advertising strategic sourcing · tv to radio or from radio to newspaper) can potentially...

Advertising Strategic Sourcing:

The Supply Chain’s Most Elusive Sacred Cow

October 20, 2005

1© Surge Consulting

Presentation Objectives

• Identify 11 advertising strategic sourcing cost reduction levers you can apply at your company

• Share learnings and success strategies gained from working as both a consultant and corporate supply chain officer in this space

• Tell you where to find more information on the advertising space and marketing sourcing

• Identify 11 advertising strategic sourcing cost reduction levers you can apply at your company

• Share learnings and success strategies gained from working as both a consultant and corporate supply chain officer in this space

• Tell you where to find more information on the advertising space and marketing sourcing

The objectives of today’s presentation are to:The objectives of today’s presentation are to:


Presentation ObjectivesBackground & IntroductionCost Containment IdeasLearnings & Resources

Agenda


I’ve sourced advertising as a management consultant and currently as a Supply Chain AVP at Nationwide. I started with no advertising expertise.

The Results:

• Cumulative, Hard Dollar Sourced Savings of $100M+

• Average Save Across Nine Companies: 8% of External Spend

My Background

Consulting World Corporate World

Then… …and Now


With efficiencies averaging 8% of external spend, the natural question is “How are results like this possible?”

• Agency and client economic incentives can be misaligned

• ROI is tough to measure resulting, historically, in low accountability

• There often exists a “procurement buys paper clips and marketingbuys advertising” mentality

• There is often blind reliance on and faith in external experts

• Many purchasing decisions are made by intermediaries which may not spend your money as frugally as they’d spend their own

• Marketing senior management is rewarded more by moves in brand awareness, market share and revenue growth than the economic efficiency that generated them

How Are These Results Possible

They are possible, in my opinion, because:



Agenda


The discussion which follows is summarized from my article, “Advertising: The Supply Chain’s Hidden Cost Reduction Gem,” published in Purchasing Today magazine and ANA Finance Committee presentation.

The Planning ParadigmMedia Mix Re-AllocationIntra-Media Programming MixVolume DiscountsAgency CompensationService DisaggregationProduction Cost ContainmentInvoice Error EliminationDemand ManagementPrint Production SourcingVendor Negotiations

11 Cost Reduction Levers

Cost Containment Ideas

See http://www.ism.ws/pubs/ismmag/090142.cfm for full article.


The Car Salesman Example

Purchasing advertising from the perspective of “This is what I want. How much does it cost?” vs.”What can I get for $X?” may achieve the desired objectives at a lower cost. It may also identify unrealistic expectations if the budget is too small.

Key Take-away:

Don’t start the annual or campaign planning processes by communicating how much you have to spend – particularly if you compensate your agency on a percentage of spend basis.

You have $30,000 to spend on a new car?

Guess what? This car here costs $30,000.

The Planning Paradigm


Shifting ad spend weighting from higher to lower cost mediums (i.e. from TV to Radio or from Radio to Newspaper) can potentially communicate the desired message to the desired target at a lower cost per impression.

Key Take-away:

Many successful media mixes exist in any given industry. Experimenting with a lower cost CPM (cost per thousand) media mix may yield savings without loss of reach.

Media Mix Example

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

A B C D E F G H I

Med

ia W

eigh

t % OtherMagazinesRadioCable TVNetwork TV

Media Mix Re-Allocation


Choosing programs that reach the desired target market at a lower cost per impression can achieve desired objectives while saving money.

Key Take-away: By choosing the channels with the most cost efficient CPP (cost per point) for a given daypart, one is able to maintain the daypart mix and obtain the desired TRPs (Total Rating Points) for the lowest possible cost; in the example above, the save is 20%.

Choices

$355

$200

$315

$200

Agency Recommended Programming Mix Illustrative

Cost Per Point for Spot TVDaypart Station A Station B Station C Station D Station E Average CPPMorning $210 $220 $250 $200Daytime $175 $160 $215 $205 $200Primetime $300 $350 $400 $275 $355Late News $250 $300 $400 $280 $315

$268

$175

Choices

$355

$200

$315

$200

Cost Optimized Programming Mix Illustrative

Cost Per Point for Spot TVDaypart Station A Station B Station C Station D Station E Average CPPMorning $210 $220 $250 $175Daytime $175 $160 $215 $205 $160Primetime $300 $350 $400 $275 $275Late News $250 $300 $400 $280 $250

$215

$175

Intra-Media Programming Mix

20% Less


Larger same-vendor spending volumes, purchase guarantees and advance purchases can lower unit costs.

