Value Based Procurement
VBP uses specifications, costing models and formula pricing to ensure fair market value for the commodity products processed and sold by your business. Many businesses purchase the inputs for their production process at prices that may not be "fair" given what it costs to produce those inputs. This can mean millions of dollars are routinely "left on the table" as a result of out-dated procurement practices. In the VBP process, Informa professionals will closely examine the methods by which your company arrives at the price it pays for inputs and recommend alternatives, if appropriate. The goal of this process is not to squeeze suppliers to the point of margin loss, but rather to assure that all parties are getting a fair shake in the pricing of goods that pass between them day in and day out. Not only are there often large cost savings to be realized, but the new purchasing approach can often be structured so that overall price risk is reduced or at least made easier to manage. In this way, VBP can reduce the impact of market volatility and promote more stable margins for your business.
Measuring and Managing Margin Risk
Using a Risk Measurement Model custom-constructed for your business, the risk to profit margins created by proposed sales and promotion activity can be measured. Where risk is unacceptable, feature selection and promotional prices can be changed in order to meet margin objectives with less risk. Risk measurement models are variants of the models that are used by large trading desks to monitor and manage price risk on a daily basis. Unfortunately, many food companies do not have the ability to accurately measure the risk involved in forward transactions or even in their day-to-day activities, particularly when a large number of items are involved. A tailored Margin-at-Risk model can fill this need by succinctly reporting the risk to margins as a single number that can be easily monitored by management.
Customer Demand Analysis
Knowledge of the demand curve (that is, how much customers will purchase at various prices), is the most powerful piece of information any business can possess. Businesses that have this knowledge can exploit it to price products in a way that maximizes profit margins. Using your proprietary customer sales data, whether warehouse shipments, specific customer sales history or retail scan data, Informa is able to analyze specific customer demand, price elasticity, margin generation and trend analysis on a historical basis and determine promotion effectiveness over time at the item and segment level of your business. This allows for better assortment selection, promotion planning, product pricing and margin enhancement while creating the knowledge required to develop new and more accurate sales and margin objectives for your business. This work also has the potential to decrease the inefficiencies caused by over- or under- estimating sales volumes. By quantifying the demand curve and using it to project volumes given the selected price point, errors in the quantity ordered can be reduced. Often, companies find that the reduction in shrink alone far outweighs the cost of developing and implementing a customer demand model.
Maximizing Profit with Optimization Models
By grouping the demand relationships for a large number of products, an optimization model can be constructed that will deliver optimal output pricing in order to maximize profit over an entire category or line of business. The same data used in customer demand and trend analysis forms the basis for the demand work that feeds the optimization model. An important aspect of the optimization model is that it considers the cross-effects between products—that is, if the price of one item is lowered it is possible that the volume of other, related products will go down. A well-constructed optimization model truly exploits the power of knowing customer demand and has the potential to add millions of dollars to your company's bottom line. These models are most effective when they are constructed to operate at a local level, which recognizes that there will be different customer demand in different geographic regions and socioeconomic climates.
Risk Management Support
Beyond the quantitative tools, commodity risk management other elements that are critical to long-run success. Among these are a written company policy to guide risk management decision and systems for assimilating and tracking commodity exposures across all areas of a company. Informa's professionals have helped many agribusinesses put these elements in place over the years. We can guide your company through the process of developing a sound risk management policy that aligns the risk-taking behavior of the procurement staff with the wishes of upper management. The days of ad hoc risk management are fast slipping away as shareholders are now demanding a structured and well-thought out approach to controlling commodity price risk.
Hedging and risk control require accurate and timely knowledge of the firm's cash commodity position. Many companies have difficulty extracting the information needed to provide risk managers with an accurate assessment of their commodity exposure. Let the MarginQuest team help you design and implement a turn-key solution to this problem. We recognized early on that a one-size-fits-all approach to these tools would produce an unsatisfactory result for most companies. Accordingly, we have focused on building custom systems that work well and accommodate growth without becoming overly complex. Our professionals can help you determine the platform (spreadsheet, database or web application) that is most amenable to your specific situation.
Our Maintenance Program
When you work with the MarginQuest team you get personalized support to help assure that the products we deliver add value for your business. We do not believe in delivering a technical tool then leaving the user to figure out how to best use it. Instead, we plan on being available for telephone consultation and on-site visits as often as needed for many months following implementation.
Routine data downloading is a common feature of our maintenance program. This will allow for a regular updating of models that will keep them from becoming out-of-date and should help you quickly recognize important shifts such as those involved in customer demand. Another important feature of the maintenance program is the development of a results metric specific to your business that will allow on-going monitoring of progress. Because each business situation is unique, Informa specialists will work with your company to construct a results report that best conveys the financial impact that the MarginQuest program is having on your business. This becomes a scorecard of performance toward your company goals and objectives. As markets are dynamic the scorecard will allow for continuous improvement efforts using all of the tools indicated above.
Contact Rob Murphy (firstname.lastname@example.org) with questions regarding the MarginQuest suite of products.