Economies of scale: Customers Looking For Savings From Suppliers

Yesterday’s NamNews’ item on Morrisons’ alleged demands for £500k savings from some suppliers produced our top visitor-count for the day.  
However, the issue is not whether larger quantities mean greater savings, but whether the discount demanded by the buyer matches the savings made by the supplier.

'Economies of Scale'

As you know, there are many potential sources of economies of scale, depending on the company and category in question, including:

- spreading administrative overheads over a bigger operation/quantities

- purchasing power to get better deals from suppliers of raw materials, packaging, etc

- lower costs in manufacturing - e.g. if longer runs result in lower costs per unit produced

- greater delivery quantities leading to lower distribution costs

- cross selling synergies

Any such savings will obviously depend upon your category and factory capacity/asset-utilisation levels.

The incremental sales route to fair-share negotiation

However, either way, the ‘incremental sale’ calculation allows suppliers to approach the problem from a more productive angle…

In other words, if a customer demands £500k cost-price reduction from a supplier netting 7% on the business with that customer, a ‘back-of-envelope’ calculation says the supplier needs incremental sales of £7.1m to cover the cost (i.e. £500k/7 x 100), unless you can identify and measure some real scale savings, and reduce the incremental sales requirement appropriately.

The basis of your costing-model

Any credible negotiation stance means that you will need to reveal the basis of your costing-model ( i.e. even tougher negotiation with your colleagues?) in order to be able to quantify and argue with the buyer that there is a shortfall between the actual savings and the discount demanded, an additional discount that will not realistically be covered by the anticipated incremental sales. 

Quantifying in this way may result in something approaching a fair-share solution..

Simply saying no is not an option

Q1. Why not substitute your figures and see how much extra you need to sell in order to break-even on the new deal?

Q2. Some might argue that explaining scale economies to a customer is not the job of a NAM/KAM. If so, please explain to us mere earthlings why the global financial crisis is diminishing, rather than enriching, the scope of the job…

Bankers & Politicians, the remaining ‘trust’ evaporates?

Given the latest global LIBOR banking scandal, with politicians playing belated catch-up, the one certainty is that savvy consumers are becoming more entrenched in their determination never to outsource their product-buying decision-making to third parties like suppliers and retailers, ever again. Apart from the ‘obvious’ irreversible damage to the City and traditional banking brands (and unprecedented opportunities for the Co-op bank, Tesco-bank and other retailers that carry little banking baggage. They simply need the skill to count reliably and meet consumer needs) this new ‘unprecedented turmoil means that suppliers have to increasingly deal, and be seen to deal, in business reality.

A wake-up call to end all wake-up calls?

This current wake-up call from 30 years of credit-fuelled demand has already lasted four years (!) and as a result we are embarked upon 10-15 years of flat-line growth, to be overseen and driven by increasingly savvy consumers, who will be satisfied with nothing less than demonstrable value for money…a new culture that is spreading back up the supply-chain…with de-stocking simply one symptom.

With EU unemployment at 15%, rising to 25% in the age segments that matter, consumers, suppliers, retailers and whole countries deleveraging (i.e. using money to pay down debt rather than investing/spending), there will simply be little or no basis for real growth, anywhere, for a long, long time.

The new business reality

This is the new business reality…an opportunity for anyone prepared to face up to it…

In fact, in the current climate business success, and even survival, is about being able to optimise reality.  Indeed, if you do not face up to reality in business, others will do it for you…  Hence the reason why bankers and politicians gradually increase their influence on a faltering business until they eventually officiate in its liquidation. And the LIBOR crisis is currently demonstrating the reliability and trustworthiness of both…

Like never before, reality now counts, bigtime, and the responsibility for dealing in reality is now in your hands, where it belongs, and should be kept…

Q: Is this really the responsibility of NAMs & KAMs?

Back to the pencil, a lead-intensive status-symbol for men...

