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Chapter 5: Building an Effective Redistribution Program —

Manufacturers

“How much should we pay for a wholesaler program?”
This is a common question from Sanitary Supply manufacturers who are exploring redistribution, as
well as those who are entrenched in long-standing redistribution relationships. The answer is different
for every manufacturer, and is dependent on a thorough understanding of three factors:
■ Cost Avoidance
■ Revenue Impact
■ Marketing Value

In this section, we will get into the “dollars and cents” of analyzing the potential benefits of
redistribution, and building them into your program offer. You will see which cost avoidance
opportunities can be accurately quantified, and which will require more digging and the judicious
application of assumptions.

The marketing value of redistribution is discussed, along with means of reflecting this value in your
program offer. The revenue impact, which is a function of your price bracket structure, is also taken
into consideration.

When manufacturers consider cost avoidance, revenue impact, and marketing value, they generally
arrive at a wholesaler program which costs more than their average logistics cost. This is consistent
with the fact that most of the customers served through wholesalers are smaller, higher-cost customers
to begin with. The cost premium is further supported by access to new customers, improved customer
satisfaction, and other benefits which are easy to understand but difficult to measure.

Cost Avoidance

Cost avoidance is probably the easiest component to understand. When a customer is sold through
a wholesaler, the manufacturer avoids most if not all logistics costs, as well as all of the activity and
Order Management Costs associated with receiving and entering the order, billing, managing credit, and
collecting.

Because the goal of most wholesaler programs is to outsource the fulfillment of small orders, the
manufacturer must first understand his total cost to service these orders himself. Beginning with the
finished goods sitting in inventory at the plant, manufacturers must quantify the cost of freight and
accessorial charges for delivery to the distributor.

The order management cost of handling orders, as well as billing and collecting, is generally more difficult
to quantify. We find, however, that manufacturers are often amazed at the sheer number of orders received
and managed in their smallest brackets. Your Customer Service, Credit, Billing, and Accounts Receivable
staffs must support all of this activity. Because these costs flow “per order” regardless of order size, the
cost per case or per pound is very high on your smallest orders. It is well worth the effort to analyze and
understand how much these functions cost, and perhaps reduce cost by eliminating activity.

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