4 - How the distributor business model works Flashcards
What defines the business model of a distributor?
The roles fulfilled by the distributor for both customer and supplier.
What is a key characteristic of the distributor’s business model?
It is capital intensive, driven by the need to hold stock and finance trade customer credit.
Why do distributors operate on thin margins?
Because they are essentially a high-volume, low-value-add business.
What are the three dominant numbers on a distributor’s balance sheet?
- Inventory (products held for resale)
- Accounts receivable (from customers for sales made on credit)
- Accounts payable (to suppliers for products bought on credit)
What does working capital consist of?
Inventory plus accounts receivable less accounts payable.
What is the impact of having too little working capital for a distributor?
The distributor runs out of inventory or cannot pay its suppliers in time.
What happens if a distributor has too much working capital?
The cost of the capital required drags down the profitability of the business.
How is gross margin calculated for a distributor?
The difference between the price paid for products to suppliers and the price received when sold to customers.
What is a common challenge for distributors regarding profit?
Profit is a very small number compared to sales and cost of sales.
What is the relationship between gross profit and working capital in a distributor?
Distributors may tie up large amounts of working capital to earn relatively small gross profits.
What is the 80:20 rule in distribution?
20 percent of the products account for 80 percent of the volumes, while a different 20 percent may account for 80 percent of the profits.
What is ‘overtrading’ in the context of a distributor?
A situation where a distributor’s cash situation deteriorates rapidly despite healthy sales and profits.
What can happen if a distributor does not plan for growth?
Their cash situation can deteriorate rapidly, leading to potential financial trouble.
How can a distributor increase its capital?
- Retaining more profits
- Borrowing more
- Asking shareholders for more capital
What are the implications of tightening customer credit for a distributor?
It may conflict with key trading relationships and growth ambitions.
What are the key measures that matter in a distributor’s business model?
- Margins
- Working capital management
- Productivity measures
What does the income statement reveal about distributor margins?
It shows how tight the margins can be in some sectors of distribution.
What is a critical role in a distributor’s business model?
The role of product managers, whose incentives should be tied to margin and working capital management.
What is a potential risk of outsourcing for distributors?
Loss of control and potential impact on customer satisfaction.
What is the challenge in timing investments for distributors seeking growth?
Avoiding getting too far ahead of the curve and pushing up the cost base before sales grow.
True or False: A distributor should aim to have fixed costs that vary directly with sales volumes.
False.
Fill in the blank: Distributors are often pressured to take extra discounts and volumes to protect their _______.
market positioning and customer base.
