I have received a number of e-mails regarding my August 10th posting (Double Marginalization and the Point of Ideal Price Viability) requesting clarification of my theory. In line with the old saying that a “picture is worth a thousand words,” the following graph will hopefully illustrate the basis for my conclusions. (NOTE: due to space limitations I am not able to incorporate the actual graph into this posting. To obtain a copy of the graph send me an e-mail at jhansen@procureinsights.com with “Graph” in the subject line.)
The data behind the graphic output is an amalgam of 13,000 transactions over a 12 month period involving the purchase of MRO products. (Note: MRO products usually demonstrate a Dynamic Flux Characteristic).
The majority of analyses focus on what I refer to as the Successive Sell, which reflects the graduated or sequential increase in pricing through the transaction stream to the end customer, and the Collective Profit which illustrates the gap between the profit and sale price of the most current transaction. This is an example of limited price variability knowledge whereby most organizations’ point of reference is confined to this narrow range.
The PIPV however tracks the actual Cost/Sell price and Supplier Profit on an individual transactional basis throughout the entire transaction stream. Through this expanded window of visibility you are better able to reliably identify the Point of Ideal Price Viability. In the case of the graph below, the point of convergence (re the point where declining profit and increasing sell price meet) is $500. Therefore the “range of price reasonableness” is between $400 and $600. This is a substantially lower price than the $1,200 the end customer actually paid.
(GRAPH)
Once again I would like to emphasize that the PIPV is influenced by a number of factors such as individual commodity characteristics (re Dynamic Flux and Historic Flat Line). However, the methodology I employed to formulate the PIPV theory can be consistently and reliably utilized with a 98% rate of accuracy in terms of outcome – that is the successful identification of the PIPV.
If you would like to learn more abouth the Point of Ideal Price Viability or commodity characteristics, please feel free to contact me at jhansen@procureinsights.com.
Double Marginalization and the Decentralized Supply Chain (White Paper)
Expanding on the concepts and methodologies that were first introduced in the critically acclaimed article of the same name, this latest white paper from industry supply chain expert Jon Hansen provides needed insight into the impact that double marginalization has on the modern supply chain.
Based on years of exhaustive research and practical experience that was partially funded by the Government of Canada’s Scientific Research and Experimental Development (SR&ED) Program, these emerging elements of an effective supply practice will definitely interest and in some cases surprise you. Included are the specific details surrounding the discovery of the Point of Ideal Price Viability theory as well as the identification of the primary commodity characteristics and their impact on bottom line savings.
Use the following URL Link to obtain your copy of Double Marginalization and the Decentralized Supply Chain (White Paper): http://www.hansencsi.ca/cgi-bin/online/storepro.php
Procurement Insights 
Posted on August 23, 2007
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