ROI of a distributor or supplier – business turnover, margins and rotations (in e-commerce and FMCG)

ROI_Brandalyzer.png

Retail excites me a lot because it is a simple business of buying and selling goods and yet it covers almost every complexity under the sun. It has a complex supply chain from raw material to finished goods, yet seeming so simple and convenient when we add items to our shopping cart in offline and online stores. One of the most interesting aspects of retail distribution is the calculation of return on investment by various stakeholders in the supply chain.

If you are a manufacturer, you will witness both suppliers upstream and the distributors downstream investing in your business. Suppliers setup factories, invest in raw materials, labor, technology, etc. for your products. Similarly, distributors or retailers buy your finished products, invest in warehouses, technologies and partner with you in distributing the product to your end customer. Both these stakeholders invest capital in making and/or distributing your products and will look for profits in doing so. While IRR is probably the most sound way of calculating the ROI of an investment, most distributors and suppliers you meet always do a quick back of the envelope ROI calculation and it is never far away from the IRR(internal rate of return) method in its results and is really cool to work with suppliers and distributors on the various parameters that go into it.

“Across all kinds of investments, ROI is more common than IRR, largely because IRR is more confusing and difficult to calculate.” – Investopedia

As businessman, all vendors, distributors and retailers are interested in the return on working capital employed (ROWCE). After all there is only so much cash in the bank! Distributors and vendors are concerned about two key aspects: profit and cash – maximize profit by minimizing cash requirement. ROI can be increased by increasing profit and by reducing investment requirement. Increasing profit can happen by increasing sales revenue or by reducing expenses and in expenses cost of goods sold (COGS) is the major component that is focused on. However, one has to check all other retail components such as goods returns, payments, transportation charges and other options to reduce costs.

But more important than anything in business is CASH. Vendors and distributors want cash to 1). hold inventory and 2). extend credit in the market. As the turnover starts to increase, the inventory requirement starts to increase and credit requirement in the market increases. This increases the cash requirement for vendors in the market and blocks lot of capital in the market. As inventory requirement increases, there are advantages of ordering full truck loads (FTLs) and holding the inventory for shorter periods of time too, but it depends a lot on category lead times. Therefore, distributors are always on top of their ROI calculations to keep a check on their business situation.

Let us look at various cases to understand ROI calculations:

Case 1:

You are buying a product at Rs.100 on day 1 of the month and you sell it to another stakeholder at Rs. 110 immediately. The stakeholder will give you the Rs. 110 exactly after 1 year. What is your return on this business? Simply put, the answer is Gross Profit/Investment = 10/100 = 10%. The formula is also nothing but (earnings – expenses)/(investment).

Case 2:

You are buying a product at Rs.100 on day 1 of the month and you sell it to another stakeholder at Rs.110 immediately. The stakeholder will give you the Rs.110 exactly after the end of one month. What is your return on this business? You  100 rupees in inventory at the start of every month and you get Rs.110 at the end of the month. So, I make Rs.10 every month and that multiplied by 12 times for 12 months makes it a return of Rs. 120. Return of this business is 120/100 = 120%

The difference between case 1 and case 2 is not in the margin percentage but in the number of rotations of the invested capital. It is actually about margin * number of rotations of invested capital. In the first case, the margin is 10% and the number of rotation of invested capital in one year is only 1 – hence 10%*1 is the return. In the second case, the margin is 10% and the number of rotations of invested capital in one year is 12 – hence 120% return.

But, when you meet a supplier or a distributor, he will tell you that he has invested in a special account manager for you, a special warehouse for you, a special machine for you, etc. So, there are direct and indirect expenses. It is important to break-down the vendor or distributor’s  expenses and account it correctly. The formula comes down to ((Gross Margin)*(Number of rotations of invested capital) – (Expenses direct/indirect))/(Capital Invested)

While the cunning business guys always tell you that they’ve invested in warehouses, human resources and machinery only for you, typically they will always serve more than one customer or vendor. So, it is important to understand their overall business value and your contribution to that and take expenses in proportion to that. If a supplier is supplying to 3 customers and you are contibuting to 40% of their business. It is safe to say that you should take 40% of the human resources, depreciation of the machinery, etc. into the expenses and not the entire expenses of the human resources and depreciation expense.

