• How to Obtain Useful Data from Sales Figures

• Measuring Account Profitibility

• Theory into Practice: 2 Case Studies

Account Profitability: How to Obtain Useful Data from Sales Figures
by John C. Vavalva, Finance Manager, Johnson & Johnson
Source: Spring 1996 NAPAA Newsletter

Using sales volume as the primary performance measurement can often produce misleading data and can result in decisions that are not aligned with profit, share and strategic company goals. Traditional accounting and reporting systems were not developed with the customer as the primary focus. They were designed to provide internal management a historical perspective by measuring actual performance versus forecast.

Traditional reporting systems sufficed when competition was lean and price increases were a forecasted annual event. However, recent trends in the consumer products market have created a need for manufacturers to develop alternate tools in analyzing their customer's performance. These trends include an intense competitive market, an increase in account specific promotion spending and pressures on manufacturer's profit margins. Also, the top 25 accounts now represent the lion's share of the manufacturer's sales volume.

Given these trends, manufacturers who fully understand their customers are at a strategic advantage over their competition. Achieving this advantage is no small task. The challenge for manufacturers is to develop an actionable customer profitability system that captures and reports discrete costs of doing business. For those costs that are not directly sourced by the account, Activity Based Costing (ABC) logic must be employed to generate customer allocations.

Objective
At Johnson & Johnson's Customer Support Center the objective was to design, create and implement a common database application to be used across Consumer Business Divisions that would provide account level sales and cost information on an ad hoc basis. A multi-disciplined team, representing sales, finance and information technology, was assembled to determine system requirements and project scope.

Requirements
Overall, the project took 18 months to complete:

• Planning - 10 months
• Development - 4 months
• System testing - 3 months
• Training - 1 month

The application was then rolled out to a select user group to validate the data.

The first step in the planning phase was to establish standard definitions across all operating companies. Specific areas of concern were gross sales, adjustments to sales and net sales. Also, identifying the cost elements that directly relate to the selling activity at the account level required many hours of discussion. For those costs that are not sourced by customer, activity-based allocations were developed.

During the planning phase, several key criteria were established:

• Uniform database with common definitions
• Easy-to-use application
• Meaningful, actionable data
• Quick response time
• Limited maintenance

To satisfy these criteria the system was developed in the Windows platform using PowerBuilder software. Existing databases and systems were utilized to extract sales, accounts receivable and promotion payments detail. Access to the application is online and paperless.

Four levels of reporting were established:

1. Account contribution - (Exhibit 1)
2. Gross profit by brand - (Exhibit 2)
3. Promotion spending by brand (Exhibit 3)
4. Line item - high to low analysis. This provides the ability to select specific line items for comparison between various accounts.

All reports can be rolled up by Sector, Operating Division, Region, District and Territory, at the "Sold-To" level. Also, all reports can be exported into Microsoft Excel.

The above reports provide meaningful trends in customer activity and in turn highlight potential areas of concern. The application was not intended to be a subsidiary ledger to the general ledger and consequently Promotion Spending and Freight costs are reflected on a cash basis and do not provide for accrual accounting. Therefore analysis should be conducted on a timely basis to avoid misleading sales and expense comparisons.

Conclusion
An account profitability application can provide the manufacturer with the vital sales and financial data necessary in identifying business building opportunities at the account level, specifically, class-of-trade differences, product mix optimization and promotion profitability analysis. Account profitability can also be used as a scorecard for strategic initiatives such as Efficient Consumer Response (ECR), Category Management and Channel Strategy. Used correctly, it can also be the basis for rewards and recognition.

To be successful requires not only system resources, but real commitment from management. And most importantly, the intrinsic value of the application must be demonstrated and communicated effectively to gain company-wide commitment and support.

Exhibit 1
Account Profitability for the Month Dec 1995 (dollars in thousands) (% to Net Trade Sales)

Return to Four levels...

Exhibit 2
Account Brand GP Report for the Month Dec 1995 (dollars in thousands) (% to Gross Trade Sales)

Return to Four levels...

Exhibit 3
Account Brand Promotions Report YTD Dec 1995(dollars in thousands) (% to Gross Trade Sales)

Return to Four levels...

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Measuring Account Profitability
by Judith F. Huth, Manager, Business Systems & Administration. Pharmacia & Upjohn, Inc.
Source: Winter 1996 NAPAA Newsletter

In today's environment of rapidly changing technology and increased access to information, many manufacturers as well as retailers and distributors have become more sophisticated in determining the impact of various types of promotional vehicles. As a result, a wider variety of promotional tools are available today than at any time in the past. Manufacturers may offer a wide assortment of promotional allowances in order to best fit the promotional needs of particular customers.
In years past, it was not uncommon to offer one or two traditional cooperative advertising allowance programs, paid on a billback basis, which were standard to all customers on a take-it-or-leave-it basis. In today's competitive marketplace, however, it is recognized that there is no one ideal approach to the consumer, and that flexibility in designing promotions is critical to success.

With promotional allowances offered in a variety of formats, including off-invoice allowances, billback payments, credit memos and others, the need to find a means of measuring overall account profitability becomes a vital tool in order to ensure that consistent, equitable standards are being applied.

The challenges of identifying appropriate data components and resolving issues of timing can be formidable. However, the benefits to sales, marketing and the trade promotion administration department are many. Such an analysis provides benchmarking capabilities which allow sales to fine-tune the mix of promotional dollars being spent within a trade class. It also allows marketing to review the relative uses of various promotional formats and plan future programs. Additionally, the trade promotion administration department can monitor performance to ensure that standards and guidelines are being followed.

