Get a handle on your costs

I have written before about the way manufacturers respond to retailer 'requests' for supply chain redesign. I have urged all suppliers to get a handle on their real costs to serve the major multiples so that the true profits they make can be calculated and fed into the decision-making process on supply chain negotiations and future key account promotional investment.

I would now like to address the equally serious issue of retailers who cheat by taking supply discounts while blatantly ignoring the rules around which those discounts were originally agreed.

I am constantly surprised by how few suppliers check whether retailers have, in placing their regional distribution centre orders, kept to the letter or spirit of the agreement around which on-invoice discounts were originally negotiated.

The most obvious tenets of such agreements concern full pallet and full load ordering. I have seen discounts as high as 4.3% of gross sales value given away to retailers who agreed to minimum 26 full-pallet loads. What do you find when you analyse actual retailer behaviour? Orders for as little as 18 pallets are being created, often accompanied by several order lines that cause expensive case picking.

If your average selling price is £10 per case, every case you physically pick will reduce the effective margin on that case by 1.3%. A 26 pallet order costing £250 to deliver will cost an extra £1.60 per pallet if the order reduces to 18 pallets. At a grocery standard 80 cases per pallet, the margin hit you have taken on your £10 case is another 0.2%. I have worked with food manufacturers who will not process customer orders that fall outside the agreed parameters. Sadly they seem to be in the minority.

Retailers are street-wise: they will try you out with 24 pallet orders at first, then 22 pallet orders until they find out whether you are on the ball in your sales order processing area. If they find your disciplines are lax, they will order what they like, knowing you are not picking up on it.

Tim Knowles is partner at supply chain consultancy TKA. Contact him at:gvz.xabjyrf@cebnpgvirybtvfgvpf.pbz​