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I Advice - Margin Management - Using the Supplier Profitability Ratio to Hold Your Vendors Accountable
Shipping Company delivers almost anywhere in the world. Masters of logistics the shipping co will take care of your needs whether it is just to the next state or thousands of miles over land and sea. No matter what size or shape there will be a shipping co that will be able to take care of it for you Today's shipping companies can be responsible for moving thousands of container loads per year all around the globe. The movement of goods so vital for economies is all handled by computers and experts who never have to leave their offices.Shipping companies are not all about big business. Every time we send overseas we are using some shipping co or other. How convenient it has become for us, there will usually be a shipping co just down the road that will be able to get things delivered for us. Not just parcels either. Moving overseas, then a shipping company will be required to transport your furniture and belongings to your new country. This is easily achieved these days, as the shipping co will most probably organize a co
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific circumstance. The objective of this exercise is to simply determine if your suppliers are making a genuine effort to enhance your profitability.
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively from profit enhancement. Issues to be considered are excessive inventory carrying costs due to extended lead times, late shipments, missed deliveries, inability to direct ship, excessive conversion costs, rework, packaging issues, lack of or restrictive return policy and the general level of co-operation and willingness to keep you competitive in the market. Some of these issues are easily quantifiable. Others may require an arbitrary assigned dollar fi
A facility is any publicly or privately owned building used for a certain purpose. To ensure that you get maximum services from it, you must take care of it through regular maintenance.Facility Maintenance offers you several benefits. First and the foremost is longer facility life span. By maintaining your facility regularly, you can rectify problems early and keep it in working order for much longer time. This helps you immensely in saving money, since a Facility is usually expensive to build. The other accompanied benefits are low operating expenses and maximum space utilization.In case you are already a part of any facility team or planning to build your own facility in the future, Facility Maintenance is very important. To prevent any major problems in the future, you can prepare a checklist of components that need to be checked regularly.The most critical issue in Facility Maintenance is security, especially at times of emergency like fire or any other catastrophe. All security components, like alarm systems
On the Sales Side
Ultimately to create margin improvement, your entire sales team must have good judgment of market potential as it relates to margin improvement. They must be self disciplined and make intelligent decisions based on fact. Each territory manager must develop his own plan for profit improvement and be flexible on the implementation of that plan. They must be action oriented and customer driven and yet be extremely conscious of profitability objectives.
Results must be measured against the plan. Trend lines need to be established both on revenue and profit growth. They must be able to see the rewards for their efforts. They must accept responsibility and accountability for improved profitability and achievement of established objectives. They need to understand activity based costing.
On the Buy Side
The buy side of the equation also offers numerous opportunities for margin improvements. Approach all of your vendors. Dont be afraid to demand cost reductions. Your customers certainly arent embarrassed to ask you. Review your entire purchasing organization. Do you have true buyers or are they simply order schedulers.
Establish specific inventory reduction goals, turn-rate increase and fill rate improvement. Incenticize the critical success factors on the buy side, factors such as, margin improvement, inventory reduction and inventory turn rates. Include any others specific to your initiatives for profitability.
Try to take advantage of any "itchy-scratchy" opportunities. (A new term I learned from some friends in Detroit.) These are opportunities where you are buying a product from someone that uses the types of products you distribute. The academic term is "reciprocity". The following is a checklist to review when considering margin improvement objectives.
Do you have an established pricing policy?
Do your pricing policies consider market segmentation, risk, service levels and value added?
Is your counter sales/will call priced according to margin objectives?
Do you have well trained buyers and do they negotiate?
Is your purchasing/inventory control department managing the inventory well? Are they using the correct volume discount and item analysis?
How do you measure your fill rate? Do you bench mark it to your competition?
Do you have a system to review and evaluate your RGAs? (Return Goods Authorization)
Do you charge for restocking?
Are you getting the optimum discounts from your supplier and are you keeping the discounts as profit?
Have you done a supplier profitability analysis?
Are your customers profitable?
Do you have significant supplier error?
Do you have a vendor returns program and do you manage it well?
Do you track your own and your suppliers on time delivery? Are you selling the right products to the right customers?
Do you have an outcall program?
Does your inside sales force understand the concept of up selling?
Is your warehouse operating efficiently?
Do you have a freight recovery program or do you fold under pressure and give it all away?
Do you rank and evaluate your customers by gross margin dollars and gross margin percentages?
