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Supply Chain Europe: Making the Connection – Using Data for Better Supply Chain Sales Performance

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July 1, 2013- 

Information is power: use it or lose it, says Sebastian Mamro, Director, Head of Professional Services EMEA, at PROS.

In the midst of economic uncertainty, companies that manage global supply chains continue to face significant pressures. In Europe and throughout the world, these organizations are experiencing consolidation, volatility in raw material costs and margin erosion in highly competitive markets.

Many of these companies have done an excellent job managing costs and negotiating deals from the procurement perspective where products are bought into the organization. Where they’ve often lagged is doing the same for sales performance and product pricing activities, where products are going out onto the market. Whether from lack of resources, focus or simply the ingrained habits of many years, too many organizations fail to make the connection between their approach to procurement and the useful customer data they now collect in their CRM and ERP systems. This information can be combined to improve sales performance and effectiveness, especially in setting prices and negotiating deals.

In today’s supply chain world, information is power.  And in many cases, those companies that make the most of available information – commonly referred to as  “big data” – have the upper hand in setting prices that keep pace with raw material costs and currency fluctuations.  It also enables a sales force to conduct negotiations from a position of strength based on timely information. When margin levels are razor thin, it is imperative that organizations segment and target their best customers and maximize profit opportunities across the board to unlock the potential of big data to improve sales effectiveness.

Follow the Leader

One of the major challenges companies with global supply chains must deal with is managing pricing across a large and growing number of products and services offered to customers. Enormous efforts and investments go into buying these goods at the most advantageous prices. However, for those managing hundreds or even thousands of products, the task of determining the value of these products – customers’ willingness to pay – and ensuring profitability has become increasingly difficult. Managing pricing and associated costs for hundreds of thousands of products requires automated systems that can deal with the complexity and variability to help pricing and sales managers make better decisions.

One way to increase margins and sales force effectiveness is to utilize software technology that analyzes the product mix to identify “leaders” and “followers.”  For example, many pricing and sales managers instinctively gather similar items into buckets or groups. Instead of setting a price for each individual item, the pricing or sales manager identifies and focuses on “Leader items” in order to streamline the pricing effort. By focusing on pricing the leader item, all the remaining price items automatically follow the leader.

This approach helps to identify patterns and differences between individual price points for product groupings. The goal is to find price items that have a stable relationship to each other that can be expressed as a mathematical equation. This can include managing different variations of the same product as well so that these can be grouped in the most efficient way. A good example here is from the chemical sector: products can be priced at different purity levels, but also different products of the same equivalent purity can be combined into groups as well to make pricing management easier.

While this approach reduces the number of price points that must be managed, there is a risk that a broad price level for a group of products could sacrifice margins in exchange for an easier, faster pricing process. Calculating Leader-Follower pricing relationships and automating prices can get complex very quickly, especially with large numbers of products.

If a leader item cost changes, for example, it will have an impact on margins. Thus pricing professionals must be aware of changes in variable costs among follower items, which may or may not be linked to the leader’s cost base. If the cost base of a follower and leader item can move or vary independently of the other items within a group, the risk of margin slippage for the follower item increases when setting the leader price.

Likewise, a change in market conditions or dependencies can have a significant impact on leader-follower pricing and margins. A leader item may be selling well at a certain price, for example, while followers are consistently lagging. The formula that expresses the leader-follower relationship may be out of date or have been affected by an item shortage in one region, which distorts the pricing relationship.

To minimize this risk, pricing technology can be used to initially set the best pricing and also to automatically adjust pricing of leader items as market and currency conditions evolve. By automating steps in these processes, pricing technologies ensure that decisions about price levels can be made faster.

Adopting a Leader-Follower concept in pricing to outperform the competition begins with a disciplined strategy and process. The first step is to identify Leader-Follower pricing link opportunities, define the relationships, and then automate those relationships as much as possible. Once established, the second step is to use pricing software to minimize the risk of margin drift, and manage individual item cost variations through continuous monitoring and adjustment.

One example of this is a large UK-based distributor that generates more than €1 billion in revenue, which faced a critical problem: their generic list prices were too high. Sales teams consistently had to offer substantial discounts on every product they sold and they didn’t have a frame of reference for how much was too much discounting. Fearful of losing customers due to the fact that their list prices were high, they were losing margin because they didn’t have knowledge of what their customers were really willing to pay.

By looking at what the customers perceived as valuable and their willingness to pay, the company implemented a new strategy that segmented their customers into more appropriate groups.With new customer-targeted price lists in place, sales managers didn’t have to discount every product to start. For those products that still needed a discount, the guidance showed a price range similar customers were paying. For prospective customers, sales professionals can be provided with a price based on the buying capacities of similar customers. For products launching for the first time, using data science let them set guidance based on products within that product segment.

Sell Solutions Not Just Products

Far too many companies with global supply chains still rely on traditional cost-plus models when pricing their products.  The problem with this approach is obvious when one considers that the cost of materials and labour that make up a product item are only a part of the total value delivered to a customer.  Payment terms, packaging and bundling, freight charges, and even currency exchange rates all play a part in the benefit provided to a customer and should be reflected in the price.  The challenge comes from incorporating all these factors into a practical system that sales can use in the field when pricing products as part of contracts or negotiated deals.

Organizations can change the sales force mindset from selling a product strictly on price to selling a solution with added value by integrating “cost to serve” calculations into pricing for negotiations and deals. On-site quoting software that utilizes the big data from customer systems can give sales people the information needed to properly price a set of products and services for each individual customer in order to maximize value and profitability.

This can significantly improve sales negotiation effectiveness by giving sales people the information they need to genuinely sell a solution.  It allows them to construct the highest value deal within a disciplined framework that enables them to combine or unbundle products, make substitutions, change payment terms, adjust currency exchange rates and upsell and cross-sell more products, all to suit the individual customer’s situation.  Most important, it gives the sales force the ability to demonstrate why a certain price is justified based on the specific value it delivers to the customer.

Give Your Sales Force Timely, Useful Information

We are seeing more companies than ever before build internal teams that focus on pricing across their organizations. This includes appointing Chief Pricing Officers to make the link between procurement and sales teams and investing in technology that enables them to outperform their competition in creating the vital connection between data and sales effectiveness.

By implementing strategies such as the Leader-Follower pricing approach and selling products as solutions incorporating the concept of “cost-to-serve,” organizations can unlock the potential of big data they already collect through procurement and customer management systems.  Insights gained from these strategies can then be delivered to the sales force at the point of negotiation so they can be much more knowledgeable – and therefore much more effective – in securing better prices and margins.

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