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Lower Costs for Those Who Receive Your Offerings and Become More Efficient

Jan 7, 2008
What does a typical cost reduction look like? Rather than assembling a full product, you may ship it in pieces for the customer to assemble. This means a smaller container and less shipping and assembly cost for you.

But consider the poor customers: They have to now assemble your offering and may not have the skills or tools to do it effectively. You may raise their costs by a lot more than you lower your own.

How can this be avoided?

Business model innovation is something that many for profit and nonprofit organizations struggle with accomplishing. In this article, I have broken out three of the elements and supplied three examples to make innovative business model thinking and analysis easier to do in a nonprofit example. The same concepts apply, however, to those who are for profit enterprises. This article's material will be clearest to those who have already read about continuing business model innovation.

Do More of What You Do Now

Unless you are providing a very small percentage of the needs of each beneficiary or customer, growing by 21-fold requires adding beneficiaries or customers. Because so many organizations can expand to provide 21 times the number of beneficiaries or customers, that's a great place to begin. You should start by considering who you will serve as these added beneficiaries or customers and where those benefits will be delivered to make the expansion more practical and affordable.

Who Will You Serve and Where Are They?

Let's begin considering volume-expanding business models by looking at "who" is served. The lesson is to keep it simple. Change as little as possible while becoming more efficient and effective as an organization for your beneficiaries. The simplest way to do this is to put more volume through an existing organizational structure without adding fixed costs.

Let's consider an organization that carries donated food by truck to distribution centers serving needy families. Most such distribution centers provide a small portion of a family's total weekly needs -- perhaps as little as one meal a week. The families may be visiting 10 to 30 different distribution centers weekly to fulfill all their needs. The trucks carrying the goods to a given distribution center are often owned and operated by that center, may be in use for only a few hours a week, and could be operated much more often without wearing out the equipment.

Let's assume that more volunteers can be found to load the food, and drive and unload the trucks. Both the nonprofit organization and the needy families will benefit economically if 21 meals weekly are delivered and distributed at one time to a distribution center. Asset costs of having the truck will be spread over much more use, dropping cost per mile. Beneficiaries will make many fewer trips, cutting weekly costs of acquiring the food.

By contrast, if an organization picks people and organizations to serve who are located far away and desire less profitable offerings, this choice of who is served and where to serve them can increase costs to serve each beneficiary versus doing more with the same customers. If the nonprofit's food distribution truck has to serve families all over a large country and recipients still receive only one meal per week, the cost to deliver the food will increase versus serving local people even though the same number of people are served in both cases. Look at Exhibit 1 to see details of why this cost increase can occur.

Exhibit 1: Adding Truck Trip Volume but Expanding Miles Driven per Trip by a Large Factor and Keeping Food Received per Family Pickup the Same

While driving more miles can reduce capital costs per year for a vehicle, there's a limit to how far this efficiency goes. In this example, you drive such longer distances that you actually wear out your vehicles and have to buy new ones. In addition, your operating costs of fuel, oil, and maintenance would also be higher from taking longer delivery trips. As a result, increasing volume a lot doesn't drop costs by nearly as much.

Truck Beginning Point -- One Truck Trip per Week Annual truck capital costs $52,000 (5,200 miles per year)

Capital cost per trip $1,000

20 Times Truck Volume Increase with Tripling of Miles Driven per Trip Annual truck capital costs $327,600 (327,600 miles per year)

Additional truck operating costs $81,900

Capital cost and additional operating costs per trip $400

Automobile Beginning Point for Recipients -- 21 Pick Ups per Week

Weekly gas, oil, and maintenance $21.00

Cost per pickup for a beneficiary $1.00

Since pickup frequency remains the same, recipients receive no benefit in reduced costs.

What Benefits Are Being Served?

Providing more of what you already offer to beneficiaries can be a big help in creating efficiencies. But sometimes you are serving virtually all of someone's needs for given items.

When that happens, improved effectiveness occurs in food trucking by the nonprofit organization if you add items dense in nutrients and weight are shipped instead (e.g., old-fashioned oatmeal versus potato chips). See Exhibit 2 for a quantification of this factor.

Exhibit 2: 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 in a given volume, 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
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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