DO NOT PASS GO :: DO NOT COLLECT $200
Please do not confuse yourself (or me, if you write), please read Part 1 first. Which includes working the P&Q example out for yourself, on paper, showing your work.
Then, this part will make a lot more sense.
Honest
In fact, if you want my help (for free), you may fax me your proof (330.308.0236) of the P&Q and provide your phone number and/or email address and I will follow up. Plus, I will email you a spreadsheet that I use to work P&Q like challenges.
USA Only
NOTE: Anyone following my adventures for more than about ten minutes knows that I must focus in the United States in the short term. I am happy to exchange emails and talk via skype (my ID: TMXhelp) with most anyone anywhere in the free world, but I must limit my travels and therefore the bulk of the clients that I can help, to the USA.
The Answer
If you work the problem to the proper and logical conclusion, you will find that this manufacturing plant can make $300 per week, given the parameters of the P&Q. Working the issues as documented.
A number of clients over the years, have argued that one simply needs to hire another person for the constrained operation. Maybe. Maybe not. On another day, I will wax poetic about personnel issues and employee turnover... but not today.
If you look at your pricing model through the eyes of your sales manager, here is what you would discover:
- Q sells at a higher dollar amount
- Which means that Q pays more commission
- Q does not require a purchase part
- Which means no supply chain hassles
- Q takes less time to build
- Which means that we can produce more
All these factors will lead your sales team to take certain actions, which will lead the company down the wrong path. In fact, you probably have already put the wrong reward system into place!
No laughing matter
Do you see the importance of determining the weakest link in your operation? How can you set policy when you do not know the factors in play? Years ago (right after college), I was the Comptroller for a distribution company. It was in financial trouble when I got there, and my urgings to change direction was not welcome (I left after six months). The owner had started buying the franchises back, and was trying to grow the business from the retail side of the equation.
Wrong headed thinking, at best
His focus was broken and the expense of running numerous high traffic (read: expensive) store fronts was stripping all working capital from the business. He had failed to analyze the business from the holistic (or systems) thinking vantage point. But I digress.
As you now know, the key to P&Q is to produce all 100 units of "P" and back fill with "Q" based on the remaining time available. Which is 30 units of "Q". Based on most compensation plans, the salesman would be demanding all 50 units of "Q" be produced, which would result in a $300 loss per week!
Our second lesson of pricing: learn how to evaluate your whole business! In order to make the best possible decisions. In the case of P&Q, the first step is to align production to take full advantage of the market conditions and your individual strengths.
With my simple PQ.xls file, you would quickly learn that the best mix would be 160 "P" per week and no "Q" and yet, we have demand for 50 "Q" per week. We would make $1200 per week on just "P" if we could increase the demand. Should we throw the "Q" business away?
Never
What if we subcontracted "Q" out to a company that we could trust? If we even made just 5% for handling the bidding and billing processes, that would add another $250 per week to our bottom line!
The point is simple: until you know all the ramifications of your pricing model and the incentives that have been implemented around that strategy, you don't know squat!
Jeff 'SKI' Kinsey, Jonah
Throughput.us LLC
(330) 432-3533
©2008 Throughput.us LLC. All rights reserved.
