Profit-seeking companies often make major mistakes when
they decide to add the wrong products to their mix, ones
that increase costs faster than the products expand profit
contribution and profit. A similar effect can occur in
nonprofit organizations that decide to provide benefits
that are too costly . . . reducing the overall benefits
that can be provided.
Do the opposite by improving efficiencies, and a for-profit
or nonprofit organization can instead deliver many more
benefits.
Let's look at how this can happen in food trucking by a
nonprofit organization if items dense in nutrients and
weight are shipped instead (e.g., old-fashioned oatmeal
versus potato chips).
See Example 1 for a quantification of this factor.
Example 1: Adding Helpful Nutrient Volume Through an
Underutilized Truck and Increasing Food Available to Needy
Families for Each Pickup
If we add the factor of what kind of food is delivered, we
see that capital costs can be lowered greatly if we carry
food that contains more helpful nutrients per cubic meter
or foot of space. By shipping foods with 10 times as many
nutrients, we are able to lower the capital cost per
trip/unit of helpful nutrients by another 90 percent.
Truck Beginning Point — 1 Truck Trip per Week
Annual truck capital costs $52,000
(5,200 miles per year)
Capital cost per trip $1,000
Capital cost/unit of helpful nutrients $0.10
20 Times Truck Volume Increase with Denser Nutrients
— 21 Truck Trips per Week
Annual truck capital costs $109,200 (109,200 miles per
year)
Capital cost per trip $100
Capital cost/unit of helpful nutrients $0.001
Note: Annual capital cost is higher because service life is
reduced by driving more miles a year.
Increasing nutrient density has a similar effect on the
costs of recipients picking up the food. The 96 percent
cost-reduction gain from reducing frequency of trips is
also improved by making the materials more nutrient dense
by a factor of 10.
Automobile Operating Costs Beginning Point for Recipients
— 21 Pick Ups per Week
Weekly gas, oil and maintenance $21.00
Weekly gas, oil and maintenance/unit of helpful nutrients
$0.21
Automobile Operating Cost — 1 Trip per Week for
Denser Nutrients
Weekly gas, oil and maintenance $1.00
Weekly gas, oil and maintenance/Unit of helpful nutrients
$0.00084
Let's look now at how the wrong choice of offerings can
increase costs too rapidly. Trucks that haul frozen foods
are different from those that haul refrigerated foods and
dry goods. Most distribution centers for poor people
provide only dry goods.
If the distribution centers add frozen foods, a special
truck will have to be purchased and a freezer added.
Electricity costs will soar, and there will be less space
for dry goods.
Unless a lot more volume goes through these new facilities,
the added costs may exceed the value of the benefits to
food recipients compared to sticking with dry goods
providing the same nutrient volume. If the foods
transported are less nutrient dense, the cost of delivering
a unit of helpful nutrients may increase compared to what
is shown in Example 1.
The economics of this reduction in beneficiary value
delivered are displayed in Example 2.
Example 2: Adding Less Nutrient-Dense Volume with Frozen
Food to Increase Food Available to Needy Families
In this example, a change in what is delivered increases
capital costs in total by sixfold. This shift in costs is
made worse by a 90 percent reduction in nutrients being
delivered.
20 Times Dry Goods Truck Volume Increase with Denser Dry
Nutrient Foods — 21 Truck Trips per Week
Annual truck capital costs $109,200
(109,200 miles per year)
Capital cost per trip $100
Capital cost/unit of helpful nutrients $0.001
Note: Annual capital cost is higher because service life is
reduced by driving more miles a year.
20 Times Volume Increase with Less Nutrient-Dense Foods
Including Frozen Items — 21 Truck Trips per Week
Annual truck and storage capital and added operating costs
$655,200
Capital cost per trip $600
Capital cost/unit of helpful nutrients $0.06
Note: Driving requires two trucks (one for dry goods and
one for frozen foods), a freezer, more dry storage space,
and added electricity costs.
Copyright 2007 Donald W. Mitchell All Rights Reserved
----------------------------------------------------
Donald Mitchell is chairman of Mitchell and Company, a
strategy and financial consulting firm in Weston, MA. He is
coauthor of six books including The 2,000 Percent Squared
Solution, The 2,000 Percent Solution, and The Ultimate
Competitive Advantage. You can find free tips for
accomplishing 20 times more by registering at:
====> http://www.2000percentsolution.com .
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