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The Secret to Distributor-Delivery Profitability

Abstract

Distributors who deliver with company-owned trucks incur significant overhead costs associated with their delivery operations. Typically, a small delivery fee is added to each order. In reality this fee almost never covers even 50% of the actual cost of the delivery. In this paper we will show how a simple measure can create huge visibility of customers that are causing you losses vis-à-vis delivery. We will show a formula for easily determining who they are and then discuss remedies that can make them profitable.

Background

This project was carried out for a regional distributor who delivered most of the products they sold via company trucks. We used the formula described in this white paper to target low sales / high cost customers and lower their cost-to-serve. This resulted in small increases in sales, but more importantly reduced delivery costs and improved profitability.

The Delivery-Profitability Formula

One of the great management tools is the Pareto (80/20) chart. It is perhaps the most powerful analytical tool available to managers. In most companies there are a vital few customers who deliver the majority of sales and profit. However, for this project, it wasn’t the vital great that interested us, it was the vital worst. However, sales and even cost wasn’t our focus, the secret was the number of deliveries made for a customer.

To determine true “delivery” profitability you have to adjust gross profit dollars earned from a customer for the total delivery cost.

Gross Profit $ = Sales – Product Cost

Delivery Profit $ = GP$ – (Delivery Cost per delivery * # of deliveries)

Delivery cost per delivery = Total annual delivery expenses / # of deliveries per year

Our goal was to look for low sales customers that were high cost to service (deliver).

Project Results

The top customers are no surprise. Some are great. Customer #2 took only 27 deliveries this year. That was a company that ordered smart and did not cause us excessive deliveries… a high sales and high profit account.

Top Customers

Customer #; Gross Profit; # of Deliveries; Adjusted Gross Profit

#1; $157,968; 167; $146,278

#2; $103,122; 27; $101,232

#3; $72,820; 23; $71,210

#4; $66,905; 39; $64,175

#5; $48,460; 18; $47,200

The bottom are a different story. Note that we were not concerned with the small customer who ordered just once from us in the last year. That is always going to happen. These companies are low sales and low cost. We were looking for the low sales and high cost accounts.

Bottom Customers

Customer #; Gross Profit; # of Deliveries; Adjusted Gross Profit

# 910; $503; 9; -$127

# 909; $447; 6; $27

# 908; $268; 4; -$12

# 907; $273; 4; -$7

# 906; $281; 4; $1

One our worst accounts had 9 deliveries. This company had 1/3rd the deliveries of our #2 customer! Yet they had less than $700 in sales. $700 in sales is not a terribly low figure, but the deliveries made this account negative profit.

This analysis demonstrates clearly what you have to do to increase delivery profitability… either increase the delivery fee for very small customers to recover more of the delivery cost or reduce the number of deliveries. Of these, reducing the number of deliveries is the easiest. More deliveries not only increase our costs, it costs these customers in time to receive and process our invoice.

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