Supply Chain Vulnerability: Is Your Pricing System Prepared?

In the ever-evolving landscape of global commerce, the aftermath of the COVID-19 pandemic has unveiled a new frontier of challenges for businesses across most industry sectors. The once steady rhythm of price fluctuations has transformed into a chaotic symphony, with shortages, bottlenecks, transportation hurdles, weather disruptions, and labor crises orchestrating wild price swings across diverse industries. And here’s the kicker – the turbulence and associated supply chain vulnerability (from the ongoing and the Hamas-Israel conflict to the cargo ship attacks of Houthi rebels in Yemen causing Red Sea shipping routes to be rethought, and a range of other issues in between) are not showing signs of letting up.

Due to ongoing attacks on Red Sea shipping, the cost of moving a container full of automotive parts bound for Europe from Asia is up by 2.5 to 4 times and ships are taking 8 to 10 days longer to make the journey. The resultant surge in shipping costs should ultimately show up in consumer car prices, and if automotive manufacturers are not ready, cost increases that are not proactively passed on to consumers could eat into their margins.

At Pricefx, we are a stalwart provider of modern pricing software. We have a decade-plus worth of experience in dealing with all manner of economic tempests. As a result, we have been at the forefront of addressing the myriad pressure points faced by our customers, guiding them through times of sudden and extreme change, and providing them with flexible and transparent data-driven solutions that allow them to be set up as best as possible for the changes and challenges they will face.

In this article, we will examine some of the current supply chain issues at hand and explore how preparing your pricing infrastructure can act as a soothing balm during the eye of the storm, preparing your organization for any unforeseen disasters that may lurk on the horizon. Because, let’s be real – this won’t be the last time your business faces a dramatic shock to its ecosystem. Brace yourself; the next challenge is just around the corner and learning how to deal with it will be critical.

How Manufacturers Can Manage the Cost of Transportation Supply Chain Issues

The current supply chain issues, such as the attacks on cargo ships in the Red Sea by Houthi militants (forcing more than half of ships to be expensively rerouted around the Cape of Good Hope), have the potential to cause significant disruptions and drive up the prices of manufactured goods, impacting global supply chains and the battle against inflation. As these challenges continue to unfold, it’s crucial for businesses to prepare for potential bottlenecks in their pricing infrastructure.

As the global economy grapples with the ramifications of these supply chain disruptions, businesses can turn the challenge into an opportunity by strategically preparing their pricing infrastructure. Proactive preparation and strategic investment in pricing infrastructure can empower businesses to not only weather the current supply chain storm but also emerge stronger and more resilient in the face of future challenges.

For example, a manufacturer dependent on parts being shipped from China to their European plants will need to recalculate prices accordingly. With a pricing software solution capable of automatic recalculation of dependent price lists, the manufacturer can stay ahead of the ball game, preparing their infrastructure for future-proofing.

 

For some manufacturers, dealing the current state of supply chain affairs often involves snail-like manual and error-prone processes, with calculations being carried out slowly in tools like MS Excel, leading to potential margin loss, inaccuracies and a lack of a robust audit trail. However, the opportunity to proactively prepare for supply chain disruption lies in embracing automated solutions that streamline data gathering, apply pricing strategies for list price calculation, incorporate robust simulation capabilities, and seamlessly integrate with ERP systems for efficient execution.

 

By adopting this approach, businesses can unlock a host of benefits:

 

• Firstly, the time spent on list price revision is significantly decreased, reducing the risk of margin leakage as the costs of sending those ships around the Cape of Good Hope kicks in.
• Secondly, the risk of manual errors is eliminated, promoting accuracy and reliability in pricing decisions.
• Thirdly, the incorporation of simulation capabilities ensures that list price recommendations become more relevant, contributing to improved price realization.
• As a bonus improvement, aligning prices across various sales channels becomes a seamless process, enhancing consistency and coherence in pricing strategies.

To learn about the full range of pricing capabilities that a fully automated pricing software solution like Pricefx can provide to manufacturing companies, check out the helpful article below:

Chemical Companies Can Use Pricing Software to Address Ingredient Prices That Are Under Constrained Supply

Due to its incursion in Ukraine, sanctions and measures against Russian exports of oil and gas have sent shockwaves across the global economy, lifting the cost of living, impacting industrial and agricultural production. As Russia controls the supply 20% of global seaborne ammonia markets, the disrupted supply has pushed up fertilizer and food prices.

