Promotion planning

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Promotion planning
EyeOn bv
Business Planning
& Control Solutions
Croylaan 14
P.O.Box 85
NL - 5735 ZH Aarle-Rixtel
+31 492 388850
+31 492 388835
[email protected]
www.eyeon.nl
Special
Offer!
Promotion Planning for Professionals
in the Food & FMCG industry
An EyeOn white paper
Promotion Planning
for Professionals
in the Food & FMCG industry
Drs. ing. Niek van de Crommert, drs. André Vriens MTD
EyeOn Business Planning & Control Solutions,
Croylaan 14, 5735 PC Aarle-Rixtel, The Netherlands
+31 492 388 850, www.eyeon.nl
Our special recognition goes to the members of the EyeOn
Food & FMCG knowledge network. This white paper
reflects the findings of interviews and discussions with the
participating companies.
April 2010
An EyeOn white paper
Table of contents
Summary
3
Promotions in the Food & FMCG Industry
High level promotion planning process
The added value of promotions
Promotional demand and the supply chain
Promotion planning for professionals
5
5
6
8
8
Current Practice of Promotion Planning
It is difficult to forecast promotions
Promotions generate a bullwhip effect
Limited information sharing and collaboration
Advanced promotion planning tools are scarcely used
Only one scenario for the promotion is considered
Often there is no integral evaluation process
9
9
10
10
11
12
12
Promotion Planning of the Future: Professional, Mature, Integral
Planning stage: Create the foundation
Preparation stage: The 7 step approach
Execution stage: Do, Check, Act
Evaluation stage: Learn and capture for future improvement
Improve tools: Promotion database and advanced planning tool
Do’s in relation to promotion planning for professionals
13
13
14
16
17
18
19
References
20
2
Summary
An assessment of the current practice of
promotion planning leads to the conclusion
that numerous manufacturers in the Food &
FMCG industry:
•Often do not have a structured process to
plan promotions. Supportive tools are absent
or are not used effectively.
•Do not use all the information that is
available when planning and forecasting
promotions, such as input from the retailer,
forward buying, the actual lift factor, and the
pre- promotional and post-promotional dip.
•Do not always store information related to
previous promotions. This information is
often only available in people’s heads and
this makes it difficult to forecast the effect
of future promotions correctly.
•Do not apply lessons learned from previous
promotions in improving the quality and
accuracy of new promotion forecasts.
In 2009 the promotion pressure in the Dutch
supermarkets sector was 13.9% on average.
This is expected to increase further in 2010 to
approximately 14.9% (GfK).
A survey amongst the members of the EyeOn
knowledge network for the Food & FMCG
industry and discussions held during a full
day event indicated that two thirds of the
network members share the expectation
that there will be more promotions in
these dynamic economic times. They
specifically think that there will be more
price promotions to retain consumers and to
safeguard turnover and market shares.
CEO food multinational: “It is almost impossible for the
supply chain to keep up with the ever increasing promotion
pressure.”
This all leaves plenty of room for
improvements in promotion planning.
Discussions with the members of the EyeOn
knowledge network resulted in the drafting
of an enhanced promotion planning process.
This promotion planning process consists
of four stages and is to be supported by
a promotion knowledge database and a
promotion planning tool.
Increasing promotion pressure will require
manufacturers to become more flexible
than they currently are in order to meet
customer demand. This flexibility could come
from additional (costly) capacity, additional
inventories, or a state-of-the-art promotion
planning and control process.
This white paper describes the current
practice of promotion planning in the Food
& FMCG industry and how professionals
in this industry can make their promotion
planning process more mature, integral and
professional, and with that more effective.
Figure 1: Members of the Food &
FMCG knowledge network
3
Evaluation stage: Learn and capture for future
improvement
•Determine the real incremental promotion
volume (the net effect) by decomposing the
promotion peak.
•Draw up a commercial and financial
evaluation which also includes all supply
chain related costs. The deliverable is a
small P&L for the promotion.
•Determine whether there was any forward
buying or pre-promotional and postpromotional dip effects and correct the
baseline for the promotion product.
•Continuously evaluate your promotion and
your promotion planning process to ensure
continuous improvements.
Planning Stage: Lay the foundation
•Make a promotion year plan based on the
promotion strategy.
•Distinguish between planned and confirmed
promotions and make them visible in the
demand review or S&OP process.
•Set-up a workflow including milestones
and create a standard retrospective activity
planning for different promotion types.
•Establish who, on both the manufacturer
and retailer sides, is involved in the
promotion planning process and connect
them!
Preparation Stage: The 7 step approach
•Determine the promotion drivers.
•Set the parameters for the promotion drivers
based on information that is available from
past promotions, market insights, and
collaboration.
•Define scenarios for the promotion in
the event that insufficient information
is available to determine the parameters
for the promotion drivers correctly, or in
the event that this information is highly
uncertain.
•Determine the promotion peak based on the
parameters that were set in step two.
•Translate the promotion peak into a
promotion demand plan, taking into
account the loading profile, expected
forward buying, pre-promotional and postpromotional dip effects, and cannibalization.
•Check the availability of the promotional
products and promotional materials.
•Confirm the promotion by means of a
formal sign off to ensure that only those
promotions will be executed that are in line
with the promotion strategy and for which
the required products, materials, and funds
are available.
Promotion knowledge database and advanced
promotion planning tool
•Set-up a promotion knowledge database in
which past promotions are stored.
•Set up an analysis and evaluation method
on the possible promotion drivers and their
parameters. Set up your promotion model
based on a limited set of key drivers.
•Start filling the database and ensure that
improvements on the model and settings
are made with every promotion. Do not wait
to fill and use the knowledge database.
•Invest in an advanced tool for promotion
planning and evaluation.
The use of the enhanced promotion planning
process described above by professionals
in the Food & FMCG industry will lead to
integrally managed and evaluated promotions,
and more mature and professional promotion
planning through the use of a sophisticated
promotion planning tool. These are the
ingredients for the promotion planning
process of the future, a promotion planning
process which is more professional, integral,
and mature and which will both reduce
supply chain costs and improve market
performance.
Execution Stage: Do, Check, Act
•Execute what has been prepared and agreed
in the preparation stage.
