Increase customer results – manage volatility correctly

After the Corona crisis and the subsequent disruption of many supply chains have already had a massive impact on raw material prices and availability, political crises are now leading to further uncertainties. This also threatens to reduce earnings from agricultural products and the food industry. Permanent controlling and management of all sales and purchase contracts and inventories are therefore now more important than ever.

The special requirements in the agricultural and food industry

Prices and qualities of the raw materials required are often very volatile for companies in the agricultural and food industry. The availability of many raw material markets also fluctuates greatly. The raw materials needed for the production of the sales just negotiated often cannot be purchased directly. In order to reliably ensure delivery capability, inventories must be purchased when they are available.

As a result, the sales and material costs posted in a period often do not match in terms of costing. The raw materials used were not purchased directly for the orders delivered and converted. The cost of goods sold in a period can then deviate seriously from the calculation of sales. The effect can be all the greater the higher the cost of goods sold. And the remaining inventories are subsequently not those that were purchased for the open sales contracts. Quality and quantity may fit for the open sales contracts, but the inventories have been purchased and valued at different prices than calculated in the sales contracts.

This can result in uncertainties in the determination of earnings and the forecast of future earnings development. Often, standard controlling and standard valuation methods can no longer provide the transparency required for results-oriented sales and production management. However, the results that are (or can be) achieved with the various customers and products are also a central control variable in the agricultural and food industry. Therefore, the implementation of controlling and evaluation procedures – adapted to the business model – is necessary, which reliably and correctly inform about the earning power of customers and products.

Due to the volatility of the markets, current price and quality information must be taken into account for new offers and orders. Often, processes that support sales, purchasing and production in managing volatility are only established with a high level of manual effort. Digital processes that solve this task quickly and efficiently help to make better decisions.

Results-oriented sales need transparency and the right incentives

In order to create the necessary transparency, we set up a multi-level contribution margin calculation in the first step (with our customer).

One focus here was the allocation of raw material and manufacturing costs in line with the contract. Specifically, we assigned the raw material costs contracted for them and lot-size-dependent production costs to the sales at the customer level.

Profit contributions from recipe optimization by mixing the qualities and origins of the raw materials used, so that raw material costs could be reduced compared with the costing estimates, were subsequently determined and allocated to the customer and product segments of the contribution margin calculation.

Finally, the changes in the valuation of inventories and contracts resulting from price developments on the raw material markets have been included in the contribution margin calculation independently of customers. This is because customers are not responsible for price fluctuations on the commodity markets.

In order to manage the opportunities and risks arising from the volatility of the markets, we have established a controlling system for positions (long and short) with the company. Including all sales and purchase contracts, inventories and recipes in an individually programmed application, positions can be retrieved at any time. Availability, topicality and efficiency are ensured by the now completely digitalized process and the integration with the internally used merchandise management system as well as the connection to external data sources with the current market prices.

In the second step, which was already started in parallel with the development of the described controlling system, the changeover from a turnover-based to a DB-based commission remuneration of the sales staff was carried out. On the basis of the newly gained transparency, it was possible to reassess the attractiveness of customers from the food industry and the wholesale and retail trade. The sales force now had clear goals. Based on the price-sales strategy, they were able to increase the contribution margins for the company.

To improve the competent external appearance, the sales employees were equipped with tablets, which gave them access to all necessary customer and article data from controlling at any time. Together with online-on-site costing, with complete decision-making authority above a defined minimum contribution margin per order, sales efficiency was increased. Digital integration integrated and accelerated sales and purchasing processes, optimizing purchasing costs and improving gross profits.

The increase in results was achieved together with an improvement in service

  • Thanks to targeted sales work, the return on investment was improved from approx. 1% to approx. 5%. (the industry standard return in our customer’s market was most recently approx. 2.5%).
  • This was achieved by improving the customer portfolio.
  • The average customer size or the contribution margin per customer was increased significantly.
  • As a result of the price and sales strategy, unprofitable small customers in particular have left.
  • The freed-up capacities and easier controllability of purchasing and production have improved service for A and B accounts.
  • Improved delivery times, delivery reliability and quality have sustainably strengthened our customer’s earnings and market position.

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