price increases

Six Sigma Pricing > Control: Set and Enforce Pricing Authority Levels and Repeat Previous Steps

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This is the final article in our six part blog series on how manufacturers and distributors can apply Six Sigma methodology to the pricing function to generate repeatable margin gains. This blog covers the importance of setting and enforcing pricing authority levels and repeat previous steps as continuous improvement never stops.

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As a quick review, here is the Six Sigma Process as described by Wikipedia:

“Six Sigma seeks to improve the quality output of process by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, mainly empirical, statistical methods, and creates a special infrastructure of people within the organization (“Champions”, “Black Belts”, “Green Belts”, “Yellow Belts”, etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified value targets, for example: reduce process cycle time, reduce pollution, reduce costs, increase customer satisfaction, and increase profits.”

As we covered in our last article on this topic, it is crucial that you build processes, systems and tools to assist teams and create reporting tools to track improvements and implement real-time visibility into business processes defects to ensure you are focusing your improvement efforts in the right areas.

In the Control phase, our job is to make sure the improvements we have put in place – stay in place. To achieve this you want to chart performance against upper and lower control limits. Run charts show single values plotted over time and indicate trends of process & shifts in process performance.

The key to success it to continuously monitor performance and measure against the control limits via Control Charts which allows you to:

  1. Study process variation over time
  2. Monitor and improve process performance
  3. Maintain “In-Control” processes

Additional benefits of The Six Sigma Pricing Control phase include:

  • Developing an effective “Control Plan Audit Process”
  • Identifying opportunities for improvement in processes, tools, and or behavior
  • Establish a “Pricing Authority Matrix”
  • Develop “Profitability Improvement Plans” for every customer
  • Developing Change Management strategies and plans

The following are the five areas we covered in this blog series that will helped demonstrate a proven pa to Six Sigma Pricing Excellence and links to additional blogs and other content.

  1. Define: set roles, responsibilities, and goals for the team in alignment within the business
  2. Measure: build correct measurements and incentives for each person
  3. Analyze: use reporting tools to find opportunities to grow or challenges to fix
  4. Improve: build processes, systems and tools to assist teams and create reporting tools to track improvements
  5. Control: set and enforce pricing authority levels and repeat previous steps as continuous improvement never stops

Six Sigma Pricing related articles:

Six Sigma Program Overview

Six Sigma Master Blackbelt Greg Preuer, of SPA has created the first course designed to apply time tested Six Sigma methodology to pricing.  Those who study with Greg will learn not only how to drive the pricing process but how to sustain the gains and automate the process.  They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

“Over time we discovered the most critical part of moving the pricing process forward came in helping people deal with change. Establishing a plan for the human reaction to all change is incredibly important.”

– Greg Preuer

Graduates from this course will learn to chart a clear path to pricing improvement.  They will learn each of the following steps:

  • How to design and design goals which are consistent with their company’s pricing strategy.
  • How to measure and identify characteristics critical for pricing success.
  • How to analyze the current situation and steps along the way.
  • How to design an improved alternative which moves closer to the desired result.
  • How to verify that actions taken create the right results.

A Pricing Process founded on SPA’s Six Sigma Program includes the following:

  • Negotiating strategy and tactics
  • Value-based pricing
  • Automated decision making tools
  • Customer Profitability improvement plans
  • Sales team selling value
  • Pricing strategy and leadership
  • Consistent and fair pricing architecture
  • 2 to 4% growth in GM%
  • Pricing based on customer sensitivity
  • Continuous improvement focus

To learn how you can realize the benefits of SixSigma Pricing, contact SPA today at info@strategicpricing.com or 216.455.1545.

 

SPA Events

Click here for other SPA event dates and times including our upcoming webcasts.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

Six Sigma Pricing > Improve: Build Processes, Systems and Tools to Assist Teams & Create Reporting Tools to Track Improvements

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This is the fifth in a six part blog series on how manufacturers and distributors can apply Six Sigma methodology to the pricing function to generate repeatable margin gains. This blog covers the importance of driving incremental improvements through building processes, systems and tools to assist teams and create reporting tools to track improvements.