•Check how the promotion is evolving during
the promotion period.
•Take corrective action if required.
4
Promotions in the Food & FMCG Industry
In times of uncertainty, the battle for
consumers becomes more and more intense.
Retailers and manufacturers then start
making more and more use of promotions to
attract consumers to their stores and entice
them to buy their products. Although it is
often unclear how effective promotions are,
there is no doubt that they have a major
impact on the value chain. Moreover, the
fluctuations in sales caused by promotions
result in additional (hidden) production and
logistics costs.
In fact, some items even have an average
promotion pressure of 45% (GfK, 2009).
Research amongst participants of the
EyeOn Food & FMCG knowledge network
indicates that, in the case of the downstream
manufacturing companies in the network
(mainly A-brands), roughly 23% of their
annual turnover comes from promotions, and
this percentage is increasing all the time.
Promotions seem to be important for
manufacturers and retailers alike. The first
question asks what the main reasons are
for carrying out promotions. The answer is
twofold. On the one hand, promotions can
be related to marketing and are intended
to support new product introductions, or to
create or increase brand awareness. This is
particularly the case as regards A-brands. On
the other hand, promotions can be related
to sales with the objective being to increase
sales or to act as a traffic builder in order to
entice consumers into stores and to sell more
products to them. The underlying objective of
these sales promotions is to restore, retain, or
increase turnover and market share.
How to plan promotions in order to manage
the value chain is considered to be one of the
key issues relating to planning and forecasting
in the Food & FMCG industry (Vriens and
Versteijnen, 2006).
Performance
management
One-number
planning
Collaboration
Figure 2:
Key issues in planning
and forecasting in the
Food & FMCG industry
New product
introduction
Promotion
planning
Marketing
and sales
involvement
A food manufacturer: “In the recent past there were mainly
promotions for A-brands. Today we see more and more sales
promotions for private labels. We are in competition with our
customers.”
Constraint
management
High level promotion planning process
The 50 members of the EyeOn Food & FMCG
knowledge network participated in a survey
on promotion planning. Based on the findings
of this survey and discussions from a full day
network event, this paper provides an answer
to the question of how manufacturers in the
Food & FMCG industry should set-up and
manage promotion planning effectively.
First and foremost, promotions are an
instrument of the category management
process. This process is often managed
by trade marketing which, in many
organizations, is the link between the
marketing and sales department. Some years
ago a GS1 Netherlands task force developed a
manual for effective promotions. This manual
refers to three consecutive phases when it
comes to planning, executing, and evaluating
promotions.
An examination of Dutch supermarkets reveals
that about 14% of their turnover is generated
by products that are sold via some kind of
promotion. In the case of some supermarket
formats, this percentage is more than 21%.
5
forward (promotion) proposals that respond
to the promotion strategy for the category.
This, in turn, will contribute to both the
effectiveness and efficiency of the promotion.
• Develop promotion strategy
Phase 1
It is advisable to select and plan milestones
related to the promotions. These milestones
could be linked to the preparation, execution,
and evaluation of the promotion. Once
the promotion calendar is ready, it should
be shared with the necessary internal
departments like sales, marketing, finance
and supply.
• Develop promotion year plan
Phase 2
• Decide, execute and evaluate promotion
Phase 3
Figure 3: High level phases in promotion planning
Phase 3: Decide, execute, and evaluate the
promotion
Phase 1: Develop promotion strategy
Based on the promotion year plan the
manufacturer and the retailer decide and
agree upon the promotion elements. The
milestone overview should help plan all the
activities that need to be carried out in order
to be able to execute the promotion properly
and effectively. In this phase a distinction can
be made between two streams:
•Commercial stream (develop, order, produce,
and deliver supporting POS promotion
materials and realize media support).
•Supply stream (forecast, order, produce,
deliver, and distribute products and POS
promotion materials to the stores).
This starts with an analysis and results in a
promotion strategy for a category. It takes into
account the definition, role, and strategies of
the category for which the promotion strategy
will be developed.
The features of the promotion strategy should
include:
•An objective and a target group for
promotions for the category in question.
•An assessment of the sales channels to be
focused on.
•The type of incentives to use in the
promotions (price, premium, none).
•The method of communication (point-of-sale
(POS) promotion materials, media support).
•The location in the store.
•Key Performance Indicators (KPIs).
The last step in this third phase is to evaluate
the promotion. This is done by comparing
the actual results of the promotion with the
objectives using the KPIs that were formulated
for the promotion.
In general, the promotion strategy is created
on a one-off basis and is reviewed every year.
If there is a significant change in either the
brand strategy or category strategy, a new
promotion strategy should be made.
The added value of promotions
Promotions are an important marketing
and sales tool for most manufacturers and
retailers and therefore they often put a lot of
effort into promotion planning, execution, and
evaluation. However, the question is what the
added value of promotions is for a particular
organization? For some types of promotions
the added value is limited. Research by
market research agencies indicates that
especially for price promotions there is a
positive effect (additional sales) in the short
run, but that the effect is small in the long
run.
Phase 2: Develop promotion year plan
Convert the promotion strategy into a tactical
year calendar to determine when the various
promotions need to take place. In the event
that the manufacturer and retailer do not
draw up a joint promotion year plan but do so
separately, it is important that the promotion
year plans are exchanged between the
manufacturer and the retailer. This will allow
both the manufacturer and the retailer to put
6
The example of the beer promotion below
illustrates that price promotions for a certain
brand often do not add much value in the long
run. Research performed by GfK supports this
example.
For some products there simply is not more
consumption by consumers, even if the
product is constantly promoted. In the long
run, you will not buy more toilet paper than
you actually need.
Short run Long run
Positive
64%
However, the effect of promotions is not
always small. In some situations and for
some categories, promotions do make sense.
Examples are promotions for new product
introductions and promotions for products
that are often bought on impulse, like
confectionary. If companies consistently offer
more promotions than their competitors, this
may, in the end, have a greater positive effect
for their own business.
4%
Negative
6%
1%
No effect
30%
95%
Table 1: Effect of price promotions on own business (GfK, 2009)
Another question is what the effect is on the
category. If there is always beer on promotion
somewhere, you might expect this to have
had a positive effect on the total sales of beer.
