Best Practices for Effective Trade Funds Management

If you are involved with trade spending, at some point you have probably spent some time thinking about how to identify the most effective use of those funds.  This has become the Holy Grail of trade spending process and systems design.  The good news is that it can be done.  The downside is that it is not a quick and easy answer to define.  Over the next few months, we will be posting additional blog entries on effective trade spending, touching on best practices and pragmatic advice for strategy, process design and key performance metrics.  The following content focuses on accountability for trade funds and common traits shared across organizations representing Best-In-Class trade funds management practices. 

At the core of the journey towards effective trade spending are hundreds of daily decisions made across the organization relative to whether or not to spend money.  In that sense, “effectiveness” is often defined by each decision-maker, eg, if the funds help them achieve their goals, they are by default “effective”.  Too often, the goals of the decision-makers are not aligned with the return on investment for the business.  For example, a local sales manager may authorize $5,000 for the next “No Show Food Show” because she will avoid having her distributor upset with her.  In a second example, a brand manager may reject a request for a low school bid price in order to maintain his run rate margin target.  In both examples, the decision was a good one for the person making it – they both accomplished their individual goals, 

However, in both cases, the opposite decision may have been more effective for the business.  The $5,000 is not likely to generate any volume and would have a better chance of contributing to the company success having not been spent at all.  The low bid price may have secured distribution on a key product line that would have prevented a competitor from gaining a foothold.  These are hypothetical scenarios that lack additional details, but, we surface them to make this point -- many organizations struggle to build accountability for trade spending that aligns the needs of their business with those of the people responsible for making decisions. 

Traditionally, the sales force has been held responsible to “delivering the volume” with finance and/or marketing holding authority over pricing, corporate shelter and marketing funds.  Within that model, there are several obstacles that block an effective process –

• Other People’s Money:  The industry has become heavily dependent upon trade dollars as the primary mechanism to drive volume, and as a result, trade funds are the key lever for delivering volume goals.  If the sales group does not have visibility to spending targets, available budgets or margin goals, they end up negotiating internally with their own organization.  With ambiguity about what constitutes a “good” or “bad” deal, they will ask for more than they need to hedge against internal negotiations.  Additionally, if they are not responsible for managing the funds, there is no incentive to make sure the request is appropriate.  Their goals are purely volumetric and, after all, it’s “OPM”, or, Other People’s Money.  As an analogy, this is like shopping with someone else’s credit card – there is no responsibility to pay off the balance and you might as well buy as much as possible as fast as you can before someone shuts down the card [also known as the Community Dog Bowl, or, First Dog to the Bowl Eats].  Ultimately, the company spends more than necessary while expending resources negotiating with themselves.
   
• Ineffective workflow process:  Dividing accountability for volume and spending across two peer functions requires a great deal of coordination and communication.  As the funds are disbursed across hundreds of smaller local events [eg, trade shows, sponsorships, DSR spiffs, etc.], the burden for workflow and coordination is often too great for an effective process.  With two functional groups each separately focused on the competing goals of [a] delivering the volume and [b] minimizing spending and maximizing income, the process often breaks down due to delays and poor communication.  As customers demand a quicker response than the process can deliver, “unofficial” authorization of requests becomes the norm, with customers deducting against deals that were never officially reviewed or authorized. 
   
• Poor visibility for analysis:  Generally, the processes to capture and track the committed funds are too manual and lack sophistication relative to analysis and reporting.  As a result, organizations lack visibility to the rolling sum of funds they have committed in order to monitor and control requests for incremental funding.  To avoid over spending against their accrual balance, organizations tend to “hold back” a percentage of their available funds.  Ultimately, the result is a funding level that is less than optimal relative to the competitive environment and delivery of the volume goals. 

Consolidating responsibility for your volume goals and authorization of trade funds within a single function can – and should -- drive accountability for the most effective use of funds.  For specific categories of trade funds, case studies indicate that the field sales group is the most effective functional discipline for authorizing the funds.  The following is a set of characteristics and capabilities that are common across organizations considered Best-In-Class for effective trade spend management:

• They provide a clear definition of scope for each workflow:  Not all trade funds should be managed within the sales or sales operations functions.  There are categories of funds that should be managed centrally at headquarters based on size and scale.  These funds are both [a] significant in their impact and, [b] relatively small and stable in terms of the quantity of events.  Market leaders clearly define categories of funding events, parameters for evaluation and resource accountability.  The following is a simple example of a foodservice trade spending framework that aligns the evaluation metrics and accountability with the appropriate resource functions:

Market or Stock Price [distribution general inventory pricing]

Evaluation Metric[s]:  Net operating margin considering trade and current costs

Accountability:  Finance and Marketing

Exception Prices [exceptions from list or market prices]

Evaluation Metric[s]:  [a] Net operating margin considering trade and current costs and  [b] Variance from market price

Accountability:  Sales has authority within range of variation from market price; escalation to Finance beyond variance

Corporate Shelter [corporate distribution allowances]

Evaluation Metric[s]:  Net operating margin considering trade and current costs

Accountability:  Executive level – Sales, Finance and Marketing

Local Shelter [local warehouse sheltered income and rebates]

Evaluation Metric[s]:  Regional and/or market-based annual spending budget balance

Accountability:  Field sales management with escalation to executive level and/or Finance once available budget fully committed

Local Marketing [local events, sponsorship, short term promo, etc.]

