Disciplined offer management and service-cost playbook enforcement will reduce negative margin variation. These small changes will help distributors allocate service resources only to customers who are willing to pay for them. It's only with visibility into supply chain costs that this level of targeted offer and price management becomes possible.
Supply-aware Discounting Strategies
Another way supply chain professionals can add value to a distributor's commercial organization is to help inform discounting behavior. It is a pricing best practice to reduce discounts, or to increase prices on products in short supply. As inventory levels go down or order velocity increases, most distributors will want to price differently. Simply having visibility into current stock levels may be insufficient for informing pricing decisions, but insight into the trends, velocity and current stock levels is essential to informing inventory-aware pricing behavior to increase margins.
Certainly supply chain organizations add value by understanding actual service costs at the customer level and accurately forecasting service costs on new opportunities. In addition to understanding customer-specific service costs, best-in-class distributors actively benchmark competitor costs.
Distributors know the shipping cost, but do they know what it costs their competitor to make a comparable shipment? There are tough decisions to be made here. If the distributor has a cost position advantage, should they pass that savings on to the customer? Or should they match the competitor's price and keep the savings as incremental margin?
In many industries, competitor supply chain costs can be factored into pricing decisions for dramatic improvements in margin realization. The cost-position advantage can be utilized to win deals and increase share or, in some cases, to increase margins.
Validating Competitive Situations
Another way that supply chain and commercial organizations can increase revenue and margins is through the validation and qualification of competitive situations.
Distributors are constantly responding to competitive pricing situations, and it's important to determine the service level of that price. The best practice is to validate each competitive situation in a structured way to determine the service component and respond appropriately. For example, has the distributor answered these questions?
1. What good is that low price if the delivery won't arrive for three days?
2. Who is the competitor and what is their price?
3. Is that price delivered next day by noon? What services are included?
4. Is that price net of rebates and programs?
Tracking competitive situations and service levels allows distributors to occasionally call a customer's bluff. If they know the competitor can't deliver the same product/service bundle in the same delivery window, they can price for margin as opposed to share.
Similarly, understanding the customer's cost of use can help increase price and margin realization. If the distributor knows that some customers have very little room for inventory, that knowledge can help them determine a service level and discount strategy for that customer. Because downtime and production delays are more expensive for some customers than others, insight into the extended supply chain can help the commercial team make better pricing decisions.
The days of treating the supply chain as a mere cost center to be allocated are long gone. Today best-in-class distributors continue to take cost out of their supply chains and turn their supply chains into sources of competitive differentiation and profit centers. Better customer-specific costing leads to better allocation of service resources, and better price and margin realization. A close linkage between supply chain insights and commercial decisions helps distributors identify and exploit margin opportunities.
About the Authors: Colin Carroll is vice president of business consulting at Vendavo, and Kim Long is a senior business consultant with Vendavo. For more information, go to www.Vendavo.com.