Imagine the following scenario:

$20.00  Case price you would sell to a local distributor for a truckload order

$15.00  Bid price you are offering that same distributor for a piece of local operator business

$ 5.00   Case rate you expect to pay that distributor for each case they sell that operator

$18.00  Case price to an authorized redistributor for a truckload order [net of a $2.00 redi allowance passed through off invoice]

$24.00  Price that same redistributor charges the local distributor who is servicing the bid

$ 9.00   Case rate that distributor deducts for each case sold to that bid account   

The incremental $4.00 has no revenue offset, it is sourced purely from your operating income.  This is a simple scenario that is playing out across the foodservice industry with increasing frequency as the need for supply chain efficiency and order optimization drives the popularity of redistribution.  The magic question in this scenario is how to best control the variance.  If your organization is struggling to process deviated price deductions against redi volume, the following are some pragmatic suggestions for defining and controlling the financial exposure to your business. 

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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:

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Over the past 2 months, the subscriber base for this blog has grown to over 4,000 foodservice professionals.  There have been a number of requests for access to previous posts as background material for internal discussions and meetings.  For the new subscribers, and those of you requiring access to prior posts, the following is a brief summary of the most popular entries of the past 6 weeks along with links to access the full entry:

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Many foodservice manufacturers are struggling to gain control over the pricing and allowances offered to Group Purchasing Organizations [GPO] without placing undue risk against the volume these arrangements represent.  The need for control continues to increase as more of them are extended to locations that were not originally assumed to be eligible. 

Historically, these offers were isolated to large non-commercial organizations such as ARAMARK and Sodexo, where unit-level compliance was managed and relatively under control.  Within the past 4-5 years, the convenience of blanket allowances has gained traction with commercial segments as well.  Today, it is common to find aggressive deviated price offers for Premier, foodbuy and Avendra right alongside offers such as ‘State of Florida Schools’, ‘Café’s of the Pacific Northwest’ and ‘Summer Camps of America’.  My personal favorite is ‘RJ’s Restaurants’, where RJ was the initials of the Region Sales Manager.  The point is that the definition of the locations intended to receive a discount has become too subjective and arbitrary.  With loose definition and poor control of location eligibility, one industry executive noted recently, “We have Premier rebates being passed along to Bowling Alley’s and Gentlemen’s Clubs”.    

The increase in extension to incremental locations represents a call to action relative to control:

• The economics of the original offer did not contemplate the extension to locations that have historically contributed higher margin volumes as “street business”.  The continued erosion of pure list price business is reducing the overall contribution of the business and increasing pressure to deliver the company operating budget.
   
• Distributors who have access to those discounts are using them to their advantage in gaining the business from distributors who do not.  Those distributors who are on the losing end of the equation are left to either [a] cry foul based upon restraint of trade and Robinson-Patman; [b] request their own “private” deviated pricing offers for those same locations in order to effectively compete; or, [c] both.  Ultimately, the manufacturer is impacted by spending more and taking on additional administration.   
   
• Across multiple points of distribution, volume from many locations is contributing to rebates against more than one offer [eg, the infamous double, triple and quadruple dip scenarios].  The result is that the economic appeal of these allowances is reduced as the dollars invested are spread across fewer net actual cases than intended. 

Given the volume involved, it is not realistic to assume you can walk away from these opportunities or dramatically reduce their allowances to control the risks.  The following are 7 common sense actions you can take to build more control behind your offers to GPO’s.

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No less than 10 years ago, what many of us in foodservice now refer to as “the good old days,” the majority of operator discounts and allowances were rebates – this much per case or that much per pound.  For special situations where the volume was large and the operator actually committed to buying your product, you would reluctantly offer a deviated price.  Those prices were well-controlled and were only offered after a thorough analysis and justification process.  The reasons most folks were reluctant to “open the flood gates” back then still hold true today –

• Deviated prices carry higher administrative costs than rebates due to the ambiguity of the effective claim rate.
   
• Uncertainty around how much of the discounted price would ever reach the operator.
   
• Risk that distributors would “go up and down the street” with the hot price, upsetting balance in the market and costing you money for volume that did not require the discount in the first place [the elusive “full list price street business”]. 

Flashing forward to 2010, the new reality is that Chet’s Chevron in Small Fry, Mississippi, now receives multiple deviated pricing offers on just about every category.  The flood gates aren’t open … they have been removed from their hinges and thrown away.  It’s at this point in the conversation that I often hear “that’s just the cost of doing business in foodservice.”  Before we jump to that conclusion, consider the following statistics from a recent survey of the industry:

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In the foodservice business, one of the great topics for debate between manufacturer and distributor is focused on the operator [or end user] and the simple yet complex question, “Whose customer is it?".  Over the years, many manufacturers have publicly answered diplomatically [“Why, of course, we share that customer.”] and privately responded aggressively [“Those operators are under contract with us!”].   Over the past few years, the emerging practice of distribution bids [whereby the distributor awards preferred category supplier status within regions or clusters of local houses] has challenged everyone to seriously re-visit that simple question.  The bidding process has upped the ante and altered the debate.  The new reality is that the stakes are bigger than ever before and the implications of winning and losing are substantial.

Like most of your peers, it’s likely you have recently found yourself hunched over a conference table, surrounded by your colleagues, engaging in a heated discussion over questions like these:

• How much of the business do we have on bid or contract that we will keep if we lose the distribution bid and are “de-listed”?
   
• How strong are our relationships with the operators … will they raise their hands or even notice if our product is no longer the product they receive?
   
• If they do notice, will they do anything about it, or will they just accept the substitutes and replacements?

If the operator community accepts this power shift in the purchasing cycle, what began as a limited proof of concept will gain broad adoption as the standard approach for managing most categories.  Emboldened by success, this practice may very well evolve into an all-the-time policy with the majority of the trade.  Debating whether or not that day will ever arrive is not the challenge of the moment.  The task at hand is to prepare for that potential outcome now in order to mitigate the risk of getting caught flat-footed if it does. 

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