The same research by GfK shows that the
effect of price promotions for the complete
category in the long run is even more limited.
In the knowledge that, in general, most
promotions do not add much value, one
may well ask why most companies are so
persistent in continuing with promotions?
Part of the answer is that some companies
are unaware of the limited (if not negative)
added value promotions have in the long
run. However, the main reason may have to
do with what could be called the (prisoners’)
dilemma of promotions. This means that, if
your competitor promotes their products and
you never do, consumers will move to another
brand (brand switch), or to another retailer
(store switch). If you stop your promotions
but your competitors continue, you will lose
consumers and eventually sales in the long
run. If all manufacturers were to stop their
promotions, they all would be able to earn
more. However, you can simply never be
certain that, if you stop with promotions, your
competitors will do as well.
Short run Long run
Positive
58%
2%
Negative
5%
0%
No effect
37%
98%
Table 2: Effect of price promotions on the category (GfK, 2009)
The net effect of promotions on the long run
A beer manufacturer offers a 20% price discount on a crate
with 24 bottles for a period of two weeks. Sales in these weeks
increase by 200% for this specific item. Consumers who are
already familiar with this product, the loyal consumers, might
buy more because it is on sale at a discount. However, they
will not necessarily consume more beer and, as a consequence,
they will not buy the beer for the next few weeks or even
months because they still have enough at home (forward
buying by consumers). The increase in sales in the short term
will be offset by the decrease in the mid or long term.
Besides this, part of the increase in sales comes from
consumers who normally buy another brand of beer but now
bought the beer that is being promoted. Next time they will
buy their regular brand again, or even another brand that is
being promoted at that moment in time. This phenomenon
is called brand switching. Additional sales due to brand
switching will add limited value in the long run because
these sales often do not recur. In fact, these additional sales
from (temporary) brand switching might cost money because
a substantial part of the margin was given away to these
(temporary) consumers.
The promotion dilemma: In the long run most promotions
do not add value, but stopping them will cost you money.
Nevertheless, even if manufacturers were to
stop their promotions, retailers would most
likely never stop promotions all together
because their primary aim is to get as many
consumers as possible into their stores and
then try to sell them as many products as
possible. Their primary objective is not to sell
certain brands, but to sell.
7
Promotional demand and the supply chain
Promotion planning for professionals
The demand pattern of a promotion shows
a peak, but often also a dip. The peak is
caused by additional sales of the promotion
product. The lift factor is used to express how
much more a company expects to sell in the
promotion period compared to the baseline.
The lift factor is defined as the additional
volume sold during the promotion period
expressed as number of times the baseline.
The promotion dip is caused by temporary
saturation of demand.
Promotions are a fact of life, so in order to
deal with them as effectively as possible
as a manufacturer (or retailer), you need
to manage them in a more effective and
professional way.
The manual for effective promotions that
is described in brief in the paragraph ‘High
level promotion planning process’ focuses
on the more commercial part of promotion
planning. However, managing promotions in a
commercial way alone is a thing of the past. It
is time to plan, prepare, execute, and evaluate
promotions in a more integral way. Therefore,
this white paper focuses more specifically on
the actual planning process of promotions,
including forecasting (volume) and the link
to the supply chain. Today there is a greater
focus on cost management and this should
apply to promotions as well. Professionals
who are involved in promotion planning
should look at promotion planning from a
more integral perspective.
Promotion Peak
Baseline
Lift factor
Promotion dip
Figure 4: Promotion peak, dip, and lift factor
The impact a promotion has on the supply
chain is considerable, especially in the
event that the promotion was not forecasted
correctly. The elements affecting the
promotion peak and dip, and how to deal with
these effects when planning promotions, are
addressed in the next chapter. In order to
be able to manage the impact of promotions
on the supply chain, we need to understand
how promotions work and how they can be
forecasted with a higher degree of accuracy.
8
Current Practice of Promotion Planning
promotion planning process and are therefore
able to forecast promotions with a higher
degree of accuracy. Without this more mature
promotion planning process, the correlation
would have been even stronger.
Research amongst the members of the EyeOn
Food & FMCG knowledge network indicates
that none of the members is fully satisfied
with how they work with promotions and
they all believe there is plenty of room for
improvement.
There are several reasons for this:
•Companies find it difficult to forecast
correctly the incremental volume that will
be sold as a result of a promotion.
•Many organizations are not sufficiently
aware of the disturbing volume effects
related to promotions like forward buying,
pre-promotional and post-promotional dip,
and cannibalization.
•At many organizations the promotion
planning process is not properly structured
nor sufficiently mature.
•Information is not shared on time in the
chain (both internal and external).
•Advanced tools for promotion planning are
scarcely used.
•Scenarios for promotions are not created.
•Results are not analyzed and lessons from
previous promotions are not retained.
100
Forecast Accuracy
90
80
70
60
50
40
30
0
10
20
30
40
50
60
70
Percentage promotions (%)
Figure 5:Relation between forecast accuracy and percentage of
promotions (EyeOn Demand Planning Benchmark 2009)
In order to determine the additional volume
that will be sold by means of a promotion,
companies take account of various drivers
such as:
•Price reduction offered
•Type of campaign
•Visibility in the store
•Season of the year
It is difficult to forecast promotions
Most companies cannot say how accurate
or inaccurate their forecast for promotional
demand is because they do not measure the
forecast accuracy for promotional demand
separately. However, there is a common
certainty amongst the companies in the
EyeOn Food & FMCG knowledge network
that promotional demand has a negative
effect on the overall forecast accuracy of
an organization. For many companies it is
considered to be one of the most negative
influencing factors on the overall forecast
accuracy.
However, it is often not known which of
these drivers has the greatest effect on the
promotion volume. In fact, in the end, the
combination of various elements determines
the promotion volume. Many companies are
not aware of the interdependencies of the
various elements or drivers and therefore find
it difficult to forecast the promotion volume
correctly.
This statement is supported by data from
the EyeOn Demand Planning Benchmark.
