Download White Paper: The Secret to Distributor-Delivery Profitability
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. Simply put, they are the low sales / high cost customers. We will show a formula for easily determining who they are and then discuss remedies that can make these customers profitable.
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 transform them into lower cost customers. 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 customers 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).
Below we present the top 20 and bottom 20 customers from a delivery profitability perspective. The top 20 customers are no surprise. We have some great customers. Note how customer #2 took only 27 deliveries this year. That was a customer that ordered smart and did not cause us excessive deliveries… a high sales and high profit customer.
The bottom customers 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 are low sales and low cost customers. We were looking for the low sales and high cost customers.
The table below shows customers with less than $200 adjusted (for delivery expense) gross profit. Notice the customers at the top with 9 deliveries. This customer 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 a negative profit customer.
This chart 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.
The simple action item that resulted from this analysis was to work with the low sales – high cost customers to increase how much they purchased per order. This reduced the number of times a year they ordered. In addition, we instituted a small increase in delivery fee for smaller customers. Some of the sales team was worried that we would lose small customers, but the $10 – $15 increase was not noticed. This was such a small expenditure for these small customers they gladly paid to have the product delivered to their business.
Using the right metric can lead to visibility of true profit per customer. If customers are unprofitable, often simple remedies that are win-win or neutral can make every customer profitable. For distributors who deliver product with their own trucks, this metric is profit adjusted for delivery expense.
Delivery Profitability Data
Below are the top 20 customers by this measure.
Below are the bottom 20 customers sorted by the number of deliveries and gross profit $.