‘Price Optimization’ Is Just Good Supply Chain Management

Since component pricing continues to be a hot button issue within the supply chain, I was interested to see an article on “price optimization software” on today's newswire. Could it be that easy? Buy some software and your pricing problems go away?

Of course not. Pricing's too complex. Here's what I learned:

Consulting firm Deloitte Consulting LLP and Vendavo software have been working together for about four years to help companies improve profitability through pricing and profitability management practices and pricing software. In one case study, they helped Mohawk Flooring “assess and rebuild its corporate strategies for pricing by focusing on improved go-to-market and pricing strategies. As a result, Mohawk has new insights into what drives — and erodes — profitability. Their sales force has become more efficient and effective with improved pricing tools and customer pricing/profitability information.”

Not much info there. Mohawk is a huge flooring company and easily manages as many SKUs as any large electronics supplier or distributor. The difference for Mohawk is, it also sells through retail, which is a wildcard, but most retail sales promotions are well thought out and obviously done with the supplier's blessing. Mohawk knows exactly what its flooring is selling for at any authorized sales location.

So I took a look at what the software does. “It combines pricing science, pricing best practices, and enterprise-class software to drive small improvements in average prices at every stage of the pricing process, from segmentation to deal close. Together, these improvements deliver big increases in profits — from 10 percent to 30 percent.”

That's a little more helpful. But that's also what a good supply chain can accomplish. The electronics marketplace knows exactly what its components are selling for in every region of the world. It may not be optimum, but the information is there, and it's channeled back to the supplier. Price adjustments are made every day in the channel. “Price optimization” is in the eye of the beholder: To the distributor or EMS, it's the price that wins them business. To a supplier, it's a fair price with a decent profit margin. To the customer, it what's they are willing to pay for that particular project.

I'm not finding fault with the idea of pricing software. I think it could help, but I also think it's badly named. What Deloitte and Vendavo do is help companies increase visibility into the end market, make pricing adjustments, and look at how improvements can be implemented to increase profitability. That's supply chain management. Not “price optimization.”

Has your company ever used pricing software? Did it improve profitability?

2 comments on “‘Price Optimization’ Is Just Good Supply Chain Management

  1. hwong
    November 11, 2010

    I didn't have first hand experience using price optimization software but the overall impression from peers feedback on different kinds of supply chain management software in the market are doing great job in terms of optimizing the flow and reducing the cost. Some of them use very complicated mathematical modeling to optimize inventory control and logistics.

  2. Barbara Jorgensen
    November 11, 2010

    Thanks hwong,

    That's good to know. I haven't seen it in action either. There's always room for improvement in pricing. I guess I feel if you have a supply chain in place, you might as well use it.  But if software can simplify the process, or if you don't have a great supply chain model, it's a good idea. If it works, I'm all for it.

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