Pricing & Profitability Management in the Chemicals IndustryFrom commodity to value |
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Abstract
A large diversified chemical company, facing increasing commoditization of its products and under increasing competitive pressure, wanted to improve margins by pricing products based on customer-specific costs to serve. To do this, the company needed to understand its customers’ buying behavior better and know more about how its business units priced products.
The Challenge
The company decided to buy a software application to help pricing professionals perform advanced analytics and optimization as well as basic price management tasks such as price-setting and deal management. This software would allow the company to systematically analyze historical transaction and cost-to-serve data to determine the theoretical profit-maximizing, or “optimal,” price for its products. But to take full advantage of the software, management knew that it also needed to change the company’s pricing processes and organization.
How We Helped
The company launched several concurrent projects to make the needed technology, process and organizational changes in tandem. With Deloitte’s assistance, the company:
- Increased pricing process standardization. The company standardized pricing processes across the organization as much as possible. This not only made it easier to put in the new system but also made pricing easier to measure and manage.
- Implemented a pricing analytics and execution software package and a customer relationship management system. The software implementation team worked closely with the process change team to accommodate the business units’ process variations. The process redesign team, in turn, created processes to accommodate the limitations of the software implementation. For instance, they developed process workarounds for activities that could not be fully automated because of incompatibilities between the pricing software and the company’s Enterprise Resource Planning (ERP) system.
- Adjusted pricing roles, responsibilities and incentives. Roles were created and modified as necessary to carry out the redesigned processes, and training programs developed to educate staff on how to use the new tools. The company also adjusted rewards and performance metrics to reduce cultural barriers to change.
- Created a formal organization to coordinate the business units’ pricing activities. Each business unit now has a profitability manager who reports to the business-unit president and who meets monthly with the other business units’ profitability managers to review pricing policies, develop strategy and monitor profitability. The business-unit presidents report to the corporate chief operating officer, who has been made formally responsible for overall company profitability.
Solution
As a result of these efforts, the company stands to realize as much as $15 million in short- and medium-term profit, representing a net present value of $40 million and a greater than 300 percent projected return on investment. The new analytical insights also have allowed management to modify pricing policies, including policies around price guardrails (minimum and maximum prices) and price exceptions, to encourage salespeople to adopt a value-based approach.
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
