Page 26 - UnderstandingJanSanRedistribution_flipbook

In this example, redistribution provides a clear benefit for small orders, as well as “medium-sized” orders.
The exact benefit by order size will vary by manufacturer, based on his prices, cost, and redistribution
allowance program. The key point is that a properly-structured redistribution program provides great
economic benefit to manufacturers on all but the largest orders, and frees up funds for higher-return
investments.

Let’s look in detail at how each of these lines is calculated:

Line 1 - Revenue
This line represents the weighted average price per pound for the manufacturer’s product line. For the
“Order to Distributor” columns, the figure reflects the prices charged to distributors; in the “TL Order to
Wholesaler” columns, it is the gross price that will be charged to the wholesaler. In our example this is the
truckload price, assuming the manufacturer is shipping full truckloads to the wholesaler. It may also be the
appropriate bracket price if the wholesaler is receiving less-than-truckload orders from the manufacturer.

It is critical that this information be calculated accurately, as it will drive not only the manufacturer’s
financial analysis, but the wholesaler’s assumption about gross margin to be earned on his selling price
vs. his purchase cost.

If the manufacturer’s price bracket structure has a consistent premium per pound across the brackets,
this calculation is relatively simple. If not, it is best to create a spreadsheet reflecting volumes, prices, and
weights by SKU or category, so that an accurate picture is gained.

Note: This calculation requires that we use price per gross pound, including the weight of packaging.
Because freight costs flow per gross pound, all calculations, as well as the redistribution allowance, should
be stated this way.

It is also very important for the manufacturer to be “true to himself” about the reality of collected prices. If
in fact many small orders are shipped at truckload prices (or if “bracket jumping” is allowed), this needs to
be reflected in the analysis. Failure to do so will understate the value of redistribution. Similarly, if certain
products are subject to a high level of billback activity due to contract pricing, this must be reflected if such
business is likely to be handled by the wholesaler.

Line 2 –Customer Freight Cost
The Manufacturer’s Freight Cost is usually the major component of cost avoidance offered by redistribution.
It is in this area that the difference across various order sizes must be fully understood, and this is where
misconceptions often surface. A company which uses a “rule of thumb” of $.05/lb. for customer freight is
overlooking the high cost of shipping small orders, which is driven by:
■ Less efficient trailer utilization
■ Multiple stop charges
■ Higher out-of-route miles

Looking only at stop charges, a small order of 1,000 lb. thrown on the back of a truckload order might
appear to be “riding for free.” But at $75 per stop, that order has driven an incremental cost of $.075/lb.
in stop charges alone.

Allocating Customer Freight costs across order sizes is a somewhat inexact science, and requires the
involvement of Supply Chain and Finance. But it is a critical step to get everyone on the same page in order
to gain a consistent understanding of the value of redistribution.

Note that for orders serviced by the wholesaler, this manufacturer has included the freight cost of shipping
his products to the wholesaler. In our example, this cost is $.03/lb, suggesting a Truckload rate. As with

26