Just like each customer should bring value to your business, each of your suppliers should bring value as well. But, do you know which suppliers contribute most to satisfied customers and profitable operations? Do you know who your most valuable customers are? How about the optimal inventory levels and pricing points to maximize ROI?
With decreasing margins and growing market pressures from technology disruption and new market entrants, it’s more important than ever to be able to answer questions about the underlying performance of your business. To stay competitive, wholesalers and distributors should look to bring greater efficiency to their operations.
To achieve this, wholesalers can often make improvements in three core areas, which we’ll discuss in-depth in this article:
- Inventory management
- Supplier management
In order to make these improvements, companies need to set performance objectives to measure against, make accurate data more available, and use reporting and analytics to gain a clear picture of where they currently stand.
Find your pricing sweet spot
Getting pricing right is one of the most important factors that will determine whether your wholesale business is profitable. Price too high and you could price yourself out of the market. Price too low and you will struggle to recoup the cost of goods sold (COGS).
The cost of materials, general market prices, and market demand are just a few of the factors that should be considered when deciding pricing. To make sure you don’t lose money on a product line, you’ll need to set prices that allow you to surpass your break-even point – the level at which sales revenue covers fixed and variable costs.
To calculate your break-even point in sales dollars, divide fixed cost by contribution margin:
Break-even point (sales dollars) = fixed costs ÷ contribution margin
Where: Contribution margin = sales revenue – variable costs
You can calculate your break-even point collectively for your entire product mix, or per product line. When calculated per product line, the result will indicate the sales volume that must be attained for that particular product line to be profitable.
Ideally, this analysis will be run prior to launching a new product line to verify its feasibility, and on an ongoing basis. The break-even formula accounts for all fixed and variable costs. So, if you aren’t reaching your break-even benchmark, you need to dig into the factors preventing you from doing so. Ask yourself this set of questions after your break-even analysis:
- Are costs too high?
- Are prices too low?
- Does this product line have the potential to be profitable?
Keep in mind that a break-even analysis only provides a bare minimum performance guideline for profitability, but does not necessarily help you pinpoint optimal product pricing. To offer the best price at the best time, you need to have real-time data on costs of inventory, labor, shipping, and customer demand.
To stay on top of these various data points, many companies rely on software that offers pricing functionality and reports. With QuickBooks® Enterprise for Wholesalers, for example, the landed cost feature factors in freight, duties, insurance, and other expenses, so that pricing can be informed by true product costs. Users can also take advantage of account-based reports to easily see which customers’ accounts have been most profitable, which customers pay on time, and where it is beneficial to offer discounts and promotions.
Remember, pricing is a process, not a one-time exercise. With fluctuations in procurement costs, inventory management, or changes in market demand, pricing needs to be changed as well.
Improve inventory management
For wholesalers and distributors, inventory is the most important asset, and often the biggest operating expense. How well inventory is managed determines how well your business can fulfill orders and generate revenue.
Days inventory outstanding (DIO) shows the average number of days inventory is held before being sold, and indicates how well a company can convert inventory investment into cash.
To calculate DIO, choose a time period based on your sales cycle, and use the following formula:
Days inventory outstanding = (Average inventory/Cost of goods sold) x # of Days
Where: Average inventory = (Beginning inventory + Ending inventory) /
A lower result indicates greater liquidity of inventory (and generally cash on hand), and is more desirable. A higher number is less desirable because it indicates that products are sitting on the shelf longer before they are sold, increasing inventory carrying costs and decreasing cash flow.
By keeping track of DIO, you can not only determine which products are popular and which aren’t, but also identify underlying reasons for cash flow problems. This is important for long-term inventory planning. But, to arrive at accurate results for your DIO calculation, and to meet immediate order fulfillment needs, wholesalers need a precise picture of their inventory profile across locations in real-time.
With QuickBooks Enterprise barcoding and cycle count features, inventory quantity and location are updated each time an item is moved to a different point in the supply chain, reducing stocking errors and providing managers with an accurate snapshot of what’s on hand, without shutting down warehouses to do a manual count.
In addition, advanced analysis features inside QuickBooks Enterprise make it easy to conduct inventory valuation analyses, such as DIO and inventory value, as well as view reports on which inventory has been committed or ordered. With this information on hand, managers can make better decisions on procurement and take swift action to discount slow-moving products, so that they don’t burden cash flow. Likewise, sales reps can act with confidence and avoid disappointing customers with delays.
How to evaluate suppliers
Efficient supplier relationships are the first, and arguably the most important, building block to profitable wholesale operations. Wholesalers need to know which up-chain suppliers can provide the products they need in a timely fashion, at the price point and quality level required.
To find your most valuable suppliers, calculate gross margin per supplier:
Gross margin per supplier = ((Supplier sales revenue – Supplier COGS) / Total sales revenue) X 100
The result is the percent of sales profit a specific supplier contributes to overall sales. Supplier gross margin should be measured against the following:
- The percent of late or damaged deliveries by supplier
- The supplier fill rate
- The percent of item recalls by supplier
- The percent of customer returns by supplier
To get the most out of suppliers and ensure you have the inventory to meet demand, wholesalers and distributors can take advantage of business management software to get a detailed view of supplier relationships. With QuickBooks’ Alternate Supplier Center, users can easily view supplier contacts, prices, and items in one place, so that backup suppliers can be quickly found if items are out of stock or quality is unsatisfactory.
What’s more, QuickBooks Enterprise enables wholesalers to hone in on their most valuable suppliers with reports for items by supplier, delivery time by supplier, and shortages by supplier.
After identifying your most valuable and least valuable suppliers, you can prioritize certain supplier relationships, look to improve others, and perhaps end those that prove to hinder profitability.
The benefits of integrated systems
As you may have noticed, the availability of accurate data has been a recurring theme throughout this article. By connecting end-to-end supply chain data points, you can efficiently synchronize processes and cut costs.
For example, with a purchase order management system that “talks” to your inventory management, procurement teams will always have a 360-degree view of what’s in stock and what needs to be purchased. Integrated systems also eliminate the need for duplicate data entry and remove the possibility of human error.
QuickBooks Enterprise for Wholesalers seeks to unify all core business systems on a single platform, so that teams across your organization always have the information they need to maximize performance and profits.
Automated workflows means traditionally siloed systems will all be updated simultaneously, without the need for human intervention. Purchase orders can be auto-filled based on pre-set reorder points, and sales orders and invoices are generated and dispatched automatically to streamline the order to cash process.
Since wholesalers and distributors also rely on external partners, QuickBooks Enterprise is designed to seamlessly share data through electronic data exchange (EDI), or out-of-the-box connectors for e-commerce sites such as Amazon, Shopify, or WooCommerce.
Integration and free flow of data to stakeholders amount to fewer errors, leaner operations, and faster service.
Close the performance gap – boost profits
As a wholesaler, the key to remaining competitive is offering the right product, at the right time, at the right price – while remaining profitable.
Wholesalers can do this by leveraging data and reporting analytics to make smart business decisions at the right time. This includes:
- Finding your pricing sweet spot, based on true product cost.
- Maintaining a real-time view of item availability vs. demand, and optimizing inventory management according to inventory valuation analyses.
- Maximizing the value of supplier partnerships, with an understanding of most reliable and most profitable suppliers.
- Integrating systems to reduce manual error-prone tasks, improve collaboration, and facilitate profitable, speedy operations.
By using digital solutions to measure performance objectives against performance realities, you can better position your business to close the gap and boost profits – bringing long-term benefits to your business and its customers.