When should you run a reverse auction? How much margin is enough?

November 30th, 2010

Generally a company is measured and evaluated by its margin. If margin is to low, earnings are usually not high enough. So to begin with the question is how much margin is enough?

A lot of privately owned companies are happy to grow a little every year, add employees, make payroll, have happy associates and put a little money in the bank. It is only when a company decides to be a public company or use a Venture Capital Company that this philosophy becomes a problem.

This author could go on and on relative to the subject of realistic earnings; which continues to piss me off. However the title of this blog is much simpler. The answer is how much margin  you want to target and how much should your supplier be allowed to make when selling products to your company.

A simple suggestion is if your company margin is plus or minus 5% of the industry norm you probably can afford to look at a number of categories as good candidates for a reverse auction. The technology area is one that often offers a pretty good opportunity for cost improvement which means increasing your margin and reducing what the manufacturers is making. A site that can help you with this in the technology area is isuppli.com which provides market intelligence for the technology space. In a recent review of technology gadgets in Men’s Health magazine isuppli lists a number of products such as Apple IPOD’S and Blackberry Torch whose margins are above 60%. This is based on materials plus production costs and the current retail price.

If you want to come up with a list of good items to take to reverse auction, look at your company’s gross margin and the margins of your suppliers by product and a pretty good list will reveal itself.

We look forward to and appreciate your comments.

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