GMA Roundtable Question for GMA, Information Systems, and Logistics Distribution Conference in Tucson Arizona, April 3 & 4, 2006:

ROI has risen to the top of every CEO's priority list, and CEOs are actively looking for tools, techniques and resources that meet the ROI test. In your travels about the CPG industry, what noteworthy initiative or investment have you seen that impressed you because it actually produced a meaningful ROI for a CPG company and/or retailer?

In your opinion, how and why did it work? Would investing in this tool or initiative make sense for all CPG companies? If not, where would it make sense?

Synectics Group Response, written by Wayne Spencer, VP Business Developement:

One of the most significant initiatives, if not the most significant untapped initiative in the CPG sector today, would be the addition of a closed-loop trade promotion management system. In the past decade CPG organizations have made substantial investments in upgrading their ERP systems, demand planning intelligence, forecasting and category management to name a few, in the quest ROI optimization. The one area in a significant portion of the CPG sector (approx. 70%) that has not been addressed is the ever growing and under-performing area of trade promotion. In the past 10 year period the trade promotion expenditure of the average CPG company has increased 16% and is currently estimated to be at $125 billion per year. It is now the #2 expense of CPG companies and the ROI on this escalating expenditure is eroding at a dramatic rate.

When you add to the equation the government involvement in the past 2 years surrounding this emotional and unprofitable area, it provides pose for concern as to why this critical opportunity has not been addressed. In the past 2 years public companies have been introduced to FASB and Sarbanes-Oxley to better monitor the accounting and audit trail of this and other expenditures. In addition, the SEC has become involved in the auditing of the age-old practice of channel stuffing at the end of financial periods to post corporate volume and financial numbers for shareholders. This legislation and government involvement has provided a catalyst for C-level executives at public corporations to aggressively explore the implementation of a closed-loop trade promotion approach. When the due diligence regarding current TPM practices is presented to these executives, there is are common threads in the information obtained,

1) the planning vehicle is often being housed on static spreadsheets with various corporate views of current liability,

2) it is not uncommon to have to source upwards of 5 silo bases of corporate information to effectively analyze the TPM expenditure from a variable contribution basis,

3) the propensity for human error on promotional planning information being fed to the ERP GL’s is extremely high,

4) the manual intensity of deduction and payment resolution is costly from both a manpower scenario, as well as the ability to accurately post promotion expenditures to the specific account/promotional event/promoted product group,

5) the manual feeds vs. electronic synchronized feeds of planning information, financial liabilities, and real time changes impacts the accuracy of various operating areas systems analysis. A true closed-loop trade promotion system addresses all of these critical areas as well as providing integration capability to existing systems in demand planning/forecasting, category management, ERP GL feeds, etc;

The CPG sector is at a unique and daunting crossroad where we are spending more and enjoying it far less. The retailers’ and CPG manufacturers’ margins continue to erode at alarming rates as our categories become more mature. Realizing that the trade promotion expenditure is not going to go down from a percentage of gross sales in the immediate future, CPG manufacturers and retailers need to collaborate more effectively in the expenditure of these funds for mutual maximum gain. A closed-loop trade promotion system provides a foundation for the ability to constantly and accurately monitor the effectiveness/efficiency of various strategies and tactics regarding trade promotion. Once this information is available to an organization it opens the doors to a significant improvement to the ROI on the trade promotion investment. It is not uncommon for a manufacturer to improve the return on the effectiveness/efficiency of the total trade spend by 3%-5% in the first 18 months of project implementation. Those organizations that are committed to a significant paradigm shift in their trade promotion approach will accomplish a 5%-10% return within a 3-5 year period.

The ROI is a tangible reality, but equally sobering is the fact that delaying this decision on the #2 expense in most CPG companies is recipe for shrinking shareholder equity. Reduced shareholder equity is the primary cause for the incredible shrinking world of retailers and manufacturers fueled by mergers/acquisitions and the sad reality of failed businesses.

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