The ultimate profit opportunity

By Patrick M. Byrne -- Logistics Management, 10/1/2006

Leading-edge technologies and processes have helped scores of companies improve forecasting, supply planning, replenishment, and inventory optimization. Likewise, advances in revenue management, dynamic pricing, and promotions have helped many organizations add value to marketing management and pricing analytics. But because these two efforts often take place in relative isolation, they fall short of their combined potential: an end-to-end process for balancing supply and demand while also maximizing profit and top-line growth.

Coordinating these approaches can help organizations determine the right pricing and promotion strategies based on customers’ price sensitivity, supply chain costs, and the availability of supply.

Unleashing the pooled potential of these activities is a challenge from both a process and a technology standpoint. Just consider all of the steps in a typical pricing- and promotion-planning process.

First, historical order data must be analyzed by sales channel and customer segment in order to identify factors affecting baseline and incremental volumes. Next, the analysis must generate recommended marketing instruments, promotional calendars, and price bands to maximize profitability and growth.

Finally, this information must be communicated to upstream functional areas such as demand planning and fulfillment to ensure that promotional volume or price-induced demand can be met by the upstream supply chain.

Extending the Supply and Demand Planning Process

Moving beyond this sequential approach requires collaboration across all supply chain stakeholders to incorporate pricing, promotions, and induced demand (e.g., special pricing and promotional initiatives) into the overall demand/supply-optimization process. The graphic to the left illustrates this new paradigm and the various stakeholders involved in an extended sales and operations planning (S&OP) process.

Jointly optimizing demand and supply inputs in an extended sales and operations planning process.

Changes in technology are vital to the extended S&OP process. For example, most companies will need to extend the level of integration between: 1) their ERP and supply chain systems for demand planning, fulfillment, and production planning; and 2) their promotions-planning and pricing-optimization applications.

Analytical tools may also be needed to help parse customers by lead-time sensitivity and other buying characteristics, and to optimize pricing and product availability under constrained conditions. Additionally, organizations may be able to capture better information about customers’ behavior by using analytic techniques to determine their customers’ willingness to pay.

By offering an integrated planning forum where stakeholders can agree on business decisions that jointly balance demand and supply, the extended S&OP process can help companies significantly improve enterprise wide decision-making—and make decisions that increase the opportunity for greater profit.

Coordinating dynamic pricing, promotional, and operational decisions also can help reduce the so-called “bullwhip effect,” where small variations in orders get amplified up the supply chain and cause inventory shortages or excesses, elongated lead times, lost sales, and declines in customer service. A synchronized approach helps improve both the revenue and the cost sides of the profit equation.

Taking Dynamic Pricing to the Next Level

An integrated S&OP approach can increase profitability by helping companies make segmented pricing decisions. Customers in different channels and segments often have different sensitivities regarding how quickly their orders are satisfied. By segmenting customers based on their degree of sensitivity to lead times, an organization can set higher prices for customers that are willing to pay more for shorter product lead times, and offer discounts to customers that are willing to accept longer product lead times.

Similarly, organizations may be able to tailor their production decisions to satisfy these different customer segments. For example, they could combine a “make-to-order” production strategy for customers with low sensitivity toward product lead times with a “make-to-stock” product-customization strategy for customers with a high sensitivity. Done successfully, this represents a clear path to high performance and higher profitability.

Lastly, when companies link pricing and promotions decisions with operating decisions, they reduce variation in demand while better controlling stocking levels and resource utilization. Moreover, information regarding capacity and resource utilization that is received from manufacturing plants can help identify which plant or resource to consider in pricing decisions.

By calculating and utilizing variable pricing and supply-constraint information in the extended S&OP process, companies can drive higher returns than they could by optimizing their pricing and supply decisions in isolation.

Optimizing Supply, Demand, and Pricing

Extending the S&OP process first involves understanding the connectivity among pricing and promotional tactics and supply chain constraints. The following five questions can help supply chain managers assess how effectively they are pursuing joint supply, demand, and pricing optimization.

How do you ensure that your pricing and promotional activities do not adversely affect the upstream supply chain?
How do you link your sales and marketing instruments with critical supply chain factors such as lead times, inventory, and capacity constraints?
How do you measure the impact of sales and marketing decisions on your upstream replenishment capabilities?
How flexible are your production and distribution strategies with respect to fluctuating customer demand?
How do you adjust your sourcing strategy and inventory rules to take into account the effects of dynamic pricing as well as customer margins?

Ticket to Higher Profits

Inconsistent, ambivalent, or pessimistic answers to the above questions could indicate that joint supply, demand, and pricing optimization is just the ticket to higher profitability—the one performance measure that matters most.

Author Information

Patrick M. Byrne is managing partner of the Accenture Supply Chain Management practice, which provides consulting and outsourcing services for strategic sourcing, procurement, product design, manufacturing, logistics, fulfillment, inventory management, and supply chain planning and collaboration. Based in Reston, Va., he can be reached at pat.byrne@accenture.com.