Retailers, consumer packaged goods manufacturers, and their suppliers are arguably having the toughest year in decades as they struggle to understand changing consumer behavior amid difficult macroeconomic context and rising inflation.
This struggle in the first half of 2022 has challenged profitability, ballooned undesired inventories, eroded pricing power, and left companies guessing what the right product mix. Longing for a lower inventory-to-sales ratio and higher profit margins, growth is illusive. In the retail sector, evidence of this challenge is highly visible.
The solution to this situation is twofold: First, sensing the optimal mix while leveraging processes like collaborative planning, forecasting and replenishment. And second, shaping demand by leveraging new technologies and algorithms with optimal pricing.
The Art & Science of Optimal Product Mix
Getting product mix right is both an art and a (data) science. The art element is an understanding of the drivers of consumer behavior. The science is the diverse data from online and offline sources including but not limited to discretionary and non-discretionary purchases, footfalls and clicks, reviews and ratings, and macro- and micro-economic indicators. This combination of art and science allows us to understand responses to demand variation and gives us the knowledge to develop a financially viable and consumer demand driven product mix.
Understand Demand Drivers
With so many macro- and micro-trends compounding on consumer behavior, getting educated on consumer behavior is extremely important. While it’s an art to understand the consumer, that understanding can become more illuminated with data. This art currently lies in the consumer insights function of the organization which is often invisible to the operations function.
Organizations can gain visibility into this end consumer behavior with a digitally enabled omnichannel ordering and fulfilment ecosystem. There are a multitude of variable factors that go into influencing the product mix that consumers desire and it is up to us to determine the demand drivers across channels, product attributes and consumer demographics. It is essential for the insights team to understand the variability of these strongly correlated influencing attributes to arrive at an optimal product mix that responds to consumer needs in the current economic climate.
Making Sure “The Price Is Right”
Pricing is a powerful tool for organizations to execute on their strengths in normal times and is critical during times of inflation. Optimal pricing requires a comprehensive understanding of the marketing/merchandising and business operations, clarity in contract management, and an understanding of the competitive landscape to setup and execute negotiation strategies.
1) Understand Cost-to-Serve
Senior Management must initiate and implement a coordinated organization-wide effort to understand the cost-to-serve and related attribute correlations for their business. Depending on organizational structure, different costing methods, and different levels of knowledge, it can be difficult for different functions to measure costs and align on optimal pricing. Bear in mind this alignment requires collaboration between Finance, Marketing/Sales, Manufacturing, Procurement, Distribution, and Logistics teams. A cross-functional team of cost-experts operating within S&OP or IBP must educate each other internally on different costs and evaluate pricing models for different offerings.
2) Offer New Products at Different Price Points
Organizations must look for opportunities to create offerings at different price points with the agility to configure products according to demand. This ability to offer different price points requires physical agility in the supply chain network as well. This may require using different modes of global and regional transportation, different warehousing solutions (centralized or distributed), different manufacturing solutions (in-house, outsourcing, multi-sourcing). Having multiple options at different nodes in the supply chain network makes more products available to customers at different price points.
3) Develop Customer Value Profiles
Organizations must create customer value profiles and capture pricing and service sensitivity of customers when deciding on pricing changes. Depending on their financial situation and purchasing power, customers and consumers will absorb varying degrees of price variations and service quality. It is vital to classify customers and consumers according to the prices and service quality (as measured by KPIS) that they will tolerate.
4) Develop Negotiation Strategies
Organizations must adopt top-down negotiation strategies for customers and suppliers. Pricing, being a strategic lever, needs clear rules of negotiation approved by leadership. Organizations can benefit from developing a RACI (Responsible, Accountable, Consulted, Informed) matrix that defines roles and ways of working that support decision making for new pricing models and responses to changes in the market.
Competing in this emerging century of disruption, uncertainty, and volatility is not for the timid. As companies continue their evolution from linear “chain” thinking to ecosystem supply “network” thinking, they will have to assess, adapt, and mature their business models and organizational structures.
This adaptation is critical to maintain a competitive product mix and pricing response to ever increasing global change. Implementing an Integrated Business Planning process, enabling the organization with advanced analytics and technologies, and leveraging collaboration across the ecosystem will drive actionable outcomes for growth.