Opportunity_Cost

Opportunity Cost In manufacturing, the success of a business is measured in the sales achieved. Higher sales mean more profit. All companies need to set higher targets than the previous year to sustain growth. Whist this is what all companies want, it is not always achievable. Whilst this could be down to many factors like pricing, quality and delivery, one of the reasons could be down to opportunity costs. An example could be that an engineering distributor decides to buy a power drill for £60 and sells it for £95 as an end of year offer to their customer base. A second option could be to buy a power saw at £60 and which sells for £110. The opportunity cost would be the £15 the distributor lost by not buying and selling the power saw. As a sales manager in engineering we need to target potential customers and get them to buy our product. This can be done over the telephone, face to face meeting, internet, exhibitions, newspaper/magazine advertising, conferences etc. All of these ways of generating business would usually be discussed at weekly or monthly sales meetings. During these discussions we would look at the most cost effective ways to win business. Different sales reps have preferred ways to target their customer based and are judged by their success. Internet directory advertising verses Exhibitions Internet Directory Many engineering companies would take an enhanced listing in an online engineering directory that targets their particular product. This is usually paid on an annual basis. There are many different types of directories with companies being listed in several. One local company in Coventry called Fanuc Robotics (UK) Ltd are listed in over 10 at an annual cost of around £16,000. Each year, at sales meetings they would review this outlay against sales that have been generated from customers viewing there directory listing. If they looked at the figures and found that they had generated over £20,000, then they would have profit from their outlay of £16,000. Obviously if they are generating less than £16,000, then they would be running at a loss. Exhibitions Engineering companies would exhibit at exhibitions like SubCon or Mach held at the NEC, Birmingham. Costs for stands vary from as little as £3,000 with large companies buying more floor space at maybe £25,000. Other costs involved are transportation, set up, hotels, food, market materials (pens, key rings and brochures) and the cost of having the staff off the road for the week of the exhibition. All of these costs need to be taken into account when looking at the outlay cost against enquires/sales generated. Fanuc Robotics (UK) Ltd in 2010 spent around £18000 attending both SubCon and Mach. Actual figures from Fanuc Robotics (UK) Ltd for 2010 were Internet directory costs of £16,248 and Exhibition cost for 2 major events were £18,173. Estimation of sales generated from internet directory was £156,765 and sales generated from SubCon and Mach exhibitions was £389,723. These figures are based on customers indicating how they made their enquiry and can only be verified if the sales department are up to date with their records. Conclusion Both of these ways of generating business proved successful for Fanuc Robotics (UK) Ltd for 2010. Had Fanuc been a new company in 2009 and at their sales meeting they were looking at ways to promote their company for 2010. Being a new company the marketing budget was limited. They now have to decide whether to spend around £16,000 on advertising in several online directories for 12 months or spend £18,000 attending just 2 exhibitions that last only 2 weeks. They decide that internet advertising promotes their company for 12 months continuously and go with this. The opportunity cost would be the £232,958 of lost revenue by not choosing to attend the exhibitions instead of advertising in the online directories.