All pricing practice leaders know a disciplined process is needed to create and maintain Pricing Excellence – to effectively drive incremental improvements your team must focus on these four areas:

  1. Build process, systems & tools to assist team in exceeding their goals. (Automate at all cost)
  2. Hire based on foundational skills versus experience
  3. Train teams on key foundational skills that they will need to exceed their goals.
  4. Create reporting tools to track improvements

Processes, Systems, and Tools

As we covered in our last article on this topic, it is crucial that you implement real-time visibility into business processes defects in the Analyze phase to ensure you are focusing your improvement efforts in the right areas.

Other key elements of this phase include:

  • Base lining your current pricing performance helps to understand what the potential improvement can be.
  • Benchmark your goals and objectives based on the leader in your industry to drive toward World-class performance.
  • Creating playbooks allows you to go from identifying to rectifying deficiencies in your pricing process.
  • Implement automated deal tools so you can play offense or defense when appropriate by being able to make dynamic pricing decisions.

Hiring and Training

The real key to long-term success and to achieve Pricing Excellence – people. Always choose character over experience. Pricing is hard and you will train them to make excellent pricing decisions but they must have some core traits. Leadership, communications skills, and an analytical mind are the three most important traits. Quantitative, numbers driven decision makers such as former military academy grads, quantitative undergrad (Finance, Accounting, Physics, etc.) majors who also participated in a team sport, and yes even select sales people in your own company make great pricers.

To achieve long-term success, an effective and robust training program must be developed. It must include everything pricers will need to be successful and must be geared towards developing a proactive approach to identifying improvement opportunities in margin, market share, etc.  They must be constantly driving change – the ability to make decisions faster and more accurately is a major competitive advantage.

Reporting

Reporting tools to track performance in all areas are a must to drive profitable growth in your business and to drive discipline in the revenue side of your business.

Automated tools are needed to make effective decisions based on analytical scorecards. Answers to 95% of the questions about a deal should be at hand in near real-time and in a clear and concise format.

Creating Standard Operating Procedures are also key and must detail who does what in each step of each process and how decisions are made to eliminate confusion over price setting and approval authority, etc.

Six Sigma Program Overview

Six Sigma Master Blackbelt Greg Preuer, of SPA has created the first course designed to apply time tested Six Sigma methodology to pricing.  Those who study with Greg will learn not only how to drive the pricing process but how to sustain the gains and automate the process.  They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement.  They will learn each of the following steps:

  • How to design and design goals which are consistent with their company’s pricing strategy.
  • How to measure and identify characteristics critical for pricing success.
  • How to analyze the current situation and steps along the way.
  • How to design an improved alternative which moves closer to the desired result.
  • How to verify that actions taken create the right results.

A Pricing Process founded on SPA’s Six Sigma Program includes the following:

  • Negotiating strategy and tactics
  • Value-based pricing
  • Automated decision making tools
  • Customer Profitability improvement plans
  • Sales team selling value
  • Pricing strategy and leadership
  • Consistent and fair pricing architecture
  • 2 to 4% growth in GM%
  • Pricing based on customer sensitivity
  • Continuous improvement focus

To learn how you can realize the benefits of SixSigma Pricing, contact SPA today at info@strategicpricing.com or 216.455.1545.

The following is the remaining area we will dive into in a future article in this blog series that will help illuminate the path to Six Sigma Pricing Excellence.

  1. Control: set and enforce pricing authority levels and repeat previous steps as continuous improvement never stops

Upcoming SPA Events

Set You and Your Team Up to Win Better Agreements at Battle For Margin

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Your organization’s profits depend on the individual and collective negotiation skill of your employees – from sales to purchasing. The Battle for Margin negotiation intensive is a rare opportunity to dive deeper into negotiation strategy that will immediately drive for more profitable agreements. Don’t you and your team deserve to be set up for success? Don’t miss the Battle for Margin.

It will be held in Miami at February 9-10 at the Grand Beach Hotel Surfside.

Get negotiation intelligence you’ll find nowhere else:

Revolutionize how you and your team view negotiation. Give your organization the tools and knowledge to drive more profit than ever before with compelling and eye-opening case studies, critiques, and group exercises. Instill knowledge fast. The day will fly by because our seminars are purposefully entertaining and educational; people learn more when they’re having fun.

Attendee Testimonials

Here what our clients have to say about the power of strategic pricing tools from SPASigma Negotiation Training Seminars.

