How to Optimize Trade Terms, Mitigate Risks, and Reduce Costs for Consumer Products Manufacturers

VIDEO

In the last few years, the conversation between Consumer Products (CP) manufacturers and their customers has been driven by margin wholeness and dominated by price. How to split the load of inflation along the supply chain has almost been the only topic discussed in all price negotiations but now that inflationary pressure has decreased, conversations are shifting. A more collaborative approach seems to have replaced the conflictual negotiation previously driven by the zero-sum game and mandated by inflation.

Climb on up

Many manufacturers I have talked to have addressed areas within their route to market that have created unplanned costs hindering their profitability; however, contractual Trade Terms are one area that they have not prioritized. This is further echoed by analysts and consultants in the CP industry.

For example, PwC has published a study that explains how contractual Trade Terms that are managed ineffectively can result in missed opportunities for profitability and growth. 

While these numbers may not sound high, keep in mind that we are talking about the second most important sales incentive investment, after promotional spending, in the CP industry.

The question is, what can Consumer Product manufacturers do to achieve this growth?

Ascend and succeed

Here are the 3 steps I believe you need to take to garner success with Trade Terms. 

1. Digitalization – The first step is to rationalize and automate the activities and processes you manage related to Trade Terms in contracts. While they are the second largest sales incentive investment, averaging 15% of sales (even with a large variation in countries and categories), they are the most mismanaged item on the P&L. Without proper digitalization, Excel files and manual activities promote a lack of governance and compliance and are still quite common even in large enterprises.
   
   This step is important for 2 main reasons. First, because it provides a positive ROI. The digitalization of Trade Term activities enables companies to run several tasks more efficiently, such as contract definition, workflow approvals, audit procedures, accruals management and claims and deduction management. In my experience with customer rebates, I have seen more efficiency with FTEs (full-time employees) required to manage operational activities by reducing the time needed to perform “monthly close” to several days (weeks in some cases) and recovering a portion of margin by eliminating undue claims. See how Damm improved their monthly closure processes.

The second reason is even more important in building clarity around your contractual Trade Terms. This step enables you to analyze and discover what is working and what is not.

2. Analysis – Once digitalization has provided the foundation to effectively govern the actual Trade Terms of a contract, it is possible to identify risks, mitigate costs and uncover sales opportunities, so you can course correct as needed. This will help you set the framework to prevent any breakdowns in the future.
   
   The result of this analysis allows CPs to link a clear commercial scope to each investment and understand the balance between conditional and unconditional spending so you can address the right combination of Trade Terms to the right customers.
   
   It becomes possible to classify customers based on different drivers and to address the appropriate share of contractual Trade Terms to each customer for specific reasons: the customer is aligned with the manufacturer's strategic view, it is growing more than the market average, it is overperforming in a particular channel, or its level of in-store execution is above standards. Building this matrix between customers, objectives/reasons and Trade Terms spend allocation enables you to understand the effectiveness of the actual spend and to see how the Trade Terms investment could be better used. The next step is sharing this visibility with your customers.

3. Joint Business Plan – The last step is to bring your view to the negotiation table. Having clear visibility provides 2 main benefits.

1. • Hard selling. The ability to facilitate difficult conversions with retailers using fact-based arguments.
   • Win-win conversations. The ability to leverage mutual benefits to move investments into the “pay per performance” space.

Step up to the challenge

It’s time to add a bullet point for Trade Terms in contracts to your 2025 “to-do” list. It may not be as attractive as promotion and assortment optimization but by bringing Trade Terms in contracts into clearer focus, you will uncover part of the crucial operating income needed for growth and forecasted by industry analysts.