In my previous post about distributors, I mentioned that these guys are experts in SKU management. Some of the top global technology distributors such as Ingram Micro or Tech Data engage in millions of transactions per day while managing logistics for an equivalent number of items. This complex stuff.
More importantly, they have to do this in a profitable manner. As I mentioned before, distributors work off of wafer thin margins. So, how are they doing this?
One approach they use is a bottoms-up method, wherein product managers keep track of the profitability of their lines. In many instances, product managers are managing multiple lines of products from several suppliers, making their jobs fairly complex on a day-to-day basis. While gross margins are a good indicator of business, I would argue that contribution margins is a better indicator of the pulse of the business.
I took the liberty to do a quick analysis of some key distributors based on their 3Q-2013 results. Their quarters do not match up exactly as each of them have different fiscal years.
While each company has a different definition of COGS, in general, this number encompasses – purchasing costs (raw materials, ingredients etc), labor costs inventory costs etc. Cost drivers for variable costs include (and not limited to) marketing, sales, logistics, inventory, finance, transaction costs.
Check out the very slim Net Income and very large WC. In other words large amounts of capital is required to essentially drive very low margins. At the very gross level, banks perhaps offer a better rate of return – right? More on these numbers later.
Going back to GM and CM’s, at a tactical level, both these metrics make sense. But, to get a better sense of portfolio profitability, the product manager is better served, when they factor in the CM’s. Typically, CM’s are calculated at the SKU levels and also at the portfolio levels to get blended margins. The product manager has to balance a number of different aspects to maintain or grow their margins. These typically include actions to obtain adequate fiscal support from their suppliers and also preventing sales from going too deep on discounts to get close a deal.
Some product lines tend to drive large margins and essentially subsidize product lines with low or often negative margins. The blended margin essentially smoothens these margin discrepancies.
I’ll cover some of these numbers in further detail in my next post.