Determine the cost of each item

When handling wholesale product requests from existing or new customers as a co-packer, time can be critical. Many product requests are shopped out to several bakeries and the bakery that gets the best quote in a timely manner has the customer’s attention. During this time of pressure we must resist the urge to shoot from the hip. We need to be able to negotiate the potential sku knowing what it will cost to produce it thus being able to determine if the potential customer’s price point is going to allow profitability of the producer. Remember that the purchaser we are co-packing for is going to want as much of the margin as they can get.

The goal typically is to move a high number of units with high gross profit margins. Moving a high number of products with soft margins can again be attractive as compared to moving a small number of highly profitable products or even moving a large number of products with poor profit margins. However, the waste factor must be considered. Is the business guaranteeing a certain number of sales and accepting back that which isn’t sold? Is there a cripple or waste factor at the store or significant damage in transportation?

Obviously, we want to fade out products that cost us more to produce than we can earn back by selling them. Additionally, when a product with a medium profit margin is lost, especially a high dollar item, it may take the sale of many more to make up for the one lost. A fruit pie, for example, that sells for $9.99 with a profit margin of 30% creates a profit of $2.99. For each pie that is unsold or lost in transportation, three more must be produced and sold to make up for the one that isn’t sold.

Without specific knowledge of our cost of doing business juxtaposed to the profits or monies coming in for each SKU, we are doing business in the dark. And, with the cost of ingredients heading up, we can’t afford to do business in the dark.
To download the Product & Ingredient Costing form, click here.

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(0) Comments • Permalink • 11 20 2008

• Dan Ettling
• Photo by: Kurt Nordstrom

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