The distributor industry itself has no technical barriers; it all comes down to cost. Whether it's new retail or new marketing, if you can't pass the cost hurdle, you won't last long. Even manufacturers who have dealt with distributors for decades often can't accurately calculate distributors' operating costs and net profit margins. They always think the profit margin they give distributors is quite generous—often 10 to 20 or even 30 points of gross margin. If you just increase total volume and optimize the product mix, how can you not make money? Indeed, ten years ago, it wasn't difficult for distributors to achieve an average net profit margin of 10 points. Now, having 3 points is decent, and 5 points is excellent. Of course, I'm talking about net profit, which means after deducting accounts receivable, warehouse inventory, and basically compliant taxes and social insurance. After all, between gross profit and net profit, there's something called cost. Manufacturers have never cared about distributors' own operating costs, just like a passenger taking a taxi cares about speed, not fuel consumption; the taxi driver has to balance speed and fuel. Manufacturers want total performance, growth rates, and product structure optimization. They don't bother with the costs distributors incur to achieve those goals. So, the distributor's own cost control ability largely determines the final profit level. Why is it that with gross margins of 20-30 points, various market support from manufacturers, and year-end rebates and rewards, distributors end up with only a few points? Where do the profits go? It's not that there's no profit; it's that distributors have too many leaks. Here are the six most common ones:

Employee Turnover Some bosses think that having one fewer employee saves a bit of salary cost. How could it increase costs? Costs are divided into book costs and non-book costs. On the books, losing an employee saves salary, but because of that loss, the work they were responsible for lacks maintenance in the short term. Especially for sales positions, when customers aren't maintained, performance directly suffers. Plus, when old employees leave, their handover might not be thorough, leaving a mess behind. Just cleaning up those messes is exhausting. Then there are recruitment costs for new employees, and the learning and adjustment costs for new hires. Generally, it takes one to two months for a new employee to fully get up to speed, and during that time, they still get paid but produce little. Isn't that a cost? All told, for every employee lost (especially if they leave voluntarily), the boss's comprehensive cost is about half a year's salary for that employee.

Accounts Receivable It's said that the most beautiful Chinese phrase now isn't "I love you," but "payment has been made." Every distributor has accounts receivable floating around, ranging from tens of thousands to millions. Of course, these receivables come in types—contractual, industry-specific, technical, etc. Bosses absolutely don't want these receivables, but there's no choice; the market is like this. Customers are strong, and if you don't extend credit, you lose business. So they reluctantly extend credit, sometimes even borrowing at high interest to stock up and then giving credit to downstream customers. Accounts receivable seem to be caused by market conditions and customers, but they're actually more about the distributor's own shortcomings. Most distributors fail in these areas:

  1. A significant portion of debts are caused by their own sales staff—such as embezzlement, forging debt notes, using company funds to settle personal debts, or accumulating receivables to gain status. But few distributors conduct thorough audits or take preventive measures.
  2. Customer relationships aren't maintained. When customers say they have no money, that's nonsense; the real issue is the relationship isn't strong enough—they don't give face. Of course, relationships and face require proactive accumulation. How many distributors systematically manage customer relationships?
  3. It's normal for customers to delay payment. To get them to pay promptly, besides relationships, you need value-added services that bring multiple benefits to customers. Only then will they exchange timely payment for more benefits.
  4. Even debt collection is a skill. Strictly speaking, collecting debts is more technically challenging than selling. How many distributors have trained their staff in debt collection techniques?
  5. Each customer has specific settlement characteristics—such as required documents and supporting materials, timing for submitting documents and settling accounts, approval signatories, key influencers, internal processes, and specific settlement windows. If you don't know these, can you ensure efficient settlement? Every customer file should have a settlement notes section, but how many distributors take that seriously? Some veteran salespeople know this information but don't write it down or share it; they keep it to themselves. Also, simple forgetfulness—forgetting to submit documents, get signatures, or bring materials—causes many receivables to be settled late every year.

