One of the most revolutionary changes in manufacturing and supply chain management was the shift to just-in-time (JIT) inventory. With this methodology, “carrying inventory” became virtual profanity; entire new industries and consultancies sprung up to help manufacturers shift to this leaner, more optimized operating model. Once the kinks were worked out, JIT helped manufacturers walk the fine line toward greater profitability. They were able to meet market demand while dramatically reducing their inventory and materials costs. No inventory and no stock-outs – what a dream!
Today, a new revolution is stirring in manufacturing organizations that impacts supply chain – the revenue management revolution. Today, manufacturers walk a fine line in managing revenue. Here are four challenges manufacturers are experiencing within supply chain as they tread into the territory of revenue:
- Pay incentives faster while ensuring accuracy – A common complaint manufacturers hear relates to delays in payment of ship-and-debit claims or processing of discounts and rebates. Speed is slowed by manufacturers’ need for accuracy.
- Process more contracts faster and maintain compliance – Most companies struggle to quickly process the volume of contracts and agreements. The International Association for Contract and Commercial Management estimates that companies can increase revenue by 9 percent when they improve contracting processes. However, streamlining contract management can be offset by tracking and ensuring compliance with contracted terms, milestones and other metrics. It is almost impossible to assess contract and milestone compliance with outdated manual revenue management practices.
- Design high-impact incentives while minimizing costs – In a 2011 study, Deloitte found abuse of channel incentives can cost technology-related companies 5 to 10 percent of their total incentive budget, or $1.4 billion in profits industry-wide. Despite needing tighter controls, manufacturers look for new ways to differentiate incentives and promotions and drive greater volume through channels while minimizing stock rotation and inventory costs.
- Accrue for channel expenses while avoiding over- and underpayment – Companies accrue funds to cover anticipated expenses. To manage accruals, they need insight into performance of channel incentives and other pricing-related activities. Too little and revenue is overstated. Too much and it is understated.
If balancing conflicting priorities and needs sounds challenging, it is. It is difficult for organizations trying to adapt decade-old, spreadsheet-based approaches to dynamic, critical challenges. Most companies underestimate the risk that spreadsheet models and tools present. Manual processes have room for miscalculating amounts owed to trading partners, resulting in reduced revenue, inaccurate accounting and lower profit margins. In a report on the risks of spreadsheets, PwC cited an estimate that spreadsheets with more than 200 lines have about 100 percent probability of error.
The revenue management revolution has arrived. Instead of looking at supply chain, contracts and channel incentives as distinct processes, best-in-class companies consider contracts, agreements, incentives, promotions and compliance as one integrated process. This is called Enterprise Revenue Dynamics (ERD). These systems include automated contract creation and execution; tools to handle pricing incentives and revenue structures; compliance solutions to meet commercial, financial and industry regulations; and analytics to report on past performance and model future success. A formal revenue management strategy using ERD eliminates the legal and financial risks of manual and error-prone spreadsheet-based models.
ERD allows manufacturers to find competitive advantages by optimizing contract performance, channel incentive spending and channel relationships; providing faster and more accurate insight into market demand; and improving working capital by reducing the risk of excess inventory. The old saying “the best defense is a good offense” applies here. The key to a high-performance supply chain may be an automated, integrated revenue management solution.
Michael Kerman is the Director of Industry Development at Revitas, supporting marketing, development, and sales efforts to bring Revitas’ solutions to manufacturing and technology clients. He is also an author for The Revitas Blog, at http://blog.revitasinc.com.