Do you have an incentive program that is tied to gross margin growth both in dollars and percentages?
On the buy side of the equation, you must be able to determine which of your suppliers enhance your margin opportunities and which suppliers detract from it. Add up all the things that each supplier does to help you increase profitability.
Supplier Margin Contribution Enhancement
What is your discount structure with your supplier and how does it rank in your competitive analysis? Are you getting the same discount or better than your competition? What are your total gross margin dollars earned by supplier? Rank your suppliers accordingly to be used as a weight factor. Apply a 1 to the lowest ranking, a ten to the highest and an appropriate number for those in between.
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific circumstance. The objective of this exercise is to simply determine if your suppliers are making a genuine effort to enhance your profitability.
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively from profit enhancement. Issues to be considered are excessive inventory carrying costs due to extended lead times, late shipments, missed deliveries, inability to direct ship, excessive conversion costs, rework, packaging issues, lack of or restrictive return policy and the general level of co-operation and willingness to keep you competitive in the market. Some of these issues are easily quantifiable. Others may require an arbitrary assigned dollar fig
A business card is the ideal way of introducing your business to the locals in your area. It is a small card that is not very expensive to print and can be distributed in the area in the same way that a flyer would be distributed.It is small and easy to put into a pocket or purse and more likely to reach the recipients home than a large pamphlet or flyer would. These cards make very effective advertisements for your business and can be printed by yourself or by professional printers, depending on your budget.The cards can be distributed systematically through the area where your business is situated. This will bring what you sell or what service you render to the attention of all the people in the area. Use the cards to their full potential by printing on the backs of the cards as well. You can use this side for all the special offers and discounts you want to advertise. You could print a small map of the area where your business is situated or some interesting facts about the city or town. Any snippet of genera
On the Buy Side
The buy side of the equation also offers numerous opportunities for margin improvements. Approach all of your vendors. Dont be afraid to demand cost reductions. Your customers certainly arent embarrassed to ask you. Review your entire purchasing organization. Do you have true buyers or are they simply order schedulers.
Establish specific inventory reduction goals, turn-rate increase and fill rate improvement. Incenticize the critical success factors on the buy side, factors such as, margin improvement, inventory reduction and inventory turn rates. Include any others specific to your initiatives for profitability.
Try to take advantage of any "itchy-scratchy" opportunities. (A new term I learned from some friends in Detroit.) These are opportunities where you are buying a product from someone that uses the types of products you distribute. The academic term is "reciprocity". The following is a checklist to review when considering margin improvement objectives.
Do you have an established pricing policy?
Do your pricing policies consider market segmentation, risk, service levels and value added?
Is your counter sales/will call priced according to margin objectives?
Do you have well trained buyers and do they negotiate?
Is your purchasing/inventory control department managing the inventory well? Are they using the correct volume discount and item analysis?
How do you measure your fill rate? Do you bench mark it to your competition?
Do you have a system to review and evaluate your RGAs? (Return Goods Authorization)
Do you charge for restocking?
Are you getting the optimum discounts from your supplier and are you keeping the discounts as profit?
Have you done a supplier profitability analysis?
Are your customers profitable?
Do you have significant supplier error?
Do you have a vendor returns program and do you manage it well?
Do you track your own and your suppliers on time delivery? Are you selling the right products to the right customers?
Do you have an outcall program?
Does your inside sales force understand the concept of up selling?
Is your warehouse operating efficiently?
Do you have a freight recovery program or do you fold under pressure and give it all away?
Do you rank and evaluate your customers by gross margin dollars and gross margin percentages?
Do you have an incentive program that is tied to gross margin growth both in dollars and percentages?
On the buy side of the equation, you must be able to determine which of your suppliers enhance your margin opportunities and which suppliers detract from it. Add up all the things that each supplier does to help you increase profitability.
Supplier Margin Contribution Enhancement
What is your discount structure with your supplier and how does it rank in your competitive analysis? Are you getting the same discount or better than your competition? What are your total gross margin dollars earned by supplier? Rank your suppliers accordingly to be used as a weight factor. Apply a 1 to the lowest ranking, a ten to the highest and an appropriate number for those in between.
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific circumstance. The objective of this exercise is to simply determine if your suppliers are making a genuine effort to enhance your profitability.
