May 20, 2020
“If there’s one thing that’s certain in business, it’s uncertainty.” – Stephen Covey
To say there’s some uncertainty lately is a bit of an understatement. Our personal and business worlds are facing disruption with a capital “D.” Soon, there will be a point at which the rate of disruption slows, and we all begin to get used to the New Normal of business. Clearly, there’s a lot of work to be done right here and right now. And once we have some idea of what that new normal looks like, some level of Business Transformation is going to be required.
I don’t know about you, but the only prognosticators I have any amount of consistent faith in are the crew at the National Weather Service. But even these computer-assisted experts have a tough time getting things right more than four or five days out – and they still can’t get my local snowfall amount forecast right.
That being said, I’m going to make a prediction and go way out on a limb and guarantee my next statement: Some unknown number of months from now, when the Coronavirus storm is tamed, when it comes to business – especially B2B pricing – things are going to be very different than they were pre-pandemic. There you go. Take it to the bank.
The distribution way
The unique position distributors play in the marketplace – working the middle ground between manufacturers and customers – has always been challenging. Expanded value added services have helped most distributors’ bottom lines, but the key to distributor financial success continues to be having the right products in the right quantities in inventory and selling them at the right price.
Way back before the turn of the century, I held an Inventory Management position with a large electronic component distributor. I was lucky enough(?) to ride the Oliver Wight inspired Distribution Requirements Planning (DRP) wave: Building on the capabilities of MRPII with main-frame software programs to optimize the balance between inventory turns and fill rate by using demand history to forecast future demand (I was and continue to be a big fan of exponential smoothing). “Stock cards? We don’t need no stinkin’ stock cards!”
Fast forward a few years (I won’t say how many) and we’re well into the golden age of Supply Chain Optimization. In order to survive and thrive, distributors have implemented commercially effective systems that have helped them achieve significant and measurable benefits in terms of lower logistics cost levels and reduced inventory, while improving customer service through better predictability of demand.
Well, at least until recently that was the case.
Keys to profitability
Expertise at accurately forecasting demand to manage inventory and forecast customer willingness to pay to manage revenue and margin will continue to be the keys to distributor profitability – and survival. Unless you’re using a crystal ball, all forecasting models are based (to varying degrees) on historical transaction data. To put it mildly, for the foreseeable future, demand based systems (even old reliable Exponential Smoothing) are going to be of ‘limited value.’ So as a pricing function leader, what should you do? Here are three ideas.
- Take inventory of your pricing organization’s ‘agility capabilities.’ Is there a process in place to make quick, targeted changes to prices or does one need to be developed? Are your business intelligence/analytics/reporting systems ready to react to the new questions that will be asked? What tools do you have to get quick insight on changes in demand? How will the effectiveness of changes in prices be monitored?
- Spend some time with the sales team. What’s going on with your customers? What kind of plans do key customers have in place for ramping their businesses back up? How are their inventory levels of key products you sell them?
- Remember the supply chain crew. What are they hearing from their key manufacturers? What’s going on with their inventory levels? What shortages are they experiencing and anticipating? Are there certain groups of products that are going to be in short supply?
There’s also another topic that needs to be discussed with upper management: As the economy comes back up to speed and bumps in the supply chain get slowly smoothed out, there are going to be opportunities to use agile pricing tactics to make money. What’s your company’s position going to be on socially responsible pricing?
We’re entering a bizarre world of business uncertainty. There’s no real playbook for dealing with the next unknown number of months. But there is an opportunity for leaders of the pricing function to step up and help engineer the agile, transformational response distributors are going to need to survive and thrive.
To learn more about strategic pricing and the benefits it brings, download our whitepaper: 5 Best Practices to Take Back Control of Your Pricing.