This article is excerpted from a publication available from NAW at www.naw.org/dvm or by calling Vicky Walsh at NAW: 202-872-0885.The following case study is excerpted from ‘Driving Growth and Shareholder Value: The Distribution Value Map’ published by the National Association of Wholesaler-Distributors. Improve pricing and drive higher margin. This is easy to say but difficult to achieve, but not impossible. Take the case of a pricing executive who was looking for ways to improve price realization. The implementation of a new enterprise resource planning (ERP) system presented just such an opportunity.
Before For this distributor, pricing was a complex process with myriad influencing factors, including the oft-cited fact: This is the way we have always done it in our industry.
In this case, many of the pricing practices
rooted in historical processes and
terminology did not match current market realities. For example, the company’s 2,000+ salespeople were compensated, in part, based on the gross margin dollars they generated. However, with little or no transparency to the margin at the purchase order or line item transaction level, they were less concerned with margin and more concerned with top-line sales.
To oversimplify it, the sales philosophy could have been summarized as this: We don’t have to have insight to transaction level profitability numbers because we’ll do fine in our overall mix of sales dollars.
Base prices in the pricing system (e.g., net, discount, or cost plus) were set and maintained without a common approach. However, relatively more weight was given to the sometimes unrealistic suggestions of manufacturers/suppliers, while relatively little attention was given to the actual price realized in the marketplace.
And, of course, most products or services could have been priced differently for each customer and for each sales transaction. In effect, the salespeople used their discretion to set product prices more to close deals and cement relationships with customers than to generate profits. Another problem: The distributor found it nearly impossible to be quick and accurate when entering a supplier’s price i.e., the distributor’s cost, changes into the information system, and just as difficult to know when price/cost maintenance i.e., distributor’s cost and customer’s price) was done correctly.
Nonetheless, all things being equal, the system had worked for a long time.
ERP implementationSome key pricing objectives were addressed as part of the ERP implementation:
- Make base prices more realistic, fair, and reasonable, and more reflective of market realities, as well as future expectations. For example, the distributor recognized that some customers did not want to hear price in terms of the manufacturer’s price less a discount percentage because many of the manufacturer’s prices were simply not realistic.
- Manage a massive number of pricing conditions. Pricing, rebate, and incentive agreements changed often, and multiple agreements could have been applied to any given sale. The system should free the salesforce from any expectation that they could manage all of the complexities of this distributor’s pricing conditions manually.
- There would be no one right price for multiple customers for a given product or service. Like most distributors, this organization relied on the salespeople to use their judgment in reacting to competitive pricing situations. As a result, the system should have delivered improved decision support and reporting to the field and top management.
- The new system should help the company improve visibility to applicable rebates and incentives,
