Zero-Based Budgeting – New Norm Among CPGs
Zero-based budgeting is a technique which involves the use of analytics to diminish waste and utilize resources effectively. In this method, companies need to rebuild their budgets from scratch every year, which helps them in justifying each line item rather than targeting an increase and backfilling the budget. In 2016, Kellogg’s started adopting this approach and anticipated that by 2018, the company will achieve savings worth USD 150-180 million1. The company plans to invest these savings to strengthen existing brands, fund geographic expansion, and acquire new brands.
CPG companies such as Unilever, Kraft Heinz, Danone, General Mills and Mondelez International have started adopting the zero-based budgeting technique to strengthen profitability. According to a survey by Deloitte in 2017, only 16 percent of companies among the Fortune 1000 have used the zero-based budgeting in the last 24 months2. Around 22 percent of CPG companies among the Fortune 1000 are adopting the technique because the industry is facing evolving consumer preferences, competition in the digital marketplace and rise of private labels2.
One area within CPG where zero-based budgeting can be applied is commercial spending. This involves the costs that sales and marketing functions own. Commercial spending within CPG includes trade promotions, discounting, and advertising. Companies can use the technique within commercial spending as it accounts for 15 percent to 20 percent of gross sales2. In addition, the ROI for performance trade can be calculated to some degree of accuracy.
The process starts with defining savings or goals and mobilizing the teams toward addressing specific cost areas. Then teams go ahead and collect data to evaluate the drivers within specific spend activities. Simultaneously, ROI guidelines are set for each category and are validated with the cost owners. Moving forward, the budget and implementation plans are created for each specific category of spending. The organization tracks performance and creates incentives for cost owners as and when budgets are implemented. The performance metrics are reevaluated and spending levels reset within each budgeting period.
Zero-based budgeting, if implemented right, helps in reducing costs, improving efficiency and competitiveness. The technique has the potential of preventing takeovers, identifying and nurturing top performers, and instilling a cost-conscious culture throughout the organization. While the technique is powerful, it does pose some challenges. Zero-based budgeting is more resource intensive than the traditional approach. The technique can sometimes have a negative impact on employee morale. It is thus very important for the company to approach the technique in a balanced way.
To achieve savings, procurement managers can provide industry benchmarks across all categories to understand the spending patterns. They can help in identifying the savings opportunities through demand management techniques, work with supplier community toward identifying cost optimization opportunities and renegotiate contracts after budget allocation.
Marketing stakeholders need to treat the zero-based budgeting technique as a springboard for doing new things better.