THE PERFECT PROFIT
Profit-optimization tools now look at the entire value chain.
By Alix Nyberg

Just 18 months ago, Ford Motor was pleased with its rst foray into prot-optimization software. By working demand-related data into its pricing (which options buyers wanted most, for example), it designed incentive programs that yielded impressive prot-per-vehicle gures.

But profits still proved elusive last year. Ford lost almost US$700 million in the third quarter of 2001, after a gain of US$888 million in the same quarter the year before. If profits are to rebound, more than the right combination of cup holders and stereos may be needed.

Companies across all industries are taking a broader look at the factors that influence profits. At Ford, that means the software that serves as its "pricing engine" doesn't just analyze the impact of different incentive programs; it also links to production planning, distribution, marketing and even financing databases. "We're pulling together all of the areas that touch revenue so that we can be more sophisticated about when to scale back production, when to work overtime, and when to change pricing and promotions," says Lloyd Hansen, vice-president of revenue management at Ford.

A small but growing number of companies are following Ford's example. US-based Fairchild Semiconductor, for example, launched an initiative that synthesizes data from both internal and external sources so that it can reprice 50,000 products as often as once a week, and adjust production accordingly.

While Ford and Fairchild's nascent efforts have yet to yield quantifiable results, research suggests there is much to be gained. AMR Research studied 35 companies that used a variety of "profit-optimizer" tools and found that they added as much as 6 percent to the bottom line within a year.

But Forrester analyst Stacie Kilgore estimates that only 1 to 5 percent of companies other than hotels and airlines use profit-optimizers. One reason is that success requires investing in lots of software. Much of the data needed for optimum pricing resides in enterprise-wide systems, but Kilgore cautions that "vendors like SAP and Oracle can't easily manage prices across channels." Nor can supply-chain management systems translate capacity-planning into prices.

Customer relationship management applications, she adds, "are blind to changes in customer spending patterns." Many of these companies have profit-optimization applications in the works, but availability is likely to be several quarters away.

Alix Nyberg is a staff writer for CFO in the US, CFO Asia's sister publication.