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively from profit enhancement. Issues to be considered are excessive inventory carrying costs due to extended lead times, late shipments, missed deliveries, inability to direct ship, excessive conversion costs, rework, packaging issues, lack of or restrictive return policy and the general level of co-operation and willingness to keep you competitive in the market. Some of these issues are easily quantifiable. Others may require an arbitrary assigned dollar fi
Only a few years ago my approach to business was very much along the lines of risk avoidance. I didn't want to take risk, not at all.In the last few years I have spent more time than ever with risk takers. Talking and meeting with these people has been, and continues to be, extremely stimulating. Through conversations I realised that, despite my previous perceptions, there was an ounce of entrepreneurship within me. In fact, not an ounce but a seed and like all seeds it needed nurturing to grow. I have been focussing on this ever since and channelling my energy and time toward this. One key skill that I realised I have is that of risk management. Through avoiding risk for so long I have a great eye for identifying risks in the first place. What is different now is that I want to take risks. Risk is stimulating and challenging. It breeds uncertainty which takes us back to challenges again. I see more and more that;[a] taking risk is an absolute necessity in today's world. There are far too many peop
Do you have an established pricing policy?
Do your pricing policies consider market segmentation, risk, service levels and value added?
Is your counter sales/will call priced according to margin objectives?
Do you have well trained buyers and do they negotiate?
Is your purchasing/inventory control department managing the inventory well? Are they using the correct volume discount and item analysis?
How do you measure your fill rate? Do you bench mark it to your competition?
Do you have a system to review and evaluate your RGAs? (Return Goods Authorization)
Do you charge for restocking?
Are you getting the optimum discounts from your supplier and are you keeping the discounts as profit?
Have you done a supplier profitability analysis?
Are your customers profitable?
Do you have significant supplier error?
Do you have a vendor returns program and do you manage it well?
Do you track your own and your suppliers on time delivery? Are you selling the right products to the right customers?
Do you have an outcall program?
Does your inside sales force understand the concept of up selling?
Is your warehouse operating efficiently?
Do you have a freight recovery program or do you fold under pressure and give it all away?
Do you rank and evaluate your customers by gross margin dollars and gross margin percentages?
Do you have an incentive program that is tied to gross margin growth both in dollars and percentages?
On the buy side of the equation, you must be able to determine which of your suppliers enhance your margin opportunities and which suppliers detract from it. Add up all the things that each supplier does to help you increase profitability.
Supplier Margin Contribution Enhancement
What is your discount structure with your supplier and how does it rank in your competitive analysis? Are you getting the same discount or better than your competition? What are your total gross margin dollars earned by supplier? Rank your suppliers accordingly to be used as a weight factor. Apply a 1 to the lowest ranking, a ten to the highest and an appropriate number for those in between.
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific circumstance. The objective of this exercise is to simply determine if your suppliers are making a genuine effort to enhance your profitability.
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively from profit enhancement. Issues to be considered are excessive inventory carrying costs due to extended lead times, late shipments, missed deliveries, inability to direct ship, excessive conversion costs, rework, packaging issues, lack of or restrictive return policy and the general level of co-operation and willingness to keep you competitive in the market. Some of these issues are easily quantifiable. Others may require an arbitrary assigned dollar fi
Most people know that a Sunny Saturday is the best day of the week to have a car wash fundraiser. But what if you cannot have a car wash fundraiser on a Saturday? What if the business location you have available is too busy on Fridays and Saturdays, but it can be used on Sunday? What if this location is a very busy location? Could a car wash be done on a Sunday instead asks a group of Professional Models raising money for a cause?Well, personally I have done many car wash fundraisers on Sundays and it can work although not as well. Why you ask? It is because most carwashes are busy on Fridays and Saturdays and a lot of people wash their own cars for the weekend. Therefore, so many people who actually DO wash their cars (I mean just look as some of those dirt bombs out there would you?) already have them cleaned and this eliminates some of your potential traffic of course.Now then, seeing as the place is hopping on Fri and Sat days and nights this can help you alert people to come on Sunday to the car wash too by handing
Do you have an outcall program?
Does your inside sales force understand the concept of up selling?
Is your warehouse operating efficiently?
Do you have a freight recovery program or do you fold under pressure and give it all away?
Do you rank and evaluate your customers by gross margin dollars and gross margin percentages?
Do you have an incentive program that is tied to gross margin growth both in dollars and percentages?
On the buy side of the equation, you must be able to determine which of your suppliers enhance your margin opportunities and which suppliers detract from it. Add up all the things that each supplier does to help you increase profitability.
