Advertising Strategic Sourcing:

Transcription

1 Advertising Strategic Sourcing: The Supply Chain s Most Elusive Sacred Cow October 20, 2005

2 Presentation Objectives The objectives of today s presentation are to: The objectives of today s presentation are to: Identify advertising strategic sourcing cost reduction levers you can apply at at your company Share learnings and success strategies gained from working as as both a consultant and corporate supply chain officer in in this space Tell you where to to find more information on on the the advertising space and marketing sourcing 1

3 Agenda Presentation Objectives Background & Introduction Cost Containment Ideas Learnings & Resources 2

4 My Background I ve sourced advertising as a management consultant and currently as a Supply Chain AVP at Nationwide. I started with no advertising expertise. Then and Now Consulting World Corporate World The Results: Cumulative, Hard Dollar Sourced Savings of $100M+ Average Save Across Nine Companies: 8% of External Spend 3

5 How Are These Results Possible With efficiencies averaging 8% of external spend, the natural question is How are results like this possible? They are possible, in my opinion, because: Agency and client economic incentives can be misaligned ROI is tough to measure resulting, historically, in low accountability There often exists a procurement buys paper clips and marketing buys advertising mentality There is often blind reliance on and faith in external experts Many purchasing decisions are made by intermediaries which may not spend your money as frugally as they d spend their own Marketing senior management is rewarded more by moves in brand awareness, market share and revenue growth than the economic efficiency that generated them 4

6 Agenda Presentation Objectives Background & Introduction Cost Containment Ideas Learnings & Resources 5

7 Cost Containment Ideas The discussion which follows is summarized from my article, Advertising: The Supply Chain s Hidden Cost Reduction Gem, published in Purchasing Today magazine and ANA Finance Committee presentation. 11 Cost Reduction Levers The Planning Paradigm Media Mix Re-Allocation Intra-Media Programming Mix Volume Discounts Agency Compensation Service Disaggregation Production Cost Containment Invoice Error Elimination Demand Management Print Production Sourcing Vendor Negotiations See for full article. 6

8 The Planning Paradigm Purchasing advertising from the perspective of This is what I want. How much does it cost? vs. What can I get for $X? may achieve the desired objectives at a lower cost. It may also identify unrealistic expectations if the budget is too small. The Car Salesman Example You have $30,000 to spend on a new car? Guess what? This car here costs $30,000. Key Take-away: Don t start the annual or campaign planning processes by communicating how much you have to spend particularly if you compensate your agency on a percentage of spend basis. 7

9 Media Mix Re-Allocation Shifting ad spend weighting from higher to lower cost mediums (i.e. from TV to Radio or from Radio to Newspaper) can potentially communicate the desired message to the desired target at a lower cost per impression. Media Mix Example 100% 90% 80% 70% Media Weight % 60% 50% 40% Other Magazines Radio Cable TV Network TV 30% 20% 10% 0% A B C D E F G H I Key Take-away: Many successful media mixes exist in any given industry. Experimenting with a lower cost CPM (cost per thousand) media mix may yield savings without loss of reach. 8

10 Intra-Media Programming Mix Choosing programs that reach the desired target market at a lower cost per impression can achieve desired objectives while saving money. Agency Recommended Programming Mix Illustrative Cost Per Point for Spot TV Daypart Station A Station B Station C Station D Station E Choices Average CPP Morning $210 $220 $200 $175 $250 $200 Daytime $200 $175 $160 $215 $205 $200 Primetime $300 $350 $355 $400 $275 $355 $268 Late News $250 $315 $300 $400 $280 $315 Cost Optimized Programming Mix Illustrative Cost Per Point for Spot TV Daypart Station A Station B Station C Station D Station E Choices Average CPP Morning $210 $220 $200 $175 $250 $175 Daytime $200 $175 $160 $215 $205 $160 Primetime $300 $350 $355 $400 $275 $275 $215 Late News $250 $315 $300 $400 $280 $250 20% Less Key Take-away: By choosing the channels with the most cost efficient CPP (cost per point) for a given daypart, one is able to maintain the daypart mix and obtain the desired TRPs (Total Rating Points) for the lowest possible cost; in the example above, the save is 20%. 9

