Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

A Trade Promotion Myth

Consumer Packaged Goods (CPG) | By •

I wanted to write a case study about a company that had implemented trade promotion optimization, so I conducted some secondary research and came across the following claim in analyst reports, trade publications, and comments made by software vendors: “For consumer products companies, trade spend is the second-largest expense item on their Profit and Loss statements right after the Cost of Goods Sold (COGS). For the average consumer products company, trade promotions account for 18 percent of revenues.” Some articles claimed 20 percent, which sounds impressive. Effective trade promotion must be strategic.

But something about these statements struck me as odd. I’m a supply chain guy, not a finance guy, but according to a financial management textbook sitting on my desk, here is how an income statement is organized:

Revenues
– Costs of Goods Sold (All supply chain costs, including procurement, manufacturing, and distribution)
= Gross Margin
– Selling, General and Administrative (SG&A) Costs
– Other Stuff
= Operating Income

So, when you say promotion spend is the second largest item after COGS, what you’re really saying is that it is the largest line item in a consumer products company’s SG&A costs.

But still, if promotion spend is 18 -20% of revenues at the “average” consumer products company, that is significant. But is this true?

I went to the Edgar database and looked up COGS and SG&A data for the publicly-traded consumer goods companies listed below. The table shows COGS and SG&As as a percentage of revenues based on each company’s most recent 10-K filing:

Company COGs SG&A
Coca-Cola 36% 37%
General Mills 60% 21%
Hormel 83% 8%
Kellogg 57% 27%
Kraft 64% 24%
Mars 91% 3%
PepsiCo 46% 39%
Procter & Gamble 49% 31%

So, as I look at this chart, I notice a few things. The “average” consumer products company isn’t very average. That 18-20% of revenues coming from promotions does not look credible or particularly meaningful.

I have nothing against spending money on Trade Promotions Optimization applications. In fact, I think it is a good idea for this industry. But if companies choose to invest in new applications, shouldn’t they make an informed decision?

One question that a consumer goods company might ask is the following: If I break sourcing, manufacturing, warehousing, and transportation costs out of COGS, what are the percentages for each? If I break trade promotions out of SG&A, what is its percentage? What is the rank order from largest to smallest of these different spend buckets? By itself, this type of analysis might not tell you where to spend your IT dollars, but it is a good starting place.

Guest Commentary: CPG Companies Collaborate on Sharing Best Practices and on the Road

Consumer Packaged Goods (CPG) | By •

For years, collaboration has been a major topic of interest for shippers that focus on best practices and innovative supply chain strategies. But with growing uncertainty around an economic rebound and shifts in capacity, forward-thinking shippers are talking about collaboration to improve their supply chain operations and to better serve their customer base.

For the past five years, Transplace has brought together leading consumer packaged goods (CPG) companies for its annual CPG Summit, where supply chain leaders engage in open, strategic discussion as a way to share knowledge and identify opportunities to work collaboratively. Last month, six leading companies met at a Transplace CPG customer’s headquarters to discuss top-of-mind issues, specifically best practices of collaborative transportation management, customer scorecards and benchmarking.

This event gives Transplace a front row seat to hear its customers and understand their concerns. It also allows the CPG corporate leaders to learn from their peers and make collaborative transportation management an active part of their supply chain strategies. The innovative, actionable discussion produced the following themes:

Improving Service Performance Execution, as Measured by Customer Scorecards: Service is king for CPG companies serving their retail customers. With the added pressure of more retailers adopting compliance programs and levying penalties for not meeting order/delivery terms (e.g., missed delivery window, incorrect shipment weights, etc.), shippers are looking to improve their service performance metrics. To do this, many shippers have focused on aligning their KPIs with their customers’ scorecards. Some CPG companies are even asking retail customers to provide their supplier scorecards so that shippers can measure their performance by the same criteria. During the CPG Summit, the participating companies looked to benchmark their own scorecard initiatives against their peers as a way to ensure they’re measuring the optimal criteria and developing scorecards that will help drive exceptional service to their customers.

Making Collaborative Transportation Management a Reality: While the idea of collaboration has been discussed for years, few companies have taken action on this initiative. Yet, as CPG companies and their logistics partners gain greater network visibility and the ability to more efficiently identify and execute collaborative transportation, more businesses are taking advantage of these innovative and untapped opportunities. The ability to identify network synergies opens the door for shippers to take advantage of several collaborative opportunities, including co-shipping, utilizing dedicated fleets and participating in multi-party bids. For companies already engaging in collaborative shipping strategies, there is an opportunity to bring in additional shippers and expand on how they are working together.

