Profit improvement Plans, commonly referred to as PIPs, are a key feature of any procurement team with an eye on maintaining margins. Where the common constant is to reduce costs and drive efficiencies against inflationary headwinds, a tide of competitive threats and the expectation of new technology.
Whilst developing a product specification is important, managing, adjusting and refining it to remain competitive is essential. This can require identifying a new source or a different specification of materials (Bill of Materials) in order to make savings, which in turn can enhance profits and boost margins. These changes can be as simple as selecting an alternative cut - using a smaller prawn or downgrading the thickness of a plastic rim or tray to use less material. Or more complex changes, such as changing pack design or delivery format - instead of taking cream in 20 litre buckets, taking it in bulk tanks.
When developing their PIP category buyers need to focus on identifying actions that will generate cost savings. These actions are based on the following checklist.
Profit Improvement Plan Checklist
- Competition: The cost for ingredients and products can often vary significantly between different suppliers which may help reduce prices. Being able to combine and integrate data from external sources with internal supplier data to analyse costs all in one place enables procurement professionals to make data-driven comparisons that support price negotiations.
- Aggregation: The bulk ordering of materials from a supplier helps dilute their overheads apportionment and as such helps to reduce their costs and lower prices. Market trend analysis helps buys understanding where market prices are and to identify the best times to buy. Negotiating prices and placing orders when prices are low can help lock in savings and provide a competitive advantage compared with those not following the market.
- Optimise the specification: Re-specification of materials - like using smaller prawns, or thinner film – helps sustain product price and maintain margins. This can be achieved by constantly comparing market price trends for current ingredients with lower cost alternatives or substitutes.
- Cost Driver based Savings: Comparing supplier prices to market prices using cost models that breakdown finished product costs helps identify where costs are increasing as well as reducing to inform changes in specification. For example:
- Input raw material costs (like prawns above)
- Packaging format or size (using bigger boxes, or plastic sacks etc)
- Distribution cost - if I order 10 pallets it’s £300, but 1 pallet is £100, so I make savings per pallet
- Labour savings - if I don’t need 10 people inspecting h product I may be able to take the benefit.
- Yield savings - If it’s OK to use by product, then yield increases and costs are reduced.
- Spend Analysis: Helps identify area for costs reduction, by carrying out analysis into how where and how spend varies across the organisation. This includes making comparisons between raw material purchases (using the PPV) across separate suppliers, by analysing the inputs into separate products and performance benchmarking the purchase profile of individual category buyers. Spend analysis can help to pin-point any variance and help to identify opportunities to introduce efficiency improvements that reduce costs. Using Should Cost Models can help identify where individual food ingredient or associated commodity volatility is driving increased product costs.