Sale Volumes and Profit margins by Selling Products and Services - Essay Example

?Improvements in productive flow and product quality lead to an increase in sales and profit Introduction The primary objective of every business enterprise is to increase sale volumes and profit margins by selling products and services at prices much above the production cost. At the time of initiating a business, small scale operations may be sufficient for production. But with growing recognition of the product in the market through advertisements and other sales promotion techniques, companies begin to grow both in size and reputation. To meet the growing demand, it is viable to move production to a larger facility like a manufacturing plant. This can reduce the cost of production and increase the volume of sales. Increased production can reduce the cost of manufacturing per unit, and this can enable the company to lower the price of products thereby increasing sales. In order to earn more profits, it is necessary to boost sales and this can be done by producing better quality goods at reduced costs. This paper discusses how productive flow and product quality lead to an increase in sales and profit. Production and quality In any business, the traditional concept of enhancing sales and increasing profit is to increase the volume of production with innovative technologies so as to produce quality goods that will satisfy the demands of the consumers. Sales can increase when products become easily accessible and affordable for consumers. Therefore, the main focus of the management should be on increasing production and also distribution efficiency. This concept of production is applicable in two different situations. In the first situation the demand of a product is so high that it exceeds the supply i.e. production of the product is below the quantity in demand. In this case, management should apply plans and strategies to increase production while keeping the cost of production per unit low. In the second situation, the manufacturing costs of a product become too high and it becomes necessary to improve production techniques to bring the cost down. For instance, Henry Ford applied the philosophy of improving production for boosting sales. He perfected the production of Model T to reduce production cost and allow sale price to drop, thus creating more demand among the consumers. However, this same concept which is know as production concept may not work for other companies if the consumers do not find the product attractive in terms of quality, performance and innovative characteristics. In such case, it is required to follow the product concept. Under this concept the business organization should focus on improving production techniques to continuously increase the quality of products. However, there is a disadvantage, for instance, producing better mousetraps may not satisfy the consumers’ need for eliminating mice. The demand may be for other types of solutions like a chemical spray or an exterminating service. Moreover, even a good quality product cannot boost sales unless the packaging is done attractively, pricing is affordable and distribution processes are efficient. Also a good deal of promotion and advertising is required in order to convince the buyers that it is a better quality product. This calls for selling concept which implies that consumers will not respond to enhanced quality unless rigorous selling and promotion efforts are made by the business organization. Then there is the marketing concept which indicates that the objectives of business enterprises of increased sale volumes and enhanced profit structure can be achieved by understanding the demand curve of the target markets, and by providing quality goods for consumer satisfaction more efficiently than the competitors. The selling concept holds an inside-out perspective, which means it focuses on heavy selling of the existing products by rigorous promotions and advertisements. Contrary to this the marketing concept holds an outside-in perspective, which means it puts emphasis on consumer demand, coordinates all marketing activities and enhances profit by concentrating on consumer satisfaction. 1 It is important to implement technologies for increasing both the quality and quantity of production of goods and services with minimum labour and reduced costs. Every business is part of a competitive market. Improvement of quality can ensure reduced wastes and increased consumer demand. In many cases managers view quality as burden on costs and so gives it less importance that cost and delivery. This is because they believe that quality can be enhanced only through expensive technological processes and slow inspection methods.2 Business enterprises that believe in supplying high quality goods to consumers know that by increasing satisfaction level of consumers it is possible to create more demand which will increase sale volumes which in turn will offset any extra costs associated with quality production. Moreover, these enterprises are also aware that in the long run cost of quality production will decline because of technological improvement and efficient processes will occur due to quality improvement effort. For the first time, it were the Japanese who realised the cost burden of poor quality and how it has