Advertising Strategic Sourcing:

The Supply Chain’s Most Elusive Sacred Cow

October 20, 2005

Presentation Objectives

Theobjectives
The objectivesof
oftoday’s
today’spresentation
presentationare
areto:
to:

••Identify
Identify11
11advertising
advertisingstrategic
strategicsourcing
sourcingcost
costreduction
reduction
leversyou
levers youcan
canapply
applyatatyour
yourcompany
company

••Share
Sharelearnings
learningsand
andsuccess
successstrategies
strategiesgained
gainedfrom
from
workingas
working asboth
bothaaconsultant
consultantand
andcorporate
corporatesupply
supplychain
chain
officerin
officer inthis
thisspace
space

••Tell
Tellyou
youwhere
whereto
tofind
findmore
moreinformation
informationon
onthe
the
advertisingspace
advertising spaceandandmarketing
marketingsourcing
sourcing

© Surge Consulting 1
Agenda

Presentation Objectives
Background & Introduction
Cost Containment Ideas
Learnings & Resources

© Surge Consulting 2
My Background
I’ve sourced advertising as a management consultant and currently as a
Supply Chain AVP at Nationwide. I started with no advertising expertise.

Then… …and Now

Consulting World Corporate World

The Results:
• Cumulative, Hard Dollar Sourced Savings of $100M+
• Average Save Across Nine Companies: 8% of External Spend

© Surge Consulting 3
How Are These Results Possible
With efficiencies averaging 8% of external spend, the natural question is
“How are results like this possible?”

They are possible, in my opinion, because:

• 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 marketing
buys 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

© Surge Consulting 4
Agenda

Presentation Objectives
Background & Introduction
Cost Containment Ideas
Learnings & Resources

© Surge Consulting 5
Cost Containment Ideas
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.
11 Cost Reduction Levers
„ The Planning Paradigm
„ Media Mix Re-Allocation
„ Intra-Media Programming Mix
„ Volume Discounts
„ Agency Compensation
„ Service Disaggregation
„ Production Cost Containment
„ Invoice Error Elimination
„ Demand Management
„ Print Production Sourcing
„ Vendor Negotiations

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

© Surge Consulting 6
The Planning Paradigm
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.

You have $30,000 to

The Car Salesman Example spend on a new car?

Guess what? This car

here costs $30,000.

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. © Surge Consulting 7
Media Mix Re-Allocation
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.
Media Mix Example

100%

90%

80%

70%

60%
Media Weight %

Other
Magazines
50% Radio
Cable TV
Network TV
40%

30%

20%

10%

0%
A B C D E F G H I

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.
© Surge Consulting 8
Intra-Media Programming Mix
Choosing programs that reach the desired target market at a lower cost
per impression can achieve desired objectives while saving money.

Agency Recommended Programming Mix Illustrative

Cost Per Point for Spot TV

Daypart Station A Station B Station C Station D Station E Choices Average CPP
Morning $210 $220 $200 $175 $250 $200
Daytime $200 $175 $160 $215 $205 $200
$268
Primetime $300 $350 $355 $400 $275 $355
Late News $250 $315 $300 $400 $280 $315

Cost Optimized Programming Mix Illustrative

Cost Per Point for Spot TV

Daypart Station A Station B Station C Station D Station E Choices Average CPP
Morning $210 $220 $200 $175 $250 $175
Daytime $200 $175 $160 $215 $205 $160
$215
Primetime $300 $350 $355 $400 $275 $275
Late News $250 $315 $300 $400 $280 $250
20% Less

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%.
© Surge Consulting 9
Volume Discounts
Larger same-vendor spending volumes, purchase guarantees and advance
purchases can lower unit costs.
I can sell you a plane ticket to New York for
$450.

If you can assemble a group of 10 or more,

the cost per ticket drops to $350.

If you reserve today, I can give you a 14 day

advance fare which lowers the price to $325.

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.
© Surge Consulting 10
Agency Compensation Arrangements
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.
Sample Agency Compensation Arrangements

Industry Supply &

• % of People’s Time Demand Curves
• Advertising Expertise
Price
• Service & Attentiveness S
=
• $ from General Ledger

$500k D1
The price you paid two years ago…
$200k X
D2
…may be lower in today’s market
Quantity
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.
© Surge Consulting 11
 Service Purchase Disaggregation
Disaggregating advertising services and purchasing them at the component level
(vs. one stop shopping with a full service agency) can reduce costs.

