March 4, 2012
For decades, process industry manufacturers generally, and Chemical manufactuers in particular, have been leveraging best practices in supply chain management and manufacturing to improve efficiencies and lower costs. By utilizing approaches like Six Sigma, companies have identified and driven out unwanted variation in areas like manufacturing and production. Any engineer or plant manager worth their keep utilizes these best practices every day, with many proudly displaying their black belt status in their email signatures.
Yet many chemicals companies continue to underinvest in the most powerful business lever they have: Pricing. Many chemical companies routinely accept significant variation in price (or pocket price, pocket margin, etc.); the same level of variation in production would be enough to get the plant manager fired. Forget “six sigma,” or “three nines”… if we could just stop looking at the proverbial shotgun-blast of prices and margins, we’d be making progress!
Focusing on reducing or optimizing variable costs is certainly important. Optimizing the volume you put through your assets to leverage your fixed costs is also important.
But in most companies, improving price realization (the amount of the price you set that you actually receive) is the single greatest step you can take in improving profitability.
In the last several years, a growing number of best-in-class chemical companies have begun to focus on pricing processes and capabilities as a means to improving profitability. Vendavo has worked with more than 45 chemical business units to implement new processes, tools, and skill sets to improve profits through better pricing. The results are enough to get any CFO, COO, or CEO’s attention.
Given that the discipline of pricing is still relatively immature compared with other topics like operations management, how do you know where to begin? What are the most likely areas where a chemical company can focus, to dramatically improve profitability?
This is the first of the six-part Chemicals Profitability Blog Series. In the next several entries, I have enlisted the help of some of my colleagues at Vendavo – all experienced in pricing in the process industries – to explore five of the key areas of opportunity for better pricing in chemicals:
Empowering the Sales Team with Intelligent Pricing Guidance
Effectively Managing Costs-to-Serve
Managing for Profit, Despite Raw Materials Cost Volatility
Improving Price Increase Effectiveness
Modeling and Monitoring the Profitability of Customers/Contracts
– Alex Hoff