been traditionally underestimated. While estimating the production cost of poor quality, consumer grievances over poor quality were not used to be taken into consideration. The Japanese concluded that cost associated with poor quality used to be very high.3 However, now many managers can now comprehend the effect of quality on market conditions as consumers are becoming more quality conscious. Only by providing quality goods and services at affordable prices can sale volumes be increased and profit margins can be enhanced. Thus, better quality “improves productivity, increases sales, reduces costs, and improves profitability.4” The ultimate result is that the business enterprise can thrive in the competitive market. Elasticity of demand As explained above, increase in production along with cost reduction can lead to low price and enhanced sales. However, this is not always the case. Change in price of products does not have the same effect on individual demand curve and market demand curve. This is because of the economic and religious factors that act as deciding factor for a consumer’s demand. For instance, if the price of cigarettes rises ordinary people will buy fewer cigarettes while addicted people will buy same number of cigarettes. This phenomenon is termed as elasticity of demand.5 Increasing productivity will reduce cost of production and more products will be supplied in the market at low price. But, sales will be affected according to the demand elasticity of the product. Thus if the demand of the product is elastic then sales will drastically rise with the drop of price, which in turn will create increased demand for the factors of production.6 Just-in-time manufacturing Just-in-time (JIT) manufacturing is a “Japanese management philosophy applied in manufacturing which involves having the right items of the right quality and quantity in the right place and at the right time.” Proper implementation of JIT manufacturing can improve productive techniques, increase the quality of product, and decrease production cost and wastes.7 For the survival of a business enterprise, several factors play active role like increased competition, economic fluctuations and consumer demand for high quality products and services. The organizations which can promptly adapt latest technological innovations within the production process to reduce the cost can survive in the competitive market over the long run. JIT manufacturing does not get negatively affected by economic fluctuations as the process is flexible for meeting the changing demand patterns of the consumers. The adaptation of JIT manufacturing is favourable during both economic growth and decline since the volume of production can be adjusted with the rise and fall of consumer demands. This happens as the process “operates on a pull system where demand acts as the impulse calling the production process into action.”8 During economic upheavals, there is a growth of demand and accordingly production with JIT manufacturing can be easily increased to satisfy the markets needs. Similarly, during economic downturns, production can be reduced to adjust with the falling demand in the market.9 There is another reason by implementing JIT and that is the possibility of production cost reduction. The formula of profit is “profit = selling price x sales volume – price.”10 It is not easy for any business enterprise to control the selling price as it is influenced by consumer demand and production supply. Hence to meet the objective of enhanced profit structure, the need is to emphasize on increasing sales volumes by reducing price of products. Sales can be increased by supplying quality products and effective delivery process while price can be reduced by eliminating wastes and unnecessary production operations. JIT is a convenient process of production that enhances quality and reduces costs to inflate sales volumes thereby providing opportunities for increased profit revenue. Conclusion For any business enterprise, the two most important aspects are production and sales. It is the relation between the two that decides the price of products which in turn decides the potential profit margin of the enterprise. The focus of management remains on creating a solid market base by creating market for its goods and services by satisfying the needs of the consumers. Since the consumer behavior and choices are extremely volatile, so it is necessary to regularly update production processes to enhance quality at reduced costs. With improved quality consumer satisfaction can be maximum and reduced costs will decrease the price of products thereby increasing sale volumes and profit margins. References Cheng T.C.E. & S. Podolsky Just-in-time manufacturing: an introduction, ed 2. Springer, London, 1996 Kotler, P. et al. Marketing in a changing world. pp.69-90, In Understanding Business: Processes. Barnes, D. (ed). Routledge, N.Y., 2001 Lipsey, R.G. & C. Harbury First Principles of Economics, ed 2. Oxford University Press, UK, 1992 Madsen, D.A. Print Reading for Engineering and Manufacturing Technology, ed 2. Cengage Learning, USA, 2004 Russell, R.S. & B.W. Taylor Operations Management along the Supply Chain, ed 6, John Wiley & Sons, India, 2008 Sagar, R Together with economic applications. Rachna Sagar Pvt. Ltd., New Delhi, 2005 Read More