The National Association of Paper Merchants

 Understanding Transaction Costs

A recommendation by the NAPM for understanding and implementing a transaction based costing system

Increasing the efficiency of the trading relationship between a merchant and their customer is likely to be of benefit to all in the supply chain.

However, to start this process, an analysis of all the costs in the chain, from the taking of an order to the delivery of the goods, is required.

By understanding and implementing a programme of Transaction Based Costing, merchants should be more able to respond to customer service demands and ensure that service costs are fully recognised by all. This can provide a platform for discussion between merchants and their customers where unnecessary logistic costs can be identified and removed.

Background

• Merchants are encouraged to take necessary steps to understand all the transaction costs of their business  

• Commercial teams should be trained and encouraged to understand transaction based costing and its effect on company profitability  

• Through regular discussion of service levels, merchants should work with customers to remove unnecessary logistic costs, so encouraging the adoption of efficient buying practices with lower prices.

Consider basing sales remuneration schemes on net transaction profitability rather than on gross margin

Basic Principles

1.     The real value of paper has fallen over the last 20 years

• Prices are the same as the mid 1980’s

• Other costs have largely grown in-line with inflation

• Some efficiencies have arisen through scale

2.     Merchants have not won the battle to balance increased efficiency with the growing cost of service.  

3.     Traditional ‘profit scoring’ methods are probably no longer appropriate if true costs are recognised

Margin %, an old favourite, loved by sales teams!

• Applied without "due care and consideration"

• At its worst, a percentage is added to cost which does not equate to ROS

• Does not recognise differing transaction costs

Margin per tonne

• Better, but only recognises average costs in order to calculate profitability

• Requires transaction costs to be known if transaction margins are required

4.     New methods to understand costs and profitability should be considered.

The paper merchanting industry has been slow to utilise modern methods, which have been employed in other industries for some time

ABC (Activity Based Costing)

• Activity Based Costing is not a new idea

• Can become over-complicated to the point of uselessness

• Requires a ‘commercial’ approach. What factors are important; what can be ignored.

 TBC (Transaction Based Costing)

• Based on ABC but focuses on the cost and profitability of a transaction

• Requires ABC to be understood across the business

Key Drivers

• These are the important things that affect the cost of a transaction

• Possible to have a multitude of these

• Best to maintain to a manageable number

• Can include:

                                        Order size

                                      Packing; bulk or ream

                                      Conversion costs; cutting, re-packing etc..

                                      Time of delivery required

                                      Distance of customer from distribution centre

                                      Payment days of customer

                                      Payment terms to supplier

                                      Time to pick

                                      Stock turn

                                      Product promotional costs

                                      …. and many more.

5.     Understanding costs creates value for all

Customers

• Through discussions with merchant suppliers, logistic costs can be understood and lowered if customer buying patterns can be amended

• The benefits of efficient ordering can be realised in lower ongoing pricing.

Suppliers

• Merchants will increasingly be able to discuss, with their suppliers, the viability of various lines and take steps to reduce upstream costs.

Merchants

• Can cut out, or pass on, unnecessary costs

• Customer, supplier and company profitability can be properly measured

• Employee remuneration schemes can be based on ‘real’ margins

This “Best Practice” has been prepared for the guidance of merchants and is not binding upon them. Each company must remain free to implement whatever cost management systems they believe appropriate for their business and it will be for each individual merchant to decide whether or not to apply the principles set out in this “Best Practice”.