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Thursday, March 09, 2006

Constructive Exaggeration

I started out with an idea for quantifying when to pull the trigger on a quantity discount offer. Three observations help to illustrate this decision process.

The first instance is a restaurateur who phones a major packer in Chicago at precisely the right time. He contacts a shipper with freezer trucks. Two days later, a full truckload of meat gets delivered to his freezers.

Following the full truckload focus, I have seen an entire truckload of individual packets of hot chocolate arrive at a major ski resort. They have a large warehouse and the truck drops everything once.

Finally, my mind wanders to the highly constrained inventory storage locations found in urban areas. Specifically, New York's Greenwich Village comes to mind. Not far from the Waverly Theater (now the IFC Center), trucks come and go from a commissary setup to supply a small chain of burrito shops. With a strong focus on fresh ingredients and lots of natural food options, you never see a truckload of salsa (boxed 6 - #10 cans to a case) at the loading dock. In fact, it's difficult to see any opportunities for a large price discount. Lots of fresh produce, dairy, meat and tortillas are received and dispatched to units daily.

When a supplier offers a price break for a mammoth order, you can rapidly calculate the savings per case, pound or can. This savings can be increased if you avoid overtime pay for management to observe deliveries. Fewer deliveries mean less hours at the loading dock. Offsetting the savings is the cost of storing all those cases, cans and pounds. If it's frozen, you need outside freezer space and power generators. It takes many dollars of discounted cases to justify the investment in a large outdoor freezer, locks, power usage, control needed to prevent loss, etc.

My fellow race track fans use a tool called Beyer speed ratings to handicap a horse's probability of winning a race. In this tool, Beyer has blown up tiny differences in time and distance into integers. A horse who placed a nose in front of another horse at the end of a mile long race could be rated 100 vs. 99 (for the second place horse). If you divide 3 inches by 63,360 inches, the result is .0000473 not 1. Beyer exaggerates the difference to assist handicappers. The horse finishing second costs the entire wager for a win bettor.

Pretend you are in Manhattan and have no more land available before you buy a huge outdoor freezer. Look at renting space or land. Perhaps you could locate the freezer in another borough or New Jersey. Take a look at the cost of a delivery truck with freezer capacity. If you can save enough to justify the cost, do it.

My customer with the large freezer began to adjust his thinking slightly. He started to see the annual utility charges, cost of two extra staff with FICA and vacation pay, repair costs and many other costly surprises involved in storing frozen meat. Today, he still watches the market intently. When he sees a major opportunity, he calls his full line supplier. They in turn order the truckload and have it shipped to their huge warehouse. They pass the savings along to my customer with each week's delivery. Now the freezer is used to store portion control items which are sent to his other outlets.

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