The sponsorship for developing a Profit Contribution Report can come from any of these areas. It is imperative, however, that whoever provides the justification (and funding) obtains the consensus and support of the other groups. Unless all departments feel some ownership for the results and see benefits for their organization, it can degenerate into little more than an exercise in finger-pointing.

The determination of what cost components should be included in the analysis will be unique to each industry, but all data should be tested against the following criteria:

Relevant

Does it contribute to the purpose of the analysis?

Consistent

Does the data represent consistent information across all customers and products?

Actionable

Are the costs variable? Can action be taken which will impact the cost?

Available

Does the data exist? Not all costs may be identified at a detailed level.

Easy to measure and understand

If only the programmer and the financial analyst understand the report, no improvement will result from the analysis. It must be understandable and useful to people in a variety of positions.

Some of the components which may be considered include:

• Gross sales
  
• Gross sales
  
• Off-invoice allowances
  
• Cost of goods sold
  
• Trade promotion spending (cooperative advertising, MDF, etc.)
  
• Bad debt expense (this component often includes unresolved deductions for advertising and pricing discrepancies)

Once there is consensus that the analysis is meaningful and credible, it can be used in a variety of ways. It can be incorporated in sales and evaluation and compensation models. It can help identify additional information needs in order to better allocate costs. And most importantly, it can be an integral part of your efforts to analyze the effectiveness of various trade promotion programs and enhance the value of your promotional budget.

Ms. Huth was a featured speaker at the 1996 NAPAA Spring Conference in San Diego, April 28 - May 2.

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Putting Theory into Practice: Two Manufacturers show how it pays to Measure Account Profitability
by Tracy Torena, Advertising Audit Service
Source: 1995 Summer NAPAA Newsletter

Are my accounts profitable? The question should be on every manager's mind today. The steps toward finding the answer were presented on the final day of the NAPAA conference, May 4, when Michael Marn of McKinsey & Company, Shen Li of Hewlett-Packard and Bruce Hesse of Johnson & Johnson Consumer Products conducted an information-packed session on how to measure profitability, by account or by promotion. For those of you who were not able to attend, the following is a brief summary.

Mr. Marn, Partner and Director of Pricing, explained the Pocket Price Waterfall and how pricing affects profitability. Under the Pocket Price Waterfall concept, the Pocket Price (that is, the actual amount which a company has left in its pocket after completing a transaction) is equal to invoice price minus all the "leaks" in the waterfall - including prompt payment discounts, volume buying incentives, and cooperative advertising allowances. Both Mr. Li and Mr. Hesse showed how they applied the concept to help determine account profitability within their respective companies.

Up the Waterfall
Hewlett-Packard

Mr. Li, Marketing Program Manager of Hewlett-Packard's computer products organization, applied the Price Waterfall concept from his marketing department's point of view. He chose to work his way "up" the waterfall, rather than "down." The tools he used were simple and readily available. Using Microsoft Excel and linking with existing databases as well as contracts, he created an information base.

He began with the pocket price of a product and reviewed each level of the "waterfall" comparing each marketing program against the cost of the product including co-op, rebates, promotions, display allowances, and discounts. Using the review and some additional research he was able to determine that the rebates HP was offering to educational institutions were not necessary in every instance. Educational institutions indicated in a poll that they would most likely buy the HP product regardless of a rebate offer or not. With this information, HP made the decision to drop the discount for educational institutions and move to competitive deal discounts which could then be reviewed on a case by case basis.

The reduction in rebates improved overall profitability for HP by $10 million annually, with no loss in revenue. Mr. Li feels that return-on-investment measurement is key to a company's marketing success. While your company's action plan and results may vary, it is easy to get started and begin receiving benefits.

Measuring the Top 100
Johnson & Johnson

Mr. Hesse, Finance Manager, went into greater detail about the process which Johnson & Johnson Consumer Products has gone through. J & J decided to make an investment in developing a system which would use various formulas to calculate sales information fed into its database. This Account Profitability Program measures the effectiveness/cost of doing business with J & J's Top 100 accounts.

They started by creating a projected timeline for the project including the following phases: Planning, development, testing, and training. The majority of time spent in system development was linked to planning; an absolute necessity in order to provide direction for the process. The planning process was used for defining the key elements/key criteria to be gathered for the system. Mr. Hesse indicated that the most difficult part of the planning phase may be gaining the consensus of all key personnel and identifying their requirements for the system.

During the development phase (systems), he suggests that you seek feedback at regular intervals to determine if the focus of the project is being kept intact and that the target goals will be relevant to all key personnel. When development was completed, the J & J system was tested for data accuracy. After the system test was completed, the J & J work force was trained on how to use the new system. This was also used as an opportunity to sell them on the capabilities of this new system. If your company decides to invest in developing a system for tracking account profitability, Mr. Hesse recommends that it be parameter-driven so the information can be "sliced and diced" in a variety of ways.

Whether your company chooses a simple approach and focuses on one department's point-of-view or chooses to include information from a variety of areas, the result seems to be the same. Your company's management will have a useful tool for making effective and relevant decisions about improving account profitability which in turn will lead to corporate profitability.

Tracy Torena is Account Manager at Advertising Audit Service, Inc., Huntington Beach, California.

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