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Getting control and delivering value

IBM Business Consulting Services

Trade Funds Investment

Trade Funds Investments

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


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.


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.


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.


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.


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


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.


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.


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.


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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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

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