Episode 13 Aug 27, 2020

How to Achieve Dynamic Formula Pricing

When it comes to the ability to set prices that are market-driven, rather than cost-driven, specialty chemicals manufacturers consistently rank among the lowest in B2B. Because of the unique amount of transparency and raw material cost-driven pricing structure, manufacturers in this sector are usually contractually obligated to take prices up and down in line with publicly available commodities indices. Further complicating things, historically the approach to building up to a price has been done by brute force – through spreadsheets, PDFs and tracking down contracts stored in multiple locations. Barrett Thompson and Mick Naughton discuss a better way, driven by data science, to automatically update component cost factors, recalculate formula prices and quickly deliver updated prices that follow contracted guidelines.

Featuring
Mick Naughton

Mick Naughton

Understanding all of the costs and where they allow you to set that price based on the agreement is critical. And you're talking about hundreds and thousands of different formulations across different customers. So, managing those in as close to real-time as possible, being as efficient as possible, that's just so critical in this industry.  
- Mick Naughton, Zilliant

Episode Transcript

Barrett Thompson: Hello everyone. My name is Barrett Thompson. I'm the General Manager of Commercial [00:01:00] Excellence at Zilliant. And I'll be your host for our podcast. I'm joined today by Mick Naughton. Mick is the Regional Sales Director in the Midwest for Zilliant, and we'll be discussing pricing in the specialty chemicals manufacturing industry. Welcome, Mick.

Mick Naughton: Hey Barrett. Glad to be here. Looking forward to the conversation.

Barrett Thompson: Mick, would you take a moment and introduce yourself to the audience to share a little bit about your experience working in this space and B2B and about your role?

Mick Naughton: Sure. My role at Zilliant is I'm the Regional Sales Director. I have responsibility for the companies from Chicago all the way out to the east coast and the Philadelphia region.

And that's actually a fairly new role for me. I spent the bulk of my career, about 20 years in industry; started in the specialty chemicals business, worked for a company that was a global sourcing organization, but it acted as an intermediary between overseas chemical producers and consumers here in the U.S. [00:02:00] and then spent about 15 years with a very large multinational distribution and manufacturing company that primarily served the pharmaceutical and production industry. So I have some pretty good exposure to the space. And I have some perspective on it.

Barrett Thompson: I appreciate you taking the time with us. I know it's going to be rich, so let's get right into it. Mick, I like to start first outside in. At the highest level - what is it that the pricing teams and specialty chem manufacturing are really after?

What are the goals, the fundamental goals, for people who have that pricing title in these organizations?

Mick Naughton: It's interesting. I got exposure to this really working for the company that did both distribution and manufacturing. And a lot of our pricing was focused on the distribution space around the typical things in that space.

What are the market dynamics? What's price elasticity? But I really got a real exposure to this back in the early to mid 2000s during the Acetonitrile [00:03:00] shortage that took place. And Acetonitrile is a byproduct of resin manufacturing, but it's used in production all over the place.

And there was this global shortage that took place. And it caused all sorts of cascading effects in terms of our pricing. A specialty chemical manufacturer is really trying to make sure that they're managing all of the underlying costs and all of the different elements that go into the end price that's been agreed upon by the customer.

These are highly contracted, highly formulaic prices that are driven and the underlying costs, and there are so many different components of those underlying costs, need to be managed and handled to make sure there's accuracy in terms of what the price that's being offered. And just making sure that you're in line with whatever those contractor agreements are. It's managing those costs, doing it quickly, doing it efficiently, keeping your hands on all those, and making sure that those formulas are online. [00:04:00]

Barrett Thompson: This sounds a little different than maybe what I hear a lot of B2Bs will say things like: “I want to go out and make some more margin, give me a hundred basis points, 150 basis points” in the sense that they're taking pure price gains or they're finding a way to capitalize on pure price increases in the market. But this feels a little different.

It feels like you started from a cost-side about wanting to make sure that you get your cost pass through, or is it more responsive than going out and trying to figure out what's inside the head of the buyer, for example?

