The B&S Theory of Lumber Wholesaling

Ernie Harderc. 1970

1st Annual BCWLA Roast - 1980

“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

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.

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.

The B&S Rating

(B1 + B2 +B3… Bn) + (S1 + S2 + S3… Sn) = X

B - The factors that affect the buying of a potential orderS - The factors that affect the selling of a potential orderX - The B&S Rating

• 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.

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.

B&S Factors

A sampling of B&S factors might serve to illustrate:

Market conditions generally

Market outlook

Production conditions at mills

Competition

Price

Products

Our own personnel(experience, attitude, knowledge.. etc.)

Compensation plans for traders

Customers(peculiar conditions affecting each requirement)

Mills

Availability of transportation equipment(trucks, rail cars)

Credit restrictions

Profit motive, goals

Mill relationships

Customer relationships

Long run considerations or objectives

Foreign exchange rates, surcharges, duties

Supply and Demand

Financial resources of the Company

Sales policies

Buying policies

We might elaborate on a few to indicate, by example, how these factors can affect B&S rating:

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.

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.

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.

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.

Products

Products we are more familiar with would tend to have a higher B&S rating.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 business2. A failure to interpret B&S ratings accurately3. Disregard for – or action contrary – to a course suggested as

a result of B&S rating analysis.

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.”

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