Uncovering the Hidden Costs of Trade Promotions

As unemployment continues its relentless rise and personal savings rates increase, consumers will continue to spend well below trends of the last two decades. Shoppers are taking fewer trips to the supermarket and department stores. When they do, they are sticking to their coveted shopping list with militaristic discipline and are looking for value. Retailers and manufacturers, in turn, are pulling out all of the stops to inundate the consumer with deals&#x2014;anything to get them to buy and, more importantly, buy their product. Promotional spending by consumer packaged goods (CPG) companies (trade promotions) is at historic levels, but is all of that spending working? CPG companies often spend anywhere from 8 percent to 20 percent of revenue on promotions. Various studies suggest that anywhere from 25 to 70 percent of CPG suppliers' trade promotion spend is ineffective. Some quick math suggests that for every billion dollars in revenue, at least $20 million to $50 million and likely significantly more is being poorly spent. That is a substantial amount of money that could be better applied to product innovation or other more significant drivers of growth and brand equity.<br clear="none" /> <br clear="none" /> While some CPG companies conduct sophisticated post-promotion analysis to determine the effectiveness of tactics such as displays to generate incremental volume and return on investment (ROI), they typically don't measure if inefficiencies in their processes create <i>hidden costs</i> (i.e., ones that usually could be avoided with a more disciplined process). Promotions have become complicated in their own right&#x2014;free gifts with cosmetics, customized free-standing displays, complicated and expensive graphics, limited-edition products, and the list goes on. Frequently, promotional campaigns with unique needs create ad-hoc parallel supply chains that are heavily dependent on third parties to outsource production, graphics, or shipping. Generally, these parallel supply chains have not been streamlined to meet the growing needs of sales or marketing strategies or the aggressive time schedule demanded by retailers. Inevitably, costs creep in, and the ROI of an otherwise successful event is not as good as it could be&#x2014;with precious money squandered.<br clear="none" /> <br clear="none" /> The retail customer is as much a driver of complexity as the fickle shopper. Retailer needs for rapid response and differentiated solutions push time-sensitive demands back on CPG suppliers. The following are examples of evolving requirements and related challenges: <br clear="none" /> <br clear="none" /> <b>Trade Promotion Trends<br clear="none" /> <br clear="none" /> Evolving Requirement</b><br clear="none" /> Increasing Customization and Volume <br clear="none" /> <b>Challenges for Trade Promotion Planning and Execution</b><br clear="none" /> <br clear="none" /> &#x2022; Key retail customers are using displays more aggressively to drive category sales and for competitive differentiation.<br clear="none" /> &#x2022; Customers are requiring increasingly more customized displays to drive differentiation from their competition.<br clear="none" /> <br clear="none" /> <b>Evolving Requirement</b><br clear="none" /> Increased Responsiveness<br clear="none" /> <br clear="none" /> 

<b>Challenges for Trade Promotion Planning and Execution</b><br clear="none" /> <br clear="none" /> 
&#x2022; Customer-specific events are not planned as far in advance as national events and are often opportunistic while still requiring at least the same quality level of product, service, and responsiveness as national events.<br clear="none" /> <br clear="none" /> 
<b>Evolving Requirement</b><br clear="none" /> 
Increased Competition for Promotional Investment<br clear="none" /> <br clear="none" /> <b>Challenges for Trade Promotion Planning and Execution</b><br clear="none" /> <br clear="none" /> &#x2022; CPG companies and their key customers increasingly are using promotional activity to drive trial for new products and overall growth for key categories.<br clear="none" /> &#x2022; As growth matures, investment will require increased scrutiny, and events/customers will have to "compete" for funds and other resources (staff time, inventory, etc.) to drive ROI and growth<br clear="none" /> <br clear="none" /> <b>Where Do Costs Hide?</b><br clear="none" /> <br clear="none" /> The leading practice for managing trade promotions is to follow what is referred to as a closed-loop promotional process. Within that framework, the most effective method for pushing excess costs out of a promotional supply chain is to tightly manage and track the planning through execution stages&#x2014;finding and eliminating waste. The usual suspects of promotional inefficiency and associated waste include<br clear="none" /> <br clear="none" /> <b>Promotional Demand Planning<br clear="none" /> <br clear="none" /> 

