Sustainable Profitability & the PQS Matrix
In every business, there is a nexus between Sustainable Profitability and your decisions on Pricing, Quality & Service (PQS). There is a need for careful balancing and control of the PQS factors.
But is this as simple as it sounds?
Let s look at a bit of theory and my turnaround experiences at Sugar Co (confidential case study).
what is THE PQS MATRIX
We all know that everything is achievable at a price. You want higher quality? Not a problem. You want higher service levels? Not a problem. But, there is a price.
Sometimes you can trade off quality and service and keep your price down. For example, As long as we can control when you get it, we can deliver it at the quality and price you want (i.e. we shall make your product in our troughs of production when our fixed costs are under utilised). Or If we can control the quality, you can get your low cost product when you want it (i.e. we shall manufacture to an identified low quality spec).
Needless to say, there are limits to this trade off if you are to remain profitable and competitive. What is important is not so much the mix of PQS but the level of control you can exercise over the PQS mix, particularly in comparison to your competitors ( man up to your competitors in key areas). Understand this and you are half way there.
Let s look at the four potential scenarios.
1. If a supplier allows (or feels they have to allow) a customer to demand the price they want, at the quality they want with the service level they want, then I will show you a business which has a high risk of failure. This is the be all things to all people approach. Avoid this scenario at all costs.
2: If a supplier can control one element of its PQS, then it will at least have a fighting chance of making a normal profit. Many of your clients are here.
3: If a supplier can control two elements of its PQS, then it is well on its way to making profits and perhaps super profits. Many of you wish your clients were here.
4: If a supplier can control all three elements of PQS, then I want to invest in its business!
THE PQS MATRIX – IN PRACTICE
When I arrived at Sugar Co, we were in chaos and were operating at Scenario 1. We did not have any real control over our PQS certainly not in a value add sense. And we did not think of our business in terms of controlling our PQS. We focused on being all things to all people and were failing. The problems were so many and varied and will be the subject of future newsletters all good stuff to be aware of for your own business.
Let s take a quick snapshot of Sugar Co when I arrived.
Price: we matched and generally bettered the lowest price in the market place.
Quality: we matched and generally bettered the best quality ingredients used in the market place, spent $$$ on R&D but did not recover this cost with higher prices. (We did have product quality problems but that is another story).
Service: we promised and tried to deliver (but did not succeed) on high service levels.
In summary, we were pretty much stuck around Scenario 1 we thought our customers wanted it all .
PQS: IT’S ALL ABOUT THE CUSTOMER
But what did our customers want? Obviously, different customers wanted different things.
Interestingly, for our most important key retail customer (30% of our business), Delivery In Full On Time ( DIFOT for those in the logistics business) was their first and most important concern ( an empty retail shelf cannot sell ).
We were costing this key customer time and money with poor DIFOT statistics target: 97%; actual: let s not go there We had not listened to this customer probably we had not even asked them (although they kept telling us loud and clear). DIFOT DIFOT DIFOT!
We thought they wanted the lowest price at all costs so we made sure we had the lowest prices in the market place prices which even the smallest backyard, low overhead/low quality producer could not meet and there was no way their machinery could match the volumes needed in the market place during peak seasonal demand.
To exacerbate the problem, we tried to meet tight and tough delivery time frames (particularly during the periods of high seasonal demand) and give them the best quality.
Many of our products were being priced on a marginal cost basis (for those non accountants, our prices were just above the variable cost of production: direct labour, materials & packaging). As you can guess, this is not smart business if you want to pay your overheads including freight to ship the product (and a wage for yourself as CEO).
Many of the better customers (read larger, less troublesome and more business-like ) wanted the best price for the product their customers were willing to buy from them, which was far different from the lowest price we had been giving them. F
or many of our products, our customers wanted a consistent quality (not necessarily the best quality), they wanted reliability in delivery (across all their national distribution centres) and they wanted reliability in stock levels during peak and low season months as well as reliable and good shelf life and, they did not want to be undercut by a smaller competitor who had managed to get a better price out of us!!!
CUSTOMISE YOUR SOLUTION
Our solution was to rebuild the business from the bottom up and find out what our key profitable customers really wanted and deliver it consistently.
Don t assume that your good customers want the lowest price, the highest quality and the best service levels. Yes, there were some customers who wanted the lowest price but not surprisingly, they were also amongst the most difficult to deal with.
What does this all mean? Every business is different. What was important in the mix of PQS for Sugar Co. might not be so important for another business (and it will probably change for Sugar Co. as more market intelligence comes to light).
But most importantly, understand the dynamics of PQS.
When appointed MD to Sugar Co., I spoke to every internal and external stakeholder (i.e. employees, management, customers, suppliers, financiers debt and equity, Unions, Government regulatory bodies in the Environmental, OH & S and Food Safety areas) who was willing to talk to me.
I needed to know what they thought we did right, what we could do better and how could they help us achieve these goals. And as our competitor knowledge was very low, I wanted feedback on the market place and the strategies our competitors were adopting. (People love being asked for their opinion!).
Not surprisingly, the hit list of good ideas was long and detailed. We quickly developed a turnaround strategy based upon sound commercial judgements. We also tested data, with consumer research, analysis of competitors products & ingredients all in an effort to make sure that what we were about to embark on was heading us in the roughly the right direction.
Did we get it all right first time? Definitely not. We had a lot of good wins but in the tight timeframe we were dealing with, we also had some losses but we learnt, we went back and we revisited our strategic direction.
And, we kept up the communication process with all stakeholders surely the most important tool in a turnaround manager s kitbag. In consulting speak, we continued to work on the business and not just in it.
As a turnaround CEO, it was my role to keep that process driving forward and keep the lines of communication open so we could keep in touch with any key developments and be ready to act.
Your homework questions .
A few war stories from Sugar Co ..
Price: I put up the price on a key product by 45% and still grew the volume of this product. Logic? There was a view we had to sell our product cheaply to get volume and be competitive, so we had been selling it below its real variable cost. Our price was well below our major competitor (similar quality), and there was no other manufacturer, locally or overseas, who could match our revised price.
After recovering from the shock of our price increase, the major retailers key concerns were whether the product s new price was competitive and whether our prices were going to go up for all our customers, so retaining everyone s relative competitive position. This last point was critical.
Quality: we used top quality ingredients and spent $$$ on R&D to keep ahead of the pack. Yet our sales & marketing did not or could not successfully sell and market these initiatives to our major customers.
For example, we used a 100% chocolate mix for our products when our competitors used a 50/50 compound mix or even straight compound. Either a 100% chocolate base was worth something to our customers (and the end consumer don t forget them in the equation) or it was not.
Trying to compete with cheaper ingredients and not being able to get a premium for your higher quality/cost product is as close to lunacy as you can get. After many discussions & options put to the major customers, they stayed with the higher quality product and accepted a 25% price increase.
Figure out where the value to the customer lies then make sure they know about it, and also make sure they know how your competitors operate.
Service: We operated on a just in time basis not as an operational strategy but because we did not have the financial and space resources to ensure we had a balanced and sustainable inventory level. We had plenty of warehouse space but it was taken up with obsolete packaging and slow moving stock. We did a cost/benefit analysis and a competitive impact assessment of the options.
We decided to dump most of the obsolete packaging, allowing us to reorganize our stock, increase stock levels of high moving lines, and improve our DIFOT stats to acceptable levels whilst decreasing complexity in the logistics chain. A fantastic result.