Measuring value for the buyer? When the buyer needs convincing his gain is greater than your cost...

S:    …and, as you know, we still need to solve this problem of your out-of-stocks Thursdays…how about upping the weekly order?

B:    No way, I am already hitting my buying limits. How about delivering more frequently?

S:    Unfortunately, the 20-unit size of our shipping outer means you would then breach your on-going stocking quantities. I really want to help, but I need some basic information…

B:    I thought you were meant to be the expert on our business?

S:    I can give you some general solutions based on my assumptions, but the more data you let me have, the more precise will be my recommendations. Let’s agree the size of the problem first.

B:    I lose a day’s sales by running out of stock on Thursdays because your inflexible distribution system delivers to our depot on Fridays…

S:    We deliver on Fridays to optimise our coverage of this part of the country, keeping your cost-of-goods low. So, what are your daily sales of our brands?

B:    Confidential…

S     OK, let’s use assumptions for now:  you sell £5.5m of our brand per annum, making it just over £15k per day, at a gross margin of 35%, right?

B:    Near enough, but where is this getting us?

S:    So, if I could eliminate your out-of-stocks on Thursdays, it would represent £15k extra sales per week, £780k per annum, an annual extra gross margin of £273k  (£15k x 52 =£780k x 0.35 = £273k)

B:    How can you help?

S:    The obvious answer is for us to deliver on Wednesdays, but that means re-routing, extra mileage and other costs. Our logistics guys tell me it would cost us an extra £1.5k per trip, making it £78k per annum.

B:    Just a cost of doing business, and £78k is not a lot to improve customer service level.

S:    As a matter of fact, with our published net profit of 12%, this incremental cost of £78k needs incremental sales of £650k for us to break even (£78k/12 x 100). Your extra sales of £780k of our brand means £507k sales for us (£780k x 0.65, allowing for your 35% gross margin), so I need something from you that will generate additional sales of £150k per annum.

Buyer:          …I suppose if we are getting incremental sales of £780k per annum…
SuperNAM:     Great!  How about the two extra facings I’ve been wanting this past few months? 

Adventures of SuperNAM (15)