A CPG Revenue Growth Management blog series on optimization sophistication: intermediate level
In a previous blog, we talked about optimization at an entry level and the benefits for Consumer Products manufacturers. But this is only leg one of the optimization trip, and once the entry level has been assimilated, it is time for leg two of the trip or a more sophisticated optimization level. This is called the intermediate level.
Growing your business without any additional money to do so, requires you to move to an intermediate level of optimization sophistication. The good news is that more volume with the same amount of money is possible! With promotional and ultimately scenario planning at an intermediate level, you will have the ability to analyze for a better outcome.
Putting in place the right mix of technology, data science capabilities and organizational skills will enable your commercial team to move from the concept of same old “Planning” to one of “What-if” Scenario Planning. It might be just a one-word difference, “planning vs. what-if”, but there are many additional benefits.
Here’s the itinerary…
From a technological perspective, additional capabilities are required, and this means new tools and data management. Tools must allow you to manage several assumptions, build different versions of plans, highlight risks and benefits coming from your assumptions, and enable salespeople to easily understand the differences between multiple scenarios. Scenarios have to be compared from a financial standpoint including the comparison of the ROI of each scenario. Data management is affected as well because to reach this level of sophistication, internal shipment and external consumption data sources have to be perfectly integrated to align consumption volumes with internal financial metrics.
Regarding your data science capability, the complexity of models required is “next level” when compared to entry level baseline forecast. Models have to be more sophisticated. They have to help you predict the incremental volume for the coinciding merchandising conditions. Gross margin is relevant based on financial KPIs which are more important than gross revenue. Some business logic like seasonality has to be injected into the models to give importance to the right KPIs and to configure the proper calculation rules. These models must not only help you understand what has already happened to volume decomposition of past promotional activities, but also support the definition of scenarios and simulate the results of different configurations of promotions. Advanced predictive capabilities are now required by the data science models.
The third consideration is related to people. Bringing staff up to speed in a new way of planning that incorporates multiple scenarios, financial KPIs, predictive capabilities and new tools. All are definitely a big challenge. A proper change management program is the key to success in this important evolution. CPG manufacturers will need help identifying skill sets needed for RGM planning. RGM teams will support the sales organization in understanding how to get the most from the new metrics and tools. Finally, the senior executive team has to sponsor and support the change.
While the travel is demanding, the mileage earned is worth it
Companies who move to the intermediate level have experienced:
- Improved promotional ROI. Testing different combinations of promotions with a focus on financial KPIs and a reliance on predictive capabilities is the final step in reframing a previous mindset of delivering volume vs. profitable volume with a full understanding of the entire P&L. Improvements can result in a 2 to 5% ROI.
- Advanced SO&P. Adopting this planning methodology requires strong communication, understanding and alignment among and across the different teams involved. Mainly the RGM and the sales teams but also the finance and the supply chain management teams. This will improve your S&OP processes and drive an even better and more accurate forecast in comparison with an entry level of sophistication.
- More effective joint business planning. Presenting retailers with new and well-supported proposals, a clear understanding of assumptions, benefits, risks and financial implications on both sides will make you, the manufacturer, a more credible partner to the retailer. Establishing a more collaborative relationship and moving the trade terms into the “pay-for-performance” space will result in more profitable growth for both sides.
Reaching the intermediate optimization level is serious business but absolutely worth the effort. A smoother ride will result once you identify the right partner who can support you with the right knowledge and the right set of capabilities related to tools, analytics, business acumen, data science and change management.