Inefficiency Drivers</b><br clear="none" /> <br clear="none" /> 
&#x2022; Forecast inaccuracies<br clear="none" /> <br clear="none" /> &#x2022; No link between sales incentives and forecast accuracy<br clear="none" /> <br clear="none" /> <b>Potential Cost Impacts</b><br clear="none" /> <br clear="none" /> 
&#x2022; Wasted material<br clear="none" /> &#x2022; Excess inventory<br clear="none" /> &#x2022; Reduced customer service levels<br clear="none" /> &#x2022; Out of stocks (and lost sales)<br clear="none" /> &#x2022; Labor to breakdown unused displays<br clear="none" /> &#x2022; Transportation to ship product between DCs

<br clear="none" /> <br clear="none" /> <b>Vendor or Partner Planning
Inefficiency Driver</b><br clear="none" /> <br clear="none" /> 
&#x2022; Lack of visibility to consolidated or portfolio view of promotion calendar<br clear="none" /> &#x2022; Poor change control, e.g., to communicate cancellations or changes to promotion parameters or timing<br clear="none" /> <br clear="none" /> <b>Potential Cost Impacts</b>
<br clear="none" /> <br clear="none" /> &#x2022; Inefficient sourcing of raw materials such as corrugate, components, chemicals<br clear="none" /> &#x2022; Inefficient sourcing of co-packing vendor capacity<br clear="none" /> &#x2022; Upcharges for "rush" orders<br clear="none" /> <br clear="none" /> 
<b>Plan Event Execution<br clear="none" /> <br clear="none" /> 

Inefficiency Driver</b><br clear="none" /> <br clear="none" /> 
&#x2022; Lack of organizational coordination across functions/lack of accountability and ownership<br clear="none" /> &#x2022; Ineffective change management controls<br clear="none" /> &#x2022; Reliance on a single vendor<br clear="none" /> &#x2022; Lack of definitive deadlines with customers<br clear="none" /> <br clear="none" /> <b>Potential Cost Impacts</b>
<br clear="none" /> <br clear="none" /> &#x2022; Inefficient sourcing<br clear="none" /> &#x2022; Unnecessary headcount due to duplicative staff efforts<br clear="none" /> &#x2022; Wasted materials/labor costs
<br clear="none" /> <br clear="none" /> <b>Manage Event Production & Distribution<br clear="none" /> <br clear="none" /> Inefficiency Driver</b><br clear="none" /> <br clear="none" /> 
&#x2022; Upstream planning problems result in reactive and inefficient downstream production and distribution<br clear="none" /> &#x2022; Lack of utilization of "postponement" (e.g., delaying creation of display to as late as possible)<br clear="none" /> <br clear="none" /> 