One of Faber-Castell’s more popular products is a pencil. But it is no ordinary pencil, it is the company’s Perfect Pencil, which will set you back about £180. Each!
It comes, admittedly, with a rubber on the end (tapping ipad?), protected by a little platinum cap. And the tip is also kept safe from breaking with a lid, which incorporates a hidden pencil sharpener. It is rather nifty. But it is still £180 for something that might only give you a few weeks’ writing.
Competition-wise, the availability of 20 bog-standard pencils for £1 at Poundland makes the Faber-Castell version stand out in a world where men’s status-symbols are limited to cuff-links and watches.
To add the numbers, the company, which is fully owned by Count Anton Wolfgang von Faber-Castell and his family, posted sales of €580m (£468m) last year, an increase of 19pc, and operating profits of €42m.
P.S. If you wish to push the boat out a little farther, Count Anton is holding their £60,000  'Pen of the Year 2012 Diamond Edition...
A lesson for all who believe that luxury cannot be added to the mundane….?

ADmented Reality - Google Glasses Remixed with Google Ads

Google's Project Glass is its attempt to make wearable computing mainstream 2014, and it's effectively a smart pair of glasses with an integrated heads-up display and a battery hidden inside the frame.

If you are one of the 16.5m people who have seen the latest Google glasses Youtube clip, you will probably appreciate this slightly more realistic version of Google's augmented reality glasses - now featuring contextual Google Ads, published by Jonathan McIntosh at rebelliouspixels!

All of the AdWords used are actual Google ad returns found via Google searches based on the dialogue, situation or setting in the original video.

NAM/KAM applications
Street accidents permitting, Google Glasses look like a potential boon to NAMs, especially in negotiation. Think of the advantages of instant lookup of sales stats, buyer’s name, bonus-progression, kamword definitions, simultaneous cost & value calculations, but especially continuous interpretation of body language signals and regular prompts to show a vestige of interest in the buyer….all whilst maintaining almost 100% apparent eye-contact…

Meanwhile, the only real decision is whether to shell out $1400 now for a developer’s working prototype, or await the mainstream launch in 2014, when the politicians will probably be telling us about the emerging green shoots of economic recovery…

Have an day-dreamy weekend, from the NamNews Team! 

P.S. Original Google Glasses clip here and useful technical details here.

Meet The Omnichannel Shopper: Anytime, Anyplace, Anywhere

Add savvy (‘unwilling to outsource their purchasing decision-making to either suppliers or retailers, ever again’) to the omnichannel shopper and you have a major shift in  power to shoppers that choose how they interact with brands. Moreover they come complete with influential decision-making information readily available at their fingertips. Ignore at your peril...

Traditional channel management
The brand and retail ‘purists’ that devote energies to the preservation of discrete channel strategies like grocery, pharmacy, geography or even retail, mobile and web,  are missing the New Tricks of  providing a unified customer experience irrespective of the channel, to consumers that reward those who allow them to use a combination of store, catalogue, call centre, web and mobile - simultaneously.

In other words, meeting consumer needs...?

Managing the omnichannel
It follows that suppliers and retailers need to reorganise to accommodate this new market need, perhaps replacing the current channel manager role with that of Omnichannel Manager. This will enable a ‘one brain’ focus on ensuring that channels are not operating independently, thereby reducing the risk that the brand is attempting to maintain separate dialogues with an omnichannel shopper, and losing that shopper to a brand that is capable of engaging with them simultaneously in all channels…

Comments invited: 
1. Should all channel managers report into, or be replaced by, the Omnichannel manager?
2. Any practical downsides to building an omnichannel strategy now, like today?                        

(tips: unprecedented times, survival priority, risk-of-change, lack-of-experience, forgetting that with ideas in times of great change, everyone has the same level of experience…)

Touch but don't press - How daily Apples have become unhealthy for the competition

Latest figures from Kantar Worldpanel reveal that in the UK, more than one in seven people now have a tablet in their household and over 52% of the population own a smartphone. Couple this global realisation that tapping keys have become increasingly out-of-tune with consumer intuition and it can be seen why Apple have forced Microsoft, Blackberry and Nokia into catch-up mode…forever in pursuit of Apple’s innovator advantage.
In other words, Apple have made ‘screen-touching’ the only future…

A touching retail experience
Add to this the escalating success of Apple’s retail outlets, and it can be seen that the company is successfully applying the same fundamental creativity to retailing by populating its outlets with non-virtual Apple people! In fact, over the past five years, the company created 35,852 retail jobs, all acting as representatives for one of the best known brands in the world, optimising their unique combination of retail plus online plus a daily dialogue with enthusiastic users that few tech companies can duplicate.
In practice, their stores are more about being the front line for Apple advertising, rather than a ‘normal’ retail experience.

