Best Practices White Paper Enhance Promotion Management

This article is part of the Supply Chain Leaders’ Best Practices series.

Enhance Promotion Management: Optimise Trade Spend and Ensure ProfitabilityWhen promotions support sales, efficient promotion management processes mitigate costs and, in most cases, ensure profitability

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Best Practices White Paper

BEST PRACTICES

It is common when enteringsupermarkets to see the main aisle arranged with full displays or boxesand giant colourful posters inviting the consumer to buy one product and get one freeor to benefit from a discount onanother product.

Promotion spending represents nearly 25% of a brand’s revenue, whereas roughly 60% of promotions fail to break even(1), and only 20% would lead to an increased sales income. Knowing this, the massive embracing of selling under promotions sounds a bit surprising.

Even if laws in some countriesaim atcontrolling promotions volume, or some brands turn to an Every Day Low Pricestrategy, promotions seem inescapable tosome brands. Indeed, theymean takingor sustaining market share, beingplaced on the shelves before or in place of the competition,recruiting new consumers, making the existing ones more loyal,and boosting sales eithercasually or by making them stable at least.

Companies’ sales growth is the target, but profitability and return make them sustainable over time. When promotions support sales, efficient promotion management processes mitigate costs and,in most cases, ensure profitability.

Who’s concerned?

Which functions? What size of companies? In which industries?

Demand planning & forecasting,

Distribution, Marketing, Sales, Supply Chain,

CEO, C-level Executives

All companies Food, beverages, apparel, body care, do-it-yourself (DIY)

Consumer packaged goods (CPG) and fast-moving

consumer goods (FMCG) companies globally

COVID-19 IMPACT

‘How to enhance Promotion Management’ Supply Chain Leaders’ Best Practices

How to Enhance Promotion Management: Optimise Trade Spend and Ensure Profitability

The Covid-19 pandemic has shown how fragile organisations were regarding disruptions to their supply chains.This understanding of the im-pact of uncertainty, coupled with the ability to simulate per-formance, enables a business to confidently take balanced and low-risk decisions in the short, medium and long terms.

COVID-19 IMPACT

Forecast Accuracy

Profitability

Wastage

Annual Sales Growth

Delivered Contribution

KEY PERFORMANCE INDICATORS (KPIS) IMPACTED BY PROMOTION MANAGEMENT OPTIMISATION

Brands assume promotions increase sales revenue and sold units. This assumption may be valid when analysing promotions individually but can be less obvious when considering annual figures.

It is usual not to consider the stocking effect, i.e. purchases decreasing post-promotion, meaning

the annual sales volume staying stable. Moreover, irrelevant offers may not generate benefits in the long run.

Companies should manage promotions better, accurately forecast volume, and monitor expenses, thus increasing profitability.

Why is it crucial to enhance promotion management? What are the benefits?


Brands struggle to define promotions effectively: selecting the right products t promote, appropriate promotions mechanics, financial mechanisms, estimating the halo effect, and ensuring gains in terms of revenue, margin and return on investment (ROI) – all these simultaneously.

Therefore, when building a promotion plan and calculating a budget, they often duplicate the current plan, adjust dates and offers, apply growth and decrease rates. Promotions are later fine-tuned progressively to fit the retailers’ requirements.

What challenges do companies face when dealing with promotion management?


Modelling promotions revenue and costs should become straightforward whatever the industry and whatever the size of the company.

Even if difficult, promotions calibration is crucial to alleviate the financial impacts. A wrong product mix may fail, not meeting consumers’ expectations, leading to overstocking. Inappropriate discounts may reduce the margin significantly. Alack of collaboration may drive shortages and missed sales.

Partnership, financials simulation and follow-up actions, followed by post-event assessment, are part of the key pillars of an efficient promotion management process.

How to monitor trade spending and ensure promotion profitability?

Pillar 1: Foster deep relationships with key partners

Manufacturers and retailers’ relationships arno bed of rosemost of the time. However, they should work together to find the right combination of strategies and tactics to achieve their common goals.

