PracticeConsultingAnaylsis: Using software to maximise profits

Anaylsis: Using software to maximise profits

Squeezing every penny of available revenue without fouling up bottom line profit by pursuing unprofitable business is something that lies at the heart of every finance director's operational considerations.

The new deal that promises to take up factory slack or the new market opportunity that means better asset utilization are just two examples stimulating interest in price and revenue optimization, or PRO, a component in the notion of enterprise profit optimization.

Enter supply chain vendor Manugistics. With its EPO message firmly strapped to its latest corporate messaging, the company is laying out the Holy Grail of software applications – something that delivers a value proposition the finance director will walk over hot coals to grasp. Sure, we’ve heard it all before and Manugistics is treading an ambitious path.

It cites well-known airline and hotel revenue management techniques as the genesis for its PRO offering, suggesting that supply and demand can be truly balanced using price. But the argument comes with caveats. The company accepts that price can only be optimized within narrow price bands and in some scenarios, depends on acceptance that there are no supply side constraints.

This is true in financial services but not so in manufacture. Manugistics counterbalance the argument by linking PRO interacting to supply chain optimization. A laudable idea. But it just isn’t that simple and PRO is sector dependant.

The actual demand for any good or service is dependent on highly complex and frequently finely balanced factors of which price is a single component. Service based businesses can find that price is less of a factor and so be able to adjust relatively easily. Commoditized product prices are much harder to flex. Marketing activity to introduce a new product may stimulate unexpected demand – or it may fail – regardless of price. So will PRO, as a software category succeed where other technologies have failed?

The long term decline in American airline industry profitability suggests techniques for achieving optimum prices may not have worked as well as PRO proponents imagine – recent events in the USA aside. The supply side may be very difficult to control without strategic rethinking. Manugistics says the PRO gains drop straight to the bottom line but the reality is that net profit is subject to an enormous range of conflicting factors.

One area where PRO could have genuinely valuable application is that of micro-market pricing. This is already practiced in retail where prices in the same brand supermarket vary from one part of the country to another. In automotive, demand of a specific configuration in a particular area might lead to premium pricing.

An alternative strategy might be to use price as a way of avoiding over capacity or reduce inventory in particular dealerships. But here is where the argument needs more meat. Product configuration for complex products is crucial as the starting point for ensuring that manufacture works smoothly while keeping customers satisfied. Linking configuration to factory assembly in a predictable way is a new and untested art and the source of many a potential misstep.

Over arching these difficulties is the unpredictable nature of market dynamics as evidenced daily on that most perfect of markets, the London Stock Exchange. It demonstrates that applying economic science to something as tantalizing as PRO or EPO is interesting and promising but ultimately just one more tool that might deliver benefit. Finance directors will need to add up the sums both before and after, attributing the impact of PRO as the only way to find out if these new tools really work.

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