Key Take-away:

Use your buying leverage to get better terms and conditions. If your spend is predictable, consider buying in advance or guaranteeing purchases to get better pricing.

I can sell you a plane ticket to New York for $450.

If you reserve today, I can give you a 14 day advance fare which lowers the price to $325.

If you can assemble a group of 10 or more, the cost per ticket drops to $350.

Volume Discounts


Periodic surveys of market commission rates and alternative payment arrangements ensure that agency compensation is in line with the supply & demand of the marketplace for their service.

Key Take-away:

Always know where the agency compensation price point has moved. Don’t pay $50,000 for 50% of a person’s time that could be hired on the market on a full time basis for $40,000.

Sample Agency Compensation Arrangements

• % of People’s Time• Advertising Expertise• Service & Attentiveness

• $ from General Ledger=

Price

Quantity

S

D1$500kThe price you paid two years ago…

…may be lower in today’s market D2

$200k X

Industry Supply & Demand Curves

Agency Compensation Arrangements


Disaggregating advertising services and purchasing them at the component level (vs. one stop shopping with a full service agency) can reduce costs.

Key Take-away:

Sometimes the whole costs more than the sum of the pieces if they are dis-aggregated and negotiated separately relative to the supply and demand of its marketplace.

$2.7M Savings

Illustrative ExampleFull Service Agency:

“One Stop Shopping”

$10.0M

Ad ConceptCreation

Target Mkt.Identificatio

n

MessageDefinition

AdProduction

MediaPlanning

Payment Admin.

Before After

- Incumbent Agency

- Outsourced Production House

- Your Company via In-Sourcing

Vendor Legend

Ad ConceptCreation

Target Mkt.Identification

MessageDefinition

AdProduction

MediaPlanning

Payment Admin.

$7.3M

Dis-aggregated Model

Price

Quantity

S

D1$500k x

Price

Quantity

S

D1$500k x

There is a market supply & demand curve for each service.

Service Purchase Disaggregation


Price

Quantity

S

D1$500k

$700k x

x

A responsible cost-benefit analysis should be performed on agency production recommendations. Fees and commissions should reflect the supply and demand of a competitive bidding process.

Key Take-away:

Make defendable creative production tradeoff decisions. Make sure all sub-contracted work is being bid in a competitive manner and that you are not paying a market premium.

• Ave. cost of a 30 second spot: $343,000• Ave. cost of a 15 second spot is $34,000 to $51,000

lessSource: June/July 2001 ANA Newsletter

Production Studio On Location in Maui

vs.Don’t be here!

Competitive Bids Favoritism

vs.

Production Cost Containment


Random auditing of agency and media vendor invoices ensures that media purchases and pass through costs reflect contracted terms and conditions.

Key Take-away:

Random audits of invoices can prevent overbilling. Care must be taken not to spend more in auditing labor than is saved in caught mistakes.

“Approximately 28% of newspaper invoices arrive with an error. 90% to 95% of these errors favor of the media vendor.” Source: Newspaper Services of America

Agency Estimate

Amount Invoiced

Actual Cost to Agency

Hidden Agency Profit

Beware of Agency “Estimate vs. Invoice” Over-Charges

Invoice Error Elimination


Reducing the specs of what we buy (ie direct mail vs. email, weekend circular vs. run of press, paper grade, color vs. b &w, etc..) and the quantity of what we buy (ie number of circular pages, number of different colors, paper grade, % coverage, etc..) can reduce print advertising cost as can proper sourcing of raw components (i.e. paper, ink, etc…).

Key Take-away:

Use the marketplace to control (P) Price. Use good business judgment and cost-benefit analysis to make marginal downward adjustments to (Q) Quantity and what is purchased.

Paper Quality:SC – ASC – B

Newsprint

# of Pages:151725

None

Medium:Direct Mail

EmailNewspaper

Billboard

# of Colors:Black & White

2 Colors4 Colors

Coverage:100% in zip code80% in zip code

110% in zip code5 mile store radius

SupplierConcentration:1 Lead Partner

5 Vendors25 Vendors

Lead Time:Week BeforeMonth BeforeDay Before

Spoilage Allowance:

3%5%0%

Inventory:1 Week3 Weeks4 Months

Size of Ad:1/6 Page¼ Page½ Page

Whole Page

Sample Print Related Variables:

Print Production Sourcing


Spot checking the pricing negotiated on your account's behalf bycompensated experts can ensure your prices are in line with the supply and demand of the marketplace and that proper diligence is beingperformed to negotiate the best possible prices.