“SPASIGMA breaks the standard mold of slow pace seminars. It’s engaging, fun, and interactive in a setting that feels warm and comfortable.”

     — Mitch Koepp, Marketing Manager, All World Machinery

Other SPA Events

Click here for other SPA event dates and times including our upcoming webcasts.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

Six Sigma Pricing > Analyze: Identify and Understand Opportunities to Grow Margins and Create Reporting Tools to Identify Defects

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This is the fourth in a six part blog series on how manufacturers and distributors can apply Six Sigma methodology to the pricing function to generate repeatable margin gains. This blog covers the importance of effective analysis of the right measurements and metrics to identify the root causes of defects in your pricing process.

All pricing practice leaders know a disciplined process is needed to create and maintain Pricing Excellence – effective defect analysis must cover these five areas which can be major sources of variation across commercial processes:

  1. People
  2. Information
  3. Tools / Systems
  4. Environment
  5. Methods

This crucial step leverages the measurements and metrics you have mindfully constructed to identify what needs improvement and what/where are the sources of defects in the process.

A company must properly analyze anything that impacts pricing performance and then use these insights and data to make meaningful improvements that will help you achieve your business goals. The following lays out some effective methods for the analysis phase.

Cause and Effect Analysis:

  • Diagram the relationship of the 5 sources of variation
  • Build a Cause and Effect Matrix to quantify impact of each process step
  • Select key sources of variation throughout the process
  • Capture 2-3 potential root causes from diagram
  • Dig deep into controls and compensation
  • Ask why multiple times

Process Map Analysis:

  • Diagram the process and hunt for bottlenecks or other defects of each process step
  • Chart metrics to see if the process appears stable or not
  • Use Pareto Charts, Histograms, Box plots, Scatter Plots, etc. to visually determine data distribution and variation

Six Sigma Program Overview

Six Sigma Master Blackbelt Greg Preuer, of SPA has created the first course designed to apply time tested Six Sigma methodology to pricing.  Those who study with Greg will learn not only how to drive the pricing process but how to sustain the gains and automate the process.  They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement.  They will learn each of the following steps:

  • How to design and design goals which are consistent with their company’s pricing strategy.
  • How to measure and identify characteristics critical for pricing success.
  • How to analyze the current situation and steps along the way.
  • How to design an improved alternative which moves closer to the desired result.
  • How to verify that actions taken create the right results.

A Pricing Process founded on SPA’s Six Sigma Program includes the following:

  • Negotiating strategy and tactics
  • Value-based pricing
  • Automated decision making tools
  • Customer Profitability improvement plans
  • Sales team selling value
  • Pricing strategy and leadership
  • Consistent and fair pricing architecture
  • 2 to 4% growth in GM%
  • Pricing based on customer sensitivity
  • Continuous improvement focus

To learn how you can realize the benefits of SixSigma Pricing, contact SPA today at info@strategicpricing.com or 216.455.1545.

The following are the two remaining areas we will dive into in future articles in this blog series that will help illuminate the path to Six Sigma Pricing Excellence.

  1. Improve: build processes, systems and tools to assist teams and create reporting tools to track improvements
  2. Control: set and enforce pricing authority levels and repeat previous steps as continuous improvement never stops

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

Six Sigma Pricing > Measure: Build Measurements and Metrics Plan for Pricing Team Member Assessment and Incentives

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This is the third in a six part blog series on how manufacturers and distributors can apply Six Sigma methodology to the pricing function to generate repeatable margin gains. This blog covers what to consider in building measurements and a metrics plan for pricing team member assessment and incentives.

All pricing practice leaders know a disciplined process is needed to create and maintain Pricing Excellence – how to measure and incent the team to achieve excellence is key.

“Discipline is the defining fire in which talent becomes ability”

     – Roy Smith

Applying Six Sigma to pricing is clearly a better way to go to make pricing processes optimal – but…

How do we measure our progress?

How do we set proper incentives for team members?

This crucial step lays the foundation for success and requires building measurements and metrics to identify what needs improvement thoughtfully, completely, and in alignment with your business goals.

A company must properly identify anything that impacts pricing performance and measure it mindfully. Identifying “Critical to Quality” (CTQ) components for each person’s role in the process is foundational to correct measurements. It is very important to choose wisely which measurement is appropriate for each role and incentives must be tied to these.