The benchmark data shows that there is a
correlation between the forecast accuracy
and the percentage of promotions a company
has. Often, companies with a high percentage
of promotions already have a more mature
9
Promotions generate a bullwhip effect
Another cause of the post-promotional dip
is down to the fact that consumers may
also adapt to forward buying or ‘purchase
acceleration’. When a product is being
promoted, consumers may buy more than
they actually need (filling the cupboard) and
the result will be that they do not buy the
product on their regular shopping trips during
the subsequent couple of weeks. In the case of
some products, the pre-promotional dip may
also be caused by consumers who anticipate a
promotion.
Even if companies were able to forecast
promotional demand with an acceptable level
of accuracy, other effects need to be taken
into account in order to draw up a proper
demand plan.
Forward buying
Most companies are aware of the so called
pre-promotional peak which is when
customers order the additional quantities
they expect to sell in the promotion period
in advance to ensure that the products are in
their stores on time. However, some retailers
tend to order more than they expect to sell
in the promotion period because, by ordering
more, they try to decrease their purchase
price. This phenomenon is called forward
buying. If no agreements are made between
the manufacturer and the retailer on forward
buying, the result may be a greater prepromotional peak.
Pre-promotion peak
(forward buying)
Diapers are on sale very often and consumers wait with
purchasing their new supply of diapers until there is a new
diaper promotion.
Cannibalization
Some promotions may be accompanied by
cannibalization. When a product is on sale,
part of the promotional sales could come
from consumers who buy the product that is
being promoted rather than the product they
would normally buy. For instance, a consumer
who always buys soda in 1.5 litre bottles,
might swap to a 2.0 litre bottle that is being
promoted.
Promotion Peak
One third of the companies included
in the EyeOn survey on promotion
planning indicated that they do not take
cannibalization into account when drawing
up the demand plan. Fewer than half of the
companies indicated that they have some
kind of manual solution for dealing with
cannibalization effects, while only one quarter
of the companies have a structured process or
procedure to deal with these effects.
Baseline
Pre-promotional dip
Post-promotional dip
Figure 6: Promotions result in peaks and dips in demand and supply
If the manufacturer receives the estimated
promotion volume in advance as a result
of a register process at the retailer, the
manufacturer is well positioned to determine
the pre-promotional peak with a high degree
of accuracy.
Limited information sharing and
collaboration
In recent years it has become clear that it
is difficult for manufacturers and retailers
to collaborate. There are several reasons for
this. First of all, there needs to be sufficient
dependency between the manufacturer and
the retailer. If the degree of dependency is
small for one of the two organizations, the
added value generated by the collaboration
for that organization will be very limited.
Another obstacle to collaboration is the fact
Promotional dip
Besides the pre-promotional peak, there is
often also a post-promotional dip. The depth
and length of this dip is related on the one
hand to the extent to which the retailer has
applied forward buying. The more forward
buying on the part of the retailer, the greater
the post-promotional dip.
10
Advanced promotion planning tools are
scarcely used
that it is difficult to quantify the benefits that
come from collaboration, and how to share
these benefits (honestly). This is also caused
by the lack of trust and willingness to share
information. Only a fairly limited amount of
point-of-sale data is exchanged in the Food
& FMCG industry. There are some examples
of POS data being exchanged between large
multinationals in real time (every 3 minutes),
but this is not the case between the majority
of manufacturers and retailers.
A variety of demand planning tools are used
by companies in the Food & FMCG market, but
most of these are not very suited to support
the drawing up of a proper promotional
demand plan. Numerous companies have
therefore created their own promotion
planning tool which is often something tailormade and based on MsExcel or MsAccess. The
problem with some of these tailor-made tools
is that they are not much more than a means
of capturing the expected promotional uplift
instead of providing a calculated forecast
based on relevant factors that contribute to the
success of a promotion (the promotion drivers).
A food manufacturer: “Some of our retailers are willing
to share point-of-sale data, but we do not ask for it because
currently we are not able to process all the data into information
we can use in our forecasting process.”
Information is not shared because
companies are afraid that the details of a
promotion might become known to their
competitors. Furthermore, the value of the
information the retailer has is often greater
for the manufacturer than the value of the
information the manufacturer has for the
retailer. Last but not least, collaboration will
lead to more transparency. This transparency
may make it clear that some promotions are
less effective or profitable than was originally
thought and they may then be discontinued.
This is not always in the interest of both
companies. Alternatively it will become clear
that forward buying is taking place and the
manufacturer might take action to restrict this.
60%
50%
40%
30%
20%
10%
Magnugistics
Future Master
SAP CRM
PlanCaster
SAP APO
Tailor made
MsExcel
MsAccess
0%
Figure 7: Tools used in promotion planning
While most of the companies use some kind
of statistics or more advanced statistical
models to determine the baseline forecast,
the promotional volume forecast is largely
based on judgmental information. Hardly any
use is currently made of real decision support
models to forecast promotional volume.
Frequently, a similar past promotion is used
as a starting point although, in many cases,
these promotions cannot be compared very
easily because too many of the drivers differ
between the previous and the new promotion.
A food manufacturer: “Communication and collaboration
with the customer should be improved to improve input.”
The fact that the collaboration between
retailers and their suppliers is limited means
information on the different promotion
drivers is often not known in advance and on
time. This makes it even more difficult for
manufacturers to forecast the promotional
volume correctly, especially without having
the proper tool support.
A food manufacturer: “There is a one-to-one relationship
between the accuracy of the promotional forecast and the
experience of the account manager that provides the input.”
80% of the companies that participated in
the EyeOn survey on promotion planning
11
Promotions are mainly evaluated on the
basis of the more commercial aspects like
incremental sales, marketing cost, and
realized margin. The incremental sales of a
promotion are often determined by taking
only the (pre-) promotional peak into account.
This method of evaluation produces distorted
results for promotions because the prepromotional and post-promotional dips have
to be deducted from the promotional peak in
order to determine the real incremental sales
of a promotion. Furthermore, the promotional
peak itself should be broken down in order
to determine the volume from deceleration,
acceleration, cannibalization, store switching,
category switching, or brand switching.
indicated that the use of statistical models
to forecast promotional volume will increase
the overall forecast accuracy. 57% of these
companies is of the opinion that their current
demand planning tools are not suitable for the
creation of a reliable promotional forecast.
