Economic Modelling & Scenario Planning

Economic modelling linked to scenario-based planning techniques cannot predict the future. It can however give valuable insights into the range of future outcomes and the associated risks, leading to more effective planning.

 

• A medium-sized importer of unbranded footwear was faced with a classic margin-squeeze caused by rising supplier costs and low tolerance of price increases amongst consumers.
• Scenario-based modelling by Moot highlighted areas where poor visibility of commercial drivers was impacting profitability
• This new focus on key commercial drivers, enabled more targetted negotiations, resulting in improved product margins from suppliers.

What was the problem?
This business was faced with a classic margin-squeeze being driven by rapidly rising costs in materials and labour in source countries, alongside low price-elasticity in the UK market. This problem was exacerbated by the significant buyer power exerted by the main supermarkets over their suppliers.

What did Moot do?
A route out of the margin-squeeze lay in the development of higher-value branded alternatives. We proposed a two-step solution: The business had little visibility of the profitability of individual product lines, so Moot developed a model that calculated a “netback” from high street price-points back through supply chain cost-transfers and customs duty-points to a factory-gate price in a source country. This provided the basis for a stronger negotiating position with suppliers.

Next Moot developed interactive scenario-based modelling of sales volumes and costs, including anticipated effects of promotional spend and influences from the wider economy.  The model developed enabled future scenarios to be rapidly evaluated and a robust range of potential outcomes tested.

What were the results?
Moot’s scenario modelling provided management with a robust picture of the range of likely outcomes of branded footwear development and, in conjunction with “netback model”, valuable insights to assist with supplier negotiations. With the confidence that such information would provide, the team were able to make much better decisions about the potential commerciality of items they would source.