Businesses will survive and thrive when inflation subsides − only if they are prepared, adaptable, and agile. In the Wholesale Distributor sector, that means using emerging technologies to achieve Pricing Optimization and Inventory Optimization. Rock star CFOs provide guidance, strategic planning, and an understanding of what it takes when things get tough.

How CFOs Reimagine Pricing and Inventory Processes

Companies must remain data-driven to survive this volatile and confusing environment. Only a rock star CFO can help coordinate how all the pieces fit together − from analyzing an ever-changing market to planning different scenarios, so pricing strategy will be in place when markets update unexpectedly or are forecasted incorrectly - even monitoring if execution matches expectations.

Gartner research “indicates that 74% of CFOs believe lower profitability is the biggest risk of input price inflation — which pushes up the cost of inputs required for producing or delivering products and services.” CFOs must understand the long-term risks associated with inflation. They must act now to mitigate rising input prices and shrinking margins.

4 Paths for Rockstar CFOs

1. Improve Supply Chain Visibility

Prices change constantly. Inflation occurs over time when supply cannot meet demand. It escalates when too much capital in the hands of consumers accelerates demand. So, inflation makes it difficult for companies to negotiate deals with suppliers.

To remain competitive, one rock star CFO shared with me that once they saw many cost changes from local and international suppliers, their company adjusted how they calculated landed costs to avoid being disadvantaged during negotiations. Their calculations accounted for transportation, such as containers or LTL, and on-site replenishment expenses when negotiating contracts with vendors who provide these goods − allowing them greater insight into what it will take now and down the road toremain competitive. This requires tools to trace proposed price increases back through specific inputs like labor, materials, or transportation comes in handy.

2. Look Beyond the Typical Recruit and Retain Talent

During periods of high inflation, annual compensation increases of 3-5% actually cut employee purchasing power. This paradox could be more optimal during long-term talent shortages. Employees have gained substantial leverage, and this trend will likely continue due to economic pressures, so business leaders should recalibrate their recruiting, compensation, and retention strategies to meet the challenges of inflation head-on.

• Conduct periodic employee engagement surveys. Identify the underlying employee concerns employers can address and resolve immediately. Problem resolution only sometimes means expense to the employer, but it could keep talent from leaving.

• Recognize that some employees feel inflationary impacts. The lowest-paid employees, for instance, will need help meeting their basic physiological needs. The time has come for an expert compensation analysis and recommendations to meet livable wage standards.

• Employers can draw a picture of compensation plans. It helps to show employees how their compensation is determined and how workers' pay is competitive with the broader market. It is also time for increased transparency on company operations and finance.

3. Improve Working Capital (WC)

Improving WC is cheaper and less risky than soliciting new bank loans, other debt instruments, or equity. WC also provides visibility on how efficiently your company utilizes its invested capital.

Companies that take advantage of the latest data processing tools and analytical insights have unprecedented opportunities to gain a deeper understanding of their accounts. By analyzing numerous transactions over time, analytics can identify patterns in receivables and payables with pinpoint accuracy – right down to the exact days for orders placed or cash received/paid.

The resulting visibility into customers’ DSOs (Days Sales Outstanding) and DPOs (Days Payable Outstanding) allows companies to create targeted strategies along every step from order-to-cash through purchase-to-pay cycles - opening up previously unexplored avenues for optimizing working capital management.

• Inventory Optimization: Distributors must pursue inventory optimization without compromising service levels or risking stock outages. Inventory Optimization means identifying and rationalizing underperforming SKUs (stock-keeping units) like D and E products, so the company can focus on what it does best - its A and B products.

• Payment Discipline: Improve payment discipline and optimize your internal supplier processes with strategic scheduling of payments, streamlined terms-management, and efficient ACH payment methods to replace tedious check delivery.

4. Price for Profitability

The days where CFOs could rely on their ability to affect cost are long gone. With more complex products and faster-changing markets, CFOs must unlock prices to stay competitive and maximize profits through innovation.

More than just viewing products on a cost-plus basis is required. To truly understand profitability at the customer, product, and volume levels—called “dynamic pricing,” you need robust data about how much each decision will contribute towards your overall profitability.