Some of the more advanced demand planning
tools provide functionality for dealing with
cannibalization and pre-promotional and
post-promotional dip effects. However, this
functionality is not always used in practice as
it seems to be too complex or too difficult to
understand the effects. Besides that, preloading
profiles, cannibalization effects, and prepromotional and post-promotional dips are
often calculated on the basis of generic settings
that have been entered into the demand
planning tool. Since there is a large variety
of different promotions and an even larger
variety of the promotion drivers’ parameter
combinations, the assumption is that a generic
setting will not provide the best result.
A large proportion of the cost of promotions
is often hidden in the supply chain and is
caused by, for instance, rush orders or rush
deliveries due to the promotion volume
forecast being too low, or due to specific
promotion products or materials having
become obsolete because the forecast
volume was too high. The members of the
EyeOn knowledge network for Food & FMCG
estimated that 21% of the total promotional
costs are supply chain related.
Only one scenario for the promotion is
considered
It seems that because companies struggle
to generate a reliable promotional forecast
they hardly consider working with different
scenarios in promotion planning. Only 4%
of the interviewed companies said that
they use scenarios, while two-thirds of the
companies indicated that they occasionally
use scenarios for very large promotions. These
scenarios are often made by the commercial
department and are not always shared with
the supply department. Supply is simply
assigned a number which represents the most
likely scenario according to the commercial
department. Supply then aims for this one
number and does not explicitly take any
account of an upward or downward adjustment.
Strangely enough, supply chain related
aspects are often not taken into account when
evaluating promotions. Some companies
monitor the additional production cost related
to the promotion (value added logistics or
co-packing costs), while others monitor
the cost caused by additional inventory or
obsolete products. However, this is done more
frequently by the supply chain department
and is not taken into account in the overall
evaluation of the promotion. If supply chain
related costs are not taken into account in
the promotion evaluation, some companies
may find that promotions result in hidden
cash drains in the supply chain. Furthermore,
the overall actual profitability of a promotion
might be less than has been assumed to date.
Often there is no integral evaluation process
The absence of a promotion evaluation
process and of a good tool to support this
process means that promotion evaluation
involves a lot of manual work and is very
people dependent. This makes it hard to learn
lessons from past promotions and to use
these for future promotions.
Only 20% of the companies that participated
in the EyeOn research into promotion
planning have a formal evaluation process
in place, while around 50% of the companies
carry out some kind of promotion evaluation
but then rather on request and not according
to an agreed format.
12
Promotion Planning of the Future:
Professional, Mature, Integral
•Finance is to be consulted in the planning,
preparation, and evaluation stages.
Promotion planning is one of the critical
success factors in planning and forecasting
in the Food & FMCG industry (Vriens and
Versteijnen, 2006). Three elements are key
when it comes to moving towards more
professional forecasting and planning of
promotions:
•A solid promotion planning process.
•Continuous improvement.
•Advanced tools.
Continuous evaluation, continuous
improvement
In order to professionalize further, companies
should continuously evaluate their
promotions and their promotion planning
process. There needs to be a stronger focus
on the cost side of promotions, albeit often
limited to the more commercial related
cost. However, the integral profitability of
promotions will become more important and
therefore companies also need to include all
supply chain related costs in the evaluation
of their promotions in order to determine the
real added value of a promotion. Promotions
should be integrally managed and evaluated.
Continuous evaluation will lead to continuous
improvement and this will make the
promotion planning process more mature
over time.
Install a solid promotion planning process
To improve promotion planning and to make
the whole process more professional, the first
activity that needs to take place is to set-up
and install a proper promotion planning
process with clearly defined stages, steps, and
roles and responsibilities. This process should
be linked to the long-term promotion strategy
of a category.
Promotion strategy
Plan
Prepare
Execute
Invest in tools for advanced promotion
planning
Besides having a solid process, knowing the
drivers and having the required information
at hand, an advanced promotion planning
tool that takes account of the various drivers
and their interdependencies should facilitate
a development towards a more professional
promotion planning process.
Evaluate &
improve
Promotion database & tool
Planning stage: Create the foundation
Figure 8: Promotion planning process
In the first stage of the
promotion planning process,
the planning stage, a
promotion year plan has to be
drawn up based on the promotion strategy. In
this year plan you indicate which promotions
you already foresee in which channels or
with which customers, and for which product
categories, including the timing during the
year. The promotions in the year plan should
be incorporated into the demand plan and
should be discussed in the demand review.
•The overall accountability for a promotion
lies with the account or sales manager.
•In general the (trade) marketing department
should be responsible for the promotion
strategy and should be involved in the
planning, preparation, and evaluation
stages.
•The demand planner is responsible for part
of the preparation and evaluation stages.
•Customer service can assume responsibility
in the execution stage.
Plan
13
Preparation stage: The 7 step approach
The expected volumes can still be rough
estimates, but by incorporating them in the
demand plan they are already visible for both
the commercial and financial community and
for the supply community.
The absence of collaboration
does not mean that
improvements in forecasting
and planning promotions are
impossible. The 7 step approach described
below can be followed to improve the
accuracy of the promotion forecast. It should
be noted that it is not necessary to forecast
and plan all promotions specifically according
to this 7 step approach.
Prepare
Having the promotion plan in the demand
plan means the promotions are also visible
in the S&OP process. Organizations should
distinguish between agreed promotions
and planned promotions in order to have
the right information available in the S&OP
discussions.
A workflow should be created that includes
the preparation, execution, and evaluation
stages. The workflow should include milestone
dates such as when the promotion will take
place, when the promotion products should be
available for delivery to the customer, when
supporting materials should be ready, when
the final promotion quantities should be
known, when the evaluation of the promotion
should be ready, etc. You should make a
standard retrospective activity planning for the
different promotion types or different retailers
and save this so that it can be reused in the
future for new, similar promotions.
Step 1 : Determine promotion drivers
Step 2 : Set parameters for the promotion
drivers
Step 3 : Define scenarios
Step 4 : Determine the promotional peak
Step 5 : Create a time phased promotion
demand plan
Step 6 : Check availability of promotional
products and materials
Step 7 : Confirm promotion
One of the ways to improve the accuracy
of the promotion forecast is through
collaboration between manufacturers and
retailers. Both the manufacturer and the
retailer have information that, if brought
together, will facilitate an improved
forecast of the promotion volume. Although
collaboration between manufacturers and
retailers is expected to remain difficult, there
is a small and easy step that companies can
take. After defining common goals like for
instance on shelf availability, an investigation
needs to be carried out to determine which
people at the manufacturer and the retailer
are involved in the complete promotion
planning process. This overview could consist
of people from the (trade) marketing and sales
department, but also people like demand
planners and people from customer service
and perhaps logistics as well. The next step
is to see where connecting the counterparts
of both organizations could generate added
value, for instance by connecting the
manufacturer’s demand planner with the
retailer’s planner.
