Aug. 26, 2013
How best to manage your costs? Should you consolidate? Shop the market and place orders based on "cherry-picking" the lowest item cost? This is such an important topic; I plan to cover in two parts.
Let's look at the basic costs of supply. There are three main costs:
- The base cost determined by the manufacturer;
- The shipping cost to the distributor, often included in the 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, proper rotation, accurate picking, loading products, proper temperature control and tracking.
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 commenting to a prime distributor program for the product basics in food, disposables and supplies.
Let us look at how this would work by focusing on the supplier bringing the product to your dock and then looking at the manufacturing cost. (We will assume you have selected and quality and operationally proficient distribution partner).
Distribution cost - determining mark-up
The fees charged by distributors are typically a percentage of the product cost. Assume the mark-up on a product is 10 percent. The distributor simply multiplies the cost of the product by 10 percent and adds that to the price you pay. Sometimes, distributors reverse the process to add some additional profit in what is called margin. In this case, they divide the cost by 90 percent, which could add as much as 1 percent to the total cost. A $10 item at 10 percent mark-up costs an additional $1. A $10 item when divided by 90 percent will cost $1.11.
Neither process is better than the other, but to a buyer who want's visibilities in pricing, knowing pennies add up this is valuable knowledge.
Share in efficiencies
The cost stop a truck for a delivery is relatively the same for 10 cases as 100. So use this to your advantage. Work your mark-up or margin in brackets. Higher mark-up or margin brackets for smaller deliveries, lower brackets for larger deliveries. Now you will be working with the distributor as a team. As delivery size goes up, the cost per delivery goes down and the distributor is happy to share the savings in efficiency. With drop size brackets, you have a powerful mechanism to control your mark-up and manage your supply at the optimum level.
Think about it, you now have two means to lower distribution costs.
First, consolidate purchases to the primary distribution program, which increases your drop size, the larger the drop, the better the value to you. This will also help decrease the administrative cost of managing more invoices, processing more checks and if you chose the right distributor probably decrease receiving time and delivery mistakes.
Next, where possible reduce deliveries until reaching the best bracket. Ask yourself, "What do I do on Sunday, when there are no deliveries?" If you get deliveries six days a week but not on Sunday, is it possible to eliminate a Tuesday or Thursday drop?
Consolidation is therefore one key to better supply costs. Try to maximize the number of cases in order to lower the cost per case. Consolidate dry, refrigerated and frozen items and include paper goods and cleaning supplies. Take advantage of this efficiency and be sure your agreements contain incentives for drop size.
Stay tuned for Part 2 in our next blog.