This week I had the opportunity to spend some time with a new client. This company, a middle market manufacturer, asked us to come in and review their various metals categories and suggest cost savings opportunities, process improvements and well anything else we identified of interest. I love companies that let us take a look-see! My experience working in the consulting industry, however, has led me to believe that most consulting firms tend to glom onto the largest of categories (thinking that would offer the greatest financial opportunity for the consultant, uh er I mean the client); whereas at this company I found myself pleasantly surprised by some of the smaller category opportunities. And all of this got me thinking about something I learned several years ago.
Back in my Andersen days, I had the privilege of working with a team of folks from the former Senn-Delaney (if you aren’t aware of this firm, they sold themselves to Andersen back in the late ’90’s). Senn-Delaney was a retail consulting group with a deep background in store operations. And the lady that ran the group at the time (now a big-time executive for a major department store chain) one day, walked me through the concept of “price blind” items and retail pricing strategy in general. You know what price blind items are – they are items in which you as a consumer have no idea what the “going price is” because you rarely, if ever, purchase the item. In our house, things like Pedialyte come to mind (I have no clue how much this should cost). The Senn-Delaney spin on price blind items was this: optimize your SKU profitability by pricing your products according to how price blind they are. So for example, a retailer would price milk very competitively because most people know how much a gallon of milk ought to cost. But a retailer might price a specific form of eye drop (often suggested by ophthalmologists) with an obnoxious margin because most people haven’t a clue as to what this should cost. (That was in fact the example she told me)
Now, how does this relate to industrial manufacturing and metal sourcing? If you have some smaller metals categories that you source but for which your customers a) never complain about the price or b) never shop around based on price, then you might want to consider prioritizing this category for strategic sourcing (e.g. cost reduction on the purchase side) over other categories, particularly if the item is considered value-add vs. a commodity. Why? Because often times, large purchase categories are often under the watchful eye of your customer. Your customer is often the first to point to falling prices and demand a price decrease. On the other hand, cost reductions achieved in smaller categories, not under the watchful eye of a mindful customer, fall straight to EBITDA. Double digit percentage savings on say a fabricated part for a $2m category make an enormous impact on a middle market company’s EBITDA or a division of a large company with its own P&L when the company can keep the whole cost reduction for itself. Moreover, that reduction could actually eclipse any small single digit savings on a much larger though more commoditized category like hot rolled steel coil.
What are your price-blind categories?