Chief Pricing Officer

Cooperation Means More Pie for Everyone

In a downturn, especially one with deflationary moves at retail, you get enormous pressure on margins throughout the supply chain - that’s generally not debated.

There are several ways supply chain companies might react to this: manufacturers - especially those with frequent price and promotion changes - may apply analytics to the price setting process, to get much sharper about what wholesale price they’re willing to accept for their products. This advantage comes not only from quantifying their customers’ price elasticities, but also from understanding the relative margins available from various products they sell which compete for the same capacity and raw materials.

Analogously, the retailer might apply sharper analytics to the purchasing process, to more accurately measure their seller’s indifference points and minimize product cost.  While both of these measures can have a significant positive impact on margins, there is a different approach with much bigger potential: cooperation.

If the manufacturer and retailer simply work together, and make an effort to help solve each others’ “problems” there is usually a bigger advantage available to both. For example, if a manufacturer’s sales team works with its retail customer to optimize exactly which product promotions will work best in specific stores, in specific time periods, he provides his customer with knowledge acquired from a much larger data set than the customer has available on his own.

However, what really turbo-charges this model is that there are win-win opportunities available at times when the manufacturer is undersold or “long” on a product in some future time window, say six weeks out, and needs to solve this problem. In this case the manufacturer calculates how much discount it’s willing to offer to get back into “balance,” and uses analytics to decide exactly which retailer customer would get the most bang for the buck from putting this product on promotion in that window, and then works with that retailer to strike a deal. So the manufacturer fixes a problem, and the retailer gets help with a promotion tailored to their own customers’ preferences, and for which they bought the product at a very special price. This is much better for both parties than haggling - no matter how good they are at it!

The bottom line is that there are clear, and significant, advantages to manufacturer-retailer cooperation, when they work together as real partners.

Thanks to the advanced price and product mix optimization technology manufacturers and retailers are starting to use today, it is possible for the entire supply chain to sharpen their game - and their margins. BOTH sides can  get a bigger slice of the proverbial pie.

Mike Neal, Founder & CEO
SignalDemand
www.signaldemand.com

So, we talk a lot here about food prices and what they mean to manufacturers and the folks at the start of the supply chain. But what about the folks at the other end, like you and me? As most people know first hand, food prices can be one of the biggest drains on families’ budgets – the bigger the family, the bigger the drain, and the lower a family’s income, the bigger bite food takes out of the monthly budget.

The United Nations’ Food and Agriculture Organization estimated that international food prices are up more than 60 percent since 2006, including a staggering climb during the first three months of 2008. Beyond the obvious bad news, other economic dangers stem from high food prices – a reverse “trickle-down” effect. Food and housing are a family’s two basic costs, expenses that cannot be forgone or significantly trimmed back – everyone needs to eat and needs a roof over their head. As those costs increase, consumers stop discretionary spending: restaurant visits slow down, people stop buying big ticket items, and generally stop spending money. Those at the bottom of the economic ladder also need more support, providing further strain.

Food prices are all encompassing, affecting broad swaths of the public and creating depressed conditions at the very base of the economy – consumers. Combine this with extreme pressure from the financial markets, and the country’s economy is squeezed from almost every angle.

This is a very simple illustration of why food producers need to intelligently determine prices. Smart prices throughout the supply chain benefit everyone in the long run.