Case 3:

You are buying a product at Rs.10 and selling it at Rs.11 immediately. The Rs.11 is given to you after the end of the third day of the sale. However, in this business, you have to invest in a machine worth Rs.36 and has a lifetime of 3 years. Return is ((10%)*(number of rotations is 120 because you are getting money every 3 days) – (depreciation expense of Rs.12 for the first year – straight-line depreciation method))/(Rs.10 as capital invested)

The important thing is you don’t take the entire 36 rupees invested in the denominator. Most suppliers and distributors will do this in their calculation when they discuss with you. But, that is sitting as an asset in the balance sheet with only depreciation as an expense coming into the profit and loss calculation.

Case 4:

Let’s take a new case. At the start of the month, you bought Rs.200 value of a stock. You are selling Rs.100 value of stock every month to another stakeholder and that stakeholder gives you Rs.110 at the end of one month. The return of the business is: ((Rs.10 profit*12 times) – (direct/indirect expense))/(200). If I ignore expenses for a moment, your return has dropped from 120% in case 2 to 60% straight. This is because of the Rs.100 capital invested in the stock that has not moved for the entire year. Your return on investment drops by the ratio of the non-moving stock (or non-rotating capital) to the overall stock (overall capital) invested. You might think that the Rs.100 non-moving inventory should not be entered in this calculation and instead, it should sit on the balance sheet (as inventory under assets). However, that is not true for stocks that are not being sold for such a long time. In fact, many companies start taking only 85% of the value once it is not sold for 3 months and 60% of the value once it is not sold for 4 months. This is assuming that one needs to give steep discounts to sell something that is not sold for such a long time and the inventory is losing its value in the warehouse because of natural depreciation, wear and tear, theft and outdated technology. However, this very much depends on business to business and product to product.

Case 5:

You bought Rs.100 of stock at the start of the month and you sell it to another stakeholder. You will get Rs. 110 from that stakeholder at the end of two months from the sale. This means the return is: (10% margin)*(6 rotations) = 60%, a drop from case 2 primarily because of the reduction in number of rotations.

Case 6:

In the above case if the Rs.100 is taken from a loan then the investment is only the interest paid and not the entire amount of Rs.100. Distributors and suppliers would again include the entire amount as a common trick.

A healthier ROI for most suppliers and distributors ranges between 25-40%. From the above cases, we learnt that the product margin is important, but rotations of capital invested in inventory and how much investment is needed matters a lot in retail.

The number of rotations of capital invested in inventory for a period is calculated as 365 divided by (the average number of days of inventory held during that period). In cases where it is complicated to calculate the average number of days of inventory, closing inventory for the period is used as a proxy.

In case 1, you would want to improve in rotations. If your rotations are good, you would want to improve on margins. If both margins and rotations are good, then you would want to improve on overall business volume.So, profits are about the business volume, absolute margins, the number of rotations of capital and the capital in rotation. It is not just about margins, it is about how much money is required to invest and how many times can someone rotate that money.

Thanks

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Are You Losing Money By Calculating Margins Wrong?

I spent time on Friday helping a client update spreadsheets and Excel reports that used an incorrect formula to calculate the margin on bids for construction jobs. While this particular client was looking for a margin of 25%, he was actually getting one closer to 20%. On a $100,000.00 bid, that can be the difference between profit and disaster.

I see sellers new to retailing make this same mistake over and over again.

The seller wants a “mark up” of 30%

So they take their cost (the wholesale price), multiply that by 30% and add the result to the wholesale cost to find the retail, or selling price.

Wrong!

You can certainly find a retail price that way, but it won’t give you a 30% margin. The confusion stems from

  1. Confusion about calculating percentages
  2. The difference between margins and mark ups

YOUR MARK UP IS NOT YOUR MARGIN

Although it is less important, let’s talk about mark up vs margin first.  Many people use these terms interchangeably to mean the difference between what you pay for goods and what you sell them for – that is, gross profit. However, they are not the same thing. Misunderstanding the nature of mark ups and margins can make it easier to calculate them incorrectly – which cuts deeply into your bottom line.

