“What-if” Modeling - An Essential Tool to Evaluate Bracket Prices & Logistics Costs
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Manufacturers are continually looking to reduce logistics costs and to encourage efficient customer behaviors. But as logistics costs are reduced, and customers begin to order more efficiently, the balance between actual costs to ship orders and the discounts/upcharges on a price list can gradually become unaligned. Pricing and supply chain costs can also become unaligned due to mergers and acquisitions. Price lists from acquired / merged product lines can vary in pricing structure (# of brackets, discounts/upcharges, minimum order size) and combining product lines can dramatically affect logistics costs.
To fully understand the relationship between supply chain costs and bracket pricing, a manufacturer needs to analyze its transportation costs, its orders and its pricing. This typically involves thousands of orders, across thousands of customer “ship To” points, across hundreds of SKU’s… an enormous amount of data that needs to be thoroughly analyzed.
Because of the daunting task of this analysis, manufacturers face a significant challenge in accurately assessing the level of risk they assume for having the proper alignment between bracket pricing and actual costs. At DHC, we have developed a model to examine the projected customer reaction to hypothetical bracket pricing parameters, and quantify the appropriate balance between price list discounts, upcharges and shipping costs. This model can run hundreds of “what-if” scenarios and estimate the effects on revenue, logistics costs and profit contribution. By using DHC’s proprietary Bracket Pricing model, a manufacturer can answer questions like:
- What is the impact on pricing and logistics costs due to any mergers or acquisitions?
- How many customers are projected to change brackets?
- Which customers might move between brackets?
- What’s the effect of proposed pricing on marketplace “price leaders”?
- What’s the expected change in logistics costs from the expected change in customer behavior?
- What change in pricing occurs due to the proposed bracket changes?
- If the minimum weight is raised, which customers move up and which need a new sourcing plan?
- What is the logistics cost change if the boundaries between brackets are changed and/or the minimum order quantity is increased?
With these answers in hand, bracket pricing and logistics incentive programs can be reviewed/revised, enabling manufacturers to have strategic conversations regarding pricing, supply chain programs, customer relationships, and logistics savings programs. Understanding these issues will help manufacturers determine efficient bracket definitions, and appropriate price differentials and incentives to meet strategic and legal compliance objectives.
Read an article on lessons DHC has learned while supporting our clients in their bracket pricing assessments. Download PDF
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