Rationalize Channel Margins to Optimize Distribution Costs

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Rationalize Channel Margins to Optimize Distribution Costs

By

Makarand Joshi
Asst. Professor - Orange City Institute of Higher Education, Nagpur Email: makarand1234@gmail.com; Mobile 9422805719

ABSTRACT:

Distribution Channel Margins form an important component of the distribution cost which directly affects the bottom line of any company. While the companies are trying to reduce the distribution costs, to improve their own margin pressures, there seem to be little innovations in this area. The margins offered to the distribution channel members by most of the companies are fixed in percentage, which is directly proportional to the price of the product. In case of any change in price, the channel margins in absolute rupee terms also fluctuate regardless of the factors affecting the change in prices. If the cost of distribution is a factor affecting the price, change in the channel margin is justified. But the price of the product depends on many factors like cost of raw material, processing cost, positioning strategy, marketing cost, overheads, etc. If the prices change due to factors other than the cost of distribution, the increase or decrease in the channel margins are difficult to justify unless the investment, revenue expenditure and business volume of an individual channel member is taken into account. The author, in this paper, makes an attempt to bring out the deficiencies in the traditional percentage system of channel margins and also proposes a comprehensive model for calculating rational channel margins, which can help in optimizing the distribution cost.

Key Words
Channel Margins, Distribution Cost,

INTRODUCTION:

A survey of about 25 distributors of FMCG products in the city of Nagpur revealed that the distributors get their margins in some percentage and is directly proportional to the price of the product. These distributors are dealing with multiple brands within the same product category of the firm. The only difference was, some margins were calculated markup, and some were markdown. The distributors were not even aware as to why a particular % is offered to them and why not higher or lower. Although they had their own calculations about their estimated gross margins and net margins, there was no systematic evaluation of the fund flow in the entire distribution process. The estimated net margins differed from distributor to distributor and there was little to justify their estimates. As a result, some distributors were found overspending in the process, whereas some were found under spending, affecting the quality of service and resultant loss of sales.

Let us discuss an example given in Exhibit I. The table clearly states that any change in the price of a product directly affects the Distributors Margin in absolute rupee terms and affect the gross earnings of the distributor even if the margin in % and the business volume remains the same. Exhibit I

|Situation |Price of one unit|Distributor’s margin in |Distributor’s Margin in |Volume of |Gross Margin for the | | |of Product |fixed in % to price |absolute Rupee Value |Business |Distributor | | |(Rs.) | | | | | |A |90 |10% |9.00 |500000 units |Rs. 4500000 | |B |100 |10% |10.00 |500000 units |Rs. 5000000 | |C |110 |10% |11.00 |500000 units |Rs. 5500000 |

Source: Compiled by the Author

The above situations shown in Exhibit I do not take into account the following factors. 1. Reason for Price Changes: The reasons for increase or decrease in prices may be due to change in...
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