11 Volume Discounts Larger same-vendor spending volumes, purchase guarantees and advance purchases can lower unit costs. I can sell you a plane ticket to New York for $450. If you can assemble a group of 10 or more, the cost per ticket drops to $350. If you reserve today, I can give you a 14 day advance fare which lowers the price to $325. Key Take-away: Use your buying leverage to get better terms and conditions. If your spend is predictable, consider buying in advance or guaranteeing purchases to get better pricing. 10

12 Agency Compensation Arrangements Periodic surveys of market commission rates and alternative payment arrangements ensure that agency compensation is in line with the supply & demand of the marketplace for their service. Sample Agency Compensation Arrangements = % of People s Time Advertising Expertise Service & Attentiveness $ from General Ledger Price Industry Supply & Demand Curves S Key Take-away: The price you paid two years ago may be lower in today s market $500k $200k X Always know where the agency compensation price point has moved. Don t pay $50,000 for 50% of a person s time that could be hired on the market on a full time basis for $40,000. Quantity D1 D2 11

13 Service Purchase Disaggregation Disaggregating advertising services and purchasing them at the component level (vs. one stop shopping with a full service agency) can reduce costs. Full Service Agency: One Stop Shopping $10.0M Message Definition Illustrative Example $2.7M Savings There is a market supply & demand curve for each service. Price $500k x S Quantity D1 Target Mkt. Identificatio n Ad Concept Creation Ad Production Media Planning Payment Admin. Before $7.3M Message Definition Target Mkt. Identification Ad Concept Creation Ad Production Media Planning Payment Admin. After Dis-aggregated Model Vendor Legend - Incumbent Agency - Outsourced Production House - Your Company via In- Sourcing Key Take-away: Sometimes the whole costs more than the sum of the pieces if they are dis-aggregated and negotiated separately relative to the supply and demand of its marketplace. 12

14 Production Cost Containment A responsible cost-benefit analysis should be performed on agency production recommendations. Fees and commissions should reflect the supply and demand of a competitive bidding process. Production Studio On Location in Maui vs. Don t be here! Competitive Bids Favoritism Price $700k x S vs. $500k x D1 Ave. cost of a 30 second spot: $343,000 Ave. cost of a 15 second spot is $34,000 to $51,000 less Source: June/July 2001 ANA Newsletter Key Take-away: Quantity Make defendable creative production tradeoff decisions. Make sure all sub-contracted work is being bid in a competitive manner and that you are not paying a market premium. 13

15 Invoice Error Elimination Random auditing of agency and media vendor invoices ensures that media purchases and pass through costs reflect contracted terms and conditions. Approximately 28% of newspaper invoices arrive with an error. 90% to 95% of these errors favor of the media vendor. Source: Newspaper Services of America Beware of Agency Estimate vs. Invoice Over- Charges Agency Estimate Amount Invoiced Hidden Agency Profit Actual Cost to Agency Key Take-away: Random audits of invoices can prevent overbilling. Care must be taken not to spend more in auditing labor than is saved in caught mistakes. 14

16 Print Production Sourcing Reducing the specs of what we buy (ie direct mail vs. , weekend circular vs. run of press, paper grade, color vs. b &w, etc..) and the quantity of what we buy (ie number of circular pages, number of different colors, paper grade, % coverage, etc..) can reduce print advertising cost as can proper sourcing of raw components (i.e. paper, ink, etc ). Sample Print Related Variables: Paper Quality: SC A SC B Newsprint Medium: Direct Mail Newspaper Billboard # of Pages: None # of Colors: Black & White 2 Colors 4 Colors Inventory: 1 Week 3 Weeks 4 Months Coverage: 100% in zip code 80% in zip code 110% in zip code 5 mile store radius Supplier Concentration: 1 Lead Partner 5 Vendors 25 Vendors Lead Time: Week Before Month Before Day Before Spoilage Allowance: 3% 5% 0% Size of Ad: 1/6 Page ¼ Page ½ Page Whole Page Key Take-away: Use the marketplace to control (P) Price. Use good business judgment and cost-benefit analysis to make marginal downward adjustments to (Q) Quantity and what is purchased. 15

