Part Five  – Using Software to Optimize Your Profitability

A few weeks ago, we introduced a series on how the “maximum capacity utilization” edict has potentially driven profits DOWN in several industries. We outlined four tactics that can help you move away from this philosophy:

• Improve communication between supply and demand groups
• Estimate demand based on data, rather than roll-ups of sales forecasts
• Consider total costs of your supply chain, including moving output to higher-demand areas
• Using software to optimize your business’ profitability

This week, we’ll focus on “Using Software to Optimize Your Profitability.”

In our previous blog, we rounded out some of the elements necessary to optimize your profitability. Once you have a sales and operations team that is talking, an understanding of your booked orders and the demand to come, as well as the costs of supplying demand from a different plant, you are well on your way to setting up the capacity optimization problem. When you add an understanding of how your specific demand varies with price, which has been discussed many times on this site by Neil Biehn, Patrick Schneidau and others, you have all the ingredients.

Having a systematic process that is supported by a tool is one of the best ways you can deliver better information to your sales force. We need to remember that an optimization process is a decision-support tool, not the Holy Grail that provides the only answer.

We at PROS have run numerous simulations and exercises during our pricing summits, where we pit the humans against the optimizer in decision scenarios. In multi-day scenarios, I’ve seen the optimizer come in at an average daily rank of #2, which means that someone occasionally beats the process. However, in the long run, the analytic process is almost always #1. One takeaway:  An informed analyst who uses the optimizer as decision support can really increase your profits.

Setting this up in your company is not challenging. Today, the software exists to incorporate your demand forecast, a price-demand relationship and your capacity constraints – including transportation costs between supply centers – into optimal price recommendations, as well as information on whether to take certain orders (or at what price you should take them). A couple of things to consider when putting such a system into place:

• The communication in point #1 above is critical: Carefully plan the change and the expected reaction of both your analysts and sales staff
• Provide analytics so your sales staff can see from where the recommendations are coming
• Provide a way for your analysts to influence the demand: They will be aware of contemporaneous market information that the analytic process cannot know about
• Deliver the output to sales in an easily consumable package. PROS recommends the price envelope as an excellent, robust way to incorporate the deep science into a familiar structure.

While it will take some time to set up and tune the process to deliver the best results, those results are well worth it. Published anecdotes have some companies increasing margin “significantly,” while at the same time increasing system-level capacity utilization by several points.

So, once you have an analytic process running, your sales team and your analysts will be armed with the best information to help them make daily pricing decisions.  How are you considering using this type of analysis in your company?

Doug