[Jewelry making - Article 00314] - Re: [Orchid] The cost of holding out

[Dennis Walker]

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    Ask a jeweler in Thailand, Indonesia, India or numerous other
    emerging market economies if they feel that the "global economy" has
    "devalued" labor.  There are severe and unfair disequilibria in wages
    and standards of living around our globe.  There seems to be a rather
    insensitive disregard for the people that make up this global
    community, talk as if they were just units of labor and not human
    beings.  Does anyone think that the jeweler in Thailand that makes
    $700 a month or Indonesia $350 a month and is as skilled as any in
    the world would share the views expressed in this economic debate? I
    wonder if that is why there is so much turmoil in the world these
    days. 

    Anyway, here is my 2 cents on business economics.  You must be able
    to achieve a reasonable rate of return on your investment using bank
    interest rates as measure of the risk-free rate of return.  What you
    want also depends on your objective, target rate of return and target
    rate of growth. It would be good to cover your overhead and makes
    some $ on top of that to allow for savings, reinvestment, growth and
    to do some fun things in life. It's a good idea to factor your labor
    into the equation as it certainly has an economic value and it is a
    cost.  The Cost Value of the piece should include labor at a standard
    rate that is competitive with the market and your materials cost. 
    There are some nice computer programs, MS Access based, that can
    calculate your costs based on a Bill of Materials (BOM) for each
    style you make.  Then you can figure out what markup is reasonable
    based on that cost.  I have seen a 1.8 to 2.5 to 3.0 times mark up
    to wholesale depending on the piece. How unique, complicated, rare
    etc it is and the material used.  Also depends on if you got a great
    deal on the stone for example. Maybe you got lucky and bought a Burma
    ruby for $50/carat and its wholesale market value in the gem trade is
    $150/carat. How do you cost your piece? With the gem cost calculated
    based on your actual cost or the wholesale market value of the stone?
     I don't think it is ruthless to ask market prices for things when
    you get a good deal on some material. You could cost the stone at
    $100/carat then multiply your total cost in your BOM by your profit
    factor and that would be a good deal for you and the customer. You
    get some extra profit for "buying smart" and your customer gets some
    savings since the stone is cost out under market of $150. 

    I think one of the critical success factors in the viability of a
    business (workshop, factory or retail) is inventory management and
    maintaining a good turnover ratio.  A standard inventory turnover
    rate that would be considered good is (in my opinion) around 3 times
    per year, that means your inventory sells 3 times in one year.  If it
    gets above that then your doing something pretty amazing and maybe
    illegal.  It's better to have things moving.  Dead stock is a killer
    ... so to speak {:o)  If your feeling is that a piece won't move,
    then discount it and get the cash back out of it so you can invest it
    in something that will turnover faster.  What would you rather have,
    a piece of jewelry in your case or cash flowing through the business
    to cover the costs? I have sold things at cost in the past to get
    the cash out so that I could invest it in something that flew out the
    door faster. If there is some emotional connection to the piece,
    that's a different matter and economics can't really factor in
    behavior that is not rational from an economic point of view.  So, if
    you are too emotionally attached to your work, it can be a high
    economic/business risk. 

    All factors must be looked at as one whole and analyzed deeply. What
    is your available capital to work with (how much  money do you have
    to invest in stock), what is your overhead (monthly expenses) and
    what cash flow do you need to cover that. You must have enough
    cashflow from turnover to cover the overhead and replace your stock.
    And what is your objective? That is an individual matter.  Not
    everyone is in it for just a profit. Other people have modest needs
    and some have high standards of living. Depends on what you want. 
    And then there is the dreaded economic cycle, the down time.  I won't
    get into politics and our the US administration's foreign and
    domestic policies and how they affect our businesses, but those down
    cycles are hard to manage.  Your cost structure has to be able to
    support the business in the down cycles, don't expand beyond your
    ability to survive in rough times. In 2000, the US finished a 10 year
    record breaking economic expansion, I hope we don't have a 10 year
    record breaking contraction to match.  I'm hoping that the
    fundamentals of the economy are generally strong and that consumer
    psychology is just in a  temporary rut fueled by all of this
    negativism about a potential war.  If we can get past this and cheer
    up a little, maybe spending will pick up some. 

    I would love to get more into the discussion on competition and
    innovation, but I have to work, so I'll save that one for later. 

    Sorry for the windy response, but everything seems to be related to
    everything in one way or another, so I tend to meander a bit ... and
    I hope there was something useful somewhere in there. 

Dennis Walker



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