As you measure the real costs to serve your customers and can see the true trading margins created, you will be faced with some interesting dilemmas. Should you simply live with current disparities in net margin? Should you increase minimum order sizes to reduce unit costs? Should you de-list the smallest, direct customers?
If you look at best practice in this area, there can be no question that a 'price card' approach to supply chain trading allowances makes sense. Introducing a price card is not easy and maintaining it requires constant vigilance against retailer 'cheating' in areas such as order size and complexity.
Two things you can be sure of, however: manufacturers with a sensibly structured price card and the controls to police it will make more profits than those without a price card.
Can you increase minimum order sizes to mitigate the high costs of handling and delivering small orders? If you force small customers to increase the average interval between orders, they will run out of stock more often and sales of your products will suffer. If you increase minimum order size and customers run out of stock, will they bother to go to the cash & carry to compensate?
The solution used by a well known, branded snacks manufacturer was to manage the transition from direct delivery to small independent retail outlets, to delivery via wholesalers, by working with both sides to ensure the right mix of margin management. The net impact on the supply chain was a small cost reduction but there was also a marked reduction in medium term supply chain complexity. This manufacturer has now avoided major new infrastructure investment.
Most current minimum order sizes were determined such a long time ago that a review of the fundamentals would probably lead to acceptance that change is needed. If you get the formula right, sales will actually grow as you free up the small retailer's 'open to buy' position.
Tim Knowles is partner at supply chain consultancy TKA.