As the idea of collaborative transportation progresses, so does the talk around doing so with a competitor. While previously a taboo subject in the United States, this strategy is being utilized in Europe. Now, some shippers are considering this approach if co-shipping or co-storing with a competitor can significantly reduce supply chain costs and help secure capacity when the market tightens.

Benchmarking Freight Rates to Identify Savings Opportunities: Benchmarking freight rates can help shippers determine if there are opportunities for savings through a bid. This has become increasingly important in an environment of tightening capacity and volatile freight rates. Leveraging timely market benchmarks enables shippers to develop effective strategies to better align their networks with competitive carriers. Seeing the value in benchmarking, many of Transplace’s CPG customers have requested such data across several metrics on a monthly – not just quarterly – basis. An automated process gives these customers access to the necessary market data to efficiently evaluate their freight bid strategy and take advantage of available savings opportunities.

Successful collaborative transportation starts with shippers that recognize its value, are willing to openly share information, and engage in strategic, forward-thinking discussions. As was examined during the CPG Summit, there is tremendous opportunity for CPG companies to reduce transportation costs and better serve customers by collaborating with other shippers both in a forum setting and on the road.

Mark McEntire currently serves as Vice President of Operations for Transplace. Mr. McEntire’s 23 years in transportation and logistics include experience with JB Hunt Transport, Inc. and Penske Logistics. His functional responsibilities have included operations, sales, customer service, and contract logistics. In 2001, he completed a two year Six Sigma certification program with General Electric and is a GE certified Black Belt. In June 2009, he became certified as an APICS CSCP. Mr. McEntire earned a Bachelor of Science in transportation and logistics from Arkansas State University.

A Robust Merchandising Supply Chain Requires Planogram Compliance

Consumer Packaged Goods (CPG) | By •

If your consumer goods supply chain starts at the retail store shelf, which is what many companies are striving toward, then it is very important that you understand what is occurring at the store shelf. But do you?

Not according to Mike Spindler, the CEO of ShelfSnap. I subscribe to ShelfSnap’s newsletter because I think they are an interesting little (yet growing) company. Here is an excerpt from the company’s most recent issue titled “The Elusive Shelf”:

A recent ShelfSnap study reviewing shelf level compliance covers 11 merchandising categories within the grocery store. In this study, we compared the store-specific planograms for the category to the actual shelf in the store. The actual store conditions were captured with digital pictures and translated into products, positions, facings and conditions called Snapograms. The planned assortment never actually makes it to the store shelf. On average only 70% of the products selected to be in the plan are actually on the shelf. Some of the shelves were reset only 2 weeks prior to the audit.

I had a few questions about this research, so I called Mike up. First of all, was this just a metric that measures compliance to the planogram or does it mix planogram compliance with shelf-level out-of-stock numbers? According to Mike, it is pure planogram compliance. The Snapogram, a picture taken of the shelf and then sent to their lab for analysis, may detect a facing void. For the purpose of this metric if that slot is open they assume that part of the category planogram is compliant and that this particular slot is out of stock.

Why does this matter? Merchandise planning solutions from vendors like JDA use fancy math to maximize the profitability of a category by creating planograms. A retailer is giving up profits if it can’t execute that plan. And a consumer goods company serving as a category captain risks losing its captaincy if it can’t maximize that retailer’s profits.

I also asked Mike about the sample. How big were the categories? They ranged from categories where the horizontal space allocated to the category was only 8 feet (e.g., bagged salads) up to categories that took up 400 horizontal feet (e.g., soda aisle). Nine of the studies they conducted were for consumer goods companies, two for retailers. When the studies were done for consumer goods companies, they typically looked at about 400 stores across 12 different retail chains. Five categories represented Direct Store Delivery product categories, the other six represented regular retail warehouse replenished products. So basically, this was a pretty fair sized sample.

So, here is my takeaway: In addition to measuring out-of-stock at the shelf, we also need to measure planogram compliance at the shelf level. We can’t get to more accurate store-level demand plans, and to a truly demand-driven consumer goods supply chain, without this additional metric.

(Editor’s Note: This topic is related to our upcoming seminar on “Beyond the Perfect Order Metric: Bringing Together Supply Chain, Category Management, and Mobile Technologies to Improve On-Shelf Availability.” Take a look at the great agenda and lineup of speakers we’ve put together. If you haven’t registered yet, secure your spot today so that you don’t miss out.)

Frito-Lay Drives Shelf-Level Demand

Consumer Packaged Goods (CPG) | By •

I believe that one of the emerging trends that will differentiate leaders from followers in the consumer goods industries is that leaders will excel at integrating their demand management and replenishment processes with category management. Consequently, it benefits supply chain executives to better understand leading practices in category management. 

Supply Chain Digest recently aired a videocast featuring Dave Boissevain, Director of Retail Strategy and Planning at Frito-Lay, which laid out at least one leading practice: the use of store-level planograms. 