Mick Naughton: Yeah, absolutely. If you look at the agreements and how they're built inside of this space, a lot of them are calling out things like crude oil indices, and they might be calling out producer price indices from the bureau of labor and statistics. Or they cite the ICIS, which is the Independent Commodity Intelligence Service. They have all of these different indices and information sources built in and they really do.

They build up the [00:05:00] product price and that is a formulation that might be very specific to that customer. And part of what happens is you might be doing a specialty chemical that has one component of that formula is hugely driven by crude oil or some sort of underlying indices, but another formulation might not have as much.

Understanding all of those cost bases and where they allow you to set that price based on the agreement is critical. And you're talking about hundreds and thousands of different formulations across different customers. So, managing those in is close to real-time as possible, being as efficient as possible, that's just so critical in this industry.

Barrett Thompson: I ran into a situation recently where a customer, the B2B manufacturer, described that there were at least a half a dozen different indices that might be used to track the same raw material, the same commoditize input. A part of their agreement with each of their end customers was: “Which [00:06:00] index are you going to be compared to?”

Which one will? And it was actually the customer's choice. Right? The customer said: “I want my price to track with this named index.” Okay? That was something they got to choose. You mentioned the product formulation itself. There’s a chemical decision that's made about how much of that raw ingredient is going into a particular product that the customer is buying.

What about the frequency? The index might change every day. I'm sure the B2B is not changing the price every day. But what are some of the cadences and limitations that they have on how often they're updating that price to match the change in the index?

Mick Naughton: It can change from agreement to agreement.

And some of that is how the sales rep is negotiating, his understanding of that market. Some of what we’ve seen has been interesting as you're measuring those indices, is determining that you're allowed a quarterly change, or a monthly change.

You also have to agree on the baseline of the [00:07:00] moving average. So where was the starting point? Where's the finishing point of that indice? What's the moving average over that? We're not only citing the indices that 're being used, but you also have to come to an agreement with regards to what's the math behind measuring the change that can be put in? That could include prices going down.

You can have prices going up, but you can also have pricings going down.

Barrett Thompson: Let's highlight that right there for a moment. Prices moving down. I think this is one of the least appreciate aspects of a mature price program. Not all price motion is up until the right over time. And even in businesses that don't have these dynamics here, we'll occasionally hear something like: “Yes, I'll take a price down when I have to match a competitor to get a win.” But what you're describing here is a systematic contractual obligation to take prices down as well as take them up because the index [00:08:00] can go down as well as go up. Is that amount of symmetry really there? I'm imagining fairly symmetric as many prices moving down as could be moving up over time, depending on how the index is adjusting.

Mick Naughton: Obviously people try to put things in place that hopefully don't show prices going down. And there are usually some elements to the contract that won't allow that to happen in mass amounts. You'll see it. particularly in this latest environment we're dealing with where you've seen crude oil prices go down to such a degree that, folks are in fact invoking those clauses to talk about price reductions. And they do have to do it. And I've seen subsequently on the other side, the Acetonitrile example was a great one where you see price indices going in such a direction that force majeure clauses get called in. In the COVID environment, part of what we've seen is we've seen a reduction in crude, which could be one component. But then, out of China [00:09:00] where a lot of this manufacturing is taking place, particularly on Petro, you're seeing you have a demand curve going down as far as the need for the end product.

But then you're also seeing workers not available. Right? If you have folks that are sick and they're out and you have a labor shortage, it becomes impossible to even produce. So even though maybe there's a raw material cost going down, you might have a labor component that's built into that.

And if you can't meet production needs, that can have an impact on pricing, too. So, yeah, it's very dynamic. There's a lot of components that can make it up and, historically, the approach to managing that has been brute force. Right? It's spreadsheets and it's PDF docs and it's agreements that may be kept in multiple locations, and pulling all that together, that orchestration is challenging and it takes a lot.

