Management By Objectives - MBO

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