Six Sigma Pricing : Improving Pricing Operations to Increase Profits

by Sodhi, ManMohan S.; Sodhi, Navdeep S.

• ISBN13: 9780132288521
• ISBN10: 0132288524
• Edition: 1st
• Format: Hardcover
• Copyright: 2008-01-01
• Publisher: FT Press
• More Book Details
• Purchase Benefits

Summary

The first and only guide to applying Six Sigma to your #1 business challenge: pricing. bull; Take greater control of pricing, eliminate "pricing leaks," and drive new revenue straight to the bottom line. bull; A systematic, start-to-finish approach: from defining defects through implementing controls through sustaining and extending improvements. bull; Requires no previous experience with Six Sigma.

Table of Contents

Preface	p. xix
Motivation and Context	p. 1
Why Pricing Operations and Six Sigma Pricing	p. 3
Introduction	p. 4
Who Should Read This Book and How They Should Read It	p. 6
Why Target Pricing Operations	p. 8
Pricing Challenges and Six Sigma Pricing	p. 10
What Six Sigma Pricing Is	p. 15
What Six Sigma Pricing Is Not	p. 16
Summary	p. 17
Profit Leaks from Inefficient Pricing Operations	p. 19
Introduction	p. 20
Examples of Price Leaks	p. 21
Why Price Leaks Occur	p. 29
The Role of the Pricing Function	p. 35
Summary	p. 37
Case Study-Pricing Operations and Six Sigma Pricing	p. 39
Introduction	p. 40
Background	p. 41
Six Sigma	p. 42
Define	p. 43
Measure	p. 44
Analysis	p. 48
Improvement	p. 50
Control	p. 51
Results	p. 52
Summary	p. 53
Basics-Pricing Operations and Six Sigma	p. 55
Price and Pricing	p. 57
Introduction	p. 58
Different Types of Prices	p. 59
Different Levels of Pricing	p. 63
Summary	p. 68
Pricing Operations	p. 71
Introduction	p. 72
Processes and Roles	p. 72
List Price Increase	p. 74
New Product Launch Pricing and Lifecycle Maintenance	p. 75
List Price Increase Due to Increase in Input Costs	p. 79
Promotions	p. 85
Discount-setting and Concession Process	p. 87
Analysis, Report, and Review Processes	p. 88
Summary	p. 89
Six Sigma	p. 91
Introduction	p. 92
Historical Background	p. 92
Why Six Sigma and Not Five or Seven	p. 95
Misperceptions of Six Sigma	p. 98
Application of Six Sigma to Non-manufacturing Situations	p. 99
Five Steps of a Six Sigma Project (DMAIC)	p. 100
Summary	p. 102
Tools for Six Sigma	p. 105
Introduction	p. 106
Tools for the Define Phase	p. 106
Tools for the Measure Phase	p. 113
Tools for the Analyze Phase	p. 116
Tools for the Improve Phase	p. 126
Tools for the Control Phase	p. 128
Summary	p. 129
Doing a Six Sigma Pricing Project	p. 131
Selecting a Six Sigma Pricing Project	p. 133
Introduction	p. 134
Acme	p. 141
Summary	p. 147
Define Phase	p. 149
Introduction	p. 150
The Charter	p. 150
Customers and Their Requirements	p. 155
High-level Process Map	p. 155
Define Checklist	p. 156
Acme	p. 156
Summary	p. 165
Measure Phase	p. 167
Introduction	p. 168
Process Map	p. 169
Data Collection Plan	p. 170
Acme	p. 176
Summary	p. 181
Analyze Phase	p. 183
Introduction	p. 184
Process Analysis	p. 185
Root-Cause Analysis	p. 187
Data Analysis	p. 188
Acme	p. 189
Summary	p. 198
Improve and Control Phases	p. 201
Introduction	p. 202
Improve	p. 202
Control	p. 203
Final Presentation	p. 204
Acme	p. 205
Summary	p. 218
Enterprisewide Deployment	p. 219
Deploying Six Sigma Pricing Enterprisewide	p. 221
Introduction	p. 222
Developing an Enterprisewide Plan for Six Sigma Pricing	p. 224
Goals for Enterprisewide Deployment	p. 229
A Starting Toolset for Six Sigma	p. 231
Pitfalls and Challenges	p. 232
Summary	p. 237
The Takeaway	p. 239
Notes	p. 245
Index	p. 249
Table of Contents provided by Ingram. All Rights Reserved.

