Sept. 10, 2013
In Part I of "Optimize Distribution Costs," we discussed how to determine mark-up, how to improve efficiencies and the importance of consolidation. Remember, there are three basic costs of supply:
- The base cost determined by the manufacturer;
- The shipping cost to the distributor, often included in the manufacturer's delivered price; and
- The warehousing and delivery cost determined by the distributor and referred to as a cost-plus mark-up or margin.
Within these costs, are those of warehousing and storage, delivery and customer service.
From years of experience, Axis Purchasing has learned that the best approach is to work with suppliers and consolidate deliveries whenever possible in order to yield the greatest long-term savings. Axis recommends committing to a prime distributor agreement for your food, disposables and supplies.
A look at manufacturing cost
In addition to shopping distributors for the best price, you can also shop manufactures. With distribution cost set, build direct manufacturer agreements. These will now work better to reduce the overall cost when linked to your prime distribution agreement.
Let's use paper goods or warewashing supplies as an example of efficient supply management. You may buy paper goods or chemicals from a separate paper supplier due to a lower price. If you make a direct agreement with the manufacture for the base product cost and add those products to your broadline distribution, you could save on your total food spend. This additional volume increases your distributor's drop size to a better mark-up or margin bracket so it will reduce ALL of your costs plus the administrative cost of the extra delivery.
Manage expenses through your GPO
Not enough volume to warrant a direct manufacturing agreement, not certain you have the best direct agreement, not enough time to source all the manufacture items you purchase? This is where group purchasing can assist you. A GPO (Group Purchasing Organization) will help you increase the number of programs covered. By combining volumes with other buyers, you decrease your costs. Distribution accounts for roughly 15 percent of your product cost. The remaining 85 percent comes from the product. A GPO works to reduce the manufacturer costs.
Put a prime distribution agreement in place and then focus internal attention to core products and operations. For the remainder of the products, team with a GPO to leverage the power of group buying. There are a few types of GPO's; I have worked with several and created the Axis Purchasing program for maximum benefit. We focus on the product not the delivery. Our program provides flexibility with your choice of distributor and product, coordination for the best internal sourcing and group purchasing agreements and expertise with knowledge of alternative products in the market that meet your needs at a better quality level or price. Most customers save 3-6 percent.
The best way to reduce your cost is to commit to a distributor, negotiate directly on your key items and join a GPO to cover all the small volume items where you lack the volume and the time to negotiate directly.