Page 15 - UnderstandingJanSanRedistribution_flipbook

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Purchasing through a wholesaler minimizes the Distributor’s inventory investment and yields more than twice the return on that
investment than factory direct purchasing. The distributor can have more “dollars available” to invest in additional inventory
and/or other services to meet his customers’ demands and thus improve its “fill rate economics”!
Instructions
STEP 1:
■ Identify the key items you buy from the manufacturer
■ Compare prices when purchased direct vs. through a wholesaler
■ Multiply by your annual volume to compare your “total spend” on these items when purchased
direct and through a wholesaler
■ Calculate the Weighted Average % Price Difference in your total spend
STEP2:
■ Apply the weighted average % difference to your “total spend” on all items purchased from that
manufacturer, in order to estimate your cost to purchase the entire line from the wholesaler
■ Apply your Average Markup on Cost to determine your Total Annual Revenue on the lines you buy
from this manufacturer
■ Assuming your pricing will stay the same, calculate your Average Markup on Cost based on prices
from the Wholesaler
■ Then apply an estimate of your Operating Expenses. In our example, we used 75% of Gross Margin
■ In the “Sourcing from Wholesaler” column, the reduction in Operating Expenses reflects the
Cost Avoidance provided by wholesaler sourcing, including reductions in administrative costs,
dock space, receiving time, warehouse space, and out-of-stocks
■ The result is the Operating Income %, which is used to calculate ROI
STEP 3:
■ Show your number of orders per year from the manufacturer, vs. potential # of orders from the
wholesaler
■ Divide Total Spend by # of orders to calculate Average Order Value
■ Show your Safety Stock level (in weeks) for both manufacturer and wholesaler sourcing
■ This is also your “Minimum Inventory” level
■ Divide “# of Orders” into 52, and add this number to Safety Stock to calculate “Maximum Inventory”
level
■ Calculate the straight average of Minimum and Maximum inventories to get “Average Inventory”
level
■ Divide “Total Annual Spend” by 52, and multiply the result by “Average Inventory” to calculate
“Average Inventory Value”
■ Divide “Total Annual Spend” by “Average Inventory Value” to calculate Annual Inventory Turns, and
determine the potential improvement represented by wholesaler sourcing
STEP 4:
■ Calculate your ROI for both Direct Sourcing and Wholesaler Sourcing
■ ROI = $ return divided by $ investment (in this case Operating Income divided by Inventory
Investment)
■ The example isolates the impact of Operating Income and Average Inventory. This is not to be
viewed as a total ROI calculation for the business which we know is probably in the 5% to 25%
range for the vast majority of distributors. Rather, this analysis intentionally isolates the inventory
investment (ignoring fixed assets, accounts receivable, and the offset of accounts payable) and
computes the “return”, in this case Operating Income, against that one investment component
only.
STEP 5:
■ Calculate your “Turn-Earn Index.” This is a measure of the earnings provided by your inventory
investments, and reflects the value of holding less inventory and turning it faster as a result of
wholesaler sourcing
STEP 6:
■ Evaluate the results and determine your best course of action
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