$10.0M Illustrative Example

Full Service Agency:
Message
“One Stop Shopping” Definition
$2.7M Savings
Target Mkt.
Identificatio $7.3M
n Message
Definition
Ad Concept
Creation Target Mkt.
There is a market Identification Dis-aggregated Model
supply & demand Ad Ad Concept
curve for each Production Creation
service.
Price Ad
S
Vendor Legend
Media Production
x Planning - Incumbent Agency
$500k D1
Media
Planning - Outsourced Production
Quantity Payment House
Admin. Payment
Admin. - Your Company via In-
Sourcing
Before After

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.
© Surge Consulting 12
Production Cost Containment
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.
Production Studio On Location in Maui

vs.
Don’t be here!

Price
Competitive Bids Favoritism S
$700k x
vs. $500k x D1

Quantity
• Ave. cost of a 30 second spot: $343,000
• Ave. cost of a 15 second spot is $34,000 to $51,000
less
Source: June/July 2001 ANA Newsletter
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.
© Surge Consulting 13
Invoice Error Elimination
Random auditing of agency and media vendor invoices ensures that media
purchases and pass through costs reflect contracted terms and
conditions.
“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

Beware of Agency “Estimate vs. Invoice” Over-

Charges
Agency Amount
Estimate Invoiced
Hidden Agency Profit

Actual Cost to Agency

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.
© Surge Consulting 14
Print Production Sourcing
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…).

Sample Print Related Variables:

Paper Quality: Medium: # of Pages: # of Colors: Inventory:

SC – A Direct Mail 15 Black & White 1 Week
SC – B Email 17 2 Colors 3 Weeks
Newsprint Newspaper 25 4 Colors 4 Months
Billboard None

Coverage: Supplier Lead Time: Spoilage Size of Ad:

100% in zip code Concentration: Week Before Allowance: 1/6 Page
80% in zip code 1 Lead Partner Month Before 3% ¼ Page
110% in zip code 5 Vendors Day Before 5% ½ Page
5 mile store radius 25 Vendors 0% Whole Page

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.
© Surge Consulting 15
Supplier Negotiations
Spot checking the pricing negotiated on your account's behalf by
compensated experts can ensure your prices are in line with the supply
and demand of the marketplace and that proper diligence is being
performed 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.
© Surge Consulting 16
Agenda

Presentation Objectives
Background & Introduction
Cost Containment Ideas
Learnings & Resources

© Surge Consulting 17
Learnings from the Field
In my ad sourcing work, I’ve learned that:
• 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

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

• 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

• Some of the savings generated should be re-invested vs. dropped to the bottom line
• 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
© Surge Consulting 18
Procurement – Marketing Teaming Strategies
Success depends upon subject matter knowledge legitimacy, trust,
respect and a win/win mentality.

SuccessStrategies:
Success Strategies:

• • Develop
Developsubject
subjectmatter
matterexpertise
expertiseby byreading,
reading,taking
takingANA
ANA(Association
(AssociationofofNational
National
Advertisers)classes,
Advertisers) classes,learning
learningacronyms,
acronyms,etc…)
etc…)

• • Start
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withaamutual
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thateach
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thecompany
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• • Consider
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© Surge Consulting 19
Additional Resources
The ANA (Association of National Advertisers) bookstore and seminars
will help you come up to speed as will articles on ad sourcing.
Resources:
Resources:
• • ANA
ANAseminars:
seminars:good
goodfor
forlearning
learningadvertisings
advertisingsABCs,
ABCs,terminology
terminologyand
andspecialty
specialtyfocus
focus
areas
areas
• • ANA
ANApublications
publications(see
(seewww.ana.net
www.ana.netand andchoose
choose“The
“TheBookstore”):
Bookstore”):provides
providesspecific
specific
informationon
information ontargeted
targetedareas
areas(i.e.
(i.e.agency
agencycompensation,
compensation,production
productioncost
cost
management,etc…)
management, etc…)

• • ISM
ISMPublished
PublishedArticles:
Articles:

• • Advertising:
Advertising:The
TheSupply
SupplyChain’s
Chain’sHidden
HiddenCost
CostReduction
ReductionGem
Gem
http://www.ism.ws/pubs/ismmag/090142.cfm
http://www.ism.ws/pubs/ismmag/090142.cfm
• • Get
GetMore
MoreBang
Bangfrom
fromYour
YourAdvertising
AdvertisingBuck
Buck
http://www.ism.ws/ResourceArticles/1998/109844.cfm
http://www.ism.ws/ResourceArticles/1998/109844.cfm
• • Purchasing
PurchasingProfessional
ProfessionalServices:
Services: The
TheCase
CaseofofAdvertising
AdvertisingAgencies
Agencies
http://www.ism.ws/ResourceArticles/1997/jsum971.cfm
http://www.ism.ws/ResourceArticles/1997/jsum971.cfm

Contact Information:
Chuck Hatsis
(614) 249-8063 office
(312) 961-3479 cell
[email protected]
© Surge Consulting 20