In the face of these types of global supply chain disruptions, chemical companies grapple with the challenge of navigating constrained product supply due to raw material shortages or production capacity limitations. For Pricing or Product Managers in these companies, strategic decision-making becomes paramount, particularly when selecting which customers to supply in scenarios involving spot or inventory-based sales. The complexity arises from the need to identify the best margin opportunities and calculate comparative economics swiftly, especially when dealing with assorted products utilizing the same raw materials or production facilities.

To tackle this challenge effectively, businesses can leverage advanced pricing tools that provide a streamlined means of evaluating the economics of specific sales opportunities.

Imagine a practical scenario where a chemical company faces raw material shortages for two distinct products. By utilizing sophisticated pricing software, the Pricing or Product Manager can rapidly assess the economic viability of supplying each product to different customers.

 

This data-driven approach ensures the allocation of constrained supply to customers yielding the highest margins, thereby maximizing revenue for the business. 

The benefits derived from this strategy are twofold. Not only does it increase margins during periods of constrained supply, but it also empowers businesses to navigate complexities efficiently, enhancing overall profitability. Key performance indicators (KPIs) such as Gross Margin or Contribution Margin become pivotal metrics in gauging the success of this approach.

These metrics, offering insights into the financial health of specific sales opportunities, serve as a quantitative measure of the economic impact on the business, guiding strategic decision-making in constrained supply scenarios.

For more information on further ways that pricing software can assist chemical companies, check out this handy article below:

Distributors Can Make Strategic Price Adjustments by Product or Customer Segments

Supply chain disruptions that can exclusively confront distribution industry sector companies include rising transportation (like the aforementioned increases in shipping costs due to the rerouting of vessels away from the Red Sea shipping lanes and the Suez Canal), labor costs, damages or product losses during shipments, and the need to divide margins along the distribution chain. These disruptions can significantly impact the pricing strategy and require distributors to make logical and scientific data-informed pricing decisions to protect their profits.

To assist distributors in being more proactive with their pricing in the face of these kinds of supply chain disruptions, it is essential to establish and update customer-specific pricing by customer segment and product.

 

This involves flexibly setting a pricing framework tailored to individual customers, considering criteria such as geography, customer class, or type, and specific customer behaviors like revenue, share of wallet, and cost to serve.

 

Distributors can adopt a multifaceted approach, combining both customer and product attributes, and iterate these frameworks annually to ensure adaptability. However, manual tools like Excel spreadsheets often lack the required complexity created by a vast combination of customers and products. Excel simply lacks the scalability and the ability to easily integrate large sets of diverse data like pricing software can.

To overcome these challenges, distributors require the specific capabilities of an automated pricing software system to create a flexible framework at any level of customer and product granularity, seamlessly adapt pricing rules to the evolving business landscape, and simulate the impact of customer-specific pricing rules to make informed decisions.

Other Possible Strategies to Manage Supply Chain Disruption

The scenarios above are only 3 examples of a range of potential responses to help your business manage supply plan disruptions. Not all of these following possible strategies may apply to your business, however, some common strategies found to assist also include:

• Regularly reviewing and adapting to changing cost-to-serve dynamics
• Evaluating and optimizing price discounts, rebates, and promotions
• Analyzing historical Data to identify product and customer underperformance
• Prioritizing value pricing in the face of supply chain created inflationary pressures
• Enhancing speed and efficiencies in the pricing approval and price realization processes

Rapid Price Adjustments at Scale Are the Antidote to Supply Chain Disruption

Proactive, strategic, and rapid adjustment of prices at scale are the keys to fortifying your pricing infrastructure against the unpredictable winds of supply chain disruption. If your suppliers are wielding this power and you’re not, it’s not a matter of ‘if’ but ‘how much’ your margins will compress, ‘for how long,’ and whether your business can weather the storm in this brave new world of supply chain chaos.

What’s the real value in mastering this pricing wizardry? Take, for instance, a hypothetical $1 billion company facing a 5% annual increase in costs. If this entity takes a leisurely four weeks to process a price increase, that seemingly innocuous delay can translate into a whopping $4 million annual margin compression. Ouch, right?

Remember this juicy tidbit; B2B buyers now expect supply chain resilience and they are prepared to pay for it.

However, you’ll need an automated and data-driven pricing solution like Pricefx to get it done.

While it’s great to know that pricing software will help you manage supply chain disruptions and the resulting effects on your margins, you’ll probably want to know what else it can do.

To learn about what pricing software can (and cannot do) for your business, check out this useful article for more handy information:

Meanwhile, Happy Pricing!