Have you noticed that there are some questions that come round year after year - and never seem to get answered? I was reminded about this recently when I was talking to one of my clients about how much each of his deliveries costs him.
You're probably familiar with the problem he encountered. However he calculated the cost, and whatever number he came up with, someone else always had another method and another number. And the trouble was - all the methods seemed reasonable. But how can that be? Surely you can't have more than one correct answer?
When I'm faced with this kind of problem, I remember a saying I came across many years ago: "It's not getting the right answer that's important; it's asking the right question".
And that's the key to resolving this conundrum.
You've got to start by deciding WHY you want to know how much a drop costs. Then - and only then - you can work out HOW much it costs.
Let me explain. You'll usually find that your need to calculate this cost is prompted by one of these three questions . Let's take them one by one. You'll soon see that, once you know which question you're asking, the method of answering it becomes clear.
QUESTION #1: THE SIMPLE COST
"I'm not planning big changes to the way I do things, but I want a realistic view of what it costs me to make a delivery".
This is the most straightforward reason. Perhaps you want to check that your minimum order quantity is set at the right level, or that your delivery charges cover their costs.
You're not planning big changes, so you don't need to do anything complicated. So you can stick to the simple cost per drop - that is, your total transport cost divided by the total number of drops.
QUESTION #2: THE MARGINAL COST
"If I add this customer, how much does each extra delivery cost me?" or: "If I stop serving these customers, how much do I save for each of the drops I don't have to make any more?"
This question is all about anticipating change. And so the important thing is to find out the difference between what it costs you now, and what it will cost you after you make the change. So, in this case, you need to work out the marginal cost per drop - that's the difference in cost divided by the difference in drops.
QUESTION #3: THE RESIDUAL COST
"If I only had this part of my business, how much would a delivery cost then?"
You ask this question to help you understand risk. Here's one example.
You've got a core business, but you've got some spare capacity. To help out, you've found some work that helps use up that capacity, but it probably isn't long term business.
So you need to know how much your core business would cost you without the extra work. If you don't know this, you risk agreeing a price with your core customers that you can't sustain in the long run.
So now you have to work out your residual cost. That's your cost - without the extra work you've found - divided by your number of core deliveries.
So there you are. There is an answer to how much a drop costs you - but you need to know what question to ask. I'm sure this method will work for you - just give me a call on 01244 314567 or email me at
stephen.errey@lucidea.co.uk and I'll talk you through it. It's completely free of charge and with no obligation - you can't go wrong!
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