IBM Business Consulting Services Trade Funds Investment

Transcription

1 IBM Business Consulting Services Trade Funds Investment Getting control and delivering value

2 Page 2 Contents 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 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.

3 Page 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.

4 Page 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.

5 Page 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.

6 Page 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 strategy 3 Cut out cross-functional process inefficienciesenc 4 Execute promotions effectively 5 Improve promotion effectiveness by learning ng 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 agreed 3 ) 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.

7 Page 7 Figure 2 Trade spend categories in European Countries 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.

8 Page 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 4 ), 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.

9 Page 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.

10 Page 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 customers 8 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, Trade Promotions Spending Survey Cannondale Associates, 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.

11 Page 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 crossfunctional 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.

12 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. IBM United Kingdom Limited emea marketing and publishing services (emaps) Normandy House PO Box 32 Bunnian Place Basingstoke RG21 7EJ United Kingdom The IBM home page can be found at ibm.com IBM and the IBM logo are registered trademarks of International Business Machines Corporation in the United States, other countries, or both. 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 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 G (10/02)