Supplier Margin Contribution Enhancement
What is your discount structure with your supplier and how does it rank in your competitive analysis? Are you getting the same discount or better than your competition? What are your total gross margin dollars earned by supplier? Rank your suppliers accordingly to be used as a weight factor. Apply a 1 to the lowest ranking, a ten to the highest and an appropriate number for those in between.
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific circumstance. The objective of this exercise is to simply determine if your suppliers are making a genuine effort to enhance your profitability.
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively from profit enhancement. Issues to be considered are excessive inventory carrying costs due to extended lead times, late shipments, missed deliveries, inability to direct ship, excessive conversion costs, rework, packaging issues, lack of or restrictive return policy and the general level of co-operation and willingness to keep you competitive in the market. Some of these issues are easily quantifiable. Others may require an arbitrary assigned dollar fi
The accounting procedure, for recording information, involves two steps, namely journalizing and posting. It follows that every business must maintain a journal (books of original or prime entry) and a ledger (principal book). Thus the system of book-keeping originally envisages that all the transactions must be recorded first in the book of original record, i.e., journal and then each transaction so recorded in the journal should be posted in the principal book, i.e., ledger. Subsequently it was experienced that the labor of recording each transaction with narration in the journal and then posting each entry in two different accounts in the ledger was enormous. The procedure was more time-consuming and resulted in higher establishment cost.It is but natural that in every business most of the transactions relate to receipts and payments of cash; purchases of goods ;. sales of goods etc. It was found to be convenient and economical to keep separate books to record each particular class of transactions. Each separate book meant
Group your suppliers into dollar categories to minimize the number of rankings. If you have one hundred suppliers, apply the 80/20 rule and rank the top ten, the middle grouping and the bottom 10. Apply any form of this scale that makes sense to your specific circumstance. The objective of this exercise is to simply determine if your suppliers are making a genuine effort to enhance your profitability.
Include cash discounts, rebates, co-op advertising, special terms and any other special incentives offered. Quantify in dollars all the enhancements each supplier offers.
Supplier Margin Detraction
Quantify each and every issue that contributes negatively from profit enhancement. Issues to be considered are excessive inventory carrying costs due to extended lead times, late shipments, missed deliveries, inability to direct ship, excessive conversion costs, rework, packaging issues, lack of or restrictive return policy and the general level of co-operation and willingness to keep you competitive in the market. Some of these issues are easily quantifiable. Others may require an arbitrary assigned dollar figure based strictly on gut feeling. What is the real cost of a lost order, a late shipment etc.? Guesstimates are okay as long as you are consistent in your application. Total all those negative costs to determine Supplier Margin Detraction.
Common Margin Detractors
Short shipments/wrong counts
Missed promise date
Damaged goods
Partial shipment
Lost back order
Incorrect technical advise
Pricing errors
Wrong or no part number
No packing slip
Illegible documents
No PO number
Duplicate shipments
Wrong PO number
Poor customer service/response
Faulty products
Difficult claim procedures
Shipment to wrong location
Non responsive to emergency requests
Supplier Profitability Ratio
We can now determine The Margin Enhancement Rating and The Margin Detraction Rating so we can create a Supplier Profitability Ratio using the following formula.
TGM= Total Gross Margin
ME= Margin Enhancement
MD= Margin Detraction
SR= Supplier Rating
SPR= Supplier Profitability Ratio
MC = Margin Contribution
SUPPLIER PROFITABILITY RATIO
1000 divided by ME-MD X SR X 100 = SPR
Example:
Margin Enhancement = $230,000.00
Margin Detraction = $110,000.00
Supplier Rating = 8
1000 divided by $230m-$110m X 8 = .066 X 100 = 6.6
This formula is by no means scientifically accurate. In fact, it is an arbitrary conception designed specifically for the exercise and not the result. The rating itself is not of significance here. What is significant is the exercise itself. It forces you to take a serious look at true vendor performance. List your vendors by their profitability ratios. This should be an eye opening exercise. Take this information and use it in your discussions and negotiations with your vendors. Be careful not to reveal all the details of your rating as it can be easily challenged due to the intangible assignment of various factors. However, it can be invaluable in discussing many supplier issues contributing to margin detraction.
What does a "stock out" really cost? How are missed deliveries impacting your customers service and lost business opportunities? Offer your suppliers an option, improve the ratio performance or increase discounts. Lastly when looking at Margin Improvement and increasing sales revenue a supply chain analysis is beneficial.
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