Supply Side
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The Supply Side Profit Engine

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Confusing economic signals in October gave us the "Ride a Bike on a Tightrope" edition of "Management Memos". Last month we looked at one part of the balancing act - getting the marketing right. Here we look at supply issues which can be just as critical to success.



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Making the Supply Side an Engine of Profit

Years ago, one of our clients decided to go on a buying binge! Not the kind of binge you might think. He went after his suppliers to make sure he was "buying better". Satisfied that his sales and marketing were in good hands with us, he devoted his efforts for several months on reducing buying costs. His mantra?

 

"In a competitive market like this, you can't get a price advantage, so the only way to make money is to buy better!"


The results were spectacular. Part of a group, his company had been performing on the bottom rung, and badly needed a boost. After six months active negotiation, this Victorian business was outperforming his New South Wales counterpart on a "Return on Sales" basis! All by buying better! Need more convincing? No? OK, then let's go!



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In the Beginning - Plan!

Not everyone has a profit plan. If you are operating with total assets of $300,000, you need $75,000 of profit left in the business after your own take-home income. Lots of things change in a year, but without that profit plan, reaching that goal is just a matter of dumb luck!


No doubt you have a sales budget, probably based on getting more than last year by some amount. This implies more profit than last year, but you can bet your bottom dollar that it won't go up in proportion! Why accept that? Plan not to! With increasing revenue, keep a lid on all outgoings by planning to control them.



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Stock in Trade - Making a bigger margin!

Most of us know the ways to get a better buying price - these ideas have been around for years. They are always worth another look:

1.          Negotiate annual supply contracts based on scheduled deliveries

2.          Fully exploit "early-bird" deals and special ordering price breaks

3.          Get better freight rates by using "drop shipment" scheduling

4.          Make the most of volume rebates and prompt payment discounts

5.          Buy "ends" and clearance deals (where its appropriate of course!!) - where you've also negotiated a special discount on the main lines for helping shift their clearance items

6.          Ask for coop advertising deals, along with promotional items as "no cost"stock

7.          Strike a "special buy" for in-store promos, and more.


There are some other moves that might make sense for you. You can probably form a buying group. Fiercely independent traders might not want to admit there is still a better price to be had, or to give up their independence. The experience of well run buying groups is there is always a better price - it just hasn't been reached yet!


Consider bulk buys and on-selling if you can't get up a buying group. This works especially well with low volume items that are part of a wider range. You have a bigger buy (and better price) from your supplier, and get the benefit of "breaking bulk" when you on-sell to other traders at the lower volumes they want.


But the most important thing is to believe you can reduce your buy price!



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Keeping more of the margin you've made.

Don't just focus on buy-ins when it comes to cutting the buy price. Set an expense reduction target. "Expense" is just one part of supply. Look at these three categories of expenses ...


           Labour related costs: Nothing you can do about on-costs as a ratio to your payroll., and actual pay (whether by salary or wages) needs to reflect the value of the employee to the business. That doesn't mean you can't do anything to control this major cost item.


             With the sales growth, you will need more people or more productivity. Look hard at the new equipment or software you could use to increase productivity, consider how the office layout can increase the throughput, and review your processes. Do it right and you will reduce casual hours, overtime working, or the number of people, all the time handling still more sales volume.


             Here's an extreme example. A client's credit checking took three people a whole week before orders went through to the factory. After our hard work, (and a heart attack for the accountant,) orders went through next day. Soon, the accounts office staff went down to two - because of systems improvement!


           Occupancy costs: Whether you own or lease your business premises, there is nothing you can do in the short run to reduce the actual cost of being in that building. But electricity, gas, water, security and waste removal are all occupancy costs that can be negotiated. "Many a mickle makes a muckle", and every penny you save in one of these cost areas helps profit. Remember that profit is the small part left after expenses, so small changes in expense are big changes in profit!


           Finance related costs: After these two categories, just about everything else falls here. It's not just bank charges and fees. All other expenses are related in some way to the volume of business. Freight, advertising, - they all fall here because the more money you turn over, the more these expenses will be. Set yourself a goal to reduce these expenses - whether it's a dollar amount or a percentage. Percentages are useful, especially for things like advertising. Look at these things on the basis of a percentage of sales - then reduce the percentage!


By doing this well, you won't starve the business of much needed resources it needs to hum. You will make your expense items more productive, and this all helps you keep more of the margin once you've made it.


Once again remember, the most important thing is to believe you can reduce your buy price, and improve your profit and cashflow!



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New Website for Cookes Pools & Spas Shows Real Red Zebra Value


When Cookes Pools & Spas needed a quote to refresh their website, The Red zebra really showed its stripes!


Cookes website had first been launched more than three years ago, and subsequently altered by two or three people of various skill levels. The site was out of date, and some of the elements in the site had become a serious embarrassment. When the site became a highlight of their Yellow Pages ad, it was time to do something about it.


Websites come in all shapes and sizes, and of course this means a wide variety of cost proposals always accompany a project to work on a website. Same thing happened in this case.


Finally it became clear that the marketing work done by The Red Zebra Business Centre for Cookes over eight years provided a perfect foundation for creating a new website that does what’s needed - and doesn’t cost the earth.


Using photographic material gathered during recent advertising shoots, and pool shots of recent jobs taken at handover, the website came together as part of the normal Red Zebra consultation process. Total extra cost of the site revamp? Absolutely zero! Nothing! Nix! How is that for one of the unexpected value benefits of being a part of the Red Zebra program? A saving of at least $2,000 - perhaps more.


Want to see the site? Click Here! This site uses “frames”. Bit unusual these days, but provides just the right environment so cross link to supplier sites. Gives the site visitor a richer experience, gets another visitor to the supplier, avoids copyright issues, and reduces the risk of having your customer hi-jacked. There’s lots more to do for Cookes, of course, because a website is always a dynamic object - constantly a “work-in-progress”. The Cooke Industries site has also had a workout. But that’s another story!



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Submission to the Australian Government Business Regulation Taskforce


The Red Zebra Business Centre has compiled a submission to the Australian Government Business Regulation Taskforce. This submission is available on The Red Zebra Business Centre website. It is also available on the Taskforce website, as the following response to the submission shows:

 

Dear Mr Williams

 

I wish to acknowledge receipt of your submission dated 21 November 2005. I note that your submission does not contain confidential information and will, therefore, be made available for public perusal from the Regulation Taskforce's website.

 

Yours sincerely

 

Vickii Wales

 

 

Vickii Wales

Regulation Taskforce

Secretariat

 

Ph: (02) 6240 3380

Fax: (02) 6240 3389

Email: vwales@regulationtaskforce.gov.au

Website: www.regulationtaskforce.gov.au

 

We will keep you advised of any further developments on this front.




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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.