P&L Management Part 4: Resource Allocation

In my initial blog posts on P&L management I presented a practical approach emerged as a synthesis of initiatives directed at improvement of P&L from top line to gross margin. (See Part 1, Part 2, and Part 3) The subject of this blog post is Resource Allocation.

Considering the Functional costs, a company should focus on getting maximum results from effective allocation of its limited resources. This task is also known as productivity improvement. Typically the resources of an FMCG company consist of GTN, spend on advertisement and promotion (A&P), and Field Force (FF). An objective of the whole process is to distribute these resources in a meaningful way to achieve company’s goals. Usually the process of resource allocation is done in four stages, starting with setting of Strategy, then proceeding to Execution and Measuring the progress, and closing the loop with evaluating results, learning and making necessary adjustments (see the picture below). Although each stage is important, and a mistake at any point can lead to calamitous results, here we will focus on progress measurement as a part of P&L management.

Due to the complexity of this task, business usually sets up KPIs for measuring each resource separately. Improving outcome for utilization of each resource leads to the improvement in overall business efficiency. For Field Force, KPIs can be Weighted Distribution and Off-take (an average number of products sold by an outlet in a certain period).

The key to successful application here is to divide KPIs by territory and channel, and link them to incentive systems of the responsible managers. One of the most impressive business turn-arounds in my practice, when Evolution Index jumped from 94% to 111% in half a year, was done in Russian subsidiary of an international pharmaceutical company. A small number of very clear KPIs were set for the whole Sales organization, and management pursued their improvement by implementing a rigorous control procedure. As a result, a substantial positive change was achieved by performing simple small steps, made consistently and in the same direction.

To estimate required A&P investments, a company can consider changes in volume between historic trend (projection of market and company data from the past), and actual performance versus market, in order to estimate incremental Sales and Profit as a result of marketing activities or price changes. In this case volume data should be taken from an external source (e.g., Nielsen or IMS), while internal data can be used for a net price (incl. GTN) and A&P investments.

By maximizing return on each invested dollar, a company drives its productivity and has a chance to get an edge over competition.