A margin is, most simply put, the percentage of the selling price that is the profit.

  • If you pay $6.00 for an item and you sell it for $10.00, you made a gross profit of $4.00.
  • $4.00 is 40% of $10.00 – so you have a margin of 40%
  • Notice this important distinction- the 40% margin is 40% of the final selling price, not of the wholesale cost.

A mark up is the percent of the cost you add to the wholesale price to get to the selling price.

  • If you pay the same $6.00 and sell the item with a 40% mark up, you make a gross profit of only $2.40
  • 40% of $6.00 is just $2.40
  • A mark up of x% will yield a smaller profit than a margin of x% because the mark up is a percentage of the lower wholesale cost.

IT DOESN’T MATTER IF YOU MIX UP THE TERMS AS LONG AS YOU DO THE MATH RIGHT

Many people say “mark up” when they mean “margin.” If you are fussy about language, this is annoying but it will not lead to financial disaster. It’s just words.

However, if you’ve confused the two concepts and are calculating your margins by mutliplying the wholesale cost by the margin percentage, you could be headed for trouble.

Just remember – you want to calculate your profit as a percentage of the final value, not as a percentage of the original cost. When a customer hands you $10.00, you need to know how much goes into your pocket and how much goes to your vendor.

Do you need a 40% profit margin to survive? Then you want to keep $4 out of every $10.

Also keep in mind that this is a gross profit margin. It does not take into account overhead, fees, etc. You may put $4 into your pocket, then have to turn around and give $1.00 to the landlord, 75¢ to the tax man, 15¢ to the bank for processing fees, etc.

You might end up keeping only $1.50 (net profit) of the original $4.00 (gross profit). Which is why calculating your margin by incorrectly using the wholesale price can be such a disaster. You can actually lose money with every sale!

WHAT’S THE FORMULA?

Now that you know you want your margin to be a percentage of the final cost, how do you actually figure it out?

Relax – as long as you have a calculator handy, it is easy.

Say you want a 40% margin. We know that 100% less 40% leaves 60%. So your wholesale cost represents 60% of the final value. To find the remaining 40%, divide the wholesale cost by .6

  • If  you want a 90% margin – divide the wholesale cost by .1
  • If  you want a 80% margin – divide the wholesale cost by .2
  • If  you want a 70% margin – divide the wholesale cost by .3
  • If  you want a 60% margin – divide the wholesale cost by .4
  • If  you want a 50% margin – divide the wholesale cost by .5
  • If  you want a 40% margin – divide the wholesale cost by .6
  • If you want a 30% margin – divide the wholesale cost by .7
  • If you want a 20% margin – divide the wholesale cost by .8
  • If  you want a 10% margin – divide the wholesale cost by .9

As long as you follow this formula for calculating retail price, you will get the margin you want.

Calculating Distributor or Dealer ROI

This is a post that is written on gyaanokplease.blogspot.com and the link to the original article is here. I just cannot emphasize enough about how well this article has been written and hence I’ve included even some of the comments. Thanks to gyaanokplease for this post.

So probably the first thing that your distributor/dealer/stockist is going to tell you when you go to him for the first time is “Sirjee, ROI nahin baith raha hai”. What this simply means is that he is challenging you to calculate his return on investment.

This is sort of a monthly exercise – he knows that he is getting an ROI, else he would not be in the business. What he simply needs is some ego massage so that he gets an ILLUSION that he is in control of something when he is not – your rates are fixed, your schemes are fixed, and so are your claims. While ROI is something that they teach us in first day of B-School, calculating dealer ROI might be a different ball game altogether as he is a weasel who is going to try different permutations and combinations to get the better of you. Do this properly with him, and he (and you BDE/TSO who is twice your age but earns half as much) will respect you forever.

The equation is simple – Return/Investment, Return = (Earnings – Expenses).

The trick lies in realizing what earnings, expenses and investment involve & it is here where the dealer uses his tricks.

