Pricing expert at Pricefx says the decades-old management strategy that minimizes inventory poses huge risks to supply chain
Companies around the world have trained the muscle of business agility over the last year. The ones who survived were able to pivot and adapt, riding the wave of changes in the market, demand, competition, regulations, and the supply chain. Before the pandemic, a business strategy called Just-In-Time manufacturing was used to minimize the need to stockpile products allowing businesses to cut costs, stay nimble and better adapt to the changing market fluctuations.
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“During COVID, Just-In-Time manufacturing led to shortages of almost everything. In this moment, we are seeing the impact of the father of Toyota’s Production System, Taiichi Ohno’s vision for cost cutting gone too far”
However, according to Gabriel Smith a pricing expert at Pricefx, the global leader in cloud-native pricing software, COVID-19 uncovered a big vulnerability to the Just-In-Time methodology.
“During COVID, Just-In-Time manufacturing led to shortages of almost everything. In this moment, we are seeing the impact of the father of Toyota’s Production System, Taiichi Ohno’s vision for cost cutting gone too far,” said Smith. “For B2B companies, pricing with an eye on supply chain and manufacturing stability can correct this trend by placing an explicit premium on availability, allowing for companies to hold inventory at sufficient levels to ensure you are not impacting your customers production now, and into the future.”
Many of the world’s goods are seeing dramatic price increases and fluctuations right now, including gasoline, lumber, computer chips, rental cars, homes, and more. These are the result of the sway of supply and demand, and other varying factors. From the ice storm in Texas, to the blockage of the Suez Canal, to the trucking shortage, to recent ransomware attacks, companies have been forced to adapt to volatile market for more than a year.
“Just-In-Time may be a well-meaning strategy to save money and avoid the stockpile but it adds unnecessary pressure on every link in the chain to be perfect,” continued Smith. “When one part of the chain breaks, everyone downwind gets the blowback, such as quality control, or analysis, or shipping. The pandemic has shed the light on the importance of inventory management costs at all stages, not just bottom-line savings that finance teams seem to only measure.”
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Instead of cutting corners, Pricefx recommends prioritizing solid pricing strategies:
- Integrate price management and optimization that offers granularity across all channels, geographies and customers for non-disruptive pricing to maximize profitability. The supply chain is complicated but it doesn’t mean pricing should be, too.
- Look for solutions with pricing transparency to minimize the risks of complex value-chain pricing and explain the value behind the data. With clear analysis, your teams can negotiate terms and conditions effectively, including rebates and discounts, while complying with local laws.
- Create a holistic approach to pricing. It must that enable analysis of data, uncover profit drivers, and turn them into effective pricing strategies across the complete value chain.
- Invest in powerful analytics to understand profit drivers for every transaction, product, salesperson and customer.
- Plan ahead by utilizing dynamic pricing (parameters-based repricing, variable price contracts, etc.) and “what-if” simulations before implementing to reduce risk.