Figure 9: The 7 step approach to preparing a promotion
Step 1: Determine promotion drivers
Knowing the real drivers behind a promotion
and the interdependencies of these drivers
should result in companies being better
positioned to make a more accurate
promotion forecast as long as they have
installed the right processes and use more
sophisticated tools.
The main drivers of the promotion should
be determined on the basis of the objective
of the promotion and the promotion type.
Promotion drivers could be:
•Price discount given to the consumer
•Features (gifts)
•Communication
•Placement in store
•Timing (is the promotion linked to an event)
•Elapsed time after the last promotion
•Recent promotions by competitors
A company can control these drivers and can
manage and direct them to a considerable
14
degree. There are also some promotion drivers
that cannot be controlled but have an effect
on the promotion. Examples of these drivers
are the weather conditions and promotions
planned by competitors.
several scenarios for the promotion. You set
promotion driver parameters per scenario
and use these parameters to determine the
promotion peak and create the promotion
demand plan as described in steps 4 and 5.
If historical data on promotions is available,
companies should use this as the basis to
determine the most important drivers per
promotion type. If historical data is not
present, a more judgmental approach should
be followed in which sales and marketing
people determine the most important drivers
per promotion type together with the demand
planners. Over time, once the promotion
database is filled with actual data on past
promotions, the most important drivers per
promotion type should be re-determined
using the information gathered on past
promotions.
Step 4: Determine the promotional peak
The promotional peak volume should be
determined based on the parameters set in
step(s) 2 (and 3). The promotional peak should
be expressed as a lift factor. Working with lift
factors instead of volume will generate a clear
comparison between promotions. It will also
be easier to reuse information on promotion
peak volumes for future promotions.
If limited information on past promotions
is available, the sales department
should determine the lift factor. This
will be a difficult exercise because it
is almost impossible to determine the
interdependencies of the promotion
drivers without the use of a promotion
tool that has the ability to determine these
interdependencies based on historical
promotion data.
Step 2: Set parameters for the promotion
drivers
After the promotion drivers have been
determined, it is up to the people with the
most knowledge of the promotion to set the
parameters for the drivers. In many companies
it is the sales department that is in the closest
contact with the customer and should be best
able to set the parameters for the drivers.
If information from the retailer is available
that is of value for determining the promotion
peak or lift factor, it should be used. An
example is when the retailer works with a
registration process for promotions, where
the expected promotion volume is gathered at
outlet level and added together to produce a
total which is given to the manufacturer.
If the information that is required to set the
parameter for a certain driver is not available,
for example because the retailer is unwilling
to share this information, the company
should estimate the parameter based on
similar promotions in the past. The roles and
responsibilities information should clarify
who is responsible for this action.
Companies need to decide for which
promotion types and for which retailers they
are going to determine the promotion drivers
and then set the parameters for these drivers.
In the case of smaller promotions that have a
limited effect on the supply chain, companies
can decide to include them in the baseline
forecast rather than forecasting and planning
them separately.
Step 5: Create a time phased promotion
demand plan
Once the promotional peak volume has been
determined, the next step is to incorporate
this volume into a promotional demand plan.
This promotional demand plan should take
account of the loading profile of the retailer.
Most retailers use a standard loading profile
for all promotions while some retailers link
the loading profile to the promotion type. If
a standard loading profile is not known for a
particular promotion, the manufacturer has to
retrieve it from previous promotions.
Step 3: Define scenarios
If not all the information is available that is
required to determine the parameters for
the promotion drivers, or if the parameters
are highly uncertain, it is advisable to make
In the event that agreements on a restricted
promotion volume cannot be made with the
retailer, and if the promotion is known or
expected that the retailer will order more
than the expected promotional peak volume,
15
Step 6: Check the availability of promotional
products and materials
After the promotion demand plan has been
generated and processed into a consolidated
demand plan, a supply check should be
executed to confirm that the required additional promotion quantities will be available
on time. The supply department should also
indicate whether there are additional costs
involved to ensure timely delivery of the
required quantities for the promotion.
the additional quantities due to forward
buying should also be incorporated into the
promotion demand plan. To restrict forward
buying, manufacturers could agree with the
retailers that the discounted purchase price
only applies to the quantities sold during
the promotion period. After the promotion
has taken place, the retailer indicates the
quantities sold in the promotion period. The
manufacturer has to cross-check this quantity
with information from market research
agencies like GfK and Nielsen.
It is the responsibility of the sales or (trade)
marketing department to verify whether
the required supporting materials for the
promotion have been arranged and will be
available on time.
Most promotions have a pre-promotional and
post-promotional dip. These dips are caused
to some extent by consumer behaviour and to
some extent by retailer behaviour. The type of
promotion, the promotion driver parameters,
the lift factor, and the retailer behaviour
together determine how big the prepromotional and post-promotional dip will be.
If no historical data on promotions is available
in the promotion database, it will be difficult
to estimate the length and depth of the prepromotional and post-promotional dip. The
pre-promotional and post-promotional dip
should be expressed as a percentage of the
promotional volume and can be defined as
the dip factor. The demand planner should
make an initial estimation for the dip factors
(one for the pre-promotional dip and one
for the post-promotional dip) per promotion
type if historical data on promotions and the
interdependencies between the promotion
drivers has not been determined yet.
Step 7: Confirm the promotion
The preparation stage should include a
formal sign off or tollgate. The person who
is accountable for the promotion should
approve the complete promotion, taking into
consideration whether it is sufficiently likely
that the objectives set for the promotion are
going to be achieved. This tollgate is intended
to ensure that only promotions will be
executed that are in line with the promotion
strategy and for which the required products,
materials and funds are available.
