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Overall Pricing Effectiveness Takes Lessons from Overall Equipment Effectiveness

by Gabriel Smith   |   November, 2019

A decade ago, the rhetorical question asked by manufacturers was whether plant equipment was operating at maximum effectiveness. More specifically the inquiry was evaluating equipment availability, performance, and quality output. That lean manufacturing principle led to a rationale, explanation, and progression of Overall Equipment Effectiveness (OEE). Ultimately, OEE is a quality systems management tool which enables manufacturers to assess a plant's effectiveness. Used wisely, OEE allows a manufacturer to identify major losses, create a road map to find problems, and enhance capacity.

OEE looks at availability, performance, and quality for each machine; these data can then be assessed against the entire complex of production equipment. In this equation, availability is operating time and planned production time. Performance translates to total pieces/operating time/ideal run rate; quality is defined by number of good pieces/total pieces. The goal is to measure and improve manufacturing processes to manage, predict, and reduce variable costs and thus improve operating margin.

Eliminating pricing waste: Overall Pricing Effectiveness (OPE)

There is an even more effective means to improve profitability than variable cost reduction. In fact, according to many studies, improving variable cost typically results in a <8% improvement in profitability whereas improving price results in an >11% improvement in operating profit.

Percentage Increase in Operating Profit as a result of 1% improvement. Source: Harvard Business Review Managing Price, Gaining Profit.

Just as OEE is fundamentally a lean manufacturing outcome and part of continuous process improvement, there is a characteristic flaw in pricing and purchasing among most manufacturing operations. In 2020, the new iteration of OEE is OPE (Overall Pricing Effectiveness).

OPE can be measured by optimizing and controlling pricing, as well as managing margin leakage with a price waterfall which allows manufacturers to track and adjust price points.

Price Waterfall: Visualize Price Effectiveness and Margin Leakage

Ignoring optimized pricing, measuring the realization of price changes, and automation of purchasing trends (including rate of reorders) are leaving money on the table. When a machine capable of producing 100 units per hour is only producing 70 units, it is not fully optimized. The machine equivalence in OPE occurs when the manufacturing enterprise is fully optimized for profitability. Companies use plant capacity as an input for pricing algorithms to maximize utilization and account for fixed and variable manufacturing costs. This is how OPE can accurately optimize margin.

Pricefx optimizes and automated prices and accounts for leakage. The very process of customer acquisition, orders, and commitment compliance are used to identify pricing sensitivity by customer and product. By using automated data-driven analysis embedded in the business OPE paradigm, manufacturers are enabled to make better decisions and achieve optimal outcomes.

Insight is at the heart of a powerful pricing system. It is the essential ingredient in developing robust frameworks and weaponizing the data manufacturing organizations gather. Insight drives automation.

Managing pricing strategy is one of the most critical elements of maximizing earnings and profits. From price policy definition and setup of price guidelines to the management of complex off- and on-invoice conditions, this practice is both highly complex and impactful. Managing pricing must be part of the manufacturing automation plan.

Realization. All the analysis and strategy in the world is meaningless without the capacity to operationalize it. Pricefx works closely with manufacturers as the organization integrates technology and tools that generate results. Results in a SaaS model achieve a rapid automation ROI (return-on-investment).

These three OPE elements, insight, managing, and realization, mirror the prongs of OEE, availability, performance, and quality output.

Lessons of OEE driving OPE automation

Ignoring the value of OEE lessons learned would be foolish. The commitment to lean is uncomfortable because of that word "continuous." The migration from the plant floor to a deep dive examination of all processes is essential. The OPE SaaS automation model makes sense to manufacturers; looking at maximum profitability from each customer is not all that different that achieving optimized output from every machine on the plant floor. OPE brings a methodology to quantify the willingness of what a customer will pay; it considers outside influences like competition and seasonality, trend data analysis to predict and prescribe actions into pricing and negotiation processes.

Gabriel Smith is a Six-Sigma Green Belt with 20 years-experience in Pricing and Quote to Cash. He has been in the price optimization software industry for 12 of those years and worked with leading companies across many industries such as 3M, Seagate, IBM, Emerson, and Siemens. Gabriel started his career at Cisco Systems, where he was part of manufacturing team that structure the Sales BOMs and wrote the CPQ logic for configuring and pricing Cisco's products. Smith holds an interdisciplinary degree from UC Berkeley focused on the use of technology to gain competitive advantage in the market. See More Details.

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