotion effectiveness by learning from past activity
1. Get visibility of the funds
The difficulty of understanding the total picture has long provided an
excuse for putting trade funds spend on the “too difficult and risky to
tackle” pile. Without this transparency, however, it is almost impossible
to make robust decisions about the allocation and prioritisation of
investment between customers, brands and promotion types.
The first problem for many companies is that they are currently unable
to discriminate between “pricing” (those trading terms which represent
the fixed basis on which supply is agreed3) and “trade funds” (those
funds which are invested conditionally in your customers business in
return for agreed activities or performance by your customer).
Spend has typically built up over time at an individual customer, brand
and country level as a response to particular trading pressures and
therefore under no common framework (See diagram 2). This situation
leaves manufacturers with no defensible rationale for their trade funds
structure, vulnerable to pressure from international retailers and
potentially exposed under European law.
3 In the USA funding from gross to net price, before the application of conditional discounts, is estimated at 17% of all trade funds – Cannondale Associates, Published 2000.
Trade Funds InvestmentsPage 7
So the first step is to order trade funds data into a common framework.
The second challenge is to integrate this data with other company
systems that will allow you to allocate these funds to actual physical
stock, which gets sold, delivered and paid for. It is this integration that
allows the real-time tracking and management of funds.
Some companies who have developed a pricing and trade funds
framework have decided to make the transparency of their pricing and
trade terms explicit to customers. For example, one leading CPG
supplier operates a transparent pricing structure which incentivises
efficient buying behaviour from their customers.
2. Align trade funds expenditure with strategy
Pricing and trade funds spending patterns have generally developed
based on “last year plus.” Retail buyers are personally remunerated not
only on category revenue and margin but also often on margin growth
above revenue growth. As a result, trade funds investment is frequently
more focused on supporting retailer margin than on investment in
activities that will drive mutual category growth.
This logic does not reflect the priority of the brand or customer, let alone
help to set specific and measurable objectives. What manufacturers
must do is establish a process to drive objectives from brand plans,
through channel plans to trade funds investment strategy and plans by
account. This will allow them to re-align trade funds investment
budgets to strategy — both customer and brand. Implementing the
re-alignment may take a number of years in order to minimise risk
to the business.
Figure 2 – Trade spend categories in European Countries
Trade Funds InvestmentsPage 8
Companies are rightly nervous of cutting conditional trade funds
investment on priority business, even when it is clear that the
investment cannot be justified in terms of payback. However, in our
experience it can be possible to cut as much as 10% of the total budget
by only cutting spend in low priority business. The real benefit, however,
is achieved over the longer term as manufacturers re-orientate budgets
to activity that can be shown to drive category profit for both
manufacturer and retailer.
3. Cut out cross-functional process inefficiencies
Historically, the management of trade funds has been regarded as a
sales function activity — albeit delivering within the scope and
objectives laid out by marketing plans. Individual customer promotion
event budgets are often captured in spreadsheets to which nobody has
access apart from the sales function.
Trade fund expenditures might be captured in a bespoke mainframe
application and deductions dealt with through the accounts receivable
system. It is usual for there to be little official process governing how
these different elements will work together and so it is not surprising
that they often don’t.
Trade funds deals create a complexity that accounts receivable
processes and systems typically fail to manage. This situation results in
high levels of manual intervention (we estimate over 40% of accounts
receivable work is “non value-adding”4receivable work is “non value-adding”4receivable work is “non value-adding” ), which drives up staffing levels.
Customer service and accounts receivable processes typically make up
more than 95% of all finance department headcount. Regardless,
typical credit note rates run as high as 15% of all invoices. The problem
also has an impact on retailers’ headcount in accounts payable — some
retailers employ specialist external agencies to maximise their claims in
this area.
Addressing this can deliver some dramatic results. In one case, an
incorrect invoice rate of 85% was turned round to an invoice accuracy of
90%.
4 Industry data/IBM Business Consulting Services.
Trade Funds InvestmentsPage 9
4. Execute promotions effectively
Promotional events are rarely executed completely to plan. Given that a
significant proportion of the spend behind activity is often fixed (e.g.
gondola support, display materials), it is critical that the opportunity to
drive volume from the activity is maximised.
Promotions inefficiencies can be caused at any stage of the process from
planning, through development, to execution. The underlying cause for
most inefficiency is the lack of agreed process and high quality, timely
information sharing between retailer and supplier and between
functions of the same organisation (e.g. retail head office and store,
brand marketing department and production).
Some of the most common problems include:
• A failure to co-ordinate different aspects of the promotion — e.g. shelf barker, price reduction and other media such as advertising
• Failure of the manufacturer’s supply chain to deliver to the required quantity and timing of the event
• Failure of the retailer to brief stores fully resulting in partial compliance to the deal.
Manufacturers should ensure that promotion-planning systems are
integrated with supply chain systems so that they forecast appropriately
for promotions.5 More than this, they must start to work collaboratively
with their customers to maximise the chances for perfect execution.
