60. Opportunity: Be Rid of Large, Unnecessary Credit Costs in Distribution

How do you measurably increase a customer’s value, keep and win a larger share of their business, and improve the net profitability of the account? A first step should be to purge the bad habits underlying high credit activity customers and rid your company of unnecessary credit costs in distribution.

How to Rid Your Company of Unnecessary Credit Costs in Distribution

First, you must be capable of looking at customer profitability on every single line item. Then, you can design this capability to do many things, spotlighting the cost of credits.

Here are three ways:

  1. Credits/thousand-line-items-bought for each customer
  2. Cost of credits involving returns or price adjustments
  3. Cost of orders in which goods were sold below cost (closeouts; inventory deflation)

Second, with this data, you can focus on the 5% of customers with outrageously high credit-cost activity. Therefore, a simple scanning of their credits can reveal the root causes for unnecessary costs to both parties. Furthermore, diplomatically presenting solutions and cures can rid your company of unnecessary credit costs in distribution to ultimately generate mutual savings, more share, and more profits.

Case Studies: Credit Costs v. Operating Profits

Here are the 2016 numbers from various distributors with sales ranging from $100MM to $2.5B. Most of all, these companies have some customers racking up tens to hundreds of thousands of dollars of credit activity costs.

Unnecessary Credit Costs in Distribution


Lastly, we can conclude that distributors with active counters for contractors tend to have more returned goods especially if they allow returns without restocking charges. But, in all the cases presented in the table, opportunities were found with the few customers with high credit costs. In all cases, the majority of similar customers were able to buy what they wanted with acceptable or no credit costs.