Question:
KB asked about measuring the
performance of his business. How may he best determine
pricing and markup by evaluating his supply chain from
manufacture, import, distribution and consumer sales to
the impact upon his bottom line? |
Answer:
Your objective is
to sell as much product as you can import.
You know your expenses at each nodal point in the
import, distribution, and sales chain.
Over time, you will have actual sales volume and pricing
data. You can adjust prices and volumes that you offer
at each point and over time. You can invent special
deals and promotions to learn how in the real world
which ones work well and which ones fail.
No one -- even the experts and geniuses here with our
vast experience -- know your business as well as you do.
No one has the control over the volumes, prices, cost of
sales, and overhead as you do.
You have been creative and inventive enough to initiate
and develop your business to this point.
Now you must continue taking risk in your next phase:
The actual selling of product, building a long-term
customer base, and selling more product to more
customers over the long term.
Your plan should be:
1.) Proceduralize the question you asked us.
Develop a simplified algorithm that contains a factor
representing all of elements of your business. Simple
arithmetic will serve as a good tool. Use coefficients
of integers and fractions as appropriate. List and
quantify as well as you can at this point all factors
and assign relationships of each as to how each impacts
your profitability and sales volumes at specific times
with specific customers and products.
2.) Monitor each factor.
As you sell, fail to sell, and make profits and
losses, track the variants that caused each. If raising
the price for a widget $0.02 per, what happened to your
immediate sales and sales along the line, and what were
the volume variances in various markets?
3.) Adapt your factors to optimize your sales and
final consumer sales.
Plug in the actual sales, price, volume numbers in to
your original algorithm. Observe the resulting profit,
volumes and timings. Adjust the values of the factors
-- your prices and promotions -- to enhance upcoming
sales efforts.
4.) Ensure the accuracy of your algorithm.
Go back to the algorithm and review each factor and
the weight (coefficients) you have assigned to each. Adjust
your original estimates and relationships to fit the
latest realities of your costs, sales and volumes.
5.) Control each step in order to optimize.
Maintain records, ensure all data you collect is
reasonably accurate, and frequently adapt your algorithm
(include new factors and adjust coefficients) using the
most accurate and current data.
Notes:
1.) There is little need for massive amounts of data
to make this procedure effective. In the real world,
there are too many factors to attempt to fine tune to
small decimals. Be realistic and appropriately
accurate.
2.) There is no intrinsic need to automate your algorithm.
Design it to be straightforward. Maintain its accuracy
and relevance. Include all significant factors. Spreadsheet programs impress some people, colorful
charts are colorful, and it is fascinating to push a
button and have numbers appear. Recall that your
objective is to sell hand tools and track data to the
extent it is
reasonable to support optimal pricing, volumes and
promotions. If you know your customers, production
factors, do deals, and manage your information
accurately, you can manipulate your algorithm on a piece
of paper and reap valuable results. |
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