Get the Most Out of a Distribution Agreement
A distribution agreement is a very valuable document and foundation for your relationship with any broadline distributor. If you do not have a distributor agreement, sometimes referred to as a MDA (Master Distributor Agreement) you need one.
Without a solid agreement, the distributor has the upper hand over pricing and many times, your supply relationship.
Whether you are a small independent operator, a multi-unit chain or a management company at a college, hospital or other large facility, you will have to scrutinize the agreement you make with your distributor in a way that best serves your needs. So what are the areas you need to have in the distributor agreement?
There are the basic Terms and Conditions of your agreement, which include who you are, the length of the agreement, termination rights, liability clauses and more. We will not discuss these at this time.
Let’s look at the financials:
- The Mark-Up – The mark-up is the distribution fee added on your products. This can be a per dollar case fee or a percentage on the cost or the margin/sell of the product. Mark-up on cost or margin are different. On cost, you multiply the product price by the mark-up for the distribution fee. On margin, you divide the cost by the reciprocal.
- 10% mark-up using the cost method, on a $20.00 product is $2.00. Total cost to you the buyer: $22.00.
- 10% mark-up using the margin method is $2.22. ($20.00/.90)
Neither method is better than the other. Just be aware that 10% on cost is roughly 11% on margin.
- Auditability – Be sure to have the right to audit cost. And wherever possible require the actual manufacture invoice paid. All invoice discounts: allowances and product discounts should reduce your invoice price. Cash discounts remain for the distributor.
- Drop incentives – It is more efficient for the distributor to drop a larger load than a smaller one. It costs approximately $100 to make a delivery for a distributor. So the bigger the order, the less this costs the distributor PER PIECE to deliver. Your product mark-up should go down as drop sizes increase. This way you share in the efficiencies you are creating. Implement pricing brackets with lower mark-ups based on delivery size. This way you can control the product cost by reducing the number of suppliers, adding more to your primary distributor and /or reducing the number of deliveries. I often hear that a delivery is needed every day. Few distributor deliver on Sunday – so if you can make it over the weekend – do you still need a delivery on Tuesday and Thursday?
- GPO affiliation and rebate tracking – Make sure you have the ability to have data released to a third party or Group Purchasing Organization. Some distributors will not report the purchase data to a GPO, which will not allow you to receive manufacturer volume allowance funds that are available. Contact Axis Purchasing for more information http://www.axispurchasing.com/
Not required in a distribution agreement but important to controlling cost is the pricing opportunities from direct manufacture agreement internally secured or through a Group Purchasing Organization. Having a good distribution agreement controls approximately 10 -15% of your total product cost. Direct manufacturing agreements control 85-90% of total product costs.