Let’s put down the formulae first:

  1. RoI or Return on Investment = Returns/ Net Investment
  1. Returns = Earnings – Expenses
  1. Earnings = Gross Margin that the dealer enjoys (Usually 6% – 8% in FMCG companies)
  1. Expenses = Direct Expenses + Indirect Expenses
  1. Here is where the first trick lies, Calculating Expenses:

This arises from the fact that the dealer in question is not dealing with just 1 company, he instead has 4-5 or even more number of companies that he is dealing with. Hence there are some resources that he is exclusively using for a particular company for eg. Sales Man and similarly many resources that he is sharing among the companies eg. His godown space, accountant, supply units etc.

Please note there is no thumb rule to it as there might be (and more often than not, will be) cases where even salesmen are being shared among 2 or more companies, and there will be one guy who would be the accountant-cum-manager-cum-supply wala etc. This is where the concept of direct and indirect expenses comes in.

Hence his expenses are split in to 2 parts i.e. Direct & Indirect Expenses

Direct Expenses are those that the dealer incurs exclusively for the company concerned.

And Indirect Expenses are those that the dealer incurs in totality for the companies for whom the resource/s is/are being shared.

The only rule in calculating expenses is that you need to take into account the part of expenses that he is incurring for your company alone. We will see how we do it below.

  1. Similarly the second trick lies in properly calculating the denominator, i.e Net Investment.

A dealer’s investment comprises of 3 parts : Average Stock that lies in his godown, Average Market Credit that he extends & Average Claims Outstanding,

Hence,

Investment = Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding

Here the usual suspect where one may go wrong in calculating Investment is the first variable i.e. Average Closing Stock of the dealer.

A layman would take the month-end closing stock as the average closing stock for the dealer, or worse if you do the mistake of asking the dealer what his closing stock is, the beast would tell you a figure which will be his all time high closing stock in a month.

The typical trend in FMCG is that majority of Pushing, also known colloquially as “thokna” (Primary) and Pulling (Secondary) happens in the last week and therefore the last week is not a true indicator of the entire month’s activity then why consider last week’s closing stock as his month’s closing stock. (To clarify, primary is what your company bills to the dealer and secondary is what your dealer bills to the retailer)

Confused?, we will deal with it with simplicity. Consider this as the trend of Primary & Secondary for a dealer in a 4-week cycle of a month

WEEK OPENING STOCK PRIMARY SECONDARY CLOSING STOCK
    1 5, 00,000 50,000 1,00,000 4,50,000
    2 4,50,000 1,00,000 2,00,000 3,50,000
    3 3,50,000 2,50,000 2,50,000 3,50,000
    4 3,50,000 5,50,000 4,00,000 5,00,000

The above table is how a dealer’s inventory in a typical FMCG set-up would behave like, i.e. majority of activity happening in the last week and hence one would be wrong in taking 5,00,000 (Week-4 Closing Stock) as the average closing stock for that dealer in that month.

The better way to do it is to take an average of all 4 weeks’ closing stocks. In this case it would come out to be as : ( 4,50,000 + 3,50,000 + 3,50,000 + 5,00,000) / 4 which equals to 4,12,500 which is lesser than the previous  result and hence his investment goes down and RoI goes up.

Enough of this gyaan now, let us get straight down to calculating a sample ROI

Premise:

Mr. Atul Mittal is the proud owner of his distribution firm M/S Bhagat Ram Jwala Prasad. His firm deals with distributing 4 companies in total of which ABC Pvt. Ltd. Is one for which we need to calculate the RoI. The firm has 1 dedicated (exclusive) salesmen working for ABC Pvt. LTd. with a monthly salary of INR 6,000/- per month per salesman. Apart from this, the firm also has an accountant-cum-manager with a monthly salary of INR 5,000/- per month, pays a monthly rent for the godown which comes to INR 5,000/- per month, incurs electricity & miscellaneous costs (supply units, chai-paani etc.) to the tune of INR 5,000/- per month. Other expenses such as his son’s education and his daughters marriage which your dealer would want to include are not to be included.

All figures are assumptions

Monthly Business (Turnover) inclusive of all 4 companies: 20,00,000/-;

Monthly Business (Turnover) of ABC Pvt. Ltd. : 8,00,000/-

ABC Pvt. Ltd.’s Company Margin: 8%

Average Market Credit for ABC Pvt Ltd. Is 10,000/- INR

Average Closing Stock for ABC Pvt. Ltd is worth 2,50,000/- INR

Average Claims Outstanding in ABC Pvt. Ltd. Is worth 10,000/- INR.

