Strategically Speaking: 12 Costs to Consider in Outsourcing Distribution
Most third-party distribution agreements are structured on a percentage-of-sales basis, with the distributor receiving a share of the publisher's net sales (gross sales minus returns). Some would suggest that a laundry list of a la carte services is a better way to conduct the analysis, but in my experience, this approach introduces complexity that is difficult, if not impossible, to manage and an uncomfortable degree of subjectivity.
Assuming that the agreement is based on percentage of net sales, your business will undoubtedly require special services, such as applying price stickers, re-jacketing, etc. Your job is to confirm that all the required processes have been considered and priced out by the bidders on the same set of assumptions, and all the potential "extras"—e.g., returns above a certain percentage of gross sales will incur incremental charges; the contract will allow you to store a specified number of units per month, and excess units will incur an additional cost.
As previously mentioned, a multi-year view of your business is needed. The evaluations of both the status quo and outsourcing options should incorporate the same growth and operating assumptions in your organization's strategic plan to ensure that the supporting distribution infrastructure is consistent with the anticipated needs.
Here is a check list of the hard costs (those that impact your monthly financial statement) your analysis should consider in evaluating the outsourcing option:
1. Distribution Costs: Assuming the percentage of sales method, what will your annual distribution costs be?
2. Returns Penalty: Do you expect your returns to exceed the contact threshold and incur penalty fees?
3. Storage Costs: Do you expect your publishing program to significantly increase the amount of space you will occupy? Do you have a comprehensive plan to move aggressively to POD to reduce your space requirements and strengthen working capital management?