By Robert Smith, 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 and technology
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.