Hence going by the formula:

RoI or Return on Investment = Returns/ Net Investment

Returns = Earnings – Expenses

Earnings = Gross Margin that the dealer enjoys (Usually 6% – 8% in FMCG companies)

Expenses = Direct Expenses + Indirect Expenses

Let’s calculate each element one by one:

Earnings = Gross Margin = 8% of monthly turnover of ABC Pvt. Ltd. which is = 64,000/-

Expenses = Direct Expenses + Indirect Expenses

Direct Expenses = Salary of Exclusive Salesmen = 1*6000 = 6000 per month

Indirect Expenses  for ABC Pvt. Ltd.=( Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover) * Total Indirect Expenses

Total Indirect Expenses = Godown Rent + Manager’s Salary + Miscellaneous Expenses = 5,000 + 5,000 + 5,000 = 15,000/-

Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover = 8,00,000/20,00,000=40%

Hence, Indirect Expenses for ABC Pvt. Ltd. = 40% of 15,000/- = 6,000/-

Therefore Total Expenses = 6,000 + 6,000 = 12,000

Hence Returns = Earnings – Expenses = 64,000 – 12,000 = 52,000

Net Investment = Avg. Closing Stock + Avg. Market Credit + Avg. Claims Outstanding = 2,50,000 + 10,000 + 10,000 = 2,70,000

Therefore RoI = Returns/Net Investment = 52,000/2,70,000  = .1925 or 19.25%

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39 comments:

    1. AnupriyaJune 14, 2012 at 8:50 PMReply
    2. Just a point here….when you look at his investment in stock – one should always check whether he has taken bank loan. if he has then his actual capital investment is actually only to the extent of his own money. rest is interest which is part of expenses. a lot of dsitributors conveniently miss out this part of the equation. and for big distributors this makes a big difference in ROI.Similarly, if the distributor has a good overdraft facility then he actually pays for the stocks to the company from that and not his actual investment. here again interest should be added into his expenses and the investment reduced by the overdraft amount.

Replies

Reply

    1. KaushikJune 14, 2012 at 8:53 PMReply
    2. Thanks Anupriya! Duly noted 🙂
    3. KiranJune 14, 2012 at 11:19 PMReply
    4. Alternatively, if a distributor rotates his investment say, 10 times a year, multiply that by net profit percentage per rotation.
      For eg:The company gives a margin of 5% on its products to a distributor. After all his distribution expenses, the net profit % is 2.1, and his investment is 20L with an annual turnover of 200L, ROI is easily calculated as under.
      No:of rotations = annual turnover/investment = 200/20 = 10 rotations/year
      Investment = 20 Lakhs
      This means he rotates his investment of 20lakhs, 10 times a year, each time making say 2.1%. So his ROI is 10*2.1 = 21%
    5. KaushikJune 14, 2012 at 11:33 PMReply
    6. Thanks Kiran! Duly noted. Please feel free to contribute in the further posts also!
    7. Sambhav JainJune 14, 2012 at 11:48 PMReply
    8. Very Well Explained.!Thanks
    9. Ashish ShahJune 15, 2012 at 12:05 AMReply
    10. Very helpful. A much needed initiative. Thanks Kaushik! 🙂
    11. Tirthadeep DharJune 15, 2012 at 7:02 AMReply
    12. Brilliantly explained – Subbu and Nishit! I remember looking for somebody or something to teach me this, about a year back. That my dist. ridiculed me abt not knowing my ROI calculation was the ‘push comes to shove’ part.However, lets not forget a very important parameter of credit given by the company to the distributor which can range from 0 to anything.So if Credit = 7 days, 7 days of closing stock is deducted from the distributor’s investment. Also a distributor gives a cash discount to wholesale or even retail, so that too has to be accounted for. I would urge you to simplify this and put it up as ur article is crisp and clear and this could prove useful too.

      Recommendation:

      1) Teach them how to calculate a Super Stockist ROI as well. Far simpler than direct.

