Optimizing the Trade Promotion Planning Process

During this Q&A Session with Nathan Goldstein, VP Solutions at River Logic, we discuss how to go about optimizing a trade promotion plan.

Question: What are the traditional methods firms employ to plan trade promotion campaigns today?

Answer: Most Consumer Packaged Goods (CPG) companies rely on historical repetition. If they ran 6 two-week Ad and Display events on a particular brand at a particular retailer last year, chances are they will do it again this year. That is not to say most CPG firms don’t include some form of analysis during the planning process, but predictive analytics and spreadsheet-based simulations rarely reveal insights that lead to doing something different – i.e., better.

Question: How is optimization different from other planning methods?

Answer: Optimization considers all relevant variables (e.g., promotion cost, assumed lift, product margin) and business constraints (e.g., budget, frequency, and duration of events) simultaneously to identify the combination of activities that yields the best result. Applying true optimization to Trade Promotion Planning allows consumer goods companies to move beyond answering questions such as, “What is the expected impact on volume if we run a 4 week $3.29 TPR?” to answering questions such as, “Which combination of events will have the greatest impact on volume, revenue, and profit?”

Question: What value can a typical Consumer Goods company expect from applying optimization to their Trade Promotion Planning process?

Answer: Trade Promotion Optimization (TPO) impacts a firm’s top and bottom line. Recent benchmark testing indicates optimizing trade promotions can increase revenues by at least 2% and more importantly, increase the margin on those revenues by at least 1%. For simplicity, consider a tier 1 firm with $5B in Annual Net Revenue and a Net Margin of 10%. The quick math implies a $100M in annual revenue growth and $10M added to the bottom line, assuming trade spending remains constant; however, the biggest value comes from using Trade Promotion Optimization to increase the total contribution margin for not only the incremental revenues but the current $5B as well. For the sample company described above, a 1% increase in Net Margin would add an additional $50M to the bottom line.

Question: What organizational requirements have the greatest impact on a firm’s ability to capture the value of Trade Promotion Optimization?

Answer: Because the data requirements for TPO are minimal, and most consumer goods companies can readily access the needed information from existing ERP and Trade Promotion Management (TPM) systems, the most critical factors in ensuring the tremendous value of TPO is realized when there is:

  1. Commitment by the firm’s executive leadership
  2. Redesign of trade planning practices
  3. Redefinition of incentives and KPI’s used to determine trade spend effectiveness

From a process perspective, executive leadership is critical to ensure full adoption of TPO’s cross-functional and field collaboration capabilities. From a KPI perspective, leaders must be able to leverage the increased understanding of plan versus actual and incentivize corporate planners and customer teams to manage trade promotions against metrics that go beyond volume and revenue – i.e., profit.

Question: What factors are most critical when selecting a Trade Promotion Optimization solution?

Answer: First and foremost is the vendor’s ability to execute. This means that not only does the proposed solution actually exist beyond the salesman’s PowerPoint presentation, but the vendor’s implementation partners possess the domain knowledge needed to assess a firm’s existing processes relative to current best practices and to configure the solution which best addresses a company’s unique requirements. Another important factor to consider is extendability. Since Trade Promotion directly impacts sales and operations planning, companies considering adopting a TPO solution should focus their search on vendors providing dynamic integration with existing or vendor-provided supply chain and finance solutions. These solutions should include Integrated Business Planning, which is designed to translate existing supply and demand plans into financial plans and provides actionable insights in order to takes the necessary course-correcting actions. The output from any TPO solution should be considered as part of the demand planning process. Additionally, supply chain constraints, such as available inventory, should be considered within the TPO framework itself.

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