Who has the power in the supply chain?
INSIGHT ARTICLE |
In a world that is changing quickly and where growth is moderate at best, we believe a long-term shift has occurred regarding who sets the price for goods sold. As a result, the power to set your price and establish a realistic and attractive profit margin is harder to obtain and preserve on a long-term basis.
In a strong economic climate, manufacturers are often able to compute their costs of production and then negotiate with their customers to achieve target profit margins on their products. However, multiple factors have occurred that have changed this paradigm and made it more difficult for manufacturers to hit their target profit margins. These factors include:
- Excess supply: With moderate economic development in the United States, slowing growth in China and supply chains that often include plants in many countries, the next company in the sales process often has options to obtain similar products at a lower price. In this “race to the bottom” to maintain sales, the customers know they have options and can negotiate attractive pricing. Excess production capacity exists as companies have expanded and until that capacity is absorbed through either growth or the closing of plants, this excess supply capacity will keep a lid on sales price growth.
- Access to information: Everyone has access to material pricing information through the internet. Interested in knowing the current and historical pricing of materials, the impact of current events on capacity or future trends and hedging of key materials? Not a problem, it’s all there online. In almost all cases, the customer knows your material prices and is taking preemptive action to negotiate or demand lower pricing. In an environment when sales growth is a challenge, most companies are negotiating to keep the business.
- Pressure on gross margins: With excess supply capacity and aggressive customer price negotiations, there is an increased pressure on gross margins that is forcing companies to focus on how to drive up profits. From sourcing options, product and material redesign, to process improvements and bundling products and services, to leveraging technology and managing labor and overhead, the whole production process is under increasing pressure to lower pricing. Does your organization have a chief margin officer? Maybe not yet, but someone has to make this their priority every hour of every day.
- Changing supply chain: Depending on where your company is in the supply chain for their customers, it’s very clear that the customer is changing your supply chain. Key customers are stipulating tight delivery chains; penalties for disruption to the customer production cycle due to delays or defects; lower allowable quality defects; and suppliers maintaining higher inventory counts. All of these serve to put pressure on profitability.
So what’s a company to do? Most well-run organizations are focused on these issues every day and are developing and refining their profit management processes. The actions taken must be coordinated, because having separate groups manage the above items will result in inconsistencies and lost profits. We think having a leader for profit management will bring together these and other key functions that impact and drive profitability.
Where does your organization stand?