GMA Question: With the economy reportedly improving, where should CPG retailer focus --- on greater efficiency and driving more costs out, or driving sales? In what information technology tools / services would you advise CPG and retailer executives to invest this year, in order to enable success in your recommended area of focus?

Synectics Group Response: Mature business segments, like the Consumer Products sector, will not enjoy the same bounce, as the growth sectors in our economy will. This said we can totally understand the urge for the CEO’s from the CPG sector, (manufacturers and retailers), to explore further cost cutting initiatives to enhance their bottom line profit contribution. The downsizing that the CPG sector went through in the decade of the 1990’s was long overdue and resulted in significant effectiveness/efficiencies, that eventually found their way to the bottom line profit contribution and investors shareholder value. These cost cutting strategies/tactics addressed inefficient overlapping management layers, as well as inefficient infrastructure regarding offices, plants and distribution centers. Going to that well to many times to extract more costs to enhance the bottom line profit has begun to act as a cancer, eroding the very bottom line they were designed to enhance.

In extremely tough times opportunities often present themselves that result in a shift of paradigm. We at Synectics believe that the CPG sector is in an extremely critical time and there is an area that has been one of the key contributors to margin erosion on both sides. The villain of the current pain felt by both parties, regarding profit margin erosion, is “Trade Promotion Spending”.

We have reached a pinnacle of inefficiency/effectiveness in this area, with the current estimated $95+ billion dollars spent annually. It has become the #1 expense in most CPG manufacturers with an annualized decline from an R.O.I. perspective. The combination of these two facts is not the makings of a successful formula for sales/profit growth. Although the retailer has more trade promotion dollars then ever to reflect to the consumer, in most instances their profit margins have eroded consistently over the past 5-10 year period. The estimated fact is that approximately 50% of the $95 billion spent annually on trade promotions never reach the consumer. Inefficiencies in the system on both sides of the fence (i.e.; channel stuffing, diversion, forward buying, etc.) have created this monster and only collaborative focus/management will destroy its ugly head.

Today approximately 70% of all consumer manufacturers have no capability to evaluate the effectiveness/efficiency of their largest expenditure. It is not uncommon for a sales manager in a CPG manufacturer to have to go to 4-5 separate silos in an organization to assemble the information necessary for a basic business review. As a result of these disparate unlinked areas in an organization, it is virtually impossible to generate an accurate P&L by account to evaluate the effectiveness/efficiency of this significant expenditure. The only good news here is that a proportionate number of retailers are equally challenged.

A closed-loop trade promotion management system can provide a CPG manufacturer a paradigm-shifting tool that manages the #1 expense in real time quantifying R.O.I. A closed-loop system enables most manufacturers the ability to redeploy personnel from paper based unprofitable activities to more analytical/proactive activities, regarding increasing the effectiveness/efficiency of the trade promotion spend. The rich information generated from this type of system should also be linked to existing forecasting, logistics, CRM/SFA and financial systems to enhance the overall intelligence in real time of a CPG organization.

The real payback of the complete closed-loop system described above will come when both the retailer and the manufacturer work together as one to truly maximize the return of this $95+ billion expenditure. A closed-loop trade promotion system with real time analytical capability will go a long way towards eliminating the current emotion and inefficiency existing against the very significant trade promotion expenditure.

We at Synectics Group can think of 95 billion reasons why it is time to focus in this area with technological investment, in an effort to shift the current paradigm and help reverse the significant margin erosion.