Where manufacturers and retailers are starting to work more
collaboratively they are not only seeing events more completely
executed but have reduced costs, reduced response time and increased
promotion payback by up to 150%.6 Given the move towards event
driven promotions, which require the co-ordination of multiple
suppliers, it is likely that some degree of joint working process
standardisation will follow across the industry.
5 Systems integration is a major challenge for the management of trade funds. Vendors who have invested in supply chain integration or who are extending out into trade funds management from an ERP background believe that this will offer a significant competitive advantage both in cost and functionality.
6 Experienced by a recently acquired business unit, now part of IBM Business Consulting Services.
Trade Funds InvestmentsPage 10
5. Improve promotion effectiveness by learning from past activity
Many manufacturers believe that the exact format of trade promotional
activity is out of their control, dictated by customer requirements and
“category expectations.” Just over half of all manufacturers claim to apply
a formal planning process, with a mere 6% believing themselves to be
highly effective in assessing promotional effectiveness.7 This is becoming
increasingly urgent to address, since over 60% of brand investment is now
estimated to be spent on activity with retail customers8 — a percentage that
has significantly increased over the last 10 years.
For some brands, this strategy may be the best way to maximise brand
growth and profit, but in other cases brand objectives may be better served
by other types of activity such as advertising or sampling programmes.
Without an understanding of which sales drivers are important, and how
previous activity has worked and in what way, it is very difficult to make a
case against promotions which you suspect may be sub-optimising
performance or diluting brand equity.
As it is common for several hundred trade promotional events to be
running at any one time, analysis needs to be highly pragmatic with
learning summarised into accessible guidelines for practical application.
7 Trade Promotions Spending Survey – Cannondale Associates, 2000.8 Trade Promotions Spending Survey – Cannondale Associates, 2000.
Achieving the vision
The end solution for effective deployment and control of trade funds
management will be one that empowers staff to plan with insight, measure
the results of actions and administrate effectively. It will change the
position of trade funds management from a sales responsibility to a
process that facilitates team working between sales, consumer and trade
marketing, finance, customer service and logistics functions around a set
of common data and measures that can be consolidated across different
customers, categories and geographies.
This team will then be able to make informed brand/customer investment
decisions. Ultimately, the winners will be those manufacturers who not
only control, but understand how to drive growth from trade funds
investment, and who work with their customers to agree the best mix of
investment to achieve joint category objectives.
Trade Funds InvestmentsPage 11
At the core of the solution will be systems support that will facilitate the
process, provide timely access to key information, drive judicious and
transparent authorisation and enable post-evaluation — tailored to
individual roles, for all functions and between companies.
The most appropriate solution will in part depend on current systems in
the business and the desire to align these and your process with those of
your customers. No vendor has dominance over this space but many
vendors have significant emerging functionality.
The early leaders in developing trade funds excellence have the
opportunity to influence systems vendors to meet their needs, and
realize the cost reduction and promotional effectiveness benefits that
will set them apart from the competition.
Our clients experience three main challenges in tackling the trade
funds management problem:
1. Integration of multiple IT systems, which although not easy, can be achieved in most circumstances and is the key enabler for truly cross-functional process streamlining and visibility of data.
2. Tackling the significant people and culture change that is required to transform this process into one that is truly cross functional, automated, informed with real-time data, and clear in its roles responsibilities and authorities.
3. Managing and cutting through the vital but cumbersome detail (data analysis, process design, IT functionality etc) to a vision of change which focuses on how business benefit can be maximised and then creating a programme of projects to deliver it.
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The IBM home page can be found at ibm.com
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Other company, product and service names may be trademarks, or service marks of others.
References in this publication to IBM products, programs or services do not imply that IBM intends to make these available in all countries in which IBM operates. Any reference to an IBM product, program or service is not intended to imply that only IBM’s product, program or service may be used. Any functionally equivalent product, program or service may be used instead.
This publication is for general guidance only.
© Copyright IBM Corporation 2002
G510-9287-00 (10/02)
Where do you start?
Setting about reforming trade funds investment is not simply a question
of installing an off-the-shelf system. It will be a difficult transformation,
having to take into account the different stakeholders involved, from
your customers who will have to be persuaded of the changes, to your
marketing and sales staff whose roles could be redefined. In helping
clients tackle these challenges, we have developed a ‘three steps to
heaven’ transition approach.
There is little time to waste
It’s obvious that consumer goods manufacturers can no longer ignore
the size of trade spending nor the rate of increase. Leading players are
recognising the need to manage them more rigorously but also that
trade funds are critical to driving business growth through customers to
the consumer.
Not only will commercial functions within the manufacturer have to
learn to work together to take the high quality decisions that good trade
funds processes and systems will enable, but manufacturers and
retailers will need to work out how together they can maximise
profitable growth through the deployment of these funds.
For more information
To learn more about IBM Global Services contact your
IBM sales representative or visit:
ibm.com /services