A planogram (POG) is a diagram of fixtures (e.g., shelves) and products that illustrates how and where retail products should be placed in a store. Leading retailers have moved to having category captains produce POGs that are communicated and explained to the retailer for all the goods in a category (like salty snacks in the case of Frito-Lay).

It is the category captain’s job to maximize the profitability of the retailer’s shelf. Think of this as the velocity at which store profits are created based on product margin, supply chain costs, and how goods flow off the shelf. This is sometimes called “return-on-shelf.”

In putting together a planogram, the category captain needs to use syndicated data and point of sale (POS) data to understand trends. 

They also need to understand product affinities to better allocate shelf real estate to profitable stock keeping units (SKUs). Frito-Lay conducted a study where it went into certain stores and eliminated 10 percent of the salty snack SKUs. The company then eliminated 20%, 30%, and 40% of the SKUs in that category. It did this to better understand the incrementality of the item. If an item was removed, how would it affect the sales of other SKUs in the store? The interesting thing that Frito-Lay discovered is that for large format stores customers actually liked the layout better when the SKUs were reduced by 20 or 30 percent. 

Historically, planograms were “one-size-fits-all” that applied to every store in a chain of a similar size. So, all stores with 20-ft aisles used one POG, all stores with 100-ft aisles used another, and so on. 

Eight to ten years ago the state of the art improved. Category captains began to do demand-based clustering. So, if a chain had 100 stores, they might have 7 different demand clusters. Planograms would then be created based on the demographics of that cluster and the size of the aisle. Thus, a category captain could end up creating 49 different POGs if the chain had different size stores in all clusters. Because a category captain was more than likely to be a category captain at other (often larger) chains, the creation of these POGs was labor intensive.

Now, the next leap has been made: the ability to dynamically create store-specific POGs based on an optimization engine. This engine produces POGs in 3 seconds versus the 30 minutes it used to take.  Consequently, not only can you do store-specific POGs, you can now do them more frequently, maybe every month instead of annually. Frito-Lay is using a new product from JDA Software (an ARC client) for this purpose.

When Frito-Lay moved from POGs developed for store clusters to store-specific POGs, it improved growth by 2 to 4 percentage points! What Frito-Lay found was that the assortment, based on the POG, might be fine Monday through Thursday, but a store-level POG really drove growth in peak selling times, Friday through Sunday. Thus, moving to store-level planograms creates more demand. This forward plan for increased demand needs to be integrated into the supply chain planning and replenishment processes. 

To get retailers to agree to this, Dave said that they need to be educated on how the black box optimization engine works. Retailers, after all, ultimately make the final decision on assortment. Moving to monthly POGs also creates more work for retailers. Finally, better planning has limited value unless the plans are fully executed. Frito-Lay is experimenting with a solution from ShelfSnap to help improve execution.     

However, Dave said that once retailers try this, they don’t go back!

How Objective are Category Captains?

Consumer Packaged Goods (CPG) | By •

As I’ve mentioned before (here and here), I’ve been researching the ROI associated with consumer goods (CG) companies using downstream data (e.g., POS, store level inventories, and DC-to-store shipments). One of the conclusions that I have reached is that Category Managers get a better ROI from their investments in this area than other consumer goods manufacturers.

Category Management might be new to many supply chain professionals, so let me provide a brief overview using an excerpt from Wikipedia, since they do a nice job of describing this topic:

Category Management is a retailing concept in which the total range of products sold by a retailer is broken down into discrete groups of similar or related products; these groups are known as product categories. Each category is then run like a “mini business” (Business Unit) in its own right, with its own set of turnover and/or profitability targets and strategies.

The focus of all negotiations [between retailer and supplier] is centered around the effects of the turnover of the total category, not just the sales on the individual products therein. Suppliers are expected, indeed in many cases, mandated to only suggest new product introductions, a new planogram or promotional activity if it is expected to have a beneficial effect on the turnover or profit of the total category and be beneficial to the shoppers of that category.

One key reason for the introduction of Category Management was the retailers’ desire for suppliers to add value to [the retailer’s] business rather than just the supplier’s own. For example, in a category containing brands A and B, the situation could arise such that every time brand A promoted its products, the sales of brand B would go down by the amount that brand A would increase, resulting in no net gain for the retailer. The introduction of Category Management imposed the condition that all actions undertaken … were beneficial to the retailer and the shopper in the store.

Large retail chains tend to employ Category Management and the category captain is usually the largest supplier in a particular category. If a smaller supplier is the category captain, it is usually because their ability to analyze downstream retail data and make intelligent suggestions exceeds that of their larger competitor.   