      2) Also, in your next article you could explain how to get back an uninterested distributor on track based on key parameters. (Kaushik you had aced that, Nishit you could share too… btw sup with you?)

      3)All distributors are swines with hair coming out of all their holes.. jusayin….they might not squeal but they do grunt a lot. Somebody has got to tell these kids that… Nishit you could elaborate I guess (this inference from ur fb statuses)

      And excellent explanation Kiran… was thinking abt that while reading the article.

      Cheers,
      TiTo

    13. Capt.KrunchJune 15, 2012 at 8:52 AMReply
    14. hey TiTo,hw u doing man….points noted dude….the upcoming posts will only highlight the point number 3 that u ve mentioned.

      may be we could come up with a post about how to tinker RoI to get back distributor’s interest provided he is sitting on a lesser RoI…

      would urge you also to contribute…and about explaining credit, wholesale discount, we intentionally didn’t go into the detail to avoid it from getting complicated…

      nevertheless thanks for the feedback.

      Cheers
      nishit

    15. Tirthadeep DharJune 15, 2012 at 10:47 AMReply
    16. Sure would love to contribute… but I would rather start by trying and provide some comic relief between intense FMCG sessions 😛
    17. Amber VermaSeptember 26, 2012 at 7:15 PMReply
    18. Thanks All of you.re,
      amber verma
    19. Kapil GuptaFebruary 8, 2013 at 4:26 AMReply
    20. Realy good explained ….Thanxxxx
    21. Robin Godara BishnoiFebruary 21, 2013 at 9:46 AMReply
    22. thanks dear
    23. vibhor srivastavMarch 4, 2013 at 12:06 AMReply
    24. very helpful…..thanks….for explanation of ROI insuch a way….
      thanks………….
    25. avik dasMarch 20, 2013 at 10:51 AMReply
    26. Can anybody exactly explain following-
      per month
      Sales: 10 Lac
      Margin: 3%
      Inventory: 2.5 lac
      Market credit: 2.5 lacCase 1: No credit from company to distributor
      Case 2: 7 days credit from company to distributor
      Case 3: 30 days credit from company to distributorPls explain the concept also

      Thnx

    27. Ankit DwivediApril 12, 2013 at 6:14 AMReply
    28. GOOD explanation……… but one doubt is there in example. ROI is 19.25%, as per calculation this is monthly ROI but monthly ROI would be 1.5-2.5%

Replies

Reply

    1. Ankit DwivediApril 12, 2013 at 6:27 AMReply
    2. avik das……
      if no expenses are there then
      case 1: roi is 6%
      case 2: roi is 7.2%
      case 3: roi can’t calculate……. because there are no investment.

Replies

Reply

    1. Davidraja J E SamJune 15, 2013 at 10:32 PMReply
    2. hi Ankit could you please explain the second case..David
    3. Rhishabh SuritJune 28, 2013 at 11:32 PMReply
    4. davidraja….if market credit is given for 7 days.. then average market credit would be 75% of inventory, thus total invenstment wud turn out to be 4.2lac.. hence ROI wud turn out to be 7.1% (guys plz correct if im wrong .. not from fmcg background)
    5. jjkljljJuly 23, 2013 at 1:45 PMReply
    6. This comment has been removed by the author.
    7. Munish KaulJuly 23, 2013 at 1:52 PMReply
    8. aa you are very close to being right if market credit = 2.5 lacfor 7 days market credit = 75% of inventory
      = 75/100*2,50000 = 1,87500total investment would be = 2,50000+1,87500 =4,37500

      margin is 3% of sale of 10,0000 = 30000

      so, Return on investment is = returns/total investment

      ie : 30000/437500 which comes out to be 6.8 % or you can say 7%

      but how come you came to conclusion that average market credit for 7 days = 75% of inventory cost ???

