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the Revenue line, the manufacturer should plug in his actual freight cost for shipments to the wholesaler,
depending on the wholesaler’s order size.

Line 3 – Order Management Cost
This is perhaps the most difficult area to quantify. Order Management entails all of the activities associated
with processing an order, including:
■ receiving it from the customer or agency
■ entering it into the internal system
■ checking customer credit status
■ pricing
■ confirming
■ scheduling freight
■ invoicing
■ collecting
■ reconciling deductions

As a starting place, it is helpful to aggregate the salaries and benefits of those people responsible for Order
Management, and divide it by the number of orders processed annually, to arrive at a cost per order. Costs
in the range of $50-$150 per order are typical. When a $100 per order cost is spread over a 40,000-
lb. truckload order, it is only ¼ cent ($.0025) per pound. On a 2,000-pound order; however, the Order
Management cost would be $.05 per pound!

Outsourcing Order Management to a wholesaler represents a significant reduction in activity across all of
the departments responsible for the above functions. The reality of converting reduced activity to reduced
cost is addressed elsewhere in this guide. For now, let it suffice to recognize that if activity drives cost, then
the elimination of activity must result in the elimination of cost.

Line 4 – Total Freight and Order Management Cost
This is simply a rollup of Lines 2 and 3, and provides a comparison to the cost of your redistribution
program. Note also that in our example, as you move from Truckload order size down to the “Small” order
size, the total cost increases at a faster rate than the bracket price. This is a typical situation, and is most
noticeable when manufacturers ship “less than minimum” orders but can charge no more than their
highest bracket price.

Line 5 – Redistribution Allowance
This is where you can plug in your existing redistribution allowance, or experiment with various allowance
levels to help you understand the value of redistribution for the various order sizes. While this allowance
may take the form of a “per case” or “percent” allowance, we believe that offering it as “dollars per pound”
(or per cube) helps all parties with calculations. In addition, this structure helps to hold the program steady
in spite of changes in product mix and pricing.

And while the logistics experts speak in terms of “dollars per cwt” (hundredweight), the rest of us generally
find it easier to think on a “per pound” basis.

Line 6 – Revenue Less Cost
For the “Manufacturer” orders, this is Line 1 minus Line 4 (Total Freight and Order Management Cost).
For the “Wholesaler” orders this is Line 1 minus Line 2 (Manufacturer Freight) and Line 5 (Redistribution
Allowance). Line 6 provides the clearest picture of “what you keep” when orders of various sizes are
serviced directly vs. through a wholesaler.

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