A marketing agency designs a promotional campaign taking multiple criteria into consideration. This includes the promoted product’s current sales volume, gross profit, the estimated incremental gross profit margin to be realized after the promotion, and so on. However, the factor that is largely overlooked is the disruption it causes to the existing supply chain, and the mechanisms required to deal with this.
The root cause of the problem is the “Silo Mentality” amidst departments that results in a restricted flow of information. Consequently, the supply chain is rendered oblivious of the drastic shift of equilibrium point in the demand-supply curve, resulting out of the promotional events.
These promotional events can be broadly classified into two types:
- Trade promotions – wherein the manufactures incentivize the retailers to stock up on their specific product.
- Consumer promotions – wherein the retailers incentivize the customers to purchase a specific product.
When we look at these short-term marketing strategies from an Economic lens, they are nothing but different means to shift the equilibrium, in the demand-supply curve. Their purpose – to drive profits towards the manufacturer or the retailer, either directly or indirectly.
To achieve this, the supply chain of an organization has to be malleable and should be able to transform rapidly, ensuring timely fulfillment and distribution of products. Any disruption to the standard supply chain, such as dis-intermediation, re-intermediation, vertical integration, and network orchestration can potentially result in negative outcomes. Typical events include – stock outages, cross-selling, loss of sale, and can even trigger adverse legal implications on the licensor agreements.
Most of these problems are quite evident in the Consumer Packaged Goods (CPG) industry, eventually resulting in customer dissatisfaction and subsequent customer loss. Moreover, with the industry’s continuous struggle with logistics and inventory costs, a simple miscalculation in volume forecasts during any promotional event can lead to a multitude of failures.
But how to tackle this? Communication and collaboration between the logistics and marketing department is the prime step towards adopting a risk mitigation strategy. The inclusion of the logistics team during the planning of any promotional event will annihilate the possibilities of stock outages, and ensure the timely fulfillment of orders. Moreover, it will verify the bottom line profits after accounting for the logistics cost and any losses due to back-orders.
The promotional supply chain should be able to evolve rapidly to take into account the disruptions caused by the below-mentioned effects –
- Cannibalization – increasing the sales of the promoted item at the cost of another item belonging to the same category.
- Halo – promoting one item that inherently influences the consumer to buy another item. A market basket analysis along with association mining techniques can help identify such pairs.
- Pull forward – consumers stock up on products during a sale, which reduces the propensity to purchase the same product in the future without any promotional event, resulting in a dip in their sales.
To leverage maximum gains out of such promotional campaigns, the supply chain needs to simultaneously tackle the synergic effects of cannibalization, halo and pull forward, and calculate the aggregate sales lift accordingly.
Total Sales Lift
Aggregate Sales Lift = Incremental Item Sales + Halo – Cannibalization – Pull Forward
This complex calculation is made simple using our AI enabled trade spend optimization (TPO) tool – SpendO. It empowers CPG firms to create promotion plans with better incremental ROI and provides real-time trade promotion performance insights.
To know more, click on the following link – https://www.spendo.ai