With increasingly unpredictable costs for raw materials, energy, and even capital acquisition, manufacturing today is a volatile, roller coaster ride filled with peaks and valleys. Manufacturers face a vast array of complex challenges including intense competition, increasing costs, and accelerated product life cycles. It is true that to, some extent, technology investments in enterprise systems such as ERP, MRP, and CRM have helped to control operating costs and increase corporate agility.

However, as adoption of these capabilities has spread to the point of producing something akin to a parity of efficiency in manufacturing, they can dilute gains in competitive advantage. What is important to realize is that the resulting quantity and quality of data produced by ERP systems have set the stage for business intelligence applications that leverage such data to analyze and optimize business performance in areas other than the shop floor.

For example, consider what competitive advantages can be built around the notion of pricing. Using data to derive customer segmentation and optimization models can recommend prices that are much more profitable than those currently in market. This is a pricing science that can be easily applied through analytical and execution applications, enabling smarter decisions and better execution across all business functions related to pricing. Indeed, there are several ERP software producers that include these pricing formula functions in their systems today. Given the current state of pricing practices and its considerable impact of financial performance, the potential benefits of pricing initiatives are enormous.

Moreover, manufacturers’ broad product lines, numerous customers, and negotiated sales model combine to create a business environment that is very conducive to a more informed approach to pricing. To the extent that strategic and precision pricing should be a part of efficient manufacturing practices today, many pricing software applications have been developed that satisfy industry-specific needs. Indeed, there is a growing use of advanced pricing techniques and applications in manufacturing that have achieved significant and measurable benefits.

Most manufacturing companies are very familiar with the power of process automation to improve business performance. However, many are just beginning to exploit the potential of applied business intelligence applications that harness data from operational systems to improve decision-making across the enterprise. A few of these companies have embraced sophisticated analysis and optimization systems so deeply that some management strategists have dubbed them analytics competitors.

Regardless of how widespread a company’s use of analytics really is, using more quantitative approaches to pricing can deliver significant financial gains. Many manufacturers use pricing processes that are manual and largely ad hoc, resulting in poorly-priced deals that leave significant margin on the table. In most cases, price, discount, and other margin-driving terms are arbitrarily based on precedent and circumstance rather than empirical analysis and strategic intent. Even companies that apply pricing principles manually (e.g. basic price segmentation), would benefit greatly from more precise price differentiation that can only come about through advanced quantitative models and optimization techniques.

Following the example set in other industries such as airlines and hotels, some manufacturers began pursuing pricing initiatives years ago. Their focus has been in two areas: controlling discounting and applying optimization techniques to exploit price elasticity. These early innovators realized that the sooner they started, the greater the financial benefit. In almost every case, these projects have exceeded their projected ROI, in some cases delivering significant incremental profit. Because of these successes, many more companies in a wide range of manufacturing sectors are now pursuing similar pricing initiatives.

In the second part of this two-part series, we will explore some specific requirements and methods for precision pricing in manufacturing. There, we will see just how vital quantitative approaches are better suited to the modern pricing challenges manufacturers face in an increasingly complex and competitive economic climate.

This entry was posted on Monday, August 4th, 2008 at 9:00 am and is filed under Accounting, Purchasing, CRM. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.