There are 3 pillars of pain that each and every distributor is currently facing; 1. Supply chain challenges will persist, 2. The surge in global inflation will stay for some time, and 3. Talent is scarce and costly.
Nelson Valderrama, CEO of Intuilize, tackled Pillar #2 – global inflation, during his presentation at the 2022 International Fastener Expo. According to a survey conducted by Institute for Supply Management, inflation is a concern for 63% of business owners and for good reason. In March 2022, the producer-price index (or PPI) — a measure of inflation meant to gauge the impact on suppliers — drastically rose to an annual rate of 11.2%. With inflation increasing the prices of goods or services, it is crucial for distributors to know how they can keep up with and defeat inflation, as well as grow their margins. Here are 5 key takeaways from Nelson’s session:
- During inflation distributors can face failure due to:
- Delayed reactions: Most distributors take 3-6 months for price changes, that is too late!
- Weak execution
- Wrong yardstick: Distributors are using gross margins as the only yardstick. Nelson reported that up to 35% of your annual revenue might be experiencing margin erosion. There are two steps to take more of a big picture approach:
Step #1: Identify SKUs with unhealthy margins
Step #2: Identify main offenders in each product group
- Price increases are too little, too late.
- Too late à Processes and people are not in place ahead of time to prepare for price increases, causing delay.
- Too little à Price increases are not strong enough to offset the cost increase.
- So how does this impact distributors AKA how much money is left on the table?
- Delayed reactions equate to 1.6% margin points.
- Weak execution equates to 6% margin points.
- What do you do as a distributor to defeat inflation and grow your margins?
- Nelson emphasized how important it is for distributors to know where exactly the problem is coming from and really focus their attention on those main offenders. The first step to any successful treatment plan is a good diagnostic!
- Roadmap for Price Optimization:
- Analyze – this can be done through customer segmentation which clearly defines characteristics of each customer segment.
- Optimize Pricing – At this point, you should establish the price point for each customer, often times this is done by quantity of items purchased.
- Setting your Prices – 60% of distributors are not using features on their ERP systems to help integrate pricing. This integration is vital and offers a simplified and efficient approach.
- Execution – This is when you should communicate and deploy the new pricing structure.
- Monitor – Just because you have implemented, does not mean the job is done. Monitor things, like contract performance, regularly to ensure you are staying proactive and astute.
As economic experts continue to make predictions about the continued rising costs, one thing is very clear, the time is now for distributors to evaluate, respond and implement on their pricing optimization strategy. Having a proactive approach and strategy is key to navigating inflation and growing margins.