Key Take-away:

On average, a good agency should be able to negotiate 8 – 10% off of the published rate card rate.

Supplier Negotiations



Agenda


• Marketing and advertising departments are typically understaffed, creating a critical dependency on the agency and other external experts

• Agencies genuinely want to make their clients happy. Formal feedback mechanisms are often absent

• There are never clear right and wrong answers in advertising sourcing, just cost-benefit trade-offs

• Victories and credit must be shared equally across functions for all ad sourcing work

• Marketing and procurement incentives become aligned when a target save/efficiency dollar figure or percentage cut is mandated on the front end of ad sourcing projects

• Agencies are human in that they will often follow the path of least resistance unless the client has created a cost conscious working climate with them

• The least expensive alternative is not necessarily the best or right one, but it the only place one can start to perform a defendable, cost-benefit analysis on incremental spend

• Agencies will not come to you proactively to tell you that you are paying them a market premium

• Some of the savings generated should be re-invested vs. dropped to the bottom line

Learnings from the FieldIn my ad sourcing work, I’ve learned that:


Success depends upon subject matter knowledge legitimacy, trust,respect and a win/win mentality.

• Develop subject matter expertise by reading, taking ANA (Association of National Advertisers) classes, learning acronyms, etc…)

• Start with a mutual respect for role that each function plays within the company

• Truly believe in the 1 + 1 = 3 philosophy

• Develop personal relationships outside of a work context to foster a “glass half full” vs. a “glass half empty” orientation

• Once you’re given an “at bat” deliver more than was expected and focus on being responsive

• Consider using “marketing” vernacular (i.e. marketing effectiveness or return on marketing investment) vs. procurement vernacular (i.e. advertising sourcing or ad cost compliance) when describing the work you’re doing

• Credit savings and efficiencies to innovation

• Emphasize how partnering will help them (e.g. add another market, budget $)

• Develop subject matter expertise by reading, taking ANA (Association of National Advertisers) classes, learning acronyms, etc…)

• Start with a mutual respect for role that each function plays within the company

• Truly believe in the 1 + 1 = 3 philosophy

• Develop personal relationships outside of a work context to foster a “glass half full” vs. a “glass half empty” orientation

• Once you’re given an “at bat” deliver more than was expected and focus on being responsive

• Consider using “marketing” vernacular (i.e. marketing effectiveness or return on marketing investment) vs. procurement vernacular (i.e. advertising sourcing or ad cost compliance) when describing the work you’re doing

• Credit savings and efficiencies to innovation

• Emphasize how partnering will help them (e.g. add another market, budget $)

Procurement – Marketing Teaming Strategies

Success Strategies:Success Strategies:


Additional Resources

Resources:

• ANA seminars: good for learning advertisings ABCs, terminology and specialty focus areas

• ANA publications (see www.ana.net and choose “The Bookstore”): provides specific information on targeted areas (i.e. agency compensation, production cost management, etc…)

• ISM Published Articles:

• Advertising: The Supply Chain’s Hidden Cost Reduction Gem http://www.ism.ws/pubs/ismmag/090142.cfm

• Get More Bang from Your Advertising Buck http://www.ism.ws/ResourceArticles/1998/109844.cfm

• Purchasing Professional Services: The Case of Advertising Agencies http://www.ism.ws/ResourceArticles/1997/jsum971.cfm

Resources:

• ANA seminars: good for learning advertisings ABCs, terminology and specialty focus areas

• ANA publications (see www.ana.net and choose “The Bookstore”): provides specific information on targeted areas (i.e. agency compensation, production cost management, etc…)

• ISM Published Articles:

• Advertising: The Supply Chain’s Hidden Cost Reduction Gem http://www.ism.ws/pubs/ismmag/090142.cfm

• Get More Bang from Your Advertising Buck http://www.ism.ws/ResourceArticles/1998/109844.cfm

• Purchasing Professional Services: The Case of Advertising Agencies http://www.ism.ws/ResourceArticles/1997/jsum971.cfm

Contact Information:Chuck Hatsis

(614) 249-8063 office(312) 961-3479 cell

[email protected]

The ANA (Association of National Advertisers) bookstore and seminars will help you come up to speed as will articles on ad sourcing.

advertising strategic sourcing · tv to radio or from radio to newspaper) can potentially...

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