Barrett Thompson: Yeah, it really is. Just before we move into that, I want to pick up on this idea that you mentioned there at the end. Beyond the raw materials in the product, [00:10:00] there might be something like labor. This makes me think - could we also imagine energy costs, tariffs, other sorts of things that definitely affect the cost to manufacture the product, but they're not necessarily what you would call a raw material?

Is it common enough to find that those are also written into the formula for how prices can be updated through the life of the contract?

Mick Naughton: Sure. Even things like, probably the biggest one that people will point to is, and you've talked about tariffs, but freight: How does the freight costs get built then?

And then, interestingly enough, a freight cost is also driven by raw material costs, but it might be disconnected specifically from a creator. You're probably not started just sending your freight prices based on the crude oil prices, but it does have an impact on it. So, freight can be built into there and your ability to recover freight can also be driven by freight indices. And in which direction those things can go.

Barrett Thompson: I've heard several businesses in this space. They've just had to admit it. They said: “Look, our customer, who's the buyer, [00:11:00] are pretty wise to what's happening.’ They have visibility to these very same indices. Right?

They can call me in the middle of the week and say: “The index just took a change and I've got an order that's coming at the end of this week. How are you going to affect my price in particular?” They're quick to pick up the phone if the index is going down. What I've learned is that the buyers have high visibility, high awareness of the indices that they know are driving the manufacturer's cost and they're going to be watching carefully to see that the manufacturer is responding to that cost change in particular, when it's moving in a way that would take the price favorable to the buyer. That also means they're aware when it's going the other direction.

And I think that's a difference, too, in this particular industry, there's such a transparency to information that the buyer has.

Mick Naughton: There was a recent study that Bain had done, not that long ago, that talks in [00:12:00] terms of different industries. It's things like consumer products and retail, healthcare, financial services. And the ability to raise prices or set prices that would be more market-driven versus cost-driven. Specialty chemicals are the lowest. They have the lowest, what they feel in terms of their own opinion, opportunity to set and adjust prices, relative to market dynamics because of exactly what you described - that transparency inside of the industry and everybody is understanding that these are largely raw material costs.

Barrett Thompson: Yeah. There's so little opportunity to exploit a buyer’s lack of awareness or inefficiency in the market, lack of knowledge in the market. Right?

There's just too much out there. It's too easy. It's a Google search away. And they might even have a ticker running on your desktop: “Tell me what the index is doing” for some material that I'm [00:13:00] buying from my manufacturer.

Mick Naughton: So you see it in every place. You know what I mean?

It's interesting. Because the formula-driven and the cost-driven pricing is still, I think, very prevalent. You've seen some work in the other direction where you're seeing folks talk about value-based pricing and there's certainly opportunity there. And that's a function oftentimes of maybe potentially innovation or, higher where your product might affect downstream processes better. But the closer you get to stuff that's still on the commoditized side of the world or has the formulation of the specialty chemical is pretty well understood. You're still going to go back to those cost drivers.

And then the name of the game really becomes: “How do I respond to them? How do I take all of these desperate systems and put them together and react efficiently? And is there an opportunity to automate instead of just brute force? And I think that's what you and I have certainly seen and heard from folks.

Barrett Thompson: Yes. So, let's explore [00:14:00] that now. So, we understand the dynamics of the industry. We understand, if you will, the objective: “I want to get my prices quickly and accurately sync-ed up to the underlying raw commodity changes and other changes and input costs. What do you see as the most common way that people are going about it?

Maybe, paint a picture for us; whether it's an individual example, or an aggregate example, across many different customers that you've seen in this space. What is it that people are doing? And how is that working out?

Mick Naughton: People are doing it. Right? The industry exists and prices do go out.

Barrett Thompson: Product is shipped. Invoices are cut.

Mick Naughton: Things are getting done. I would point to it as brute force. I know in some of the contracts that we made; I had a whole team of folks that did pricing. But I was oftentimes, at a director level, responsible on a quarterly basis, to go out and hand-pull indices and do the calculations and pull these things together [00:15:00] and then have to present them back into a format to the customer oftentimes, and maybe the form of a price notification letter or, whatever it was.

