To compete on price in the global marketplace, food manufacturers must track a huge array of cost factors across the product development steps, across markets, and across the supply chain. As brands further globalize their product lines, managing pricing decisions as part of a comprehensive enterprise strategy has become a critical need across departments.
Recently, we sat down with Selerant COO Sunil Thomas, who gave us insight into how food manufacturers can start using one global approach for product pricing decisions and how to address the biggest challenges in controlling product costs.
What are some of the biggest hurdles today’s food brands face when making product pricing decisions and controlling product costs?
Thomas: Historically, most brands have treated pricing as individual decision points at each stage of product development. Many manufacturers don’t have a standardized pricing process in place. This is largely because, in the past, brands would develop a product locally or regionally and then expand the product line to new markets, which meant sourcing entirely new suppliers, new distributors, and usually creating a new formulations for each market.
Because these decisions were largely made in isolation or a local level, each department ended up developing its own system and process for managing its piece of the pricing puzzle: Marketing and Brand Managers have their own precise modeling systems for calculating target market price and ROI at the start of product launch. This target price, which has many factors, then has to be translated into product development stages, Yet R&D teams often only work with raw material costs. Those many factors that impact aren’t usually visible to them when making those material cost choices.
Likewise, R&D usually doesn’t have access to the many supply chain costs associated with the ingredients they want to use, such as transportation and labor. They also don’t have the access to Procurement data to see how fluctuations in the market price of commodities will impact the cost of all formulas using that ingredient.
On top of all of this, Manufacturing must take into account the variables between the cost of the raw material, lab costs, production costs, distributions, and retailer promotions, but are often working in separate systems from the Purchasing team. The Finance team might aggregate all of these data into one place, but likely isn’t tracking it from a strategic, global product view.
Individually, these steps might work just fine and each department may have a completely functional system for their portion of the product life cycle. As a whole, though, it’s really difficult for each subsequent department to often know the target price they should aim for based on other decisions made across the company and for everyone to work in real-time with other areas of the business to hit that target.
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In today’s global economy, these siloed pricing decision points create a real lack of visibility into how different product choices impact total costs and obscure potential areas for cost savings.
As consumers become more invested in specific ingredient and formula properties and brands respond to meet demand on a global level, quickly launching or modifying product lines for multiple markets is a necessity. That’s much more challenging to accomplish with a disconnected information sharing infrastructure.
What are the risks of not having a comprehensive view of pricing factors across the enterprise?
Thomas: Without a complete, global view of pricing choices, it’s difficult for each subsequent department to know the target price they should strive for and to work in tandem with other areas of the business to hit that target. Collaborative decisions around material costs, labor and overtime, supplier negotiations, and other major pricing factors are much harder to facilitate when using isolated work streams.
Brands that are still doing local sourcing for each market run into a variety of avoidable supply chain and regulatory costs. For example, If you’re using a flavor that’s restricted in a new market, you have to onboard a new flavor ingredient and new flavor supplier, with different labels and regulatory constraints. A brand might only discover these costs after their initial market launch once they’re ready to expand Having to always be creating different formulas for different brands in different markets incurs so many additional expenses.
Likewise, most products contain many major commodities like sugar and salt. Procuring and purchasing these commodities from regional suppliers--and managing those suppliers within internal processes--in each market is time-consuming, complex, and costly. Even if one area of the organization is using just two manufacturing plants, they might still be using 10 different types of sugars in one plant from many different suppliers. Without harmonizing supplier choice, it’s very difficult to achieve economies of scale.
For packaging components, too, changes in the product impact labeling cost. If you’ve forecasted and printed a huge quantity of labels based on an initial product forecast, but your product changes, you’ve now got a mislabel to resolve and will likely eat the costs of reprinting new labels.
Ultimately, when food manufacturers work out a very thin profit margins, the butterfly effect of these fluctuating factors can really add up into the total product cost and put the business at risk.
What tools are companies currently using to manage product pricing and cost analysis?
Thomas: Typically, each department uses their own preferred technologies to manage the costing calculations and data for their stage of product development. Brand managers have their own forecasting tools. Packaging may have their own pricing systems. Product Development might use Excel. Labeling tasks often happen through email for approvals.
Often, many departments don’t have any sort of formal system for managing pricing data and might be conducting pricing calculations and communication through completely different channels. Over time, manufacturers end up with many different individual document pieces at each step of the process that are difficult to integrate together, both because of the sheer volume and different formats of data.
As a result, there’s often a lot of missing or out-of-sync data between product development stages, which requires a lot of work for everyone to track down or share between people and systems. Without one tool, there’s a lot of room for user and data error, and lots of rework happening between teams.
What are some of the successful ways you’ve seen companies address these pricing problem?
Thomas: Today, when brands launch a product, they’re thinking of the global market at the formulation level. With our customers, we see brands starting to design and use a global recipe or formula model across all of their markets and, as a result, taking advantage of significant pricing advantages across different materials and process decisions.
A global formula model creates cost savings at every step of the supply chain; Procurement can buy ingredients from one global supplier, leverage a great volume purchase, buy an ingredient globally, and standardize those cost savings across formulations. Standardizing procurement also simplifies the number regulatory hoops a brand has to jump through to distribute in new markets by creating a recipe that fits a wide variety of regulatory needs (or can be easily modified with approved materials.)
Likewise, manufacturing can get a complete view on cost across the product life cycle, including the raw material, labor costs, distribution costs, retailer promotions, and more. With a global formula and one or two standard material suppliers across product variations, It’s much easier to withstand or respond to market variability and make more rapid changes to formulations and supply chain selections.
The companies that are most successful at implementing this global formulation model really approach it as a cross-functional initiative across the business. That’s often one of the biggest challenges with this strategy: There is not one single stakeholder who should or can own pricing decisions and pricing technology. Manufacturers that can get Marketing, Innovation, R&D, Quality, Supply Chain, Manufacturing on board first and design a system that maximizes functionality and visibility for everyone, can Each business head can still retain control their portion of product budget while receiving real-time insights into pricing decisions and material availability across the enterprise.
As manufacturers continue to expand their brands into new markets, those cross-functional, real-time insights into comprehensive product choices will really start to separate out which brands can compete on price on the global stage.