Imagine the following scenario:

$20.00  Case price you would sell to a local distributor for a truckload order

$15.00  Bid price you are offering that same distributor for a piece of local operator business

$ 5.00   Case rate you expect to pay that distributor for each case they sell that operator

$18.00  Case price to an authorized redistributor for a truckload order [net of a $2.00 redi allowance passed through off invoice]

$24.00  Price that same redistributor charges the local distributor who is servicing the bid

$ 9.00   Case rate that distributor deducts for each case sold to that bid account   

The incremental $4.00 has no revenue offset, it is sourced purely from your operating income.  This is a simple scenario that is playing out across the foodservice industry with increasing frequency as the need for supply chain efficiency and order optimization drives the popularity of redistribution.  The magic question in this scenario is how to best control the variance.  If your organization is struggling to process deviated price deductions against redi volume, the following are some pragmatic suggestions for defining and controlling the financial exposure to your business. 

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Many foodservice manufacturers are struggling to gain control over the pricing and allowances offered to Group Purchasing Organizations [GPO] without placing undue risk against the volume these arrangements represent.  The need for control continues to increase as more of them are extended to locations that were not originally assumed to be eligible. 

Historically, these offers were isolated to large non-commercial organizations such as ARAMARK and Sodexo, where unit-level compliance was managed and relatively under control.  Within the past 4-5 years, the convenience of blanket allowances has gained traction with commercial segments as well.  Today, it is common to find aggressive deviated price offers for Premier, foodbuy and Avendra right alongside offers such as ‘State of Florida Schools’, ‘Café’s of the Pacific Northwest’ and ‘Summer Camps of America’.  My personal favorite is ‘RJ’s Restaurants’, where RJ was the initials of the Region Sales Manager.  The point is that the definition of the locations intended to receive a discount has become too subjective and arbitrary.  With loose definition and poor control of location eligibility, one industry executive noted recently, “We have Premier rebates being passed along to Bowling Alley’s and Gentlemen’s Clubs”.    

The increase in extension to incremental locations represents a call to action relative to control:

• The economics of the original offer did not contemplate the extension to locations that have historically contributed higher margin volumes as “street business”.  The continued erosion of pure list price business is reducing the overall contribution of the business and increasing pressure to deliver the company operating budget.
   
• Distributors who have access to those discounts are using them to their advantage in gaining the business from distributors who do not.  Those distributors who are on the losing end of the equation are left to either [a] cry foul based upon restraint of trade and Robinson-Patman; [b] request their own “private” deviated pricing offers for those same locations in order to effectively compete; or, [c] both.  Ultimately, the manufacturer is impacted by spending more and taking on additional administration.   
   
• Across multiple points of distribution, volume from many locations is contributing to rebates against more than one offer [eg, the infamous double, triple and quadruple dip scenarios].  The result is that the economic appeal of these allowances is reduced as the dollars invested are spread across fewer net actual cases than intended. 

Given the volume involved, it is not realistic to assume you can walk away from these opportunities or dramatically reduce their allowances to control the risks.  The following are 7 common sense actions you can take to build more control behind your offers to GPO’s.

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