But the short answer was manual. Right? Excel spreadsheets. You go back into the contract, and you go: “Okay, let's read this contract again. What does it stipulate? What are the, what are the indices? What are the mathematical formulas that we agreed to? What's the notification period that I have to adhere to?” All of those things were done pretty much, manually.

And you oftentimes will build out an SOP. Right? You draw that up. And if I vacated the role of price manager or price director, I'd have to make sure that document SOP for that specific chemical, for that specific customer, was passed down like a journal that says: “Okay, every quarter you’ve got to do this job, and this is how you do it.”

There wasn't a lot of automation. And many different companies certainly do it differently in their backend systems; trying, but it always felt like there was an opportunity to do it [00:16:00] faster, smarter, and better.

Barrett Thompson: And are we talking about thousands of customers potentially affected each quarter, given the various raw materials that are changing?

Mick Naughton: Potentially. Yeah. I would say it's a decent number of customers. But again, you might be talking about several hundred different chemicals - understanding that some things are coming online, and some things are coming offline and the formulations might change.

Even if the customer account and the product count wasn't gigantic, it wasn't also necessarily static. And you were updating agreements and trying to give guidance to the sales team in terms of: “Hey listen, the last time you structured this contract and you put together this formula, this is how you did it. And it wasn't a great way to do it. So maybe we can work together.” …a lot of spinning plates.

Barrett Thompson: I'm going to keep following that chain. Because some of these things that you're describing sound hauntingly familiar with many industries where they will tell us just the effort that it takes.

Let me go back. You mentioned that we're putting [00:17:00] manual effort, putting humans against the problem. And that always takes calendar time to execute. Great people can only work so fast, and you only have so many of them. So, it takes time. It can take weeks in a quarterly process to get a cost change effectively pass through.

And if you will, therein lies the opportunity. All that product that you ship for six weeks while you're charging last quarter's price because you haven't been able to do all the math yet and get the new cost pass through. That's the erosion that you might be experiencing, for example, depending on which way things were moving.

When I think through that, what are some of the other steps that present a challenge? Are there situations where, for instance, anyone outside of the pricing team needs to review what that price change is going to be, even though it matches the formulas in the contract? Are there ever other sets of eyes that need to look on it and how has that happened?

And then you mentioned the notification letters to customers. Is that another manual process tacked onto the end of [00:18:00] the calculation manual process? Or is there some easy way to get that communicated up and out? Any more light you can shed on that?

Mick Naughton: Yeah, sure. Obviously at the end of the day, while the pricing team might be there to manage those price updates and put them in, you still have a relationship between the sales rep and potentially a sales VP.

You might have the finance folks that are in place. So yeah, depending on the size of the organization, you might have to have that notification period where you let them know that a price increase is going through. You then have to send that price increase. But before you even put that out there, you might need to route that for approval. You might need to route that just to understand how it impacts the financials and the forecasting that's going on.

To have that ability, even in more of a real-time, instantaneous scenario, if a finance person reached out and said: “Hey, we've got this large contract. We anticipate they're going to buy 400 tons of whatever chemical. What are the indices doing? Could you give me some outlook on what does the margin going to look like as a function of our raw material costs? Even if you need [00:19:00] to do that in real-time and communicate that to finance, that's challenging, in and of itself. If you have to stop everything and do those calculations and then help build that forecast that, in and of itself, aside from the fact that you're just trying to get the job done when it needs to get done, is super challenging.

Barrett Thompson: Yeah. That's a great consideration. One that brings in yet another party; not just the seller and the buyer, if you will, but finance watching over it all. So, I'm imagining now that, let's say you've sat down to do the quarterly exercise. You pulled the index. You figured out which customers are buying a product that's subject to that particular material changing cost.

You were able to pull up the BOMs and do the calculation to determine how each product's cost is changing, because it's not the same for each product. They have different amounts of that raw material, let's say. Then you double-check that the window was open: “I didn't already give this customer [00:20:00] that change.”

