Case Study: Pricing & Profitability Management in ManufacturingPutting the parts together |
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Abstract
A major manufacturer expected a sharp decline in new product sales during the coming year, when its prices would jump due to the cost of complying with new government regulations. The company would need to rely on its parts division for the bulk of its profits for at least that year and possibly beyond – but to do that, the parts division had to address a number of issues in its pricing capabilities.
The Challenge
The parts division was getting numerous calls from salespeople complaining about errors, inconsistencies and omissions in its price book. Underlying these errors was a maze of fragmented pricing processes, inexperienced staff, poorly defined roles and responsibilities, and the challenges of using three different systems to manage pricing for more than 2 million parts. The issues were so severe that executives believed that they were causing the company to lose sales and margin to its competitors.
How We Helped
The company decided to overhaul the parts division’s pricing capabilities to fix the price book errors, strengthen the internal control environment and increase the parts business’ profitability. With Deloitte’s assistance, the company:
- Streamlined the price book production process:
- Removed several thousand obsolete or rarely sold parts from the price book
- Reassigned responsibility for several key processes such as supplier cost data entry
- Reduced the number of data handoffs
- Implemented a formal quality assurance process
- Implemented profit-enhancing opportunities identified through a transaction pricing analysis of historical transaction and cost data, including:
- Raising prices on some proprietary parts
- Eliminating unwarranted discounts
- Reducing the cost to serve on certain items
- Addressed pricing personnel staffing and organizational issues:
- Established a pricing organization to take ownership of key pricing activities
- Implemented policies, incentives and metrics to encourage the sales and marketing organizations to prioritize efforts to sell higher-margin items over unfocused tactics such as general promotions
- Instituted weekly cross-functional meetings to educate employees from various functions on one another’s roles
- Added headcount to fill several staffing gaps
- Improved internal control over pricing processes
- Established metrics to monitor business-unit and process-specific control objectives
- Assigned responsibility to the corporate controller for reviewing and approving any changes to the pricing process or controls
Solution
As a result of its pricing improvement initiatives, the company expects to increase the parts division’s annual margins by up to $70 million.
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.
