It’s ironic that despite businesses having clear and quantifiable costs, very few have the detailed information of these costs at their fingertips.

Innovation, industry 4.0 and big data are all buzzwords around at the moment that describe how using this very detailed information will revolutionise business – which I have no doubt it will. But as a friend said to me recently, there’s a lot of talk, but not a lot of action.

It’s clear to me that this is because no one really knows what these buzzwords mean, much less how to apply them.

Fundamental to any successful business is to know the true cost of its product. But very few businesses take the time to ensure they have an accurate price, save for an additional pricing estimate, normally relying on the combination of individual products to balance out in the top line P&L. Pollen estimates that up to 80% of products have an error factor of at least 25% in the standard versus actual contribution.

Not knowing the direct cost elements down to product in your business is scary enough. Add in a few complexities and this error factor grows exponentially.

Closing the cost loop

In pricing you generally hear terms like “burden” or “overhead contribution” which really mean the cost has been shared equally on a single metric and then we hoped for the best. Investing time to add detail and nuance, and understanding the true cost drivers and linkages to your products will add a new dimension to your analytics, insights and business decisions. Separating fixed and variable costs at a product level allows the consideration for volume without marginally costing your products. There are three key areas where you can add the detail which is going to help you accurately price your product:

• Freight and logistics – where are your customers, what formats are they ordering in and how frequently, do these elements line up to the original product costing?
• Rebates and discounts – whether it be on raw materials or finished product, these costs or benefits should be allocated to the corresponding products.
• Capital and deprecation – just because it’s the last line on the P&L doesn’t make it any less important. Product life cycles are often linked to depreciation life cycles, the ability to allocate these to an SKU gives you a full EBIT position for each and every SKU in your portfolio.

Keeping it live

Input prices change constantly particularly where ingredients are impacted by yields, weather or exchange rates. Performance on the shopfloor will move dependant on the business and product lifecycle and changes in volume. Freight will depend on who is buying the product where. Having live systems linked to your product costs will allow you to cut the analysis to the right level of detail, either a P&L by customer, category or manufacturing line.

The knowledge of stock traders blended with business acumen

The stock market and the local fresh fruit market are really no different, Adam Smith gets involved and prices move. Yet those really making their money in the stock market see the bigger picture and how prices interact with the macro environment. To do this they use live and robust pricing matrices from all elements of that bigger picture. What we need in our industry is the same quants to show  us the hidden gold in our own portfolio.

Imagine a world where your procurement team have an opportunity to spot buy the main component for your product at a significantly lower price – in minutes this could be modelled through to the P&L and information provided to your sales team who could then lock in a promo with the retailer to drive a rapid response promotion. The technology exists for the manufacturers and for the retailers. UK chain Morrisons already flexes the price of bananas using electronic pricing – why not have the entire supply chain be just responsive?

End-to-end live supply chain cost for each product, where prices are as live as the stock market will put suppliers is a very strong position to drive their business growth.

I’m a dreamer, so this is only the tip of the iceberg. What if the true costs included the costs all the way to the shelf taking into account the retailers distribution network, instore processes and waste levels on shelf? Now we have something powerful!

Back to the here and now: having this knowledge and understanding in your business is hugely beneficial, so are you confident you really know your “hero” SKUs and use these to drive your business, while taking action on your question marks and problems?

Written by Paul Eastwood and published by Retail World Magazine July 2018.