Buyer Analytics

In a recent McKinsey Quarterly article the authors reviewed tactics aimed at maintaining the best balance possible between sales volume and profit margins in the current challenging environment. Here are a couple of examples that your suppliers may using to manage pricing.

Watch Sudden Shifts in Price Structure

Declining demand means that some customers may be collecting volume discounts they no longer deserve. Best-practice companies are reviewing much more frequently their pocket margin waterfalls, which show how much revenue companies really keep from each of their transactions, and adjusting their pricing policies accordingly—for example, by adding delivery fuel surcharges to every order.

Monitor Customer Level Profitability

Many customer groups are becoming simultaneously smaller and more costly to serve. One industrial company found that more than 20 percent of its customers had fallen below break even profitability, forcing it to raise prices selectively and, where possible, lower cost-to-serve by decreasing delivery frequency, reducing sales support, or fulfilling orders through alternate channels.

Adjust to Changing Customer Needs

The best companies are constantly assessing—through market research and direct contact—how economics are changing for their customers. Even more important, they are reacting quickly by retooling their price and benefit offerings accordingly.

Monitor Your Industry's Microeconomics

Radical shifts in costs and demand have thrown previously predictable market pricing mechanisms into chaos. Responding correctly requires a keen understanding of the microeconomic forces at play at the industry level.

Tactics for Procurement Professionals

To counter these sales tactics buyers should work with their supplier's to reduce costs and eliminate waste. Suppliers that provide some transparency and a willingness to cooperate will be favored by their customers.

• If purchase volume is declining due to soft sales, buyers should consolidate or reallocate volume among suppliers to maintain price discounts. If this isn't possible, consider changing the sourcing strategy to increase competition through the qualification of new suppliers.
• Work with your supplier to revalidate EOQ's, payment terms and volume discounts.
• Fuel surcharges are acceptable as long as terms are spelled out to remove them when prices decline.
• Work with suppliers to reduce the cost to serve. Optimizing systems while making collaboration more efficient will help offset higher costs to serve.
• Evaluate cost savings approaches that were considered unacceptable in the past. Lower cost materials that slightly increase internal production labor costs may now be an opportunity.