Helping people buy...
However, this experience of the ultra-softsell, in an open-table environment littered with products in constant use by enthusiastic shoppers, and continual access to human advice, can be addictive. In fact, this tactile experience, coupled with the realisation that the price cannot be bettered elsewhere, makes buying compulsive.
A frustrating lesson for ‘normal’ retailers everywhere….

Applying the Apple lessons to your business
Seth Godin extracts 10 iPad lessons to enhance your product launches, especially in niche markets.

Can you risk being out-of-touch in an Apple-free personal-corporate life balance that does not include a daily bite of the inevitapple?

Gourmet Flash-mobs, French Style!

Those who think that organising a flash-mob means simply encouraging members of your social network to turn up ‘as-is’, need to check out the 25 year old French version…
Dressed head-to-toe in white, flash-mob guests must bring a table and two white chairs, a picnic basket filled with "quality menu items" and a china service, including stemware and flatware. Only wine or champagne are allowed, as beer and hard alcohol drinks are considered no-nos.

A compelling invitation, in the right media?
Last week, thousands of participants at the "Diner en blanc" were told of the venue via social media sites and the Internet, then rushed to assemble in the heart of Paris' Marais district, in a 25-year-old tradition that still leaves passers-by open-mouthed. Other venues in Paris have included Notre Dame, the Eiffel Tower, the Louvre Museum's courtyard, Les Invalides, the final resting place of Napoleon, and the famed Champs-Elysees.
The pop-up event is so popular it has been picked up around the world, with Diner en Blanc events planned this year for the United States, Canada, Spain, Singapore, Mexico and even Rwanda.

Traditional new product launches a little passe? 
Given the competition for attention represented by this 25 year evolution of consumer engagement, it may partially explain the increasing expense and diminishing returns in attempting to persuade ‘our’ apathetic/savvy consumer to drop everything and rush to buy our brand in a Kings Cross supermarket…  
Perhaps a little less money, a little more creativity, and ideally unique, starting at home?
In fact, for something really different, why not make this a pop-up weekend, from the NamNews Team?

Walgreens-Boots - a new $100bn global customer?

With yesterday’s Stage1 purchase, Walgreens-Boots ($100bn) began a process that in three years will see them become a $130bn global player (prescription medicines, OTC and Beauty) with $100m savings on purchases in Year1.
In other words, plenty of time for suppliers to procrastinate on issues like prices and terms disparities…Wrong!

Given the high speed at which companies move in these circumstances (see their combined site which opened yesterday, and appears to have taken months of top secret preparation…) and the fact that Wall Street appear to think that Walgreens are paying over the odds for Alliance Boots (see yesterday’s drop in share price), suppliers would be wise to anticipate early pressures on prices to both companies ‘to prove it is a good deal’.

Action:
1. Check your US colleagues for your company sales to Walgreens, along with retail/wholesale margins, net margins on Walgreens business, credit periods and terms, plus pointers on trade funding and deductions…fast!

2. Check your UK and rest-of-world colleagues for your company sales to Alliance Boots, along with retail/wholesale margins, net margins on the AB business, credit periods and terms, plus pointers on trade funding and deductions…faster!

3. Quick ‘what-if’ on all of the above rising to the highest common set, the worst scenario for the business…even faster!

4. Map out key steps to harmonise prices & terms….already overdue!

5. Selling Prices to Walgreens and Alliance Boots: Run the following numbers for discounts of 1%, 2.5% and 5% on your best selling prices to each company
- Assume your total annual sales to Walgreens-Boots                 = £120m, ex. taxes
- Assume your Net Profit margin on Walgreens-Boots business   = 7%     = £8.4m
- Assume additional discount                                                    = 2.5%  = £3.0m
- New sales                                                                             = £117m
- Assume Costs, etc. remain the same                                      = 93% of £120m = £111.6m
- New net margin                                            = 4.6% i.e. 100-[(£111.6/117) x 100] = £5.4m
- Incremental sales to restore net profit  of £8.4m                     = £65m = £182m- £117m
                                                                                          i.e. (£8.4m/4.6) x 100 = £182m

6. Time to map out your Walgreens-Boots negotiation strategy, globally?