We know within the last X days, or maybe I've got a cap on how much I can change cumulatively across the whole year or something, so you'd check all those T's and C's, you've gone through and approval, if an as needed, you've shared with the customer. Maybe that was easy, or you had to generate some document to share with them.

Now you're ready to make it so. How do the prices get back into the ERP or invoicing system - those new prices that resulted at the very end of that step? What does that look like?

Mick Naughton: A lot of times, you're talking about manual entry. You're going in the backend system, having to update those underlying cost factors, in particular, in the production system. You might have to be going in and manipulating those knobs and should making those changes. Yeah. Those are not necessarily being done automatically. You're doing the calculations. You're checking them. You're checking them twice, probably with another set of eyes.

And then simultaneously, you're also going in and doing those updates back into your backend system often, [00:21:00] just through manual data entry. And again, those are just the man-hours to get it done.

Barrett Thompson: That makes me shudder just a little bit, Mick. I think we all have an innate understanding that when those prices are being keyed in again, manually, there's an error rate. And the error rate might not be particularly large, but when it happens, and then you multiply that times a price per unit change or price per pound or price per gallon, and you transpose two numbers.

Instead of $2.31, it’s $2.13. Right? You give up some pennies, all those pennies you fought so hard for. They may, in fact, I had a customer recently who was in a different industry, but it was a powerful stat. They went to finance, and they said: “How many times last year did customers say to us: Hey, you overcharged me/” We had to give a little money back because, in fact, we had overcharged, and they knew what the source of the overcharging was. The accidental overcharging occurs because they, too, had a manual system for [00:22:00] entering customer agreement prices into the ERP. And when they did that, they sometimes made mistakes.

And when they made a mistake and they charged the customer too much, the customer immediately said: “That's the wrong price!” They came back and told them how much it was. And they gave back around $12 million in a year. This was on a multi-billion-dollar business. They gave back 12 million. They immediately and correctly, in my mind, hypothesized that when we make a data entry error, we could be overcharging just as likely as we are undercharging. Of course, the customers only come and tell us when we overcharged. And they did. And we realized it was a $12 million mistake. And by symmetry, they reasoned that they were also undercharging just as many line items as they were overcharging through the error function of manual entry and that it was likely worth $12 million, but the customers were keeping their mouth closed.

I think that's legitimate reasoning, actually. And it just puts a scope on it that I think escapes a lot of folks. We know that no manual data entry [00:23:00] process will be perfect all the time. We usually don't let that keep us up at night. But I think we often don't realize how impactful that can be to bottom line performance, particularly in industries where margins are tight to begin with.

And then you're talking about 2, 3, 4, 5 points that can be easily upset just by transposing a number or fat-fingering something when you keyed it in.

Mick Naughton: Two things that I've seen and have to be done are because of some of those processes and the complexity around it.

First. Around the price team, you put an ongoing audit function. So that's more people doing more oversight, not necessarily doing “value-added work” and trying to create new deals or pricing new products. They have an entire audit function that's just always perpetually testing your processes.

And then the other side of that is from a finance perspective. Understanding that's there, you [00:24:00] have to put accruals in place. Right? Accrued monies are put aside, knowing that there is a very real potential that there's going to be an audit by the customer down the line that might reveal that. And you if you don't have that money accrued, you're potentially, materially impacting financial statements, which, from a particularly, for a public company is a huge deal. So yeah, there's all sorts of implications for those.

Barrett Thompson: There are two ways that we've uncovered just in the few minutes we've been chatting. One is, if you're late, look the length of time, the number of weeks into the quarter, that it may take you to get your pricing trued up to the new cost; that could be a source of erosion and profit loss as you take time to do that. And then errors made when you enter those. Even when you're done. Let's say you did your calculation correctly. Now that I think about it, you could do your calc incorrectly and then enter it verbatim into the ERP.