Once the promotion has been confirmed, the
status of the promotion should be updated
and all relevant information regarding the
promotion should be stored in the promotion
database. This makes it possible to evaluate
whether the promotion drivers’ parameters
have been forecast correctly and how accurate
the promotion demand plan was.
The lift factor, the loading profile, the
expected forward buying, and the expected
pre-promotional and post-promotional dip (or
dip factors) can be used to create an accurate
promotion demand plan. As regards the weeks
(or days) for which a pre-promotional or postpromotional dip is anticipated, the volume
in the promotional demand plan ought to be
negative. The promotional demand plan should
be added to the baseline and together they
form the consolidated demand plan.
Execution stage: Do, Check, Act
Executing the promotion
means that you need to ensure
that all agreements made with
regard to the promotion are
fulfilled. This includes delivering the agreed
promotion quantities and the supporting
promotion materials to the retailer on time.
Execute
If promotion is expected to result in
cannibalization effects for other products,
the effect should be estimated and taken into
account in the demand plan of the products
that are the subject of the cannibalization.
If agreements have been made on
the promotional volume between the
manufacturer and the retailer, the customer
service department needs to monitor whether
16
to determine the real additional quantities
that have been sold as a result of the
promotion. Excluding the effects of purchase
deceleration and acceleration, cannibalization
and store switching by consumers would
enable you to determine the net volume effect
of a promotion.
these agreements are respected on a day-today basis.
Once the actual promotion has started, it
is key to obtain point-of-sale information,
preferably on a daily basis, in order to monitor
whether the promotion is evolving according
to plan. This information could come from
either the retailer or from market research
agencies like Nielsen. If the promotion is
sensitive to weather effects, the short-term
weather forecast should be consulted and
taken into account.
Once the actual additional quantities have
been determined, the actual cost made
for the promotion should be evaluated.
The determination of the promotion cost
should not be limited to the commercially
related costs like margin reduction, or the
communication costs for flyer placement and
in-store communication.
If deviations from the plan occur, you have
a limited time to respond to these and take
corrective action. If you have defined various
scenarios in the preparation stage, the
corrective action may involve switching to
one of the defined scenarios. If no scenarios
exist, the corrective action needs to be
detailed and verified with both the customer
and the internal organization.
100%
Deceleration
90%
80%
Acceleration
70%
Cannibalization
60%
Store switching
50%
Evaluation stage: Learn and capture for
future improvement
Category switching
40%
30%
Brand switching
20%
The last stage of a promotion is
Evaluate &
the evaluation stage. Not only
improve
should the various promotion
elements be taken into account
when evaluating the promotion, but also the
process itself.
Outside industries
10%
0%
Increased consumption rate
Liftfactor
Liftfactor
decomposed
Figure 10: T
he promotion peak broken down
(Van Heerde et al., 2004)
The person who is responsible for the
promotion should perform a formal promotion
evaluation. It is advisable to start the
evaluation a few weeks after the promotion
has taken place in order to be sure that the
post-promotional dip effect has passed. The
promotion evaluation should be split into two
parts, namely a commercial and financial
evaluation, and a process and planning
evaluation.
The hidden promotion costs can be found
in the supply chain. These may include
additional costs due to suboptimal production
batches, rush orders in production, additional
temporary inventory, repacking, rush
deliveries, and costs relating to obsolete
promotion products or promotion materials.
To determine the profitability of the
promotion both the commercial related and
supply related cost should be deducted from
the additional margin generated by the real
incremental promotion volume (the net
effect). A financial overview of a promotion
can be generated by drawing up a small
profit and loss statement which includes all
of the above. Doing this will allow different
promotions to be compared on the same
basis. It will then be immediately clear to an
organization which promotions generate a
Commercial and financial evaluation
The first step in the commercial and financial
evaluation is to determine the actual
promotion peak and decomposing it. This can
be done by using data that has been provided
by the retailer and combining this with data
from market research agencies.
The promotion peak should be broken down
17
positive return on investment and which not.
actual promotion period, but also for the weeks
(or days) for which a pre-promotional or postpromotional dip was determined.
The commercial evaluation should also include
an assessment of whether the objective of
the promotion was met. In the event that the
objective was not met, the evaluation should
include an indication of what the cause was
for not achieving the promotion objective and
what should be done differently in future,
similar promotions to ensure that the objective
will be met.
Improve tools: Promotion database
and advanced planning tool
In order to learn from
the lessons from past
promotions, the relevant
evaluations need to be stored in a promotion
knowledge database. These evaluations should
include information on the initial parameters
for the promotion drivers, the expected lift
factor, the expected pre-promotional and post
promotional dip effects, as well as the actual
values for these drivers and parameters.
The commercial evaluation should also be
stored in the knowledge database in order to
determine in the future which promotions
tend to have the most added value in relation
to a certain objective. Having a knowledge
database with information on past promotions
is only one way of continuing to improve
and professionalize your promotion planning
process. Without a proper promotion planning
tool it will be very difficult to determine the
interdependencies of the various promotion
drivers and how the parameters of these
drivers relate to the promotion peak and preand post promotional dip.
Promotion
database & tool
Process and planning evaluation
In the process and planning part of the
promotion evaluation the manufacturer should
determine the extent to which forward buying
by the retailer took place. The result should
be saved for reuse when determining the
promotion demand plan for future promotions.
Another check that needs to be performed
is whether if loading profile used for the
customer was correct. If deviations with the
assumed loading profile occur, you should
determine whether the ‘standard’ loading
profile for a specific customer or promotion
needs to be adjusted.
The next step is to determine the extent to
which a pre-promotional and post-promotional
dip occurred. For this, information from the
break down of the promotion peak can be used.
Comparing actual sales data with the baseline
forecast for the periods before and after the
promotion period could also clarify whether a
pre-promotional and post-promotional dip has
taken place. For a pure analysis a distinction
needs to be made between the pre-promotional
and post-promotional dip caused by consumer
behaviour, and the dip caused by behaviour of
the retailer.
More and more research has been done in the
area of promotion planning, and (econometric)
models and tools are being developed
that will support a determination of the
interdependencies of various promotion drivers
based on information on past promotions.
These models and tools should facilitate a more
reliable forecast of the promotion peak and the
pre-promotion and post-promotion dip effects,
and together with the loading profile generate
a promotion demand plan for a new promotion.
