Published January 4, 2012
Manufacturers of MRO products that sell via distributors produce products and arrive at their standard cost of goods. They then follow varying pricing policies to these authorized distributors. For example, there are different list prices for different markets, i.e. the Automotive-After-Market has a different listing than the Industrial Distributor that markets to Industry.
Discounts exist for distributors that are not available to end-users. These discounts can be augmented based on end-user, site-specific agreements, commitments of sales volume, competitive situations, etc. In addition, particular industries extend rebates based on a complicated scope of work. Many distributors employ people just to keep track of the rebate process.
The distributor does not have a real standard price for its inventory because of the overflow of discounts that exist for the various agreements. One price agreement for a particular end-user can be (and is) used for the distributor to be more competitive in another arena.
For example, the standard industrial discount for hand tools (some exceptions exist) is 50% from an “industrial list price”. However, 50% minus 10% minus an additional 10% can be attained:
$1.00 list = $0.50 x 0.9 x 0.9 = $0.414, not the standard 50% or $0.50. The distributor will use the 50% discount and add mark-up when they sell to their market (while pocketing the additional discounts provided by the manufacturers).
Mark-ups vary based on negotiation from end-users, relationships, perks and rush spot buys.
The optimum pricing for an integrated supply agreement is known cost plus known fee (mark-up). Now the cost factor can be negotiated back to the manufacturer rather than squeezing down to the provider (a sure way to defeat the program and lose the benefits).
How is the traditional distributor going to address this problem and still provide an optimum cost scenario for the client?