Playing the role of both buyer and seller, manufacturers live on both sides of the transaction. And what is perceived as a good price isn't always clearly defined. Now caught in the middle of a financial meltdown, many companies are finding out that determining the best price for their end products is just as important as what it costs to put them together.
Over the past year, the sliding economy has taken pricing in two distinct directions. When fuel and commodities prices soared, a significant number of manufacturers raised prices in order to offset the costs. As things have gotten worse, others have chosen to slash prices to retain a growing group of customers who were having trouble squeezing enough out of their budgets to still be considered customers.
Each of these decisions is usually made with the best information at hand, but it also depends on an executive's ability to reliably predict the future. In lieu of clairvoyance, Greg Cudahy, global managing partner of Accenture's supply chain strategy practice, suggests that companies start trending away from a long-practiced method called cost-plus pricing in favor of one that can better withstand increasingly volatile markets.
In cost-plus pricing manufacturers determine what it costs to make a product, then decide whether a specific price can be justified. In the new model, referred to as price-led costing, market price is determined during the earliest possible stages through a collaboration of sales and marketing, product development, plant management, and even procurement.
"If procurement can get involved early enough to determine whether you can produce at a profit, then the company can make better decisions when going to market, and ensure profitability," Cudahy explains. "Once market price is understood, procurement needs to respond quickly to the marketing side, to determine whether a product can be manufactured profitably."
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Cause and Effect
"Manufacturers often have to endure price increases from suppliers, but buyers need to ask enough questions to understand how things like commodity spikes might influence a supplier's need to raise prices
in the future."
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