Evaluation Metric[s]:  Regional and/or market-based annual spending budget balance

Accountability:  Field sales management with escalation to executive level and/or Finance once available budget fully committed

Trade Show Funds [booth fees and allowances for trade shows]

Evaluation Metric[s]:  Regional and/or market-based annual spending budget balance

Accountability:  Field sales management with escalation to executive level and/or Finance once available budget fully committed

National Account pricing [pricing and allowances for large operator organizations]

Evaluation Metric[s]:  Net operating margin considering trade and current costs

Accountability:  Sales has authority within range of variation from profit targets; escalation to Finance beyond variance

Bid Pricing [pricing and allowances for non-profit operator organizations]

Evaluation Metric[s]:  Net operating margin considering trade and current costs

Accountability:  Sales has authority within range of variation from profit targets; escalation to Finance beyond variance

Operator Allowances [pricing and allowances for local operator opportunities]

Evaluation Metric[s]:  Net operating margin considering trade and current costs

Accountability:  Sales has authority within range of variation from profit targets; escalation to Finance beyond variance

• Funding eligibility rules are clearly defined:  Regional and market-level trade fund budgets are typically based on a percentage of sales dollars within a given geographic area.  Best-In-Class organizations are aggressively moving to net sales dollars as the variable to apply the funding metric against.  By reducing eligible dollars to account for national account and bid volume, they eliminate creation of local marketing funds based upon operator discounted growth.  Additionally, they clearly identify private label and operator proprietary items as ineligible for fund contribution.  Following those guidelines, they insure that funds are generated by sales that will in turn benefit from the dollars.  Simply put, local funds are generated by true “street” volumes in order to align the contribution source and spending target.
   
• They are seriously committed to planning:  The commitment to “Planning” cannot be underestimated as a critical element for success.  Beyond a mere desire, executives must lead with actions to build the infrastructure and processes required to execute with excellence.  Organizations that are most successful in getting the greatest return on investment for their trade spend dollars are fully committed to a comprehensive planning process.  The process engages executive leadership across multiple functions [primarily Sales and Finance] down to the territory managers and broker organizations. 

Within these organizations, planning is not viewed as a necessary evil [eg, “it’s something I have to do because I was told to it”] -- it is a critical and continuous process that drives volume goals, spending plans and monthly activities. 

• The process controls advance funding:  A challenge for any budget-based model is monitoring and controlling payments made to customers in advance of the purchases that accrue the funds.  Generally, this is not a practice that should be broadly supported.  When the customer opportunity is significant enough to warrant the risk, the following are three control points your process should include:

[1] Customers receiving advance funding should receive written documentation of their volume and/or performance-based obligations to justify the funding along with a repayment schedule in the event their volume falls short of the necessary levels to recoup the investment;

[2] Approval of these requests should be controlled by requiring executive level visibility and agreement;

[3] The process should capture these commitments and track the aggregate customer purchases to offset the investment over time with regularly scheduled progress reviews to identify corrective action.

• Analytics and Business Intelligence are strategic investments:  Across the industry, many executives suffer from lack of visibility and the quantification of “what’s going on”.  On the surface, this may sound a lot like “reporting”.  However, if your actions are merely building a data warehouse and purchasing analytics software, you will most likely be disappointed in the results.  Reporting tools are not likely to possess the artificial intelligence to provide answers if the questions are not defined.  As such, effectively managing your trade spending requires an investment that goes beyond hardware and software. 

Best-In-Class organizations commit to resources to mine their data with an analytical approach in order to identify the storylines.  Those resources need to be given the appropriate time and training to succeed – and, during tough times when the organization is “right-sizing”, these positions need to be defended vigorously.  Market leaders recognize that successful Business Intelligence has more to do with the analyst than it does data. 

• The organization publishes tactical guidance and provides fund management training:  Once the organization is empowered to plan and deploy their funds, they will need guidance relative to the tactical performance requirements that offer the greatest promise for volume growth.  For each of your major categories, you should evaluate and categorize the potential tactics for funding commitments.  As an example, the following is a simple framework for scoring some common funding tactics relative to two distinct category positions:

A.  Base business with established distribution and value parity to competition

• Product differentiation:  Minimal – similar to competitors in price and value
   
• Funding strategy:  Secure operator commitment and loyalty

High Potential Tactics                                

Direct operator discounts [Pull]              

Aggressive pricing - EDLP [Push]          

Low Value Tactics

Sheltered income [no pass through value]-  Food shows / trade shows [mature market]                                                      

DSR incentives, contests

Samples

B.  Category has at least one relevant point of difference [eg, quality, durability, brand]

• Product differentiation:  Relevant enough to command a premium and repeat purchases
   
• Funding strategy:  Secure trial and usage – validate value proposition vs. competitors

High Potential Tactics                               

Short term direct rebates [Pull]              

Food shows / trade shows [sampling and trial drives conversion to continual purchase]                     

Samples

Low Value Tactics

Sheltered income [no pass through value]

DSR incentives, contests [inefficient funds as product point of difference drives velocity]

The guidelines you define should be consistent with the trade funds strategy to drive each category.  Without guidelines for “how to spend the money”, the organization will merely dole out all available funds with minimal correlation to purchase volume.  Additional thoughts on these areas can be found via previous entries via these links:

Trade strategy

http://www.blacksmithapps.com/blog/index.cfm/2010/3/20/Trade-Funds-Strategy-and-Positioning

Push vs. pull positioning

http://www.blacksmithapps.com/blog/index.cfm/2010/3/23/Distribution-Bids-and-the-Strength-of-Your-Operator-Relationships

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