Replies

  • MadhavAugust 11, 2013 at 2:46 PM
  • I believe, he has not taken it as 75%..but..for 30 days..stock is 2.5 lacks..so for 7 days it’s 2.5 lacs* 7/30~=58300….So net investment in inventory=2,50000-58300=191700…..So,
    roi comes to be 6.7%..I think so…
  • chandan kumar balSeptember 10, 2013 at 1:24 AM
  • Hi what is the healthy ROI for FMCG Distributors(as u told margin is between 6%-8%)? Is it between 14%-24%?
  • AyushNovember 19, 2013 at 8:08 AM
  • 30 days inventory is 2.5 Lakhs
    so we can calculate inventory for 23 days which comes out to be (250,000/30)*23=191,667
    then final investment= 191,667+250,000= 441,667
    ROI= Earning/Net Investment
    =(30000/441,667)*100
    =6.7%

Reply

  1. vickyNovember 13, 2013 at 2:39 AMReply
  2. HI can any one confirm the standard norms for the ROI & Investment.If some one having please share @ vikasmendi@gmail.com
  3. Bipin BhanushaliFebruary 7, 2014 at 9:14 AMReply
  4. can anyone clear my following doubt
    Investment include Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding OK…. but what about deposit given for taking godown on rent and down payment done for purchasing vehicle do these investments are consider for calculation of net investment and if not then what would be consideration for them
  5. pranoy paulApril 10, 2014 at 12:05 AMReply
  6. thanks dear
  7. KapsMay 11, 2014 at 2:51 AMReply
  8. This comment has been removed by the author.
  9. KapsMay 18, 2014 at 11:42 PMReply
  10. Hi..Can someone help me crack this..
    Distributor does a 20Lac business per month. Earns Gross Margin of 10%, Exp per months comes to around 2%. Avg Inventory: One month, Avg Market Outstanding of 45 days. No claims outstanding. No company outstanding. Funding purely from internal resources. Doesn’t have any other co’s distributorship.
    I get two different ROIs with different approaches. Turnover/Inv method and Standard Method of Net Earnings/Investment.
  11. himanshuOctober 14, 2014 at 1:24 AMReply
  12. In both case it will be 38.4 % annual Roi1st method 160000 *100/ 500000 = 3.2 monthly Roi or 38.4 annual Roi2nd method 2400000/5000000 = 4.8 rotations , Earning per rotation 8 % hence annual Roi will be (8*4.8) = 38.4% only
  13. himanshuOctober 14, 2014 at 1:25 AMReply
  14. in first case read denominator as 50 lac and not 5 lac
  15. Ramaswamy VenkataramanApril 18, 2015 at 1:20 AMReply
  16. in the second case shouldn’t the numerator be the annual turnover ?
  17. qamar khanJune 7, 2015 at 1:36 PMReply
  18. thanks
  19. AdarshSeptember 12, 2015 at 12:40 AMReply
  20. Was going through the comment section and found someone mentioning interest charges on CC or OD being part of the expenses. This is a valid point of discussion and I have personally faced such scenarios.
    Humbly request the author to give a verdict on this. My understanding and opinion from many with whom I have shared is…Is a dealer who continuously needs CC or OD to fulfill his billing commitment, a sound dealer/distributor?
  21. UnknownMarch 14, 2016 at 9:43 AMReply
  22. Can anybody explain the followingAbc is a fmcg companyxxx is the product name

    Margin of the product for stockist is 10%
    Margin of the product for retailer is 20%

    Mrp of the product is 25000

    cost of stockist is 19120
    Retail cost is 20830

    What is the method of calculating the margin

  23. biswa nayakApril 12, 2016 at 10:24 AMReply
  24. ANYONE KNOW THE Healthy ROI for the FMCG channel partner??

– See more at: http://gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html#sthash.8n84hH77.dpuf

Service Output Demands and Sales Channel Design

Channel design is a crucial element in any product’s marketing plan. It is sometimes the most crucial factor for success. A channel designed properly will bring in customers and increases your market share. Most of the times a channel is designed by the marketing teams and the structure and the maintenance is done by the operations teams.

A channel delivers service output demands. Some of the examples of service output demands are: bulk breaking, spatial convenience, waiting time, delivery time, payment options such as credit,  assortment/variety and customer service and information provision.

Step 1: Segment the consumer/customer segments based on service output demands (SODs)

Step 2: Identify some of the consumer/custoemr segments

Step 3: Design a zero base optimal channel such that the SODs are satisfied. The channel can have multiple routes through which the SODs are satisfied

Step 4: Gap Analysis

If an existing channel is present, then compare the zero base channel with the existing channel and come up with the gaps. Evaluate whether these gaps are caused due to demand or supply.

