3. “Many years ago I developed and wrote out The B&S Theory of
Lumber Wholesaling. Over the years it seems to have withstood
the test of time and provided a useful framework in our
approach to trading.”
- Ernie Harder
4. Buying & Selling
• The end result of each transaction (profit) in lumber
wholesaling is a function of both BUYING & SELLING
• There are many ancillary factors, eg. credit, traffic, etc. but we
shall assume that these become a part of either buying or
selling of each order.
5. B&S Theory
The B&S Theory says that every potential transaction that exists
in wholesaling is to maximize profits; both short run and/or long
run, it is critical to take into account both the buying and selling
involved in each potential order.
6. The B&S Rating
(B1 + B2 +B3… Bn) + (S1 + S2 + S3… Sn) = X
B - The factors that affect the buying of a potential order
S - The factors that affect the selling of a potential order
X - The B&S Rating
7. • If we were to say that the various “B” factors add up to a
maximum of 10 under certain conditions and that the “S”
factors add up to a maximum of 10 under certain
conditions, then the highest conceivable B&S Rating for any
transaction is 20
• Such a rating would occur under circumstances that see us
with an open-priced order about to be sold to a customer
with whom we have complete price discretion – and he
satisfies all other prerequisites for qualifying as acceptable
customer – eg. credit, etc. That is, we could say that any
‘acceptable’ firm offer from an approved account against
open-priced stock from a mill would carry a B&S rating of 20.
8. Application
In applying a B&S rating to “potential business” we might define
this phrase as the conditions that exist or occur – and in some
matter of degree give rise – to the possibility of firm business
being transacted.
e.g., inquiry from a mill, inquiry from a customer, surplus items
at mill, in warehouse inventory, information about future plans
by customer, by mill, information about competitors’
activities, inquiry from customer, offer from customer, request
for information from mill – that is, any business lead has a B&S
rating in wholesaling.
31. We might elaborate on a few to indicate, by example, how these
factors can affect B&S rating:
32. Credit
Credit probably affects the “S” more than the “B” factor in the
sale. For example, a nil credit rating would tend to cancel out any
positive “B” factors with a resultant B&S rating of zero. Of course
our own credit worthiness – limits – can influence “B” factor in
potential purchase from a mill.
33. Mill Relationships
Some mills contribute to high “B” values because of better
relationships we enjoy with them, or perhaps because of
financial involvement with them, or our personnel, etc. Some
mills contribute to lower “B” values. In fact “B” value of a mill
who will not sell us - for any reason – would tend to cancel out
any “S” value with a resultant zero B&S rating for any potential
transaction.
34. Market Conditions
In periods of strong demand the “S” value tends to strengthen
and as supply becomes scarce the “B” values tend to diminish.
The resultant B&S rating may remain unchanged.
35. Future or Long Run
Considerations
Inquiries from new accounts whom we are anxious to cultivate
might tend to strengthen “S” values for particular inquiries.
Similarly a desire to develop closer relationship with a particular
mill could tend to increase “B” values – reflection of greater
motivation or incentive to move, for example, surplus offerings
from that mill.
37. Company B&S Rating
Each company has a different B&S rating for each transaction or
potential transaction. There is even interaction among
companies to affect B&S ratings. For example, when we lose a
potential order to any competition our B&S rating for the inquiry
– now dead – automatically becomes zero. In fact, any specific
inquiry that is dead (perhaps Customer ‘A’ has decided against
buying) results in a zero B&S rating. However, this must not be
confused with the fact that the stock covered for Customer ‘A’
would probably still have a valid B&S rating in terms of its
potential sale to potential Customer ‘B’ – perhaps not yet
located.
38. Affect/Reflect
The B&S Theory does not affect change. It merely reflects situations.
However in reflecting situations it can serve as a basis for analysis –
which in turn can be useful in affecting change. It can assist us in
pinpointing strengths and weaknesses. It may reveal trends – e.g. our
B&S rating for certain business (e.g. Douglas Fir) may be unchanged
over recent years – but analysis might indicate that the “B” has
dropped while the “S” has strengthened – or vice versa – with net
result unchanged. In actual fact very recent changes in span tables
among species probably suggest Fir dimension in Ontario – for
example – may experience reduced “S” value in our formula as SPF
takes over some of that market; awareness of this assists in planning
inventory decisions.
39. Territorial Managers
It may be important for territorial managers to recognize good
B&S ratings in potential business. The ones with highest ratings
may or may not command priority in day to day
trading, depending on intangible aspects such as long run
objectives.
40. Company Operation
In terms of overall company operation, it becomes important to
recognize the significance – and rating of individual factors – that
combine to comprise the B&S rating for our business. When
these are assessed then it is possible to determine in what areas
it is desirable to reallocate resources in accordance with
maximizing B&S potential.
41. Trader Experience
The more experienced a trader is – the more knowledge he has
of a particular trading situation – the market, the
mills, customers – and products involved – the greater is the
confidence he has in directing decisions with respect to that
business because he is in a better position to recognize the B&S
rating.
42. Fair Profit Objective
Perhaps maximum long run benefit and profit is achieved when a
potential transaction has a B&S rating of 20. We say ‘perhaps’
because it is possible to abuse ‘open price’ or ‘best price’
arrangements with suppliers or customers. This says in effect
that we may enjoy a short run B&S rating of 20 for product or
product line – with particular supplier who gives us total price
discretion – ie. ‘best price’ – but a failure to interpret and act on
this rating responsibly could result in a long run rating of ‘zero’.
That is, if or when the particular supplier decides against
renewing such a contract because of a belief or evidence of less
than satisfactory performance on our part.
43. Therefore it is important to interpret long run B&S ratings in the
light of a fair profit objective. Under existing framework of
operations a long run B&S rating of 20 in our business might be
related to a predetermined ‘fair’ gross profit margin or objective
that is different for direct versus warehouse business
respectively. The analysis of ‘fair’ profit objective of course
becomes another separate, although related aspect which
recognizes a whole separate set of considerations such as
risk, return on investment, etc.
44. Perhaps there is an inherent danger in our business – where
organized by function – e.g. buyers and sellers – to lose sight of
the need for most efficient combination and utilization of
resources to maximize the B&S rating. The more that all
personnel involved in the transaction – from order
consummation to delivery, invoicing, collection – are in tune with
B&S rating the greater the potential for capitalizing on
maximization of B&S and in turn ultimate objectives.
45. It is natural for salesmen to become frustrated when they see an
“easy” sale go by the boards because of a failure to secure
effective mill coverage – or supply. Perhaps if the salesman had
recognized in that inquiry the low “B” rating he would have
dropped it in favor of emphasis on potential business wherein he
perceived a better B&S rating going for him. This does not
defend the existing rating – it might, however, assist traders in
utilizing existing ratings effectively.
46. Bad Orders
Bad orders are usually the result of one or a combination of the
following three factors:
1. A failure to recognize the B&S rating in potential business
2. A failure to interpret B&S ratings accurately
3. Disregard for – or action contrary – to a course suggested as
a result of B&S rating analysis.
47. Conclusion
Probably the greatest practical application of B&S Theory in day
to day trading rests in its potential as communications tool – in
covering inquiries more efficiently and working mill offerings
more effectively. For example, if you have a customer inquiry for
specific item – and you circulate this to other traders (buyers) it
can be useful to note somewhere on it what you consider the “S”
value to be; you might just say “High ‘S’ Value” – indicating it
worth putting effort into coverage.. or, conversely, on a particular
mill offering – note estimated ‘B’ value to indicate, for
example, that mill “needs help in moving it – and/or can be
bought very well.”