The Inventory Optimization and Pricing Optimization Differential

Analyzing the cost pressures across a distribution business provides insight into what lies ahead for specific products. With thousands of SKUs under consideration, it can be hard to determine if the average price increase compares to the individual costs for each SKU.

The chart below (Figure 1) shows the results of a Distributor's pricing change for one particular product. They waited to update the cost or price practices until December 2019. Even so, the Gross Margin percentage neared zero around Jan 2022. The decision to drastically change prices finally came with the realization that the information or processes needed updating.

In this case, Intuilize allowed the Distributor to revamp its processes − standard, actual, and forecast costing − in weeks.

Distributors must act quickly when costs go up. If a company wants to prevent the pain of cost increases, it must raise prices ASAP. But most Distributors still allow decisions to lag before making price changes. Even though they change prices more frequently in an inflationary environment, delays continue between a Distributor's cost increases and the subsequent pricing adjustment. Such hesitation can result in 160 basis points worth of margin erosion.

By escaping these slower planning cycles, Distributors can accelerate their reaction times and make more informed pricing decisions. That is where War Rooms come in. War Rooms host collaborating teams capable of agile innovation and response. They enable the strategic coordination of pricing and inventory activities while implementing better governance.

This approach tracks progress on an ongoing basis so you know when changes are needed and see when opportunities arise. The company will have greater flexibility with its resources leading to increased profits in the longer term.

When talking with a rock star CEO this year, he said, “As business leaders, we are always fighting the question, ‘Am I charging a fair price for my products and services?’ Often, we use the few anecdotal data points available to us to make that determination. Intulize has turned that art into a science. Furthermore, we have provided our employees with a suggested price that they can trust. It allows them to worry about serving the customer and the flexibility to make a good decision.”

Distributors must take advantage of their ERP system's pricing capabilities. Many Distributors must learn if these capabilities exist or how to use them. But implementing them is surprisingly easy. Most ERP systems enable users to set and provide pricing with just a few clicks while replicating pricing guidelines. This ERP feature saves time for team members while ensuring they follow best practices in controlling their win rate. A simple tweak of the ERP system can increase profits and save time.

Many companies resort to uniform rather than customized price increases in inflationary times. It is easier and quicker than figuring out how much everything costs per unit or what different customers need. But when, as recently, prices begin to escalate, these simple strategies will not do the job.

The chart below (Figure 2) shows how legacy pricing methods continue to consume this Distributor’s margins (blue line). They should have optimized and updated the pricing long ago.

A typical mid-sized distributor called Distri2020 has 1000 customers. They have an average number of active SKUs at around 5000 and at least three quantity breaks (few, medium, and many). That creates a whopping 15 million possible combinations needing proper pricing!

Even the most disciplined pricing gurus will attest that – without the correct data or models – those numbers would make it very difficult for any Owner, CEO, CFO, or Sales Manager to deliver an optimal experience for every customer and their business’s bottom line.

Rockstar CFOs Don't Wait – They Invest in Pricing!

Companies sometimes need to relax in enforcing their discount policies and terms and conditions during stable economic periods. They make so-called “strategic exceptions” to their rule when it benefits them the most. Then BANG! Suddenly an unforeseen event, an unpredictable change, such as the COVID-19 pandemic shutdowns and mounting inflationary pressures, catch them unawares. A study by Intuilize shows that only 15% of distributors successfully pass on more than 80% of their input-cost increases to customers promptly. Visit Intuilize.com to read more about this unique research and learn how AI will unlock your distribution data.

The still mounting inflation gives Distributors a rare opportunity to transform how they price their products and services. Signs predict input-cost pressures will continue for a while, making it more crucial than ever for Distributors to look forward, not back, if they want their business models capable of handling a higher customer demand.

To respond quickly and accurately in an ever-changing market, Distributors need to reimagine their organizations and be empowered with the technology and skills to secure data-driven information advantages and sales leadership capabilities. This demands new business practices and business transformation in pricing, too! Moreover, when inflation declines, the era of price instability will continue. Rock star CFOs must act now!

Work Cited

Turner, J. (2022, February 11). 3 Ways to Mitigate Margin Pressure From Input Price Inflation. Gartner.