And that would still show up as a price [00:25:00] mistake to the customer. Or you do your calc perfectly, but then key it in improperly into the ERP. And that would also show up as a mistake. So, being late cost you something. Having the wrong value cost you something. Those are hard dollar costs, accrual dollar costs. I can imagine their customer relationship costs. When is a customer most irate when they're picking up that phone to say: “What do you think you're doing? You're overcharged me, you dirty rat!” They're maybe incited by it.

Mick Naughton: There is a whole ecosystem of companies whose whole job is to just audit these types of agreements. And generally, they make their fee as a function of how much they uncover.

So, they'll literally audit agreements and audit things like these indices and the price changes and the timing and all those things. And part of the way they make their money is they say: “Hey, we'll take 20% of whatever we uncover. Give it back to us.”

Barrett Thompson: They work for the buyer? Is that what you're saying? Oh, that’s lovely.

Mick Naughton: And then they go through the buyer, and they dig into the [00:26:00] agreements and they pull transaction history and map it back and they find these errors and they uncover them.

And then they say: “Okay, we found $3 million worth of errors and all we're asking is 20% of that.”

Barrett Thompson: You think? So, manufacturers are really at a disadvantage. They're never going to be able to put as many people for the contingency, like an attorney working on contingency. Right? On the buyer's side.

They're willing to put the labor at no cost to the buyer, because if they find something, they're going to divide the spoils. And that means that the buyers out there can basically get this audit function for free. They don't have to go out of pocket to pay for it. There's no way the manufacturer can match that.

Not on the audit side, they're going to have to do something.

Mick Naughton: Focused on manufacturing. They're always going to put the resources around investment in equipment and investment people, investment, new locations. Yeah, so this pricing and this function of pricing and automation is offered again.

It's [00:27:00] usually people just trying to keep up.

Barrett Thompson: I hear you. A couple of more ideas I want to explore. And I love where this conversation is going. Because we are in a COVID world right now, I just wanted to get your take on whether COVID itself has brought any kind of change to these dynamics that we've been talking about. Are we seeing costs change more frequently? or are they changing by a greater amount? Or is it really kind of the same - sort of status quo materials move around independent from these impacts?

Mick Naughton: I think part of what you're seeing, and we talked about this a little earlier, is you have some what seemed like conflicting drivers where you've got low crude oil costs. But then, you've got also low demand and low supply of labor.

I think part of what we're also saying, and I think as folks are forecasting out, is just even where and how things are being manufactured. I think we've seen the changes that are driven by the demand and production going down. But I think [00:28:00] probably what you're going to start to anticipate is, companies are going to start really taking a very close look at - Where are these things manufactured? And where are their feedstocks coming from?

Yeah, I think we've seen some changes in the pricing. But I think what I would expect is: Where does it go in two to five years from now, as people really start to consider what the impact of something like this did? And can they move things to things, more regionally / locally, versus overseas?

Barrett Thompson: All right. There may be some deep structural changes, I think is what I hear you saying. One theme that has become accelerated for many vertical industries in the last three to six months is getting themselves up on e-commerce systems. Now, I don't know any B2B that hasn't been interested and that doesn't have an initiative, honestly, going back into 2019 or even sooner.

I think there's a lot to it for a whole lot of reasons. But [00:29:00] as a result of change in B2B practices, can I take a regional sales rep, put them on the road, send them into the customer's office to meet them, shake their hand this month, talk about their portfolio, talk about what's happening with them and how's the product working out for you?

And so on. They're not able to do these things. Even if they went, customers are likely not to be there or not wanting to meet with. And so, I hear a lot of businesses talking about the newly emerging importance of e-commerce and their business for the short medium term. From your perspective, is that happening in this space of specialty chem manufacturing. Can it happen? And what is the intersection between? If so, what's the intersection between e-commerce and formula pricing?