Companies with a well-defined Joint Business Planning (JBP) process build win-win strategies that benefit their trade and make retailers strong allies over time.

JB P means sharing information (such as point-of-sale data or store counts) and insights (such as consumer behaviour, forecast, or stock data), sometimes workforces (planners notably), and investing into joint initiatives:

- Retailers’ knowledge of the shoppers’ habits helps manufacturers recommend appropriateproducts, define relevant mechanics, and estimate mutual investments returns- Manufacturers improve their visibility in-store by developing joint events with retailers,i.e. promoting branded products with private labels- A more informed business planning process increases accuracy, improves responsiveness

reducing out-of-stock issues and sales loss

A shared analysis of the past events pinpoints the most profitable actions for both partners, and thus optimise trade spend.Duplicating JBP mindset internally, manufacturers reinforce the overall process and make it robust. A cross-functional process defines roles and responsibilities, helps flow better and speed up each promotion lifecycle progress.

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ASSESS PROMOTION PERFORMANCE, PREPARE

FOR THE FUTURE

ENSURE PROCESS EFFICIENCY

THROUGH PROPER SYNCHRONISATION

PLAN PROMOTION REVENUE AND SPEND

FOSTER DEEP RELATIONSHIPS WITH

KEY PARTNERS

PREDICT OR PRESCRIBE? SENSE OR

SHAPE?

THE 5 KEY PILLARS FOR PROMOTION MANAGEMENT PROCESS OPTIMISATION


Pillar 3: Plan promotion revenue and spend

Estimating a promotion’s impact on sales is far from being an easy task, even for promotions run every year, e.g. a retailer anniversary, Easter or Christmas events.

By working closely with their customers or using sophisticated tools, brands can at least try to roughly predict promotion sales volumes and revenues.

The benefit of constructing and monitoring profit and loss (P&L)data is evident from a company-wide perspective but doing so for every promotional event is far less so. However, brands could optimise their promotion budget by analysing answers to the following:

- How much do we spend for each promotion and globally this year? - What is the effect of coupons on our sales (i.e. calculating redemption rate)?- Is it better to grant a discount or to offer a free product?- How much do we invest in promoting our products? What is the rate of return?- What is the delivered contribution for each product when being promoted and when not?- How many accruals are recorded, how many claims are paid?- And what logistics costs are incurred? Modelling promotions revenue and costs should become straightforward whatever the company. It leverages the brands’ ability to properly monitor spending by investing only in promotions that generate additional revenue or profit. Eliminating promotions that do not meet this criterion reduces unnecessary costs that negatively impactthe company P&L.

Besides, during the promotion execution, AI capabilities help re-forecast sales units quickly and refresh promotion financials instantly. This way, companies can analyse the results and take appropriate actions.

In a nutshell, all financial aspects should be considered appropriately before, during and even after the promotion event.

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2Pillar 2: Predict or prescribe? Sense or shape?

Once partners are identified, and everyone’s mission is clear, then predicting consumers’ demand for each promotion becomes a priority.

Using the statistical approach to forecast demand has been the norm for years. The approach is relatively comprehensible. It requires limited demand factors (i.e. seasonality, trend and cycle) and sales data. It can be precise but not entirely accurate - or vice-versa

Combining this predictive approach with external data is the first option for improving demand forecasting. If, say, weather data are ideally collected, and the weather impact on sales is appropriately measured, forecast accuracy can be increased significantly, and some promotions may become ineffective:

- Knowing weather impact by product and by region enables a better forecast by store and thus a better stock allocation by production site or depot

- Capturing the impact on weather-sensitive products may reduce the need to discount that type of products as consumers would buy them anyway when temperatures are higher or lower (e.g. ice-creams or soups).

While statistical forecast supports predictive analysis and uses a limited number of variables, machine learning can use a vast amount of data to provide companies with prescriptive insights.

