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What is a Profit Improvement Plan?

WHAT is it: 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.

HOW it works: 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.

  1. 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 analvze costs all in one place enables procurement professionals to make data-driven comparisons that support price negotiations.

  2. Aggregation: The bulk ordering of materials from a supplier helps dilute their overheads apportionment and as such helos to reduce their costs and lower prices. Market trend analysis helps buys understanding where market prices are and 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

  3. Optimize 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.

  4. Cost Driver-based Savings: Comparing supplier prices to market prices using cost models that break down finished product costs helps identify where costs are increasing as well as reducing to inform changes in specification.

  5. Spend Analysis: Helps identify areas for costs reduction, by carrying out an analysis into how where and how to spend varies across the organization.

WHY execute the process: A significant benefit of a PIP is the fact that all employees are aware of the cost-benefit of their investments and the profitability of their sales decisions. This focus on the profit equation keeps the company sharp and the employees in a learning mode. Employees learn that they are part of the profit solution rather than worrying constantly about what others are going to do to their jobs (i.e. layoffs and cutbacks).

BENEFIT/OUTCOME: A Profit Improvement Process (PIP) engages the collective intellectual capital of the company to identify and harvest opportunities for profit improvement in all three areas of the profit equation: expense, loss, and revenue.

This balance moves profit improvement far beyond traditional cost reduction efforts both in terms of profit results and the impact on personnel.

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