Product Mix Most distributors handle multiple manufacturers, brands, and products simultaneously, with hundreds of SKUs being common. Theoretically, every product should serve functions like profit, sales volume, brand building, and channel development. But in reality, it's hard to find a product that generates volume, has a strong brand, offers high profit, and opens new channels. Each product usually has only one or two functions, so you need to combine products to organically integrate volume, profit, brand, and channel development, with each playing its role. It's like cooking: each seasoning has its purpose, and the timing and amount are orderly. The principle is simple, but 99% of distributors don't have a product mix. They sell everything, thinking each item makes money. But without a product mix, you get the common saying: "What sells well doesn't make money; what makes money doesn't sell well."

Employee Theft I won't go into detail, just three points:

  1. Nobody is stupid these days. If a salesperson's performance never improves, it's not because they're dumb; it's because their mind is elsewhere—like figuring out how to steal money.
  2. Methods are varied: stealing goods, withholding resources, inflating expenses, reselling displays, creating fake customers, selling private goods, doing side jobs, merging promotional resources, misappropriating funds, reselling promotional items, etc. Not just salespeople—drivers, warehouse loaders, finance staff, clerks—all have opportunities.
  3. At least 30% of sales staff are involved in some form of theft. To put it bluntly, the money salespeople steal each year might be more than what the boss earns.

Returns and Exchanges When goods go out, they're called products; when they come back, they might as well be garbage. Why do returns happen?

  1. To meet manufacturers' distribution rate targets and display fees, distributors over-distribute.
  2. Blindly distributing new products before confirming they sell well.
  3. Salespeople overstock to earn bonuses.
  4. No customer segmentation, so distribution isn't targeted.
  5. Poor customer relationships, bad displays, no recommendations—customers return items that could be kept or returned. From a cost perspective, for every case returned, you lose the profit from selling at least six cases.

Internal Coordination A company's operations are an organism involving many departments, positions, and workflows. It's like a machine: parts must fit tightly, or there's friction and inefficiency. A distributor's business—ordering from manufacturers, receiving goods, warehousing, salespeople taking orders, processing orders, picking, loading, delivering, vehicle sales, confirming receipts, displays, promotions, reconciliation, payment collection, returns—should be quantified and clear, with each department and position doing its job in an orderly manner. However, distributor companies have always emphasized operations over management, with many shortcomings in internal processes, execution standards, job design, transparency, and follow-up supervision. This inevitably leads to loose workflows, poor coordination between positions, and finger-pointing. For example:

  1. Due to poor internal management, employees waste time and money on finding things, forgetting things, and making mistakes, costing at least 20% of salary costs.
  2. The basic process—salespeople taking orders, sending them to sales support, checking inventory, customer credit, and settlement history, then issuing order slips, sending to warehouse, picking, planning routes, loading, and dispatching—often breaks down or goes wrong every few days.
  3. For products with abnormal sales, long-term warehouse storage, or frequent returns, there's no information aggregation mechanism, so the boss doesn't remove them promptly, and orders might even continue (sometimes to take advantage of manufacturer promotions). In short, when ordering from manufacturers, they don't consider current inventory and actual sell-through.
  4. After purchasing places an order, they don't proactively track logistics. The warehouse doesn't know about arrivals, so a truck suddenly shows up, the driver is in a hurry, and the warehouse has to unload first, delaying planned loading for deliveries. Drivers sit around smoking and chatting until the manufacturer's truck is unloaded, and it's already lunchtime. I won't list more, but just these points alone consume how much cost each year? And many costs aren't directly visible on the books. The boss might not know, but they know one result: business is getting harder, and profits are getting thinner.

Author: Pan Wenfu Originally a private business owner, he managed a family distributor company for years, also serving as a business manager and trainer at several production companies. His research focuses on internal management of small and medium-sized private enterprises, with main topics including HR management, cost control, management backend setup, and transitioning military veterans into private enterprises. He continuously breaks down over 400 topics related to private enterprise internal management, keeping materials and solutions updated.

Star: New Distribution Don't miss any message! -END-