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02/07/2012

Are you in for a First-Quarter, Trade Promotion Surprise?

For some CPG manufacturers, the first-quarter is full of trade promotion surprises. Are you in for a surprise?
 
CPG is even more dependent upon trade spending than ever before. Trade promotion spending for a typical consumer brand can be 15 percent to 20 percent of sales revenue, depending upon the category. Some of this spending is given automatically as off-invoice allowances. With increasing pressure to increase trade promotion productivity, manufacturers are moving more of their trade spending into bill-backs. Bill-backs are traditionally associated with higher levels of retail execution and productivity, but they can create financial challenges at year-end.
 
Driving some of the shift to bill-back allowances is the tactic of using scan-down promotions. Scan-down is a more controlled bill-back initiative if the retailer employs the promotional tactic. Payments for scan-down promotions are more efficient because the bill-back is based on what the retailer actually sales through to the consumer, not based on what the retailer buys and possibly loads into the warehouse. The shift from off-invoice to bill-back has been top-of-mind in CPG for over 10+ years.  
 
Every December, thousands of CPG manufacturers work on closing their books and preparing traditional financial reports for their stockholders. One of the biggest challenges for CPG manufacturers is the accurate reporting of the outstanding trade promotion bill-back liability. Inaccurate reporting can overstate or understate profitability because most trade promotion is classified as a current expense on the brand’s P&L. Competitive pressures have reduced CPG profit margins to the point where trade promotion is the second largest expense item behind cost-of-goods.
 
Tracking and reporting trade promotion activity isn’t as easy as other G/L expenses. To accurately track trade promotion, massive amounts of data are required. The most basic data source is historical line-item invoice sales data. In some mid-size companies, this can be millions of data records. In addition to sales history, bill-back liability must be tracked by customer, by product, and by promotional event. Planned event data isn’t always available. Some manufacturers use spreadsheets to capture trade promotion events, but manually tracking in spreadsheets doesn’t work well. Not only does it fail Sarbanes-Oxley requirements, it also is cumbersome managing the thousands of payments, deductions, and shipments that must be mapped each day to the appropriate event.  
 
CPG companies’ ERP solutions often can’t accurately report bill-back liability either. Traditional ERPs aren’t designed to manage trade promotions’ full life cycle. They are often focused on managing the order and the invoice. Trade promotion management (TPM) solutions are focused on the promotional event, and all activity for the event, from beginning to end. TPM solutions also serve as the system of record for trade promotions. When integrated tightly with the ERP, the TPM solution can provide a best-of-breed solution for accurate trade promotion liability reporting.
 
Best-of-breed TPM solutions are easy to use, enabling field sales and brokers to communicate all trade promotions to the corporate office. TPM systems encourage usage by eliminating redundant data entry, providing time-saving features, by breaking down data silos, and by combining multiple trade promotion activities into one integrated solution. The solutions also empower users to make better decisions with real-time visibility to budget, planned, projected, and actual trade promotion results. 
 
Designed into TPM solutions are calculations specific to CPG trade promotions. Rate-per-case bill-back liability is based on actual sales, not planned volume. Lump-sum marketing is adjusted by taking the larger of planned or actual spending until the event’s status is closed. For some categories, missed off-invoice allowances can be significant, and must be included in spending projections. When available, syndicated data should be available to help validate scan-down promotion liability. These and many more highly specialized algorithms are utilized to provide a projected trade spend. The difference between incurred trade liability and actual trade spend is elusive net bill-back liability.
 
There are some TPM solutions that cannot properly calculate projected liability. Some solutions don’t have the data elements or the complex business rules to provide an accurate view of the five critical measures for trade promotion management: budgeted vs. planned vs. projected vs. actual vs. accrued trade spending. The AFS Discovery Trade solution, unlike others in the marketplace, provides all five KPI’s accurately by leveraging both internal and syndicated data, and by mapping trade spending to the marketing activity, customer, product(s), funds, programs, and events. 
 
If you don’t have a closed-loop TPM solution, be prepared for first-quarter over-spend surprises!
 
 
ABOUT THE AUTHOR
Since 1979, Alex Ring has provided consulting services to more than 50 major packaged goods manufacturers in over 100 product categories in the areas of trade promotion analysis, tracking, budgeting, planning, and forecasting. In 1985, Alex founded Synectics Group Inc. and immediately put his trade promotion experience to work helping manufacturers and brokers to plan, communicate, track, budget, request payment, resolve deductions, and evaluate trade promotions. He soon realized that manufacturers needed an automated system, and Account Review™ was conceived and developed as one of the first software tools for trade promotion management. Having evolved into a complex tool that manages every aspect of the trade promotion life cycle, Account Review now has thousands of users all across the United States.