Pricing, Promotion, Analytics and SCRM

First, I’d like to take this Veterans Day (it is this Sunday) as an occasion to express my appreciation to those who have sworn to uphold and defend our Constitution with their very life.  From one vet to another, “Happy Veterans Day”.  For those of us who have served or do serve as Marines, a “Happy 236th Birthday“.  May all of us remain faithful to the courage, honor and commitment required of Marines in all areas of our lives – Semper Fidelis!

Second, I’ve put together a few thoughtful questions and some questioning thoughts that I hope will stimulate your mind on three important topics – pricing and promotion of consumer goods, making the most of analytical decision support, and supply chain risk management.

On pricing and promotion in consumer goods

If you are a consumer goods manufacturer, you likely purchase syndicated data to evaluate product trends and share by category, market and channel.  If you are more advanced, you have figured out how to leverage this data in your demand planning process so that your SKU forecasts are more accurate.  But, many firms have not yet incorporated it for the purpose of analyzing and optimizing pricing and promotion decisions.  If you haven’t, why haven’t you?

On making the most of analytical decision support

I have argued in previous posts that the process of analytical decision-making is not just math and data, but it is an interactive process through which the analyst must use his or her experience and skill to artfully find information despite defects in the data and deficiencies in the data model.  One case-in-point would be multi-stage, stochastic, inventory optimization (MESIO – for more, see “Who Is Spending Your Cash?”, the 30 September post from Supply Chain Action).  Consider the possible objectives of an effort to improve inventory (a portion of working capital) efficiency.  Here are a number of possible goals:

  1. Achieve a stated average time between stockouts
  2. Minimize the total value short
  3. Minimize the total stockout occasions
  4. Minimize the cost per unit short
  5. Minimize the cost per unit short per period
  6. Minimize the combined costs of shortage, overage and replenishment (think about shipping an individual unit versus a more economical pack size)
  7. Achieving a target likelihood of no stockouts in a period
  8. Achieving a target likelihood of demand satisfied directly from the shelf (think fill rate)
  9. Using idle capacity to build stock that will sell in a specified period of time

Most off-the-shelf applications will only give you one or two of these objectives and necessarily prohibit interaction of the modeler with the model because the software company needs to protect its intellectual property.

This does not mean that an off-the-shelf application will not work for your business.  It may, indeed, be the best answer and provide an enterprise-scale solution that is fully integrated with your other planning operations.  The point is that you have to do some careful thinking and testing in order to validate that it will work and that you will have whatever ability to interact with the model that your analysts will require.

On supply chain risk management

How do you evaluate the resiliency of your value network?  Do you have the capability to electronically represent your value network from one end to the other?  Have you determined how to represent the value (in terms of materiel, currency and data) that pulses along the paths in the value network?  Have you quantified the consequences of a disruption (from whatever cause) that would impact that flow?  If so, do you have a plan for dealing with such an interruption?  What have you done to make sure key people know the plan and can execute it?

Thanks again for dropping by Supply Chain Action.

Until next week, remember this thought from an anonymous source, “Make sure what you do today is important because you are exchanging a day of your life for it.

Have a wonderful weekend!


Building Resiliency into Your Value Network

In June of 2005, Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario published a paper entitled, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility.”  In this piece, Singhal and Hendricks quantified the negative impact of supply chain disruptions using empirical data.  They found that supply chain or value network disruptions impact both the value and profitability of the enterprise.  They specifically identified the following:

Firms suffering from supply chain disruptions experience between 33% to 40% lower stock returns relative to their benchmarks over a three year time period that starts one year before and ends two years after the disruption announcement date.

The average effect of disruptions in the year leading to the disruption announcement was a 107% drop in operating income, a 7% lower sales growth, and an 11% growth in cost.

Furthermore, they found that firms struggled to recover from supply chain disruptions.

In August of 2005, hurricane Katrina struck . . .

In September of 2005, Dr. Yossi Sheffi of MIT published his book, The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage and simultaneously a related article in Sloan Management Review.

In the years since, the importance of supply chain risk management and of building resiliency into the value network has only become more apparent, most recently underscored by the earthquake, tsunami, and nuclear disaster in Japan, floods in Thailand, and other disruptions.

Both Sheffi and Singhal and Hendricks emphasized, among other points, the need for flexibility in the value network.  It is my observation that decisions related to flexibility are key drivers of enterprise value (“Don’t Manage a Supply Chain, Lead a Value Network”, The Journal of Enterprise Resource Management, Third Quarter, 2011), even without a serious disruption in the value network.

I will not recapitulate all of the advice from Sheffi and Singhal and Hendricks here, but I do want to make a couple of important points:

First, you need to plan to be resilient.  Planning to be resilient is a non-trivial exercise.  It should be very intentional and will require deep analytical expertise.  You will need to quantify the uncertainty, calculate a risk-adjusted total cost, identify alternative courses of action and select a primary best option (see the diagram below).  It may also be prudent to develop or acquire tools that will let you quickly asses challenges to your value network that you did not anticipate.   At the 2011 CSCMP Annual Global Conference, I heard Dow Chemical talk about how they apply analysis to understand the nuances of the tradeoffs along the frontier of profit and risk.  Don’t underestimate or short-change the analytical effort.

Second, you need to practice for how you will execute when (you cannot afford to think “if”) there is a disruption.  I have heard Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management from Cisco Systems speak on how Cisco prepares and trains for the eventuality of a disruption.

We are only scratching the surface here.  You can, of course, get Dr. Sheffi’s book on Amazon.  I think that Dr. Singhal and Dr. Hendricks will be happy to provide you with their paper.  You can, and should, also get the support you will need to perform the analysis to support risk-adjusted decisions.  Finally, you should make an effort to rehearse or train on how you will handle various types of disruptions so that your people have at least minimal familiarity with the predetermined alternative courses of action or at least know where to find them.

I hope that this post has stimulated your thinking, and that it will motivate your action as well, helping your organization perform with a resilience that will serve its stakeholders well when “normal” operations are disrupted.

As you go into the weekend, remember these words of Leo Tolstoy, “Everybody thinks of changing humanity and nobody thinks of changing himself.”  Don’t be “everybody”.

Have a wonderful weekend!

%d bloggers like this: