3/23/2021

Dynamics of Distribution & Logistics

Unit 06

Managing distributors – margins and

profitability

Multiple Margins
There are as many ways to calculate a margin as there
are distributors, certainly when measured on an internal
basis.

So never assume that you can compare margins between distributors

(or any business) without first asking what is and is not included. Even
the most qualified of accountants would have no hesitation in asking,
‘How are you calculating your margins?’ so neither should you.

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Managing distributors – margins and

profitability
Gross Margin and Value-Add
The gross margin is a measure of the distributor’s value-added as it is the
purest measure of the difference between the price paid to suppliers and the
price obtained from customers.

The higher the margin, the greater the value added by the distributor.

Managing distributors – margins and

profitability
Gross Margin and Value-Add

There are several things to note for

even this simple measure:
GM is $1,008m/$19,316m × 100 =5.22%

Neither sales nor cost of sales should include VAT or sales taxes.
Cost of sales (sometimes called cost of goods sold) includes all costs incurred
in getting the product to its state and condition necessary for sale. So, it will
include any shipping inbound costs but not costs incurred in shipping the
product to the customer.
Cost of sales includes any work done on the product such as testing,
processing, configuration, assembly and packaging. If these costs are internal
to the distributor, they should include a fair allocation of labor and overhead
costs.
Any discounts, rebates or other price reductions received from suppliers should
reduce cost of sales and therefore increase gross margins.

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Managing distributors – margins and

profitability
Gross Margin and Value-Add
Gross
There are several things to note for
Margin:
even this simple measure:
GM is $1,008m/$19,316m × 100 =5.22%

Gross The cost of writing down inventories for obsolescence, shrinkage or stock
Profit/Sales losses, deterioration and so on is added to cost of sales, reducing margins as
soon as the loss is recognized.

Costs of selling the product or sales commissions are not included in cost of
sales but discounts given to customers are deducted from sales.

Prompt payment discounts received from suppliers are generally not deducted
from cost of sales nor those granted to customers deducted from sales.
However, in some industries these discounts are so significant that they have
become part of the normal discounting mechanism used by suppliers and are
deducted to present a fair picture.

Managing distributors – margins and

profitability
Gross Margin and Value-Add
Mark-up: Note also that the gross margin is the gross
There are several
profit things
expressed as atopercentage
note for of sales. If it
Gross even thiswere
simple measure:
expressed as a percentage of costGMof sales
is $1,008m/$19,316m × 100 =5.22%
Profit/Cost it would be a mark-up (in our example the
The cost of writing down inventories for obsolescence, shrinkage or stock
of sales losses,mark-up
deterioration andis so on5.51
is addedper cent,
to cost of ie
sales, reducing margins as
soon as$1,008m/$18,308m).
the loss is recognized.
It is not uncommon in talking to distributors to
Costs of selling the product or sales commissions are not included in cost of
find
sales but the terms
discounts givengross margin are
to customers anddeducted
mark-up from used
sales.
interchangeably, and incorrectly, so do not
Prompt payment discounts received from suppliers are generally not deducted
assume that the term has been used correctly –
from cost of sales nor those granted to customers deducted from sales.
askin the
However, somebasis of the
industries thesemargins
discountsyou
are soare being that they have
significant
become part of thewith.
presented normal discounting mechanism used by suppliers and are
deducted to present a fair picture.

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Managing distributors – margins and

profitability
Gross Margin and Value-Add

GM is $1,008m/$19,316m × 100 =5.22%

Points to Ponder

Gross margins can be applied to the entire

business, as we have just done for ABC Co, as well
as to individual SKUs, product lines, product
categories, suppliers, business divisions,
customers and customer segments.

It does not matter whether it is calculated for a year or for a day’s

trading, so long as the sales and cost of sales are for the same
period.

Managing distributors – margins and

profitability
Gross Margin and Value-Add

GM is $1,008m/$19,316m × 100 =5.22%

One Point to Watch

One point to watch is that percentages can be

used or interpreted in misleading ways because
they convey no sense of the size of business
done.
e.g., which is better: a gross margin of 12 per cent or one of 7
per cent? Well, if the 12 per cent margin were earned on
product A with sales of $1,000 and the 7 per cent margin
earned on product B with sales of $5,000, the distributor would
have earned a gross profit (or ‘money margin’) of only $120 on
product A but $350 on product B. This might seem obvious, but it
is a key point that is often overlooked.

