9 minute read
SUPPLY CHAIN
Building a winning pricing strategy in today’s highly volatile market
Robert Smith
Advertisement
Customer Services Executive at Pricefx
Business plans and targets for 2022 need to be redrawn in the face of persistently volatile market conditions. Robert Smith, of Pricefx, explains how businesses can maintain focus in these challenging times.
The chemical industry worldwide has been under siege by an ever-evolving series of challenges, including shortages of raw materials, supply chain bottlenecks, shipping and trucking delays, unprecedented cost increases and inflation, plant shutdowns and restrictions on movement, and a whole lot more. Just when it seemed it was time for things to settle down, a resurgence of Covid in some regions of the world, as well as war-related sanctions, have become the latest hurdles. Every factor has led to fluctuating (mostly increasing) prices and cost increases… so is it possible to stay on target? Ripple effects are easily seen in the industry. As an example, the shortage of urea is affecting industries worldwide, including those fuelled by fertiliser and diesel. Urea is needed in Diesel Exhaust Fluid to keep diesel to run cleanly. China, the world’s largest producer of urea, stopped exports of the product because of fuel costs and the decline of diesel access. Another factor to this problem is the shortage of labour to drive these diesel trucks. Also a main ingredient in fertiliser, urea is needed for crops and field production, affecting spikes in food prices, and shortages around the world. Now, fertiliser is further stressed by Russia’s position as a significant supplier to some regions of the world. To appropriately suit up for what’s to come for the rest of this year, chemical industry players need to review and adjust their strategic pricing plans – often. Achieving margin goals that support earnings must take precedence but need ongoing focus to ensure success.
COMMODITY VS. SPECIALTY PRODUCTS
Our current challenges should not deter producers of specialty products from seeking recognition of differential value, with pricing reflecting the differences. It’s actually more important to emphasise this in dynamic environments. Many commodity product areas need to prioritise recognition of increases in underlying costs and frequent price changes for nimble pricing actions to achieve margin goals. Be particularly sensitive to significant changes in logistics costs, which should drive surcharges or targeted cost recovery actions.
Data, analytics, artificial intelligence, and machine learning are making it a lot easier for players in the chemical industry to forecast data on pricing and sales. These technologies help companies move more quickly on adjusting prices, empower their sales teams, and become more successful in attaining margin and earnings goals. If you aren’t using such technology now, this is a great time to evaluate and implement it – your competitors are likely onto this strategy.
FOCUS AND MEASURE
To accommodate and anticipate our constantly shifting circumstances in the market, a laser focus is imperative on certain metrics to monitor forecasted outcomes and progress on pricing. When business plans and pricing plans are in place, you’ll want to keep the following metrics on the front burner as this will help your business adapt when things go off course in the market. In addition to the usual and preeminent metrics around revenue, volume, contribution margin, earnings, and direct and indirect costs, here are some additional focus areas of importance to keep your business on track in 2022: Distribution costs
Workforce shortages leading to increased payroll and wage bills, increased fuel costs, shortages in truck, ship, rail, and even a pallet deficit have led to cost increases. 2022 has shown us these issues are continuing to give the industry a run for its money. Businesses must be vigilant in cost oversight and should pass on these increased costs to meet margin and earnings goals. These types of costs are often overlooked in some company pricing systems. Place these costs front and centre, especially now, so you can be agile and flexible with corresponding pricing actions. Delivery percentage What percentage of your goods are arriving on time? If your chemicals are being delivered late, how late? Over the past year, customer satisfaction in this arena has been increasing in importance, so it’s imperative to get this percentage right. Understanding your on-time delivery percentage is worth a premium and should be reflected in your pricing strategy. Customer retention
Data and analytics that monitor business gains and losses will determine the health of your company and help with customer retention. Are you losing customers by not being able to deliver your chemical products on time and they are heading elsewhere? Or alternatively, are your customers staying put with you because they consider ‘it is better doing business with the devil I know’. Leverage data and analytics to constantly monitor business gains and losses, and the reasons for them. It costs a lot less to retain a customer than to find a new one. Utilise learnings to retain current customers and gain ones that align with strategy. Brass tacks
Every winning pricing strategy will always include a strong foundation of the usual suspects – total revenue, volume, earnings, contribution margin, and direct and indirect costs. Remember, for the pricing team, contribution margin is the holy grail – it requires attention at the customer, market, and product level, and for the total business. What is of primary importance is that as we make adjustments to plans and tactics, these must be clearly communicated to all stakeholders with highly visible metrics to ensure everyone is pulling together toward the adaptations in plans and goals. Robert Smith has 30 years’ experience in the chemical manufacturing industry, with responsibility for setting pricing to drive profitable revenue growth for the majority of his career. Details at pricefx.com.