This promotion demand plan can then be added
to the baseline forecast of a product.
If it has become clear from breaking down
the promotion peak that cannibalization has
occurred, an assessment should be carried
out to determine which products were subject
to the cannibalization and to what extent.
Cannibalization-related findings should be
stored in the promotion database to make
them available for reuse when preparing future
promotions.
We do not expect that having a more
sophisticated promotion planning tool will
mean that no judgmental input is needed
in order to forecast and plan promotions.
Proposals generated by a planning tool are
often based on statistics of past promotions,
and it could be that new promotions have
different characteristics for which no proper
The last step in the process and planning
related part of the promotion evaluation is
to recalculate the baseline for the promotion
product. This should not only be done for the
18
match can be found in the past promotions
data. Therefore the proposals generated by
an advanced planning tool should always
be checked by an experienced demand
planner or someone else who has relevant
knowledge regarding the promotion. In the
end the account manager or sales manager is
accountable for the complete promotion.
the commercial and the supply side of an
organization. Having a solid process covering
all the relevant steps in promotion planning,
from preparation to evaluation, will make
your promotion planning more professional.
Furthermore, it will ensure that planning,
preparing, and evaluating promotions is
performed in an integral way and includes all
the relevant functions, actions, and related
costs.
If changes are made to the proposed
promotional demand plan that was generated
by a promotion planning tool, these changes
should be recorded. The promotion evaluation
should include a determination of whether
the changes to the promotion demand plan
have made it more or less accurate.
Continuous improvement will make your
promotion planning more mature over time.
Using an advanced tool for promotion planning
will also make the process more professional
and sophisticated.
This chapter provided guidelines and steps for
improving your promotion planning process
and for making it more, professional, integral,
and mature. We conclude this chapter with the
most important do’s for professionals involved
in promotion planning.
Do’s in relation to promotion planning for
professionals
As regards future promotion planning,
professionals will be required on both
• Set-up and install a solid promotion planning process with clearly defined stages, steps, and roles and
responsibilities
• Investigate which people on both the manufacturer and retailer side are involved in the promotion
planning process and connect them!
• Make a distinction
between planned and
confirmed promotions
in your S&OP process
• Set-up a workflow
including milestones
• Make a standard
retrospective activity
planning for different
type of promotions
• Determine the drivers
of a type of promotion
• Set parameters for
drivers based on
available information
• Define scenarios
• Determine promotion
peak and dip
• Translate promotion
peak, dip, and potential
forward buying into
demand plan
• Check availability
• Formal sign-off
Plan
• Execute what has been
prepared in prepare
stage
• Monitor how promotion is evolving in the
promotion period
• Take corrective action
when required to
safeguard the objectives of the promotion
Prepare
• Determine real
incremental promotion
volume
• Determine forward
buying, pre- and
post-promotional dip
• Include supply chain
related costs in the
commercial and
financial evaluation
(not only sales and
margin)
• Make a small P&L for
the promotion
Execute
Evaluate &
improve
• Continuous evaluate and improve the promotion and the promotion planning process
Promotion database & tool
• Set-up a promotion knowledge database in which past promotions are stored
• Set up an analysis and evaluation method on the possible promotion drivers and their parameters. Set up
your promotion model based on a limited set of key drivers
• Start filling the database and ensure that improvements on the model and settings are made with every
promotion. Do not wait to fill and use the knowledge database
• Invest in an advanced tool for promotion planning and evaluation
Figure 11: Do’s in relation to promotion
planning for professionals
19
References
•Aertsen and Wouters [2006] “Sales on Board! – How to involve Sales in the Forecasting and
Planning process?”
•Den Dopper, Rutjes, and Vriens [2009] “From Barrier To Carrier – Getting Marketing & Sales fully
involved in forecasting”
•EyeOn [2009] “Demand Planning Benchmark”
•GfK [2009] “Promotion effectiveness, a retailer perspective”
•GS1 Nederland “Handleiding Effectieve Promoties”
•Van Heerde, H.J. [1999]“Models for sales promotion effects based on store-level scanner data”
•Van Heerde, H.J., Leeflang, P.S.H., and Wittink, D.R. [2004] “Decomposing the Sales Promotion
Bump with Store Data”
•Vriens and Versteijnen [2006] “Forecasting & Planning in the Food industry – A recipe to make it light!”
Contact
For additional information on this subject,
please contact EyeOn.
Drs. ing. Niek van de Crommert
+31 6 12960754, [email protected]
Drs. André Vriens MTD
+31 6 20243823, [email protected]
About EyeOn
EyeOn is a consultancy firm specialized in
designing and implementing forecasting,
planning, and control solutions in complex
organizations.
Within 100 days EyeOn provides structural
improvements in terms of the speed,
efficiency, and output reliability of planning
processes.
For more information visit www.eyeon.nl
About the knowledge network
The ‘Planning and Forecasting in the Food &
FMCG industry’ knowledge network provides
a learning network for supply chain and
planning professionals which focuses on
contemporary trends and best practices in
business planning. The network enables its
members to share experiences and learn
from each other via research and benchmark
studies in which the member’s needs are
closely reflected. EyeOn initiated this network
in June 2006. The network members are able
to meet in person during round table sessions
twice a year.
Companies that are participating in the EyeOn
knowledge network for Food & FMCG are:
Abott, Alpro, Aviko, Baarsma, Bacardi,
Bavaria, Bolletje, Campbell’s, Cargill, CêlaVita,
Coca-Cola, Crown, Diageo, DSM, Euroma,
FrieslandCampina, Givaudan, Grolsch,
Heineken, Heinz, Hero, Hessing Supervers,
IFF, Intersnack, IOI Loders Croklaan,
Johma, Klöckner Pentaplast, Leaf, LU, Mars,
MeadWestvaco, Nestlé, Nutricia, Peijnenburg,
Perfetti van Melle, Purac, Refresco, Romi
Smilfood, Sara Lee, SCA Packaging, Scholle
Packaging, Smurfit Kappa, Stegeman, Suiker
Unie, Tetra Pak, Unilever, Vion Food Group,
Vrumona, and Zwanenberg Food Group.
21

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