Few things have the ability to motivate people more than performance measures tied to their pay and incentives. Focus on a limited set of measurements that are tied closely to profitability and then hold people accountable for their performance against those measurements.

Features of CTQ’s:

  • What: must have specific and correct criteria.
  • How: must have a method to measure the criteria.
  • Must be impactful to you and the business
  • Define what you are trying to evaluate
  • Give a precise description that everyone will understand.
  • Decide how you will attach a value to what you are measuring.

Measurements must be simple, possess real business impact, reflect improvements over time, and be compared to business goals and market realities.

Criteria for an excellent pricing measurement:

  • Tracks the differences of value across the customer segments.
  • Tracks the differences in cost to serve across the customer segments.
  • Easy to measure & enforce
  • How does the measurement position versus competitors price levels?
  • Align the measurement with customer’s value received by using product or service

Six Sigma Master Blackbelt Greg Preuer, of SPA has created the first course designed to apply time tested Six Sigma methodology to pricing.  Those who study with Greg will learn not only how to drive the pricing process but how to sustain the gains and automate the process.  They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement.  They will learn each of the following steps:

  • How to design and design goals which are consistent with their company’s pricing strategy.
  • How to measure and identify characteristics critical for pricing success.
  • How to analyze the current situation and steps along the way.
  • How to design an improved alternative which moves closer to the desired result.
  • How to verify that actions taken create the right results.

A Pricing Process founded on SPA’s Six Sigma Program includes the following:

  • Negotiating strategy and tactics
  • Value-based pricing
  • Automated decision making tools
  • Customer Profitability improvement plans
  • Sales team selling value
  • Pricing strategy and leadership
  • Consistent and fair pricing architecture
  • 2 to 4% growth in GM%
  • Pricing based on customer sensitivity
  • Continuous improvement focus

To learn how you can realize the benefits of SixSigma Pricing, contact SPA today at info@strategicpricing.com or 216.455.1545.

The following are the three remaining areas we will dive into in future articles in this blog series that will help illuminate the path to Six Sigma Pricing Excellence.

  1. Analyze: use reporting tools to find opportunities to grow or challenges to fix
  2. Improve: build processes, systems and tools to assist teams and create reporting tools to track improvements
  3. Control: set and enforce pricing authority levels and repeat previous steps as continuous improvement never stops

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

Six Sigma Pricing > Define: Set Pricing Team Roles and Responsibilities, Create Goals Properly Aligned with Your Business

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This is the second in a six part blog series on how manufacturers and distributors can apply Six Sigma methodology to the pricing function to generate repeatable margin gains. This blog covers what to consider in defining pricing team members roles and responsibilities and setting properly aligned goals.

All pricing practice leaders know a disciplined process is needed to create and maintain Pricing Excellence.

As we covered in the first blog in the series, applying Six Sigma to pricing is clearly a better way to go to make pricing processes the best they can be – but… How do we get there from here?

The first step requires defining what needs improvement thoughtfully, completely, and in alignment with your business goals.

Before you can begin to set up processes to measure, analyze, control, and continuously improve your pricing processes, one must define what the problem is without stating the solution.

A starter list of what you will need to define follows:

  1. What is goal for setting up a pricing team?
  2. What part of the pricing process needs to improve?
  3. Can you identify the root problems from a numerical perspective?
  4. How often does the problem occur?
  5. What will the pricing team structure be?
  6. Where will the pricing team reside in the organizational chart?
  7. What roles are needed on the pricing team?
  8. What responsibilities will each team member have?
  9. What level of experience and skill sets are needed?
  10. Do we look internally for team members or source from outside?

SPA’s Six Sigma training drives real results focused on profitable growth and continuous improvement.

“Basic human processes are 4 Sigma at best … 99% good is just not good enough.”

Greg Preuer – Former Pricing Director at and Cooper Lighting and General Electric

Per Wikipedia Six Sigma …

“…. seeks to improve the quality of the output of a process by identifying and removing the causes of defects and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, mainly empirical, statistical methods, and creates a special infrastructure of people within the organization, who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has specific value targets, for example: reduce process cycle time, reduce pollution, reduce costs, increase customer satisfaction, and increase profits.”

