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The19th-century philosopher and essayist Henry David Thoreau once famously said:
“Success usually comes to those who are too busy to be looking for it…”
But that quote was from around two centuries ago, before technology took over the many aspects of our lives that can influence whether we become successful, either personally or via the companies that employ us.
There can be little doubt nowadays that technology, whilst enhancing our lives, has almost always made us too busy for our good. We’re either chasing endless email threads or checking our various social media channels. There is even a new acronym created for this disease: FOMO – the Fear of Missing Out. In short, sometimes we’re so busy, there can be a tendency to take shortcuts. Shortcuts often lead to mistakes. In business, mistakes can be expensive. Very expensive. Consequently, one of the most important things to get right for any organization is the accuracy of quotes for any new business from potential or existing customers.
» A little light work…
Imagine the following fictitious but feasible scenario: Juan Pharos is the sales director of a company that supplies parts to the motorcycle industry, MCSpares.com. He has created a spreadsheet to analyze the costs involved in manufacturing a rear light cluster for a motorcycle brand. Let’s call them Bikers Inc.
he spreadsheet accounts for the raw materials of extrudable translucent plastic in red, white, and amber, for the tail and brake lights, license plate illuminator, and direction indicators. All these parts must be extruded from moldings, then seamlessly plastic-welded together to create a single lighting cluster.
Juan’s spreadsheet accounts for the cost of raw materials, tooling setup, labor time involved in person-hours to oversee the extrusion process, a human manually checking each cluster before it is packed, the cost of packing materials, and the time taken to put x quantities of clusters into a box, then ship them out from the company’s warehouse.
That final cost, when all elements are added together, comes to, say, $10 per unit, so long as at least 50 000 units are manufactured in one batch, to leverage economies of scale.
Juan knows that in order to make a worthwhile profit, the markup on final costs must be at least, say, 25%. Accordingly, Juan sets the supply price to Bikers Inc at $13 per unit, dependent on them buying at least 25 000 units over the year, leaving him with another 25k units for the following year that he can supply at a newly negotiated higher price.
Juan then wants to ensure that the quote gets to Bikers Inc as soon as possible, so he phones Jim, the account manager for that customer. Jim is driving. It’s a bit of a poor signal, so he pulls over to take the call from his boss. Juan says:
“Jim, can you email your contact over at Bikers Inc? Tell them that they can get the lighting clusters they want at $13 per unit, so long as they buy at least 25k pieces over the year from the first delivery date. OK?”
» Communication breakdown
“Sure thing, boss!” says Jim. As soon as he returns to his Work from Home office, Jim emails his contact, the purchasing manager at Bikers Inc. He passes on the information from Juan. After a week, Jim has heard nothing back, so he phones the prospect. The purchasing guy at Bikers Inc takes the call:
“Sorry, $30 was simply too high a price, we just signed a contract for the units with your competitor, Light Clusters R Us, at $18 each. Maybe next time, pal…”
Jim gives the bad news to his boss, Juan. All at once, Juan becomes extremely angry:
“I said $13 per unit, not thirty!! You idiot, you just lost us the year’s biggest contract…”
A week later, Jim has been fired, the contract was lost, and several workers were laid off at the manufacturing plant. You’d think with modern technology that such a scenario could be avoided, especially with all the SaaS Customer Relationship Management (CRM) platforms around these days. Then again, CRM systems are only as good as the information fed into them, especially the minutiae of quotes to new customers. That’s where CPQ pricing software comes into its own.
» Configure Price Quote software
CPQ stands for Configure, Price, Quote. A CPQ platform lives in the cloud as a SaaS entity. It draws upon artificial intelligence, specifically machine learning, to power a rules-based architecture that considers every possible interrelationship between significant factors when making a quote. Quotes are then produced and displayed on an easily interpretable dashboard, enabling managers and senior personnel to make informed commercial decisions regarding the final quote to be sent to the prospective or existing customer. Just as importantly, the CPQ engine can work with existing CRM systems so that when the ‘Accept Quote’ button is hit, the quote goes off to that CRM and is emailed to the prospective purchaser; thus avoiding Jim’s disastrous $13 / $30 debacle seen above.
To best examine how the CPQ’s algorithms work, let’s look again at our fictitious light cluster manufacturer and see how the smallest change can affect the outcome of a quote, and, if at all, how the final output price might change. The simple fact is this: when any manufactured item, or even a delivered service, is made up of, or depends upon, more than two or three parts or factors, when one thing changes, this has a knock-on effect on everything else in the process.
