Donald Mitchell

Provide Offerings That Expand How Much Value You Add

In thinking about serving customers or beneficiaries better, it's important to appreciate the operational implications for costs of adding new offerings. This article contains a quantitative example of how choice of offerings can help or hurt operating efficiency.

Businesses 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 tortilla 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 more expensive to buy and operate than those that haul similar volumes of refrigerated foods and dry goods. Most distribution centers for poor people stock 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 large increase in 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 how beneficiary value delivered is reduced 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

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