Mick Naughton: I think, for the last few years, the big drive in B2B and e-commerce has been largely experiential. Right? How can we create a more B2C-type experiential environment inside of [00:30:00] e-commerce? Where I think you're seeing things move and when we're talking about things, whether it's automated deal negotiation, or just real-time automation around price changes for something like specialty chemical, where you're not necessarily looking for a experiential change, but you do want to have that confidence level that, if you went into a specialty chemical manufacturers e-commerce site, you could put in a request, and have it be driven by these underlying cost drivers. You can have automated deal negotiation that you could have contractual pricing being pulled up. And understanding that contractual price might fluctuate as a function of some of these raw material costs.

That wasn't necessarily something because of maybe just the speed of data processing, the ability to automate calculating indices, and pulling these things in. That was tough to get to. And we're now moving into an era with, as much of this automated backend as possible, where you could get to that; [00:31:00] where e-commerce becomes more of a reality in an industry like specialty chemicals, versus a large distribution where it's really just more about access to the variety of products and just making sure your contract pricing was in there. This one has some more nuance to it. So yeah, there's some opportunity. And I think you'll see again, just with the environment, and having folks that are not necessarily face-to-face, being able to do that inside of an e-commerce site.

And I think it's going to be where things are going.

Barrett Thompson: If you look at the industry today and you think about the typical commodity, specialty chemicals manufacturer, either one. How would you rate them in terms of the ability for a customer to take a purchase journey all on their own? Can they go on the web? Can they pick their custom product with a special formulation? Can they see their price coming out of all of the things they agreed to in their contract? Then push the submit button and get an order flowing? Or do they still have to involve people along the way? [00:32:00]

Mick Naughton: I can't speak to the entire industry.

I haven't seen that. I have not seen it move all the way through that direction. There's quite a bit that goes into it. You still have engineering folks in the mix. You still have chemists. But I think you can get closer there. And I think the more automation that gets built into this, the more these underlying factors can be automated and calculated the closer you'll get to that.

But I don't think we're there at this point. But again, I can't speak to the entire industry. I'd have to do my research to see if there's somebody out there that's really cracked that code. They haven't seen it yet.

Barrett Thompson: And I would draw the line between quoting a new product a new composition, that has not been purchased for.

I was thinking about the thing that I already have on my contract that I buy all the time. The formulations well-known, but is there any distinction there, if it's something that I'm routinely buying, but I just need to place the order. Can I come and place the order through the online mechanism?

Mick Naughton: Yeah, absolutely.

I [00:33:00] think there are some deals, some customer producers that do have that, where you have your preexisting contractual products loaded in there. Agreed prices. Again, I think where I don't know on the back end of that, if, in fact, is there automation taking place tied to these contracts where the price might change?

Maybe it's an existing formulation. And you can get in there and place your order. If something's going to change or if, depending on the frequency with which it can change, I don't know that there's anything that's doing that in real-time. I think it's probably pretty fundamental. Yeah. You've got product, the agreed upon price, and maybe that price has held for a quarter, and you go: “Great. We can go in there and do that.” If that price is going to get updated and be reflected in the new system, it's still going to require people behind the scenes flicking levers and turning dials and getting updates to the end client to let them know that's done. And then maybe they even load those notification letters into the [00:34:00] portal that shows you notification letter.

Some of that does go on. I certainly don't think that's an automated process yet.

Barrett Thompson: Okay. The last area I want to explore with you today is - let's continue to re-imagine. What might excellence look like given all that we've described; the dynamics, the mechanics, the changes in the index, the complexities, the tools that people are using today. We've discussed them.

We've talked about some of their weaknesses. We've characterized the cost of operating that way. We've recognized people are doing the best they can by putting their human resources against it. But it's not enough. Mick, outline for us what you think ‘better’ looks like?

Mick Naughton: I'll go on a triangular; from the seller out in the field, to the pricing person behind the scenes, to the interface with the customer - e-commerce. If you've got a seller on a mobile device or on a tablet that is [00:35:00] able, face-to-face selling is going to continue to take place, but in real-time, could they be building and creating a price for a customer that anticipated? What are the indices at now? Is there a forecast to where they're going?

