Let's make a very simple metaphor. When you are hungry, you will feel satisfied if you eat a hamburger. I feel good after eating the second hamburger. Then when you eat the third hamburger, you can't eat any more. Give you a fourth hamburger, and you may vomit. This is the simplest marginal diminishing effect.
▎ "When other inputs are fixed, if one input is continuously increased, the newly added output or income will gradually decrease."
This is actually similar to the suppliers we often see. When we purchase, we must develop suppliers and find suppliers. The suppliers we see are large and small. At this time subconsciously, the bigger the supplier, the better. The bigger it looks, the more it can show its power.
In fact, as we discussed earlier, all supply chain models should cooperate with business models. The so-called cooperation is to choose according to your own situation. We are divided into three categories: long-term cooperative suppliers, self-supplied capacity development and development suppliers.
1 Long-term cooperative suppliers
▎: Sometimes we will cooperate with some good suppliers. Perhaps in a series of product lines, some suppliers have their own specialties, and they will be more professional in specific products and have more competitive prices. Later, with the deepening of cooperation, we hope to invest more, develop more molds and produce more products from stable suppliers, which will also bring further profits to suppliers.
▎ When we have developed from one product to ten products, we have better control over the ways of completing orders, such as uncertain orders, multi-variety procurement and profit margin subsidies, especially the spare parts that need to be purchased, which greatly reduces the risks caused by unstable delivery and reduces the sources of risk control.
With the growth of this model, everyone gradually tasted the sweetness, so they increased their investment. So it went on for another year. Industry fluctuations occur from time to time, shipments begin to decrease, and product models become more diversified. It's a bit too much to continue investing. The order volume has been reduced from10 million to more than 2 million, which is in a very difficult situation. Fortunately, the supplier itself still has a certain market and can maintain normal operation.
▎: This is a true story and a supplier we have worked with before. In those days, the investment in machines and molds brought huge profits to the supplier boss. Later, the product models and styles produced by the equipment could not meet the diversified needs, and the orders gradually declined. In fact, this is also a marginal effect. In the case of increasing investment, labor cost, factory space demand, water and electricity cost, material cost, etc. Both are increasing, and profits are being compressed on an increasingly large scale, from an antelope with a small step to a slow elephant.
2 Self-sufficiency
Self-sufficiency is also a truth. In the small company stage, a company always wants to expand its scale, because it is too small to achieve a higher rate of return. Expanding capital is always the only philosophy of capitalists.
When the production capacity of an enterprise expands, the demand for factory buildings and labor will gradually increase. Let's make an example of image.
▎ Join our production sequence from 1 to 8, the minimum order quantity is 5 products, the production cost is 10, the product price is 160 yuan, and the profit is the selling price minus the cost. Okay, that's easy to understand. When we invest more production equipment and produce more products, the production cost is rising and the production quantity is also rising. When mass production is carried out, our prices are also falling, and we get more sales. Look at the total profit of our products, in fact, it began to decline at 1800 yuan!
This is a rough example. The actual cost analysis and price positioning will not be so simple. This is just a very easy metaphor to understand. Let's look at the profit curve again.
▎ We find that it is an arched curve, that is, under an ideal product production scale, the profit is maximized. At this juncture, enterprises can choose outsourcing strategy, establish brand and develop packaging. However, in reality, it is impossible to completely dominate fate. Blind expansion, merger and reorganization have taken a huge and complicated road of attaching importance to assets, with accumulated disadvantages. Selling another step is extremely slow, and it is difficult to run in small steps.
▎ As A Dream of Red Mansions says, "There are great difficulties".
3 Develop suppliers
Sometimes managers need to have 20 or 30 suppliers in their hands and can provide their own choices. This is actually an extreme idea. We must consider two things. How big is our data processing ability? How many orders can we assign to these suppliers?
Suppliers must have the most basic supply relationship, so that we can guarantee the supply of products. It is not enough to know information, but also to form effective cooperation to achieve the expected results. We can have many suppliers, but we must ensure that there are solid and stable suppliers in each category, otherwise just having a lot of information does not mean that it is your supplier. Or like Wal-Mart, there are many people who want to cooperate with you and ask for your quotation every year. Generally speaking, the huge volume and extremely scattered orders are very challenging for enterprises dealing with the complexity of supply chain, which is a touchstone of supply chain.
For supplier development, we can also refer to marginal effect. It is not that the bigger the supplier, the stronger the ability. You can run fast when you are young, but you may not run fast when you are old. Some suppliers are huge, but after the process and approval, the day lily is cold. If you encounter futures raw materials, you have to update the price every month, which will make people anxious. The key is to cooperate with the right supplier first, and then slowly transform. At the same time, the person in charge of procurement and development will look for suppliers with higher cost performance, and gradually improve the conversion rate of suppliers and the stability of cooperation.
▎ The first cooperative supplier often has comparison effect and benchmarking effect, and the smaller the supplier, the easier it is to control. I met a small factory building for injection molding products before, and the environmental sanitation, facilities and production capacity were worrying. If there is a complaint about the return of this product in the later stage, the cost will be very high. Suppliers are generally not in the city center. When a logistics trip is pulled down, thousands of dollars are gone, and there is no commission for this list that may be sold. If the purchase volume is large, it is necessary to select suppliers from powerful suppliers and unite with them to reach a certain scale, not only for profit, but also for brand effect. The advantage of big suppliers lies in their strong brand protection and risk control.
▎ marginal effect, if understood in this way, it should be easy to have a preliminary feeling. This is more like a philosophy. If you go too far, you should stop at a good time and choose a better road.