A Pricing Process founded on SPA’s Six Sigma Program includes the following:

  • Negotiating strategy and tactics
  • Value-based pricing
  • Automated decision making tools
  • Customer Profitability improvement plans
  • Sales team selling value
  • Pricing strategy and leadership
  • Consistent and fair pricing architecture
  • 2 to 4% growth in GM%
  • Pricing based on customer sensitivity
  • Continuous improvement focus

Six Sigma Master Blackbelt Greg Preuer, of SPA has created the first course designed to apply time tested Six Sigma methodology to pricing.  Those who study with Greg will learn not only how to drive the pricing process but how to sustain the gains and automate the process.  They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement.  They will learn each of the following steps:

  • How to design and design goals which are consistent with their company’s pricing strategy.
  • How to measure and identify characteristics critical for pricing success.
  • How to analyze the current situation and steps along the way.
  • How to design an improved alternative which moves closer to the desired result.
  • How to verify that actions taken create the right results.

To learn how you can realize the benefits of SixSigma Pricing, contact SPA today at info@strategicpricing.com or 216.455.1545.

The following are the four areas we will dive into in the remaining articles in this blog series that will help illuminate the path to Six Sigma Pricing Excellence.

  1. Measure: build correct measurements and incentives for each person
  2. Analyze: use reporting tools to find opportunities to grow or challenges to fix
  3. Improve: build processes, systems and tools to assist teams and create reporting tools to track improvements
  4. Control: set and enforce pricing authority levels and repeat previous steps as continuous improvement never stops

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

How to Leverage Six Sigma Methodology to Drive Continuous Margin Improvements

Posted on

This is the first in a six part blog series on how manufacturers and distributors can apply Six Sigma methodology to the pricing function to generate repeatable margin gains.

A disciplined process is needed to create Pricing Excellence – SPA’s Six Sigma training drives real results focused on profitable growth.

“Measure of success at strategic pricing is not how much it increases price but how much it increases profitability.”

Thomas Nagle – Professor, University of Chicago

Current State of Pricing

  • Limited negotiation skills
  • Cost + pricing
  • No analytical tools
  • No profitability improvement plans
  • Sales rep discount vs. sell
  • Reactionary pricing tactics
  • Inconsistent pricing structures
  • No growth in GM%
  • Ignores market reality
  • No strategy to improve margins

Six Sigma Pricing

  • Negotiating strategy and tactics
  • Value-based pricing
  • Automated decision making tools
  • Customer Profitability improvement plans
  • Sales team selling value
  • Pricing strategy and leadership
  • Consistent and fair pricing architecture
  • 2 to 4% growth in GM%
  • Pricing based customer sensitivity
  • Continuous improvement focus

So clearly the latter is the better way to go – but… How do we get there from here? What are the steps and areas of focus that will get us there successfully?

The following are the five areas we will dive into in this blog series that will help illuminate the path to Six Sigma Pricing Excellence.

  1. Define: set roles, responsibilities, and goals for the team in alignment within the business
  2. Measure: build correct measurements and incentives for each person
  3. Analyze: use reporting tools to find opportunities to grow or challenges to fix
  4. Improve: build processes, systems and tools to assist teams and create reporting tools to track improvements
  5. Control: set and enforce pricing authority levels and repeat previous steps as continuous improvement never stops

Six Sigma Master Blackbelt Greg Preuer, of SPA has created the first course designed to apply time tested Six Sigma methodology to pricing.  Those who study with Greg will learn not only how to drive the pricing process but how to sustain the gains and automate the process.  They will become Six Sigma experts (Blackbelt) in business process with a focus placed squarely on price management.

Graduates from this course will learn to chart a clear path to pricing improvement.  They will learn each of the following steps:

  • How to design and design goals which are consistent with their company’s pricing strategy.
  • How to measure and identify characteristics critical for pricing success.
  • How to analyze the current situation and steps along the way.
  • How to design an improved alternative which moves closer to the desired result.
  • How to verify that actions taken create the right results.

To learn how you can realize the benefits of SixSigma Pricing, contact SPA today at info@strategicpricing.com or 216.455.1545.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.

SPA Featured in Industrial Supply Magazine Article on Managing Gross Margin

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The Industrial Supply Magazine article, “Are you really managing gross margin?”, discusses some techniques for managing gross margin such as segmenting suppliers, setting minimum gross margin requirements for product lines, and reviewing pricing abnormalities and deviations among others.

