How to protect and grow margins in a disrupted environment

For good reason, inflation and global supply chain issues have dominated the corporate agenda in recent months. Yet while CEOs currently face many challenges, they also have several available levers to protect and even grow their margins.

We believe that to survive and emerge strengthened, collaboration among operations and commercial functions is more important than ever. Our Approach to Integrated Margin Management offers a framework from which the C-suite can align teams and decision-making to optimize long-term outcomes for all areas of the business.

 A new management approach for unparalleled disruption 

While companies have dealt with inflationary periods and economic shocks before, many now face simultaneous supply and demand disruption. CEOs are discovering that traditional assumptions and many of the old ways of working are no longer valid in the current environment. Some companies must now rethink certain fundamentals in the context of merging customer and supply chain perspectives. Despite the challenges, some companies have found new approaches to outperform margin and growth by using a mix of operational and commercial levers to overcome inflationary and supply chain pressures (Figure 1).

To be successful in the current environment, companies must combine the traditional realms of operations and commercial using an Integrated Margin Management (IMM) framework (Figure 2). This framework incorporates a suite of commercial and operational levers in a manner that is co-owned by both across pricing, portfolio, promotion, and profitability.

There are differences in how winners and losers approach these levers. For example, (Collaboration lever #2) we are seeing companies continue to promote items for which they fail to rebuild inventory levels after the promotion. This often occurs because commercial teams have failed to adapt to a new environment where inventory is scarce, and shocks are more frequent. 

Some companies may use the disruption as justification to redesign their portfolios (collaboration lever #4). However, to make the best commercial decisions on the portfolio, they need deep insight from operations about supply constraints and production patterns (short term and long term), combined with profitability and pricing intelligence. Only then can the SKU-rationalization decisions lead to well-informed outcomes. For example, when Coca-Cola Company slashed its portfolio in half in response to the pandemic, it nearly doubled its margins, in a move that was clearly designed to sacrifice overall volume in favor of high-quality revenue.[1] 

Other companies may make uninformed allocation decisions (Collaboration lever #6) because they lack deep insight into true customer-product profitability. As a result, they struggle to coordinate on priority accounts and can’t always identify the most optimal solutions when there are constraints.

Conversely, a ‘winning’ company with great oversight of the current issues and big picture may do things differently when faced with supply constraints - rather than automatically default to serving the biggest mass customers, they may find the best long-term decision is to overserve the smaller but more strategic accounts they are trying to grow. These complex and not-so-obvious decisions often require coordination and CEO oversight of all moving parts and implications.

Looking for opportunities

Organizations that use the IMM framework will likely find several opportunities in the disruption. We have developed a checklist of top questions that every CEO should ask themselves and their leadership:

1. Are you aggressively prioritizing the right product configurations based upon strategic goals, margin, or throughput needs?
2. What portfolio changes (such as product sunsets or pack-size adjustments) may be needed to protect the overall margin?
3. Are you taking the opportunity to redesign the portfolio in the current environment?
4. How are you positioning your products as ‘best in category’ and mobilizing sales teams to successfully secure price rises and sell-in products you can supply?
5. Do existing processes and organization design enable strong and fast collaboration between operational, commercial, and strategic functions to make winning decisions?
6. Did the disruption expose gaps in the richness of data and intelligence, systems, and analytical capabilities for which upgrades are needed?

 Addressing disruption with collaboration 

Never before have operational and commercial levers been so intertwined and critical to an organization’s success. While companies are now facing inflation and supply and demand challenges, there is an opportunity to adapt and emerge stronger.

Making the most of this will require breaking down traditional territories and using analysis driven insights to support the changes. Finally, they’ll need a strong sense of longer-term trends and a sense of conviction to know which changes should be temporary and which may be permanent.

[1] https://www.businessinsider.com/coca-cola-cancel-drinks-brands-half-portfolio-earnings-financial-results-2020-10