The value of trade associations in the chemical supply chain
New and increasingly stringent regulations, combined with disruption from Covid, Brexit and the Ukraine crisis, are causing ongoing issues for the industry. Tim Doggett, Chief Executive of the Chemical Business Association (CBA), discusses their impact and explains how trade associations can help companies in the sector deal with change and disruption.
Chemicals play a fundamental role in society. Used in virtually all sectors and industries, they have a direct impact on everything from agriculture to technology, and practically every aspect of our daily lives. Without them, our way of life would be impossible, which is why the chemical supply chain is so important. When issues arise, great swathes of industry are affected, as are the countless endusers who rely on their products and services.
UNDERSTANDING TRANSPORT
The undisrupted transport of chemicals is vital if companies are to have the raw materials they need. To reduce risk and find solutions to problems that arise, companies need a thorough understanding of the complexities and issues faced in transporting chemicals to, from and within the UK, EU, and rest of world. Trade associations offer guidance, training, and practical support on bureaucracy and paperwork, changes to import and export rules, regulation and compliance, security (site, transport, and personnel), and best practice. The carriage of dangerous goods by road is regulated by the ‘International Carriage of Dangerous Goods by Road’ (ADR) and may require the appointment of at least one ‘Dangerous Goods Safety Adviser’ (DGSA) Trade associations may also provide this service through their own teams of qualified DGSAs, who offer support on many ADR related enquiries, such as the preparation of documents, classification, labelling or carriage requirements.
OVERSEAS ADVOCACY
Trade associations also have years, in some circumstances decades, of experience providing chemical businesses with representation and consultancy for overseas security and government agencies. They can provide advocacy not just within Westminster and Whitehall, but also in Brussels, where they can have effective working relationships with legislators, policymakers and regulators.
HIGH-LEVEL REPRESENTATION
With all the noise of government, chemical businesses must engage with organisations that have a voice at the top table and which can provide direct advice, evidence, and feedback to all levels of the government, including ministers and departments such as the DfT and DIT. Lobbying on behalf of the industry, trade associations have gained some significant and important outcomes. Most recently, these include the introduction of various short and medium-term remedies for the HGV driver shortage and the announcement by DEFRA that it would consult on extending the deadlines for UK REACH and explore the possibility of a new data model that would deliver the appropriate levels of data to support UK REACH registrations. Organisations like the Chemical Business Association (CBA), the Chemical Industries Association (CIA) and the British Coatings Federation (BCF) work independently to support their members, but also collaborate when there is appropriate mutual interest. All three are members of ‘The Alliance of Chemical Associations’ (ACA) which consists of trade associations representing companies operating in many sectors of the industry’s supply chain. The ACA member trade associations represent some 1,400 companies, the majority of which are SMEs in the UK. These companies have a combined annual turnover of £45 billion and employ 170,000 people.
THE IMPACT OF COVID AND BREXIT
Two of the most critical challenges thrown up in the past two years have been supply chain disruption and regulation changes. Brexit and Covid have exacerbated what has been a growing problem for many years: the lack of HGV drivers. While demand for transport has continually increased, the number of qualified HGV drivers has dwindled, with those retiring not being replaced by newer recruits and others leaving the industry completely. Prior to the last two years, low pay, lack of facilities, difficult working conditions and a generally poor perception of an HGV career have undermined efforts to retain and recruit drivers. With Brexit, the situation deteriorated even further as the number of EU drivers working in the UK plummeted. Meanwhile, those drivers still delivering chemicals have faced additional disruption through Covid infections, isolation requirements, lockdowns and travel restrictions. Brexit has caused additional issues with the trading and transport of bulk chemicals between the EU and UK. Aside from more paperwork and bureaucracy, there are also regulatory changes – with UK REACH, for example – that will continue to arise as EU and UK regulations begin to diversify over time. As a result, some of the chemicals that many UK companies rely on today may be prohibited or become commercially unviable in the future. It is a scenario that could lead to significant manufacturing challenges and even mean some products are no longer available.
DEALING WITH THE UNKNOWN
Covid and Brexit highlight the fact that the chemical industry must develop the agility and resilience to deal with ongoing change and unexpected disruption. The latest example of this is the Ukraine crisis. With its industry grinding to a halt – and likely to take many years to recover -- as well as the unprecedented sanctions imposed on Russia, yet more havoc has been wreaked on the supply chain. Ukraine, for example, is the largest supplier of noble gases used in the production of semiconductors, while Russia plays a vital role in the production of commodities such as urea as well as metals including palladium, titanium, phosphate rock and scandium, which are essential in numerous production processes. While trade associations can do nothing to stop the conflict in Ukraine, they do assist companies at the sharp end of the disruption by providing evidence or expertise to government on specific issues, or in assisting in facilitating the opening of potential new trade networks. One UK chemical trade association, for example, is currently in discussion with the German Embassy and Indian High Commission to promote trade with the UK. These organisations also provide ongoing support to individual businesses while representing the interests of the chemical supply industry to governments at home and abroad. More details at chemical.org.uk.
