A few weeks ago my wife and I were having dinner at our favorite Thai restaurant. As we sat down, Yoshi, the owner-chef, came by to say hello. The conversation soon turned to the economy. I asked him how he was coping with higher food costs. He mentioned that the prices for rice, wheat, and cooking oil were up dramatically, forcing him to raise his prices. He was reluctant to continue doing so in fear of driving customers to cheaper restaurants or eating at home.
On the following Sunday, The New York Times published “Recession Diet Just One Way to Tighten Belt,” an article describing the various strategies that “middle- and working-class consumers” are deploying in an effort to beat high costs of food, fuel, and other essentials. While “Recession Diet” only appeared in the headline, the concept immediately resonated with me. Here are two strategies.
Strategy No. 1: Attack costs
As I read the article, my first reaction was that this would make a great marketing piece for software companies, like SCA Technologies, targeting the intelligent cost management market for food and food service companies. Over the past few months, I interviewed two SCA customers, one a well-known, quick-serve restaurant chain and the other a baker of products sold by that restaurant chain and other channels.
The restaurant chain uses SCA to manage spending on beef and pork. While it may seem like a straight-forward business, the chain is dependent on controlling costs across its network of captive, cost-plus suppliers. Its view of the supply chain starts at the order window or counter, and works backwards to its suppliers. The company has to factor in everything from inbound freight costs, raw materials, grinding plants, freezing costs, labor costs, product promotions, and the energy needed to run the supplier operations.
In this case, all of the data comes from suppliers. SCA provides the company and its suppliers with complete visibility on costs. When we talked last November, the company was using SCA’s software three times a week to track costs. In turn, the executive estimated that “three-quarters of our suppliers look at the data regularly—and one-third look at it constantly.”
My second SCA reference call occurred in early April. Prior to finding SCA, the baked goods manufacturer had been using multiple disparate systems and Microsoft Excel to manage “piece by piece, customer by customer, product by product.” Once the team loaded all of the data into SCA Planner, the results were “startling and shocking.” For the first time, the company had real visibility into product and customer costs. It was able to use this data to modify production planning across its various manufacturing plants to balance customer demand and profitability. SCA allows the company to take advantage of existing capacity instead of investing in more plants.
There’s a lot more to the 11-year old company than I’ve managed to convey in a few paragraphs. SCA integrates predictive cost and operations modeling designed to let customers simulate a wide variety of what-if scenarios, putting them ahead of the curve.
While the company endeavors to service a broad range of industries, I think they should focus primarily on consumer-facing customers for now. In the last 52 weeks, the cost of rice rose 134%, soy climbed 76%, corn jumped 68%, and wheat is up 64%. Oh, and you have to ship those products. I know I don’t have to remind you that oil has been hovering around $120 a barrel.
Strategy No. 2: Stop profit leakage
I recently spent two hours with Zilliant CEO Greg Peters for an update on his company. Our conversation began with a brief discussion of the “recession diet” concept and how this might make an interesting market angle for companies like his that focus on precision pricing.
Prior to Zilliant, Mr. Peters had served as CFO and CEO at several public companies, including Vignette. He opened by stating that companies are losing “10% to 20% of potential margin” in deals because of a lack of data and discipline. To prove it, he showed some scatter diagrams plotting discounts relative to deal size. What jumped out was the fact that small deals often received much larger discounts than transactions nearly 10 times larger.
Zilliant took that same data and matched it against a set of attributes. For the sake of simplicity, let’s say the attributes included deal size, competitive pressure, product mix, and vertical. Weighing the new order against real data collected from actual deals allows customers to rein in the discounts.
As he talked, I was reminded of the ERP sales rep who had invited his CEO in to meet a prospect. The rep felt he had the deal done at close to list price. All he wanted was his CEO to do the classic meet-and-greet. He pleaded with him not to discuss pricing. The CEO walked into the meeting. He opened by saying that “We really want your business. To prove it, we’ll give you a 40% discount if we can get the deal done today.”
True story.
We haven’t forgotten SAP’s earnings either. Read this week’s newsletter for our conversation with SAP Americas and Asia president and CEO, Bill McDermott, and look for highlights here.
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