Excerpts

Preface Preface It is remarkable how much the pricing of a company's products and services affects the profitability of the company in either direction: High (realized) prices can mean high total profits, and low prices can mean low total profits. From an Economics 101 perspective, there exists a perfect price at which profits are maximized, and any price lower than that point hurts not only profits but potentially revenues as well. However, in a business-to-business (B2B) selling context, there are two challenges in achieving such a price. These apply to the list price and to the price realized in individual transactions, respectively. First, for a company with thousands, or even tens of thousands of products, it is inconceivable that its list prices are the best possible for all its products. This is especially the case in a dynamic market with continually changing competitive and customer situations. Perfect information regarding attributes and prices of all competing products is rarely available to the customer or to the company. Second, even if a company is able to set its list prices such that they maximize its profits, each transaction has its own negotiated price or discount off the list price. Sales personnel have incentives that typically depend on the amount of sales they generate, not on the realized prices or profits. Buyers' agents have incentives that typically depend on the discounts they are able to extract off the list prices. Both sides can agree on transactions with large discounts for large sales amounts. The actual transaction price is then quite a bit lower than the list price because both sides focus on the revenue. However, such a transaction might not add to the company's profits and might even contribute to losses. Therefore, the absence of any realistic control over transaction prices means that the company cannot realize "optimal" prices even if it can determine what these are. This absence of control can hurt in other ways too. For instance, when raw material prices go up, the company increases list prices but finds that in practice the realized prices remain the same, and so profits actually go down. Even when there are operational controls in the company by way of price checks, requests by sales personnel to get prices approved within the company may take so long that the customer gets impatient and takes her business elsewhere. Such controls impede sales, the lifeblood of the company. As a result sales personnel, in their need to make and grow sales, have to devise ways to go around these controls. Nevertheless, circumventing price checks means that sometimes the price in a transaction is too low relative to guidelines, effectively diluting profit. Alternatively, the price may be too high relative to guidelines, hurting sales in the long term because the customer may find out and curtail his purchase in the belief that the company is opportunistic. Improving and controlling the realized prices over individual transactions and contracts is the domain of pricing operations. If a company can improve manufacturing and service operations, why can't it improve its pricing operations? Substandard operations, whether marketing-, pricing-, or sales-related, can lead a company to distress even when there are good marketing and pricing strategies in place. The goal for improving pricing operations is to prevent the dilution of list prices in individual transactions and contracts, assuming of course that the company has (list) priced the products correctly in the market relative to the competition and demand. Moreover, pricing operations ensure that realized prices are as close as possible to guidelines vis-#xE0;-vis list prices consistently over time and across customers. For instance, operations would ensure that volume discounts are applied consistently across transactions. This is no different than manufacturing (or services operations) seeking to ensure that the product (or service) does not deviate from the design each time the product is made (or the service is rendered). Just as companies gain a reputation for good quality for manufactured goods or services, a company that controls its transaction prices will gain its customers' trust for superior sales and pricing practices. These customers will not suspect the company of opportunistic or sloppy practices. There are many ways to improve manufacturing and service operations--Total Quality Management, Statistical Process Control, and Lean Manufacturing to name a few--to adapt to pricing operations. Which of these should a company follow to improve pricing operations? To select a particular approach, one must realize that on one hand, every decade or so there is a new movement promising to rid the business world of inefficiency, which eventually becomes a fad. Companies spend much effort doing enterprise-wide implementation. Executives and consultants tell stories in business conferences while the business press writes magazine articles about stories reporting success or at least promising it. Then slowly but surely, stories of excess start circulating, foretelling the demise of the fad but paving the way for another one. On the other hand, some ideas stay around despite the coming and going of various fads because they are core concepts and are quite useful when implemented. Such ideas include the use of statistics--inferring the state of a system or process from a sample--that permeates Statistical Quality Control, Total Quality Management and, now, Six Sigma. Another idea is incremental change or continuous improvement whether in these approaches or in Lean Manufacturing based on the Toyota Production System. This is in contrast to the radical change in Business Process Reengineering that had some successes but also birthed many disasters and unnecessary upheavals. When we set out to write this book, our goal was not to capitalize on the current popularity of Six Sigma, but to capitalize on the ideas behind Six Sigma that predate this methodology. These ideas will survive Six Sigma when some other methodology replaces it in popularity. Therefore, when reading this book, please keep in mind that we are not cheerleaders for Six Sigma or any other movement for that matter. We are fully behind fact-based analysis and for achieving major improvements to profits through the incremental changes that underlie Six Sigma. In regard to "incremental" changes as part of continuous improvement, what has been surprising in our own experience is that such changes in price improvements have had huge positive impacts on profitability. We might be doing Six Sigma a disservice by advertising that it aims for and achieves only incremental changes. We should clarify that the small changes refer to the changes in the process in question, not to the magnitude of benefits received. Finally, do we need to add to the plethora of Six-Sigma-related terms with another one, namely, Six Sigma Pricing? One could say that Six Sigma Pricing is simply the application of Six Sigma to the area of pricing, which it certainly is--you can carry out Six Sigma steps for improving a pricing process as in any nonpricing application as long as you can additionally navigate the minefield that is pricing. This, however, is where there are challenges. Pricing processes have many stakeholders, each believing he or she has a lot at stake. This means you are treading constantly on eggshells despite top management support. Not all of these stakeholders will see a Six Sigma pricing project as a win-win situation even if it adds significantly to the company's bottom line. This makes such a project vulnerable to being undone at the first possible opportunity, something that does not usually happen with manufacturing or services projects. There are other differ