Could you have a much smarter tool for our sellers to use when developing a price that would account for where things are going and taking that into account and looking potentially at the market dynamics? As a pricing team, is there anything that, out there that is automating all of these moving cost changes that accounts for every agreement and every slice and flavor of product that's out there?

And just automates that process so much better and just reduces the amount of human error, reduces the amount of manual work that goes into it and just automates that process? And then lastly, do you have an interface where a customer can go in and an e-commerce suite and, whether it's build a new [00:36:00] formulation, or access an existing contract, and they can also understand what are the underlying cost drivers?

Maybe they say: “This is my price today. And based on trends, I can actually expect this might be where my price is tomorrow.” And that's a whole customer experience change w here they're using this specialty chemical in their process. If they can get some visibility to what they think the pricing might be down the line in the future, that allows them to better plan and their production, and the cost underlying, what might be their end product.

I think there's so much opportunity to pull in technology to pull these things three things together to give everybody better visibility and just to improve the entire experience. There's just so much opportunity inside the space to do that.

Barrett Thompson: One of the key enablers I hear you describing there is, and it sounds very mechanical. Right? It almost, in some ways, sounds mundane. But it feels essential. And that would be to get those [00:37:00] agreements, the index you've agreed to track, and the math - we can take the first day of the month, last day of the month or a weighted average for the index within that month - all of those ideas, the formula will get them out of that PDF file that you had to go look up in order to do a one-time every quarter calculation for that customer.

Get that into some formalized agreements database. I run into this in more than a few places where there's no workable quarriable database of what actually has been agreed to for each customer. The key to opening up that automation that you were talking about, feels to me like you're going to have to bring that information into an environment where it's data, and not images on a paper. It's not scattered. Someone might say: “I already have it electronically. It's in Excel.” And you ask: ‘How many such [00:38:00] spreadsheets do you have?” “35,000.” “How many different formats are there for those?” “As many as there are sales reps in the organization.” …something like that.

To put that into a way that you can then, because when you mentioned, I think it was a great idea too, like if I wanted to automatically calculate which customers are impacted and how much impact do they receive in price given a cost change. The automatic I think is a loaded term there. If I can see how that's done, if I've got all of my customer agreement data, and all the calculations in the index indices they're tracking to, and my windows of opportunity to change them - if all that's in a data structure that I can understand and parse and, in a database, then I can go figure out who are the targets and where are you today?

And what is this new input value? Do the calculation and roll it out. If I don't, then I'm going to be doing it one at a time, manually. Which is pretty much the way they're going about it today. So not a lot of change there if you don't make that primary investment. [00:39:00]

Mick Naughton: Absolutely. There's very smart analysts and folks with great industry background in some of these roles that spend a lot of time crunching numbers and just keeping up with the volume of work that needs to get done. If you could unleash those people, forward-thinking activities and forecasting and digging into the existing customer base and then where else there is an opportunity. Yeah. There's a lot of people doing a lot of work that technology could do. And you could really just tap into all of that potential to just chase new business, optimize the existing business, maybe have a little bit more time to find some more confidence to be able to pass along price in a way that's maybe not so formula driven. You could actually really delve into new areas if you untap that potential and just allowed the technology to do that heavy lifting them.

Barrett Thompson: Mick, That's a great vision. It doesn't surprise me, because this has been a great conversation today. I really appreciate you taking the time to [00:40:00] share your thoughts with us. You've given us a lot to consider as we strive to improve our pricing practices.

So, thanks for sharing.

Mick Naughton: Thanks, Barrett. I really enjoyed it

Barrett Thompson: I want to thank each of our podcasts listeners for being with us. We're committed to your success. And may I suggest that you check the program info associated with this podcast? Look in the description to find a link to a recent white paper titled “Dynamic formula pricing in specialty chemicals manufacturing.”

We'd love to share that paper with you. It's got more information on our topic today. This concludes our podcast. Until next time, have a great day.

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