Chapter 5. Transforming Pricing Management in a Chemical Supplier

Six Sigma is often assumed to be the prerogative of black belts, quality engineers, or continuous improvement professionals working in manufacturing environments where the culture and approach are amenable to the rigor and discipline of statistically based data analysis. This case study illustrates how Visual Six Sigma may be successfully applied in the world of sales and marketing, a world conventionally seen as being driven more by art and intuition than by data analysis and science. Specifically, we will see how Visual Six Sigma is used to drive a new way of conceptualizing and managing the pricing process of a multinational chemicals supplier.

Polymat Ltd., a manufacturer of polymeric materials that are sold into a range of commodity and specialty applications, faces growing competition from new manufacturing facilities, primarily in China and India. Market prices have declined steadily over a period of several years. Against this backdrop, Jane, a skilled black belt, is enlisted to help arrest the steady price decline.

Jane assembles a small team, and together they construct what they hope will prove to be a useful set of data. These data capture information from two sales campaigns that attempted to renegotiate prices so as to meet at least a 5 percent price increase. The campaigns cover two very different periods, one where Polymat's product was in undersupply and one where it was in oversupply. In addition to the actual percentage price increase that the sales representative was able to negotiate for each sale, the data set also includes ratings of the experience levels of the sales representative and buyer, and a classification of the value of each sale as seen from the buyer's point of view.

The two experience levels, together with the perceived value of the sale and a few other variables, constitute Jane's Xs. Her Ys are percentage price increase and a nominal variable that reflects whether the target 5 percent increase was met. Failure to meet the 5 percent target defines a defect in the negotiating process.

Jane and her team explore this data, first assessing the capability of the pricing process and then uncovering relationships between the Xs and Ys. Given that one Y is continuous and the other is nominal, she uses traditional modeling techniques as well as partitioning to explore relationships with the Xs.

Guided by her data exploration, Jane identifies several key areas for improvement: training of sales representatives, negotiating sales based on the knowledge of the product's value to the buyer, providing appropriate guidelines for sales managers, and accounting for the prevailing supply/demand balance when setting pricing targets. Addressing these areas leads to improvements in the pricing process, which Jane continues to monitor over a period of time.

Jane and her team work through all of the steps of the Visual Six Sigma Data Analysis Process. Exhibit 5.1 lists the JMP platforms and options that Jane uses in her analysis. The data sets are available at http://support.sas.com/visualsixsigma. We invite you to join Jane and her team by working through this case study to see how Visual Six Sigma can lead to substantial improvements in sales and marketing.

Figure 5.1. Platforms and Options Illustrated in This Case Study