Part 1: Off Invoices — Why You Should Scrutinize Your Annual OI Calendar
Over the next few months, Vividly will break down various types of promotions that CPG companies employ with retailers and distributors. We’ll dive into the pros and cons of each type so you can achieve a better bang for your promotional buck!
We’ll cover common trade types such as OIs (off invoices), MCBs (manufacture chargebacks), Scans, and EDLPs/EDLCs (everyday low price / cost). We will also present proven techniques to better negotiate fixed fees like Ads and Slotting so they don’t eat up your promotional budget
First up… OIs!
Off Invoices (OIs) — A fixed % or $ discount, shown on the incoming purchase order (PO), taken off the list price of a product group. This deal is reflected on the customer invoice and not deducted off a future payment.
Pros of OIs
- No Accrual Required — You instantly know what the expense will be since the deal is on the PO. This makes for a seamless accounting process, as PO entry to reconciliation is simple and timely.
- Distributor Buy In — For a small company, running an OI encourages distributors to take in their products, which can then be more easily purchased by retailers.
- New Item Launches — If you are looking to get distribution quickly to satisfy co-packer MOQs (minimum order quantities) or to get your distributors to load up their inventory for any potential new distribution wins, OIs will support new item launches.
- New Item Launches — If you are looking to get distribution quickly to satisfy co-packer MOQs (minimum order quantities) or to get your distributors to load up their inventory for any potential new distribution wins, OIs will support new item launches.
- Mom & Pop Accounts — OIs cast the widest net for offering deals to retailers. Typically, smaller stores don’t get personalized deals and instead comb through deal books when looking for new products. For most independents (bottom 10% revenue customers), OIs and line drive MCBs are their only source of price promotions.
- Inventory Management — OIs can generate large volume movement to clear excess inventory and fuel your financials for a strong year end.
Cons of OIs
Distributor Load Up — Distributors will often take advantage of an OI to load up or “forward buy”. For example, if an OI is given in January, they might order 500% excess in January and not buy again until June. This can result in several issues, including:
- Demand Planning Complications — Front-loaded orders make demand planning much harder for the supply chain team.
- Shortages — If the distributor load-up causes shortages and you’re not able to fill the order, the distributor may be allowed to take a post audit deduction for the unfulfilled product.
- Expiration — If distributors can’t sell through their entire order on time, their inventory may spoil, leading to a deduction.
- Retailer Price Reflection — Often, retailers will take margin on the OI and not reflect the OI in their retail price. Or retailers may have significantly smaller promotion windows than the OI performance window. This will significantly reduce the ROI on the promotional trade spend.
- ROI Transparency — It’s difficult to measure the ROI and effectiveness of an OI given to a distributor.
- Deal Overlap — Retailer-level deals may overlap with OIs. These overlaps can result in “double dipping,” which sales teams must account for and prevent.
In conclusion, OIs can be great for their simplicity and their ability to drive volume. OIs will help gain distribution but may not be the best tool to drive product trial and expand the consumer base. Also, you might accidentally allow for “double dipping”, resulting in a negative ROI on your trade spend.
Many mature and well managed brands eventually move away from OIs, specifically for items that have a sustained distribution map.
Before giving an OI to a distributor, always thoroughly consider the various pros and cons of the investment!
