Operating Income Improvement
Over the past 10 years, the client, a family owned manufacturing company, experienced rapid growth adding new customers and products to their portfolio. As the company grew, the processes to support Customer, Product and Vendor data could not keep pace. Pricing models and processes that supported the business when it was relatively small could not support the current and future business. Old pricing models were difficult to identify and update in the ERP system. Price book updates and job quotes demanded multiple excel spreadsheets and tribal knowledge, requiring extensive manpower hours, facilitating mistakes and unnecessarily leaving money on table in the form of excessive discounting in the field.
Our team worked with the client’s sales management, CFO and CEO to develop pricing yield management processes and toolsets that leveraged their transaction data to generate focused management reports to identify areas to increase pricing across products, customers, and regions. The analytics are focused on sales price, not gross profit, making the data easily shared with the independent sales representatives. We established pricing baselines and client leadership set goals for every customer and product line. Together we introduced new “continuous improvement” processes and KPIs to monitor progress. The tools and improved processes are enabling the client to quickly achieve price changes in the market—realizing price increases and cash rather than deeper discounts. The approach instills sales representative discipline through fact-based management helping the client to increase sales prices and improve operating income selling the same products, to the same customers, at the same volume.
During the discovery and implementation process we identified pricing errors in the ERP system totaling over $500,000 in annual revenue and profit loss. After improving data quality, running analytics to identify pricing improvement opportunities and conducting on-going training with the regional sales managers and independent sales representatives the client experienced sales price improvements of 4% in Q1, 4.6% in Q2, 6.2% in Q3 and 6.3% in Q4.
Because list price yield was used, list price increases are not counted in the price improvement results. All product classes showed improvement. Commodity products improved 5.7% and high value/full featured products improved 5.2%. Utilizing transactional data, leveraging analytics and reinforcing pricing improvement processes, ongoing benefits for the client are being realized including better pricing decisions, reducing defective prices, managing net prices to the customer and reducing system errors. The monthly training sessions we are conducting are also uncovering additional pricing improvement opportunities.