The attached word document contains one such exercise for HUL. HUL_ChannelAudit

How the visibility budgets are used for price undercutting in FMCG?

If you speak to any Territory Sales In-charge or Manager (TSM) of a large FMCG company, they are going to mention one huge problem called price undercutting that affects their daily work. In an earlier post, I have written about how the wholesale trade leads to price undercutting. In this post, I am going to write about how the Territory Sales Persons use the so called ‘visibility budgets’ for undercutting practices.

Wikipedia defines price undercutting as: ‘Price cutting, or undercutting, is a sales technique that reduces the retail prices to a level low enough to eliminate competition‘. In most cases (more than 95%) the competition is not with a competitor’s product, but it is the competition between a company salesman and a wholesaler selling the same branded product at different prices.

Let’s understand this with an example. Let’s say there is a brand X of soap which the TSM is supposed to sell at Rs.32 per piece to the retailer. Let’s say, the area allocated to this TSM is adjacent to a big wholesale market called Bhindi Bazaar. There are twenty retailers distributed across his area and some of the retailers are at a stone’s throw distance from the wholesale market.

So, when the TSM goes to the retailer, the TSM realizes that the nearby wholesaler is selling at a very reduced price. Typically, the conversation between the retailer and the TSM goes like the below:

TSM: Naya scheme aaya he, aap bees pete (20 cartons) lelo… itne price mein milega aapko

Retailer: Kitna padega? Rs.32?

Retailer: Saab, Bhindi Bazaar mein Rs.26 per piece mein mein mil raha he (single carton mein bhi)

So, the TSM thinks that he cannot compete with the wholesaler’s undercutted price. The TSM calls the Area Sales Manager (ASM) or his supervisor and tells him the problem.

TSM: Rate ka problem he Sir

ASM or Supervisor:  Mein samajhsakta  hoon… per manage karlo

ASM or Supervisor: Aapka monthly target se shortfall hora hein

So, the TSM realizes that he is not going to get much help and he has to reach his monthly target by any means.

The TSM uses the visibility budget to get out of the problem

Generally, FMCG companies put up some display material or place their product very attractively in the shelves or as separate displays in the retail stores. The company pays a certain amount of money to the retailer for doing so. The TSM gets a certain budget to pay the retailers to place or stick the brand display material. Typically, the price for a shelf in a retail shop may range from Rs.300 to Rs.1000 per month. Generally, companies buy 1-4 shelves and pay the respective money per month to the retailer.

The TSM uses this money to reach his sales targets instead of giving it to the retailers. In our example, as the wholesaler is selling at Rs.26 per piece, the TSM will sell the stock at Rs.25 per piece (Re.1 less than the wholesaler’s price), but tells the retailer to give the bill at Rs.32 so that the company cannot find out about his undercutting practice. The TSM reaches his monthly target through price undercutting.

So, what happens to the display material of the company?

All the display material provided by the company will be placed in the TSM’s house and will probably be used by his son for making paper rockets.

What happens during the visibility audits?

FMCG companies also do some visibility audits or sometimes the brand guys would like to visit the field for some reason. Suddenly, the TSM will come to know that tomorrow morning there is going to be an audit of the display material. Within a few hours, the TSM and his salespersons will place or stick the display material in all the stores or a subset of stores where the audit is going to happen. They tell the retailer that they are going to remove it tomorrow and it is only for one day. Most retailers don’t mind it.

On the next day, when the auditors come and check, they find everything to be fine and they go back and send appreciation mails that this area is 100% compliant and that the TSM is doing a brilliant job. On the next evening, the TSM tells his salesperson to remove all the display material.

This is how the TSM achieves his sales target through undercutting practices. It is important not to blame the TSM completely but to understand that the origin of the problem is mainly due to large wholesalers. The sales teams do talk to the wholesalers and fix their prices or sometimes they solve the problem by re-allocating the markets.

The big danger in all this process is that the retailer is getting used to this practice, and it will impact have a negative impact on the brand in the long term. Nevertheless, price undercutting is a harsh reality of sales in the FMCG world.