You own a factory that makes chocolate chip cookies. Every day, when your employees arrive for their shifts, you have to have all the materials in place. You need enough sugar, vanilla, salt, brown sugar, chocolate chips, etc. for them to run the machines and make the cookies. Otherwise, if you don't have enough raw materials, the workers will just spend the day standing around, looking at their phones. Maybe at pictures of cookies.
The formal process of ensuring that workers have the materials they need is called material requirements planning. MRP is a method companies use to plan and schedule the delivery of the right materials, while still limiting unnecessary expenses, like spoilage.
In the old days, MRP involved a hurried guy with a clipboard. Nowadays, companies use specifically-designed software to optimize the process.
Related or Semi-related Video
Cost Accounting: How Do Product Choice D...0 Views
And finance Allah shmoop How do product choice decisions work
I cast my brass off is the best purveyor of
fine coffee in the world at least according to them
So they essentially offered three sets of products retail coffee
roasting equipment and coffee beans Last year they did two
million bucks of sales from their coffee bar outside the
store In warehouse they sold fourteen million dollars worth of
roasting equipment and nine million dollars worth of beans is
either is Kona Shmona Whatever But on a total of
twenty five million dollars in sales they lost a million
dollars and their credit lines are tapped and well they
have to start making money They just aren't sure how
to do it Luckily they're all watching this video The
backstory Most companies sell more than one product and each
product carries different profit margins or contribution margins of dough
back to the company Each product also carries more needs
for resource is like in order to sell the roasting
equipment the company has to employ super smart people who
really know their stuff and are selling to coffee aficionados
who really know their stuff So hiring those people is
well expensive versus the simple baristas who don't even need
a high school education outside you know serving coffee to
retail customers who barely need to be literate and will
someday you know have those Maurice does basically be replaced
by robots totally different resource needs for those two very
different products And the presumption here is that well maybe
resource is should be allocated away from the very expensive
to service and probably lower margin coffee roasting materials And
instead a serve more coffee outside with cheap labor you
know that eventually be replaced by robots That case maybe
maybe not all rights Let's turn the lens here On
another example if you have a stationary store like one
that sells high quality papers for weddings funerals bar mitzvahs
and pet birthdays you know that kind of stationery store
not one that just stands Still it wouldn't be crazy
to have that business self three million dollars worth of
paper and contribute only one hundred grand in pre tax
profits because paper sales are highly competitive and very low
profit margin And well there's Amazon And then there's the
mom and pop stationery biz with three little old ladies
in the back room happy to make minimum wage as
they draw calligraphy all day Well that biz might only
have three hundred grand of sales but contributes a one
hundred twenty thousand in profits only one tenth of the
revenue it contributes Maurin profits so profit margins matter and
the character or style or structure of the business that
product lines are in matters a whole lot Okay back
to coffee I cast my brass off has similar dynamics
First think about the retail store because it's serving food
It has to hold certain standards of cleanliness You know
city ratings and payoff To inspect a contributions Teo inspections
and something like that they have to offer parking and
have various benefits to employees It takes ten employees to
serve two million dollars in coffee at average load to
the company of sixty grand each or six hundred thousand
dollars a year In employee costs that is each employee
makes forty five grand a year and then cost to
the company Another fifteen grand in pension benefits insurance over
time Another cost To keep mall employees Well then it
has to rent the extra finished non warehouse space Another
hundred grand a year city inspections and that whole cleanliness
thing Then add another hundred grand a year in cost
And then there's the coffee itself and cups and washing
and breakage and product things that add another two hundred
Well it's reasonably profitable as a unit It contributes about
a million dollars to the bottom line is pretty good
and the owner's love it because the people who drink
there are coffee snobs and give almost free market research
in describing what they like or don't like about a
given roast Then there's the roasting equipment business flew high
end people high end product The owner's complain all the
time about the high salaries of the people who sell
the equipment The company doesn't make each roasting been theyjust
assemble it and then titrate it so that it can
chemically optimize whatever customer grind that the other coffee shops
want to build and serve on their own will The
network of coffee shops is amazing and they all respect
I cast my brass off because the PhDs in coffee
who make the equipment are also awesome on fourteen million
dollars or revenues The company when inspecting everything as a
standalone business meaning if they shut down the coffee retail
biz and the bean distribution biz well they'd have eight
million dollars in hardware product cost two million in assembly
cost and another two million in well everything else from
insurance toe warehousing shipping the website management so on So
this is odd The retail coffee biz pours a million
bucks in profits to eye CalFed and this business on
fourteen million in revenues pours in another two million So
the beans biz must be where the problem is At
nine million in revenues it's losing over four million bucks
Why spoilage Bad marketing campaigns high import taxes or duties
Ah highly competitive marketplace with everyone from grocery stores toe
Amazon being better at selling beans while the process was
the business love child of the idiot son of the
founder a common problem in American business But here the
process of selling mass beans into the consumer marketplace requires
a different skill versus selling high end coffee to snobs
The disconnect shined a light on the resource constraints in
human capital Not enough cos focus on this element the
brains of their employees and the ability to collectively contribute
to good or optimal answers in resource allocation You know
that's what it's all about Huge amounts of resource is
were being poured into growing a being distribution business which
is a low margin Almost anyone could do this thing
kind of business Instead of taking the nicely profitable retail
store in high end roasting business and being just nicely
profitably happy well the constraint here was the capital deployed
into the money losing commodity business of being selling and
sacrificing the ability to integrate even further backward in the
Assembly of the roasting hardware like they could have maybe
made a lot of profit over time and began building
their own Rose Sing hardware which they're also good at
Well the optimal resource allocation then takes the scarce resource
of human knowledge and making coffee roasters for small snooty
cafes And it spends more on that process shutting down
the mail order beans Direct marketing biz Well the change
makes the company go from losing a mil a year
so to making a few mil in cash profits which
it can then deploy Leveraging the genius coffee roasting brains
It already has to become more powerful in that smaller
but way higher margin business So that's one view or
one lens on how product choice decisions work in a
nutshell or well in a coffee bean shelf maybe something 00:06:43.058 --> [endTime] like that No
