The number every decision uses is the wrong one
In a distribution business, three functions all consume “cost”: pricing, quoting and margin reporting. In most distributors all three consume gross cost — item cost before supplier rebates — because rebate-adjusted cost is not carried on the item.
It is not carried on the item because rebates settle quarterly or annually, in aggregate, against an agreement rather than a line. So the natural home for the number is a periodic analysis project rather than an attribute, and the periodic project produces a category-level average that is too coarse to price with.
What that does to the mix
Consider two products with the same gross cost and the same list price. One carries a 6% supplier growth rebate; the other carries nothing.
Priced on gross cost, they look identical, so they get the same discount latitude. In reality one has six points of headroom and the other has none. The predictable outcome is that you win the deals with no headroom and lose the deals with plenty, at the margin where negotiation is tightest.
This is not a discipline failure. Your sales team is optimising correctly against the information they have. The information is wrong.
Why it hides in the P&L
The rebate does eventually arrive — as a lump sum, in a later period, booked centrally. It reads as good news. Nothing in the reporting connects it back to the lines that earned it or reveals that the lines were priced as though it did not exist.
Category profitability is distorted the same way: heavily funded categories look weak, unfunded categories look strong, and assortment and space decisions get made on that ranking.
Getting the number
The full version — every agreement held as executable rules, evaluated per line, published back to pricing — is the destination. But there is a useful intermediate step most businesses can do in a fortnight:
- Take the top fifty supplier agreements by value.
- Express each as a rate against a defined product scope. Approximations are fine at this stage.
- Apply those rates to one month of sold lines to produce an estimated net-net cost per line.
- Recompute margin and re-rank the mix.
The re-ranking is the deliverable. It is usually the thing that convinces the commercial team, because it names specific products they are currently losing for no reason.
The reason to then do it properly is coverage and freshness: fifty agreements out of four hundred is a sample, and a rate that was right last quarter is not necessarily right now. But the sample is enough to settle the argument about whether it matters.
What changes when the number is live
Three things, in our experience:
- Discount latitude becomes product-specific rather than customer-specific, which is where it should have been.
- Category profitability re-ranks, and the assortment conversation changes with it.
- Supplier negotiations get sharper, because you can finally state what a rebate is worth against the volume you would have to give up to earn it.
None of that requires new pricing discipline. It requires the pocket number to exist at the line.