Category captains receive downstream data for all SKUs, including competitor products, in the category they manage. The category captain advises the retailer on the best way to price, display, and promote all products in a category, including those of competitors. While this arrangement ensures retail efficiency, it does raise concerns about possible misuse of power by the category captain.

One of the reasons category captains get a better ROI from technologies that allow them to leverage downstream data is that they have better lines of communication with their retail partners. So, in addition to account teams talking about new product introductions and promotions, the CG customer supply chain teams meet regularly with their replenishment colleagues at the retailer and make suggestions about how the retailer’s replenishment settings should be changed, why they believe their POS forecast for a particular product and region is better than the retailer’s, and so forth.

One can’t help but think that the category captain spends more time making sure their products leap off the shelf instead of their competitor’s products in the category.

But maybe I’m just being cynical.

Dear Valued Walmart Supplier: The Walmart Supply Chain Reliability Program

Consumer Packaged Goods (CPG) | By •

We are coming up on February 1st 2010, the day that Walmart starts enforcing the penalties associated with its Supply Chain Reliability Program. If you are not familiar with the program, below are excerpts from the letter that Walmart sent to suppliers on Oct. 15th, 2009.

Dear Valued Supplier,

Walmart and Sam’s Club are continually seeking to improve our supply chain efficiency…Therefore, in order to better serve our customers and members, Walmart and Sam’s Club recently partnered with U.S suppliers, across all business units, in a collective effort to develop the Supply Chain Reliability Program. We are excited about rolling out this initiative in collaboration with a broader assortment of valued suppliers. The new program will help us operate at the lowest possible cost and provide the best possible service. The key facets of this initiative are as follows:

  • Walmart and Sam’s Club incur additional costs for inventory carrying cost, warehousing, store/club labor and shrink for shipments arriving early, and lost sales on short shipments and shipments arriving late. In an effort to improve on-time delivery, a reimbursement charge of three percent of the cost of goods sold (COGS) will be applied to each case not delivered and recorded in our system within the MABD [Must Arrive By Date] delivery window.
  • Walmart and Sam’s Club require domestic replenishment, promotional and new modular purchase orders (PO) to be delivered, in full, within a four day window, comprised of the must arrive by date (MABD) on the PO and the three preceding days. To determine if there is a compliant delivery, replenishment orders will be measured against the original MABD on the PO, and promotional and new modular orders will be measured against the current (aka “adjusted”) MABD on the PO.

Supply Chain Reliability Program overview:

  • Program compliance is evaluated on each nine digit (department and sequence) supplier number. We measure compliance both by the number of cases delivered outside the MABD delivery window and comparing number of cases actually delivered to the cases ordered. If less than 90% of cases in any month for any supplier sequence number are not received within the MABD delivery window, including cases ordered but not delivered, then the supplier is assessed a reimbursement charge of 3% of the cost of goods. This 3% reimbursement charge is not assessed on those cases that were delivered within the MABD delivery window. Your compliance will be evaluated on the basis of each Walmart business month and you will be provided with an explanation of any reimbursement due which Walmart and Sam’s Club will deduct off invoice.
  • For most categories, the current delivery window is four days including the must arrive by date (MABD) minus three days. The MABD delivery windows for certain business segments are more stringent (e.g. perishable). Please work with the replenishment managers responsible for dealing with your company to ensure you have a clear understanding of the MABD delivery window that applies to your category.
  • Visibility will be provided to suppliers via a scorecard on Retail Link beginning on November 1, 2009. A weekly scorecard and monthly report will be available on Retail Link to report supplier performance, PO details, and the potential or assessment of reimbursement charges. The weekly scorecard, monthly report and additional information are located on Retail Link at Retail Link/ Decision Support/ Merchandising Applications/ Delivery Window.
  • This new program does not currently apply to direct imports orders or direct from supplier to store deliveries.

In total, this program will drive greater reliability in the delivery of products to the store shelves. These criteria are subject to change. We appreciate your partnership in this process.

Sincerely,

xxx

This program raises many questions for consumer goods manufacturers. For example, if an order to a DC fills 2.7 trucks, what are the costs of sending extra inventory along to cube out the truck and reduce transportation costs versus incurring the Walmart penalties versus sending the last load less-than-truckload?  Will the answer depend on whether the SKUs in question are part of Walmart’s ‘Win, Play, or Show’ assortment strategy? What sort of analytics can be developed that leverage Retail Link to show revenues at risk? Will supply chain software companies develop optimization solutions to help with this? 

If a supplier gets penalized because of poor carrier performance, will it pass the penalties along to the carrier?  How would this influence carrier procurement? 

Will other retailers copy this program?

One thing is for sure: many consumer goods supply chain executives will be challenged to hit their cost targets in the coming year.

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