Value Chain Planning Improves ROI for CPG Companies
By john.bermudez on Jan 20, 2010
For CPG companies, one of the most opportune areas to achieve ROI from an IT initiative is by improving the performance of trade promotion spending through promotion modeling analytics. ROI can be achieved by improving the effectiveness of trade promotions and synchronizing trade promotions with supply chain operations. These two areas are ripe with opportunity because of huge dollars spent on trade promotions and the lack of systems addressing effectiveness and synchronization. Synchronizing sales and promotions planning and supply chain planning is a core concept of value chain planning.
Let's start with trade promotion effectiveness. Making trade promotion spending more effective sounds great, but for most companies are struggling just to track trade spend more methodically. Many companies run the same promotion events year after year, afraid to tamper with the perceived success of last year's programs. Even in the face of declining revenues and margins. It is no surprise that retailers expect a bigger incentive to run the same tired event again.
For a growing number of CPG companies, business as usual is no longer a safe bet and they are aggressively deploying analytics-driven promotion planning tools to improve promotion effectiveness. Analytics-driven promotion planning systems allow sales reps to simulate the expected lift from different types of events against a live forecast in order predict volume, revenue, and profitability. This allows the sales rep to present the best possible deal to the retailer and know precisely how much trade funds will be consumed by the event months in advance. Since analytics-driven promotion planning systems maintain a live forecast by tracking consumption data, spending predictions are continuously updated and visible as the event executes. This mitigates the need to wait until deductions clear to understand the impact of an event on the account level budget.
Promotion effectiveness analysis is presented as part of the simulation results each time a sales rep plans an event and is a balance of positive and negative effects. The negative effects include trade funds expense, cannibalization (product and account) and forward buying. The positive effects include incremental volume, profits, category growth and halo effects. Accurately predicting the incremental volume requires that the simulation be done on a live baseline forecast that understands how the product or product group is currently doing in the market place, considers seasonality, and uses granular lift factors that are adjusted in real-time to customer and geographical differences. .
Analytics-driven promotion planning can improve effectiveness of trade promotions by as much as 5-10% in the first year measured by increased revenue and program profits. Even with conservative improvements in promotion effectiveness (4-5%), the payback on analytics-driven promotion planning can be three to four months. Longer term, potential cost savings will come from a reduction in the need for analytical services from syndicated data providers and possibly the data itself. This by itself could yield millions of dollars in additional cost reduction annually.
Our second area of untapped ROI, synchronizing trade promotions with supply chain operations, is essentially a side-benefit of analytics-driven promotion planning. By using an analytical forecasting engine as the basis for promotion planning, the daily efforts of the sales reps are producing precise sales forecast output that can be used by the supply chain group to more efficiently produce and distribute product to support the promotional volume. Synchronization ensures high customer services, with lower supply chain costs, and reduction in excess inventories. The ROI from synchronization comes from a variety of supply chain operational improvements including the reductions in excess inventories, in DC transfers (to cover out-of-stocks), in premium freight, and in safety stock.
As most companies are still managing trade promotion analysis with a non-integrated collection of spreadsheets, ad-hoc reports and fee-based services, the opportunity for improvement in this area is considerable. Couple this with the side-benefit of synchronizing promotion planning with supply chain operations and you have an ROI opportunity that any CFO or CEO can get behind. Find out more about how Oracle Value Chain Planning can improve the ROI from your trade promotions.