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What it’s Worth
Unfortunately, there simply are no hard-and-fast rules about which product lines to source direct from the
manufacturer, vs. source from a wholesaler. Nor is there a simple formula that determines how much
price premium a distributor should be willing to pay for the benefits of sourcing from a wholesaler.
That said, distributors know that wholesalers will generally charge a price premium over the “direct from
manufacturer” price, and they understand that this premium represents the value of wholesaler sourcing.
The worksheet and example on the following page provide a useful tool for distributors who are considering
sourcing a line from a wholesaler. It starts with a price comparison for a few key items, as a means of
estimating the total product line cost difference for wholesaler vs. direct sourcing. The distributor then
plugs in information about order frequency and safety stock in order to understand the inventory turn
improvement.
In Step 4, the distributor can calculate the change in ROI on his inventory investment. Step 5 summarizes
all of the financial data, and shows the impact of wholesaler sourcing, expressed as the Turn-Earn Index.
The result is a one-page snapshot that will help guide distributors’ decisions regarding how best to source
products. An electronic version of this worksheet is available by clicking the Excel link on page 18 or
contacting info@sswa.com.
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