Strengthening your supply chain one link at a time. 

Bracket Pricing and Efficient Partnership Programs

Prices for goods are typically influenced by marketing and sales personnel based on market forces.   However, customer order size and complexity can dramatically vary vendor or supplier costs and are not always taken into consideration when making pricing decisions. Several costs vary based on customer order size and complexity, including warehousing, freight, and administrative costs.

• Warehousing: The pick type (case, layer, or pallet) associated with an order can change the amount of labor required and thus the equivalent cost per case of the order. Smaller order sizes typically have a higher percentage of more costly picks (i.e., cases). Case picking, in particular, can have a higher chance for error than full-pallet pick, which can lead to shorts or overages to the customer – both adding additional costs.
• Freight:  Order sizes also influence the cost of freight to deliver product to the customer. Small orders are typically shipped via less efficient modes of transportation, such as less-than-truckload (LTL) or consolidated with other orders into multi-stop full truckload (FTMTS) shipments. Even though these orders will be leaving the vendor/supplier as a full truck shipment, there are extra costs for load consolidation from the transportation team, multi-stop costs, out of route mile costs, etc.
• Administrative: Order entry, order processing, credit, collections, and other customer service requirements are associated with every order. Therefore, a smaller order will have higher administrative costs as a percent of sales.

To help offset rising supply chain costs associated with smaller order sizes, a bracket pricing strategy can be utilized to share the savings benefits associated with larger, more cost-efficient orders. A bracket pricing structure typically breaks prices into three to four brackets where logistics costs significantly rise or fall. For each bracket, an appropriate upcharge or discount level is given to align with the supplier’s logistics costs associated with that bracket. Implementing this type of strategy adds a supply chain-/logistics-driven view to setting prices to better allocate costs with order sizes, as well as to help drive more efficient customer behaviors.

There are other costs that suppliers can address, such as distressed and unsaleable product deductions (D&U), delivery fines, and lumper/swamper charges. These costs are typically addressed after a bracket pricing program is implemented with an efficient partner program. This type of program focuses on large or key accounts and requires customers to meet certain agreed to criteria over a period of time, such as percentage of full truckload orders, percentage of full pallet orders, appointment compliance, agreed-upon D&U allowance, etc., with a shared portion of the savings provided from the supplier to customer. Typically, the customer does not take deductions or fines from the supplier. This type of program often has a positive tone with large potential shared savings in the form of allowances, rather than customers taking their own rebates in the form of deductions/fines.

Implementing bracket pricing and efficient partner programs can help achieve common goals between suppliers and customers. It can also incentivize more efficient behavior and set logistics allowances that reflect the cost to serve customers.  These approaches have a significant opportunity to generate large savings that can be shared between the supplier and customer for a win-win. It is important that sales, marketing, and operations are aligned on this shared initiative. One final note – it is always recommended to consult with your legal team before the implementation of bracket pricing or efficient partner programs (for example, see Robinson-Patman Act).
 
—Brad Barry, St. Onge Company
 
 

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