Excerpts of the article authored by Frank E. Hurtte Jr. who has 28 years of distribution industry experience and a lifetime in sales follow.

“Any short conversation with distributors includes the topics of gross margin”

Any short conversation with distributors includes the topics of gross margin: dollars, percentages, thoughts on GM pressure and the issues with competitors who drive gross margin downwards. But very few actively manage the gross margin of their organizations, with actively being the key word.

Most distributors approach managing gross margin as if they can only indirectly affect the value. They understand sales growth as a driver, so they manage sales. They comprehend lower cost of goods sold as a tool, so they push suppliers to give them special deals. Cerebrally, they understand increases in gross margin percentage radically impact profits, but few go further than cheerleading sessions to push their sales teams to increase GM performance.

“Avoid giving away gains from special supplier deals”

It is not uncommon for supply partners to reward distributor activity, performance or other work with some type of pricing advantage. The premise of the idea is simple: the distributor gets an extra discount which creates greater revenue via improved gross margin. But systemic breakdowns within the distributor operation are legendary. One of the well-deserved supply partner criticisms of distributors lies in their inability to control passing the price along to the customer. Extra margins designed to allow the distributor to make more money are simply passed on to the customer. The market price erodes and everybody loses.

This loss of margin building potential is so rampant that many manufacturers have resorted to passing additional gross margin along via end-of-year rebates. The arguments for and against this procedure have been debated for the past decade. But, there are simple steps to avoid the margin giveaway in the first place.

“Review pricing for abnormalities”

Who in your organization is responsible for reviewing pricing abnormalities and deviations? Back before the recession, a lot of distributors assigned someone to review invoices before they were officially entered into the system. Sometimes it was the sales manager, a senior inside sales person or another person with clout in the organization. They reviewed pricing levels for abnormalities; typically prices set too low for the situation. Somewhere between 2008 and today, this activity has largely been discontinued. Now is a good time to re-visit and re-launch the practice.

“Segment your supply partners”

The concept of segmenting customers has been with us for years, but why not segment suppliers? The issue with Barry is a good reason. Further, there are other issues that must be taken into consideration.
If you enjoy an exclusive on any line, there may be excellent opportunities for pushing gross margin forward. If any of these product lines requires spare parts, why would you consider selling them for anything besides list? A review of your customer list may uncover customers who only purchase this product line from you. Looking at the situation objectively, they probably only buy this product from you because they have no choice. Why would you offer special prices?

Another area to explore and manage in the “exclusive line” offering comes via sales to competitive distributors or resellers. Strangely, many distributor managers leave the price level of these sales to their customer service group. Again, I ask you why discount?

“Gross margin improvements impact distribution like no other business.”

A couple of points in margin improvement typically increases the distributor’s bottom line profits before interest and taxes (EBITA) by 50 percent. And, since distributors are typically valued based on a multiple of earnings, that 50 percent increase to the bottom line increases the shareholder equity by a gigantic amount. Let me toss out an example. A distributor with $20 million in sales might produce an EBITA of 4 percent, or $800,000. If the distributor was valued at eight times earnings (number for illustrative purposes but realistic), this places the company’s value at $6.4 million. Increasing gross margin by two points raises the EBITA to 6 percent or $1.2 million. The new value of the same company with $20 million in sales would now be worth $9.6 million. Many times companies with higher EBITAs are valued at a higher multiple of earnings, further illustrating the need to make margin management a priority.

With payback like this, we can only ask the question, is this really possible or just a theoretical tale spun by a consultant? I know it is both practical and possible to do. It requires some special tools (which I don’t sell, so I have no reason to lie), and some processes which best come from pricing experts like David Bauders and his Strategic Pricing Associates. But, I have witnessed the results at dozens of distributors. The results are game changers.

This article originally appeared in the Sept./Oct. 2015 issue of Industrial Supply magazine. Copyright 2015, Direct Business Media., click here to read the complete article.

Follow SPA

To easily keep up with the latest SPA announcements, events and resources you can follow us on LinkedIn or on the following major social media channels and file sharing platforms: Twitter, Google+, Facebook, SlideShare, and YouTube.

We also encourage you to join the Strategic Pricing discussions in our LinkedIn group and to sign up to receive our Strategic Pricing Newsletter by clicking here.