<b>Potential Cost Impacts</b><br clear="none" /> <br clear="none" /> &#x2022; Rush order charges<br clear="none" /> &#x2022; Excess inventory of material (e.g., corrugate)<br clear="none" /> &#x2022; Breakdown charges or throwaway costs<br clear="none" /> &#x2022; Extra transportation costs to expedite product/promotions<br clear="none" /> &#x2022; Finished goods holding costs
<br clear="none" /> <br clear="none" /> <b>Manage Retailer Compliance<br clear="none" /> <br clear="none" /> Inefficiency Driver</b><br clear="none" /> <br clear="none" /> &#x2022; Understanding percentage of displays/promotions that make it to the retail floor vs. sitting in a back room<br clear="none" /> <br clear="none" /> <b>Potential Cost Impacts</b><br clear="none" /> <br clear="none" /> &#x2022; Lost incremental sales<br clear="none" /> &#x2022; Waste of materials and labor costs<br clear="none" /> <br clear="none" /> Case Study: Streamlined Promotional Supply Chain <br clear="none" /> A U.S. division of a multibillion-dollar global consumer products firm had an aggressive 5-year growth strategy based on new line introductions and line extensions. This strategic focus was accompanied by a doubling of the number of trade promotions in year one of the plan, with a similar trajectory expected in coming years. Quick-response promotional execution required enormous effort across key business functions and traditionally had not been managed within a structured process. <br clear="none" /> <br clear="none" /> The company launched an effort to improve its promotion execution process to:
<br clear="none" /> &#x2022; Reduce the cost of promotional execution while maintaining or increasing service and promotion quality<br clear="none" /> &#x2022; Increase process flexibility and support growth strategy<br clear="none" /> &#x2022; Free management time to focus on strategic issues and less on day-to-day execution<br clear="none" /> <br clear="none" /> Our assessment uncovered a set of recurring issues that, whether subtle or overt, were contributing to wasted costs in material, vendor labor, internal staff effort, and retailer management. Most shocking to this firm was that nearly 10 percent of its trade promotion budget was spent to produce promotions that still remained in its warehouse, unsold. Tracing the history of these orphaned promotions (which included the analysis of supplier records, customer orders, and inventory reports) led to uncovering "hidden" costs in their process including:<br clear="none" /> &#x2022; Wasted production materials<br clear="none" /> &#x2022; Labor to create and then break down promotions that were never sold<br clear="none" /> &#x2022; Transport (air and ground) to ship products or finished goods between DCs and vendors for unsold promotions<br clear="none" /> &#x2022; On-hand promotion inventory that could not be sold<br clear="none" /> &#x2022; Material sourcing inefficiencies from inefficient planning<br clear="none" /> &#x2022; Wasted ancillary product purchases, e.g., for "gift with purchase" promotions<br clear="none" /> <br clear="none" /> Applying these sources of "hidden" costs to this firm's overall trade promotion spend uncovered nearly <b>14 percent</b> of trade promotion production costs tied to penalties that could have been saved by implementing a process that sought to erase unnecessary activities and inefficiencies.<br clear="none" /> <br clear="none" /> Rooting out these "hidden" costs entailed understanding current inefficiencies and designing/ implementing process improvements that included:
<br clear="none" /> &#x2022; Disciplined decision-making processes supported by clear organizational accountability and data<br clear="none" /> &#x2022; More streamlined processes with a clear start point and more efficient use of resources<br clear="none" /> &#x2022; Integrated planning processes with uniform visibility to changes across the organization<br clear="none" /> &#x2022; More efficient sourcing, production, and distribution processes that enable strategic sourcing and strategic postponement to reduce costs<br clear="none" /> <br clear="none" /> Projected savings and organizational benefits of adopting the new process included:
<br clear="none" /> &#x2022; 14 percent reduction in trade promotion production costs<br clear="none" /> &#x2022; 25 percent reduction in personnel required for executing promotions through reduced staff inefficiencies, streamlined tasks, and improved communication<br clear="none" /> &#x2022; 50 percent reduction in average cycle time of development of a promotion concept to having finished promotional goods shipped from the DC<br clear="none" /> &#x2022; Maintaining an exceptionally high quality of customer service and improving flexibility to respond <br clear="none" /> <br clear="none" /> <b>How well do you understand how hidden costs are affecting your organization's true level of trade promotion spending?</b>
<br clear="none" /> <br clear="none" /> The following questions can help you determine your organization's performance.
<br clear="none" /> &#x2022; What amount of cost penalties are incurred due to "rush" orders, e.g., orders produced, then never sold; added costs for reducing production time; labor costs to break down promotions and return product to open stock?<br clear="none" /> &#x2022; What is the average event cycle time&#x2014;how many weeks does it take to turn around a promotion once it's approved?<br clear="none" /> &#x2022; What is your level of promotion productivity, i.e., FTEs/hundred promotions?<br clear="none" /> &#x2022; What are your customer service levels, e.g., fill rate and on-time delivery?<br clear="none" /> &#x2022; How flexible is your organization to responding to key customers' "promotion opportunities"?<br clear="none" /> &#x2022; What is the product quality level of promotions you produce?<br clear="none" /> <br clear="none" /> How you answer these questions will help you uncover and prioritize opportunities to improve how you manage trade promotion costs, including balancing discipline with flexibility to make the right business decisions.<br clear="none" /> <br clear="none" /> <i>David Sievers is a principal of Archstone Consulting and serves as the firm's Consumer Products and Retail Practice Leader. He has more than 15 years of consulting experience and specializes in defining business improvement strategies and implementing operational improvement programs. Sievers has worked with consumer products, service, retail, and general manufacturing companies throughout North America and Europe. He can be reached at <a href="mailto:dsievers@archstoneconsulting.com">dsievers@archstoneconsulting.com</a>.<br clear="none" /> <br clear="none" /> Hanna Hamburger is a director at Archstone Consulting. With more than 20 years of consumer products industry and consulting experience, she has worked extensively with consumer products and retail companies in the areas of sales, marketing, and supply chain process, and technology and organization performance improvement including trade promotion management, category management, sku rationalization, sales and operations planning, merger integration, and supplier effectiveness  She can be reached at <a href="mailto:hhamburger@archstoneconsulting.com">hhamburger@archstoneconsulting.com</a>.<br clear="none" /> <br clear="none" /> Julie Bonne is an associate at Archstone Consulting. She has 10 years of business experience primarily in consumer products, retail, and online commerce. Her work focuses on market analysis and consumer segmentation, corporate strategy and innovation, trade promotion optimization, brand planning development, project management, and operational effectiveness. She can be reached at <a href="mailto:jbonne@archstoneconsulting.com">jbonne@archstoneconsulting.com</a>.</i>