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 3/23/2021

Managing distributors – margins and

profitability
Gross Margin and Value-Add

GM is $1,008m/$19,316m × 100 =5.22%

One Point to Watch

One point to watch is that percentages can be

used or interpreted in misleading ways because
they convey no sense of the size of business
done.
e.g., which is better: a gross margin of 12 per cent or one of 7
per cent? Well, if the 12 per cent margin were earned on
product A with sales of $1,000 and the 7 per cent margin
earned on product B with sales of $5,000, the distributor would
have earned a gross profit (or ‘money margin’) of only $120 on
product A but $350 on product B. This might seem obvious, but it
is a key point that is often overlooked.

Managing distributors – margins and

profitability

Comparison of gross margin % and gross margin $ earned on different brands

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Managing distributors – margins and

profitability
Margin Mix or Blended Margin
For distributors handling the brand leaders in a market, the
margins will tend to be lower, but the volumes higher if they are
getting their fair share of the brand’s market-leading volumes.

Attempting to increase margins by dropping the top brands damages not

only gross profits but also the distributor’s market credibility if customers
expect to find the major brands stocked at their usual distributor. The
answer lies in managing the margin mix or blended margin.

Managing distributors – margins and

profitability
Margin Mix or Blended Margin
Consider the example shown below. The blended margin of these products
is 7.6 per cent ($34,900/$461,000).

Margin Mix or Blended Margin - Calculation

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Managing distributors – margins and

profitability
Margin Mix or Blended Margin
The options available to the distributor for improving its blended margin are:

Margin Mix or Blended Margin - Calculation

Reduce sales of products D and E, which have margins below the blended
margin, but this would put the money margin at risk. These two products
account for $21,900 of the total gross profit or money margin, almost two-
thirds of the total money margin of $34,900.

Managing distributors – margins and

profitability
Margin Mix or Blended Margin
The options available to the distributor for improving its blended margin are:

Margin Mix or Blended Margin - Calculation

Increase sales of products A, B and C, which would increase overall gross

profits as well as strengthening the blended margin.

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Managing distributors – margins and

profitability
Margin Mix or Blended Margin
The options available to the distributor for improving its blended margin are:

Margin Mix or Blended Margin - Calculation

Add a higher margin product into the mix, which would dilute the impact of
the existing products in the blended margin, and increase the blended
margin so long as the new product’s gross margin was higher than 7.6 per
cent.

Managing distributors – margins and

profitability
Margin Mix or Blended Margin
The options available to the distributor for improving its blended margin are:

Margin Mix or Blended Margin - Calculation

Increase sales prices of any of the products or negotiate better discounts

from the suppliers.

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Managing distributors – margins and

profitability
Margin Mix or Blended Margin

Margin Mix or Blended Margin – Calculation (NEW)

Making some minor improvements to the pricing and volumes of

products A, B and C could achieve a new blended margin of 8.7 per cent,
up from 7.6 per cent

Managing distributors – margins and

profitability
Margin Mix or Blended Margin

8% 25%

Margin Mix or Blended Margin – Calculation (NEW)

Making some minor improvements to the pricing and volumes of

products A, B and C could achieve a new blended margin of 8.7 per cent,
up from 7.6 per cent

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 3/23/2021

Managing distributors – margins and

profitability
Margin Mix or Blended Margin

Margin Mix or Blended Margin – Calculation (NEW)

Making some minor improvements to the pricing and volumes of

products A, B and C could achieve a new blended margin of 8.7 per cent,
up from 7.6 per cent

Managing distributors – margins and

profitability
Margin Mix or Blended Margin

Sales Volume by Margin% where there is a low ball

The ‘low ball’ is the lowest gross margin at which the sales team can make a
sale by applying all the discounts allowed according to internal rules.

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Managing distributors – margins and

profitability
Margin Mix or Blended Margin

Sales Volume by Margin% where there is a low ball

Thank you

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