The cost of trade funds investment has tripled in the last 20 years. Consumer goods companies are typically spending 15-25 per cent of sales revenue in this area, while costs in every other part of the business have been scrutinised for potential savings. Many companies acknowledge that their trade funds are poorly understood and subject to little planning, monitoring or control.
Elsevier Food International, Vol. 6, Number 1, February 2003
Hendrik Stegenga

Having tripled in the last 20 years, expenditure on trade funds is now the second highest cost for consumer goods manufacturers behind the cost of goods. It is estimated that, typically, 15 to 25 per cent of sales revenue is now spent on trade funds.
This is in part a consequence of the changing balance of power in favour of increasingly large and international retail customers, but in many cases it also reflects a lack of visibility and control.
Most companies are painfully aware of this. There are several reasons why trade funds costs have not been tackled before. One is that many companies are worried that any actions on their part could harm the relationships with their most important customers, who might resent losing what they perceive as "free" money, as well as with their own sales staff.
Even more daunting is the sheer complexity of the spending pattern, which makes it difficult to obtain a meaningful overview. Usually represented by only a few lines in the P&L statement, as many as 50 different types of expenditure and often hundreds of individual events or activities will be hidden behind those figures. The detail of the spend for each customer is a complex mix of discounting to net price, funding for consumer price reduction, and a huge variety of payments, such as displays, listings and joint advertising, making it difficult to compare customers, brands and territories.
Consequently, the spending pattern is subject to inadequate controls, weak processes and inappropriate measures. As retailers become increasingly international, they are also starting to implement Enterprise Resource Planning (ERP) systems that give them visibility of the significant differences in the pattern of trade funds investment between countries for a single manufacturer. This leaves manufacturers at risk to those retailers who see the opportunity to "cherry-pick" the most favourable terms from each country.

The benefit of tackling the problem
Manufacturers have an opportunity to reduce business risk, cut unnecessary costs and drive a better return on trade investment by addressing the processes, controls and measures for trade funds investment.
Companies can gain real-time visibility of trade funds plans alongside actual expenditure, promotional pricing that interfaces automatically with finance systems, promotional funding payments that are approved on line, and simplified deduction resolutions.
Manufacturers will be able to distinguish between activities that will drive profitable growth and those that will, at best, be a vehicle for "purchasing" volume and share. That is why leading manufacturers are looking to the systems vendors to provide them not only with the integration of multiple internal systems-finance, sales and promotion planning, supply chain, etc - but of third party data such as ACNielsen, EPOS and even loyalty card data.

What do you have to do?
 1. Get visibility of the funds
The first problem for many companies is that they are currently unable to discriminate between "pricing" (those trading terms which represent the fixed basis on which supply is agreed) and "trade funds" (those funds which are invested conditionally in your customer's business in return for agreed activities or performance by your customer).
Spend has typically built up over time at an individual customer, brand and country level as a response to particular trading pressures and therefore under no common framework (See Figure 1). This situation leaves manufacturers with no defensible rationale for their trade funds structure, vulnerable to pressure from international retailers and potentially exposed under European law.
Therefore, the first step is to arrange trade funds data into a common framework. The second challenge is to integrate this data with other company systems that will allow you to allocate these funds to actual physical stock, which is sold, delivered and paid for. This integration allows the real-time tracking and management of funds.

2. Align trade funds expenditure with strategy
Pricing and trade funds spending patterns have generally developed based upon "last year plus". Retail buyers are personally remunerated, not only on category revenue and margin but often also on margin growth above revenue growth. Consequently, trade funds investment often focuses more on supporting retailer margin than on investment in activities that will drive mutual category growth.
This logic does not reflect the priority of the brand or customer, let alone help to set specific and measurable objectives. What manufacturers must do is establish a process to drive objectives from brand plans, through channel plans to trade funds investment strategy, and plans by account. This will allow them to realign trade funds investment budgets to strategy - both customer and brand. Implementing the realignment may take a number of years in order to minimise risks to the business.

3. Cut out cross-functional process inefficiencies
Historically, the management of trade funds has been regarded as a sales function activity. Trade funds expenditure might be captured in a bespoke mainframe application and deductions dealt with through the accounts receivable system. There is usually little official process governing as to how these different elements will work together. Therefore, it is not surprising that they often do not.
Customer service and accounts receivable processes typically make up more than 95 per cent of all finance department headcount. Nevertheless, typical credit note rates run as high as 15 per cent of all invoices. The problem also has an impact on retailers' headcount in accounts payable - some retailers employ specialist external agencies to maximise their claims in this area.

4. Execute promotions effectively
Promotional events are rarely executed completely according to plan. Given that a significant proportion of the spend-behind activity is often fixed (e.g. gondola support, display materials), it is critical that the opportunity to drive volume from the activity is maximised. The underlying cause for most inefficiency is the lack of agreed process and high quality, timely information sharing between retailer and supplier and between functions of the same organisation (e.g. retail head office and store, brand marketing department and production).
Manufacturers should ensure that promotion-planning systems are integrated within supply chain systems so that they can appropriately anticipate promotions. Even more so, they should start to work collaboratively with their

5. Improve promotion effectiveness by learning from past activity
Many manufacturers believe that the exact format of trade-promotional activity is out of their control, dictated by customer requirements and "category expectations ". Over 60 per cent of brand investment is now estimated to be spent on activities with retail customers - a percentage that has significantly increased over the last ten years. For some brands, this strategy may be the best way to maximise brand growth and profit, but in othercases brand objectives may be better served by other types of activity such as advertising or sampling programmes. Without an understanding of which sales drivers are important, and how previous activity has worked and in which way, it is very difficult to make a case against promotions which you suspect may be suboptimising performance or diluting brand equity.

Shared responsibility
The end solution for effective deployment and control of trade funds management will be one that empowers staff to plan with insight, measure the results of actions and administrate effectively. It will change the position of trade funds management from a sales responsibility to a process that facilitates teamwork between sales, consumer and trade marketing, finance, customer service and logistics functions around a set of common data and measures that can be consolidated across different customers, categories and geographies.
Setting about reforming trade funds investment will be a difficult transformation involving different stakeholders. Retailers will have to be persuaded of the changes and the suppliers' marketing and sales staff could face a redefinition of their roles. A "three-steps-to-heaven" transition (Figure 2) can tackle these challenges.
It is obvious that consumer goods manufacturers can no longer ignore the size of trade spending or the rate of increase. Leading players are recognising the need to manage these more rigorously but also that trade funds are critical to driving business growth through customers to the consumer. Manufacturers and retailers will need to work out how together they can maximise profitable growth through the deployment of these funds.