» International regulations and complications
You might think that light clusters for automotive parts, whether cars or motorcycles, are a straightforward thing to make. Why need CPQ software to work out how much it costs to glue together three pieces of translucent pretty-colored plastic? But it’s not just about costs, there are also the issues of compatibility and adaption. It might be that one particular model of motorcycle sold in Europe has to abide by construction regulations that differ from the USA. Already you have two discrete designs of the same product, and perhaps two components, the red tail light coverings, will fit either version universally, but the amber indicator lenses must be a different fitment because the European version demands a higher voltage bulb, which gets hotter than the American market version. You can’t now use the amber extrusion on the US product, so another one must be sourced.
Consider also that the US market for, perhaps a Harley Davidson part, would be much more sizable than the European market for the Euro version of that same part, but shipping and customs regulations dictate a much higher price for the European component. All these complex interrelationships are bad enough, and that’s just for a simple light cluster.
Now imagine the complexity of working out interrelationships for the fuel pump on a jet airliner! In computer terms, these complex interconnected factors, when they alter the entire process and price of a quote, are known as a ‘combinatorial explosion’ (CE) of impinging factors.
» Do the math
In mathematics, CE is the exponential growth of the complexity of any given problem due to the input, constraints, and bounds of the considered factors. CE can be seen as analogous to communications within a multi-dimensional space. Consider a simple system with only one variable, let’s call it A. A has two possible states; either true or false. Adding another variable, B, will then lead to four possible outcomes, whereby:
-
- A is true and B is true
- A is true and B is false
- A is false and B is true
- A is false and B is false.
It doesn’t take long to realize that if your ‘mathematical system’ is the number of variables incurred when quoting for a complicated part to an even more complicated whole, such as the fuel pump for the jet airliner, the combinatorial factors of several hundred variables turns out to be in the billions. This is where the AI used in CPQ software uses a ‘decision tree’ model. The decision tree’s parameters are created by a human operator initially programming the CPQ platform with appropriate content into a given field. To oversimplify for exemplary purposes, the motorcycle light decision tree might involve:
Red tail light lens A [needs 5w bulb] = cost $ 3 [sourced from manufacturer X] = also compatible with stop light lens B [takes 20w bulb] [sourced from manufacturer Y] + turn indicator lenses [sourced from manufacturer Z] + glue [also from manufacturer Z]. Assembly cost 10 minutes [$200 per hour] = net quote contribution all parts [$10] +[$1 domestic shipping] multiplied by 1.33 profit margin= [final quote $14.63]
» Not just numbers, but incompatibilities
It’s true that most technical analysts could keep themselves in the job market by writing a relatively simple spreadsheet to consider any numerical changes above, say the price of air mail rather than just domestic shipping, but that spreadsheet could never hope to work out for itself that if you tried to fit lens A with a 20w bulb that the plastic lens would simply melt! A CPQ platform would do just that because the first rule programmed into it was that lens a can only deal with the heat from a 5w 12v bulb.
CPQ doesn’t only work out the accurate prices of quotes, it can also alert operators to fatal inconsistencies in the combinations of products that they are attempting to quote for.
So, we’ve got our accurate quote. The senior management team checks the CPQ dashboard, all is well, and the quote is sent off to the company’s CRM software. In turn, before being sent to the potential customer, the quote is then sent to the legal team to draw up the wording for the supply contract, the logistics team for shipping technicalities and costs, the accounting department to create accurate bills and payment terms, etc. All good.
What then if something changes part way through the fulfillment of the contract? Say that half of the light cluster units have been sourced and assembled, but the manufacturer of the amber lenses goes into receivership. A new amber lens must now be procured. Fortunately, all that’s required is for the amber lens field in the CPQ dashboard to be changed to the new parameters; instantly, the consequences are shown on the dashboard:
Blah blah……indicator lenses [sourced from manufacturer S] + glue [from manufacturer T]. Assembly cost 12 minutes [new lenses have deeper recess screws] [$200 per hour] … blah blah.. [final quote $15.62]
So now, to make the same profit as before, the supplier has to increase the final price to the customer by 99 cents. This isn’t possible, however, because the contract price was fixed over 6 months. At a glance, the sales team knows that either they’re going to make a dollar less per unit or must try to save a dollar elsewhere with cheaper packaging or shorter labor times. But the point is, they’re in control. There’s just data analysis, no guesswork, and that’s what a successful business is all about. The CPQ software acronym might stand for Configure, Price Quote, but it could just as easily spell out:
Confidence, Perfection, Quality!
Author Bio: Efrat Vulfsons
Efrat Vulfsons is the CEO & Co-Founder of PR Soprano and a data-driven marketing enthusiast, parallel to her soprano opera singing career. Efrat holds a B.F.A from the Jerusalem Music Academy in Opera Performance.