Artificial Intelligence (AI) powered algorithms use unlimited causal factors. They can define factors that are likely to influence consumers’ demand even prescribe when to run a promotion, which type of promotion to propose, which retailer, and which products deliver the highest sales and margins with the lowest costs.

AI brings techniques to shape and stimulate demand, improve offerings, and thus deliver a better customer experience.

During the execution of promotions, it enables effective re-forecasting by sensing the demand using store data, converting it into supply requirements across the chain.


Pillar 4: Ensure process efficiency through proper synchronisation

Improving promotions effectiveness cannot be done in a silo hence the need for cooperation inside and outside the company. This collaboration cannot be realised without a holistic synchronisation of people, processes and systems across the company and with every trading partner.

From budgeting to planning to execution to post-event analysis, creating a promo plan requires appropriate data quality and integration, including third party data. The overall integration process increases the business team’s ability to evaluate promotions before and after they are executed. Therefore, every promotion detail and information must be carefully recorded in the systems all along the promotion lifecycle. Data should be then available any time required, in a suitable format to be read easily, and it goes without saying, be self-evidently reliable.

Beyond systems integration, aligning people and processes is essential to enhance promotions management. From a supply chain perspective, synchronising demand forecasting and supply planning enables promotions orders to be delivered on time and in full, reducing risks of penalties or additional costs. Besides, ensuring a high customer service level confirms the manufacturer as a genuine business partner and leaps him ahead of the competition.

Moreover all stakeholders must be provided with relevant dashboards and analytics that show promotions outcomes and financial impacts. End-to-end processes drive smarter decisions based on the latest business and supply chain information and thus speed up forecast approval, investment decisions and action planning.

Pillar 5: Assess promotion performance, prepare for the future

When the promotional event is over, this is not the end of the story. Analysing gathered data, measuring financial performance and evaluating what worked and did not are mandatory for building future event success.

Brands must measure the impact of each promotion, trade promotions globally and analyse longer-term shopper behaviour.

Some key metrics should always be used when dealing with trade promotions, e.g. trade spending as a percentage of sales, accrual rates, incremental revenue and profit associated with features and mechanics. Supply chain metrics should also be considered, such as costs resulting from out of stock issues when the initial sales forecast was under-estimated, or the risk of write off in the event of overstock or wastage.

Indicators and promotion performance assessment should be communicated across the company and with trading partners. Indeed, it is essential to keep the ball rolling, maintaining the momentum of the existing process. Evaluating together and understanding the strengths and weaknesses of past promotional events can help develop more efficient strategies for future events.

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FuturMaster collects and blends internal and external information, consolidating demand forecasting, business planning, production and supply data in one tool.

AI embedded capabilities empower teams to predict promotions volumes accurately, estimate

halo effects, and re-forecast and review the plans when sales and stock data become available.

Dashboarding and scenario planning tools enable intelligent decision-making, helping brands optimise trade spend and ensure profitability.

How can FuturMaster help you optimise your promotion management process?

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About the Supply Chain Leaders’ Best Practices

It was seen as a cost centre for a long time, but the supply chain has become a key driver of competitive advantage for companies today more than ever.

The Supply Chain Leaders’ Best Practices by FuturMaster is a series of white papers focusing on the critical processes that can help you gain agility and improve business performance in volatile markets and uncertain times.

The whole series is accessible on www.futurmaster.com/best-practices/

Equipped with advanced planning software solutions, based on Artificial Intelligence and optimisation technologies, FuturMaster helps its customers to improve their service level, increase their revenues and profits.

More than 600 customers in 90 countries trust FuturMaster to optimise their end-to-end supply chain (demand, supply and S&OP), promotions management and sales & budget planning processes. With more than 25 years of expertise, FuturMaster solutions have been deployed with world leaders in many sectors, including Sanofi, Lactalis, Heineken and L'Oréal.

FuturMaster has offices in France, the UK, Singapore and China, and distributors in Germany, Australia and Brazil.

Contact us: www.futurmaster.com/contact/

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Best Practices White Paper Enhance Promotion Management