17 Supplier Negotiations Spot checking the pricing negotiated on your account's behalf by compensated experts can ensure your prices are in line with the supply and demand of the marketplace and that proper diligence is being performed to negotiate the best possible prices. Key Take-away: On average, a good agency should be able to negotiate 8 10% off of the published rate card rate. 16

18 Agenda Presentation Objectives Background & Introduction Cost Containment Ideas Learnings & Resources 17

19 Learnings from the Field In my ad sourcing work, I ve learned that: Marketing and procurement incentives become aligned when a target save/efficiency dollar figure or percentage cut is mandated on the front end of ad sourcing projects Agencies are human in that they will often follow the path of least resistance unless the client has created a cost conscious working climate with them Agencies will not come to you proactively to tell you that you are paying them a market premium Marketing and advertising departments are typically understaffed, creating a critical dependency on the agency and other external experts Agencies genuinely want to make their clients happy. Formal feedback mechanisms are often absent There are never clear right and wrong answers in advertising sourcing, just cost-benefit trade-offs Victories and credit must be shared equally across functions for all ad sourcing work Some of the savings generated should be re-invested vs. dropped to the bottom line The least expensive alternative is not necessarily the best or right one, but it the only place one can start to perform a defendable, cost-benefit analysis on incremental spend 18

20 Procurement Marketing Teaming Strategies Success depends upon subject matter knowledge legitimacy, trust, respect and a win/win mentality. Success Strategies: Success Strategies: Develop Develop subject subject matter matter expertise expertise by by reading, reading, taking taking ANA ANA (Association (Association of of National National Advertisers) Advertisers) classes, classes, learning learning acronyms, acronyms, etc ) etc ) Start Start with with a a mutual mutual respect respect for for role role that that each each function function plays plays within within the the company company Truly Truly believe believe in in the the = = 33 philosophy philosophy Develop Develop personal personal relationships relationships outside outside of of a a work work context context to to foster foster a a glass glass half half full full vs. vs. a a glass glass half half empty empty orientation orientation Once Once you re you re given given an an at at bat bat deliver deliver more more than than was was expected expected and andfocus on on being being responsive responsive Consider Consider using using marketing marketing vernacular vernacular (i.e. (i.e. marketing marketing effectiveness effectiveness or or return return on on marketing marketing investment) investment) vs. vs. procurement procurement vernacular vernacular (i.e. (i.e. advertising advertising sourcing sourcing or or ad ad cost cost compliance) compliance) when when describing describing the the work work you re you re doing doing Credit Credit savings savings and and efficiencies efficiencies to to innovation innovation Emphasize Emphasize how how partnering partnering will will help help them them (e.g. (e.g. add add another another market, market, budget budget $) $) 19

21 Additional Resources The ANA (Association of National Advertisers) bookstore and seminars will help you come up to speed as will articles on ad sourcing. Resources: Resources: ANA ANA seminars: seminars: good good for for learning learning advertisings advertisings ABCs, ABCs, terminology terminology and and specialty specialty focus focus areas areas ANA ANA publications publications (see (see and choose choose The The Bookstore ): Bookstore ): provides provides specific specific information information on on targeted targeted areas areas (i.e. (i.e. agency agency compensation, compensation, production production cost cost management, management, etc ) etc ) ISM ISM Published Published Articles: Articles: Advertising: Advertising: The The Supply Supply Chain s Chain s Hidden Hidden Cost Cost Reduction Reduction Gem Gem Get Get More More Bang Bang from from Your Your Advertising Advertising Buck Buck Purchasing Purchasing Professional Professional Services: Services: The The Case Case of of Advertising Advertising Agencies Agencies Contact Information: Chuck Hatsis (614) office (312) cell hatsisc@nationwide.com 20