When you start a business, it is essential to determine your product mix, irrespective of the size of the business. Since profit maximisation is your main objective, you need to determine the optimal product mix. Selection of a good product mix can convert a low-profit business into a highly profitable one by using your resources in an efficient and productive manner, satisfying buyer constraints and current demand trends, providing favourable cash flows and preventing oversupply.
- Skill level:
Analyse the current trends in demand for your business. Industry-related journals, newspapers and Internet sources can help you estimate of current demand. Participate in the local and regional trade shows, conferences and seminars and interact with your customers or potential clients through surveys. Go through your own records and perform a customer and sales analysis to determine your topmost customers and their trends. Forecast the demand quantities in each season based on your previous records, but also consider the current economic condition. Determine the right season to produce and sell a particular product.
Perform a cost of production or budgeting analysis, which refers to a plan that allocates resources--such as labour, water, capital--among your alternative uses. Budgets provide a basis for planning and financing requirements. You can analyse each product based on its requirements and allocate a separate cost for every item. Include your ordering and holding costs in addition to production costs. Determine the fixed, variable and overhead costs. Compare your costs with your industry average, a benchmark company or your own target. Adjust your operations if they are high. You can also employ activity-based costing if you are unable to allocate costs to separate products.
Use linear programming, which is a computational method to determine the best course of action. You will need to state your objectives, constraints and means of employing the limited resources in achieving the objective. See Resources for more details about this method.
Use the Solver function in Microsoft Excel to help in your linear programming technique. You will need to determine the available resources and the limited demand for each product in order to employ this.
Tips and warnings
- Hire an efficient professional or a team to deal with estimating the product mix every season or year, since this varies as trends change and time passes.
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