delivery service optimisation
As a distributor, a core aspect of Premier Farnell’s proposition is its delivery service."
Premier Farnell is a global distributor of electronic components to design engineers and those manufacturing or maintaining electronic systems.
From smartphones to aircraft controls – if it contains electronics, the chances are that Premier Farnell helped to enable its creation. Founded in 1939, the company now serves customers in 36 countries and has a turnover of close to £1 billion.
As a distributor, a core aspect of Premier Farnell’s proposition is its delivery service. Not only is getting the product from the warehouse to the customer a fundamental requirement, the way in which this is done is a critical driver of business success. To win and retain customers, a distributor’s delivery service needs to be consistently reliable, meet customer needs and be priced appropriately.
As part of a strategic review Premier Farnell had placed its delivery service under the microscope to ensure it was commercially optimised. To inform this, three questions needed answering:
• What is the relationship between delivery price and sales?
• What price premium do ‘value add’ elements of delivery justify (e.g. speed)?
• What is the optimum price for each delivery option – the point at which Premier Farnell’s subsidisation of delivery costs is minimised, but not at the expense of sales?
Savanta’s task was to answer these questions and identify the best pricing strategy.
Three considerations were central to our approach:
• Premier Farnell was going to make major commercial decisions based on the research, so it needed to be highly reliable
• Buying decisions involve a very complex and subtle relationship between price and benefit. This relationship needed to be reflected if the research was to provide an accurate steer
• Premier Farnell required a tiered pricing strategy where different delivery options were priced relative to each other (e.g. same day commands a premium over next day)
To provide a reliable point-of-view we conducted an online survey of more than 2,000 customers globally, centred around a conjoint analysis. Different elements of the delivery proposition (including price) and the different levels at which these might be realistically set were identified (e.g. same day delivery, next day, 3 – 5 days). Using this information, a series of hypothetical delivery propositions were created, each with slightly different features and prices. These hypothetical offerings were then grouped into sets of three and customers were asked which one, if any, they would be most likely to buy under.
This was repeated several times until, across all interviews, hundreds of potential combinations had been compared. Statistical analysis of this data was then used to reveal the level of demand under different feature combinations and at different price points.
This exercise revealed which aspects of the delivery proposition held greatest value, identified the incremental value attached to each ‘tier’ of service and created a price elasticity of demand curve which detailed how changes in pricing would impact sales.
These insights enabled us to make clear recommendations on the different delivery options Premier Farnell should offer and the specific price to charge for each. We then went one step further and created a user friendly, interactive modelling tool which Premier Farnell’s management team could use to conduct ‘what if?’ analyses. For example, if they reduced the price of delivery by 5%, what impact would this have on sales?
The research has been an integral input into a strategic review of Premier Farnell’s delivery proposition. The changes it drove are estimated to have reduced supply chain costs by 20% (a saving of several million pounds) and the approach is now used in Cranfield Management School’s MBA programme as a case study of best practice.
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