Tuesday, October 23, 2012

International Stocking and Sales

In a LinkedIn procurement group an individual asked what markup they should pay for a distributor or reseller to stock and resell products into local markets. In my responses to him it opened up a much broader discussion that I thought would be worthwhile to share with my readers.

In any reseller situation it is the OEM that decides the type of model they want their authorized resellers to follow. Some will sell to the reseller as a percentage off list price where the price the reseller pays is based upon their volumes. In that model the reseller needs to make their margin off the difference between what they buy it for and the price they can sell it to you at. Others OEM’s may have a more price protected model where the reseller is rewarded with discounts the more they stick to the targeted sales price the OEM wants to sell it at. What this means is that before you can get to the issue of what the margin should be, you need to understand what the OEM's sales model is to the reseller. Then you can select the best approach. For example, a cost plus model works well when the reseller is buying it at a discount off list. There the price they pay becomes the cost in your cost plus approach. It would not work if the OEM has the Distributor on a form of price protected model as they are getting compensated by the OEM for maintaining the target price. In a price protected situation neither approach work. The only time you would want to compensate more is if they are incurring additional costs.

The amount or percentage you will need to pay will be determined by two basic factors. The first factor is what services are you asking them to provide. The second is the point of sale that will decide where there profits are made and where they have to pay tax on those profits. In this case the individual wanted the reseller to be reselling into multiple countries. When you ask them to actually sell a product within another country, four things occur. First, the reseller would need to be legally registered to do business there. That can be costly, time consuming and expensive if they aren't already registered to do business there. Second, once they sell within that country they become subject to local laws. Third, the reseller becomes subject to payment of local income and sales taxes based upon those in-country sales. Fourth, since they will be paid in local currency, they can be subject to currency controls in terms of repatriating their profits and currency exchange risks. The combination of these can make the activity either something they don't want to do or very expensive for them, and impact your costs.

My suggestion was if the individual wanted the mark-up to be as small as possible and wanted the reseller to agree to work with them, they should be exploring the use of Bonded Free Trade Zones for each country that they want to sell into. A bonded free trade zone is an area set aside by the government where goods may be shipped into or out of and stored prior to the items clearing customs. If they set up a distribution center or contracted for one in a Bonded Free Trade Zone, they can operate in that location, but not be legally conducting business within that country. That can avoids the four problems that exist when you do business in the country. You do not need to be legally registered to do business in that country, as you are not conducting business in that country. Since you are not conducting business in that country, you aren’t subject to its laws or taxes. Since you are not selling within the country you can require that payment be made in a more stable currency and avoid being subject to currency controls or significant exchange risks. What you would need to do is have sales delivery terms where the customer purchases the goods within the bonded free trade zone and is responsible for import and transportation from that point forward.

There are many activities in procurement where people want suppliers to have local stocking point for pull replenishment programs or may want a distributor or reseller to stock items close to the customer base or point of use. If you want to be successful in establishing those types of programs, you need to always consider the impact and cost the other party will have and come up with a solution where you get close to what you want, and supplier has the ability to effectively manage the costs and risks and do that in a manner where the cost to you will be minimal. A smart supplier who wants to manage taxes could have a subsidiary based in a tax haven that establishes all these stocking areas. They could then have the profits they make on the sales (which won’t be subject to local sales or income tax) flow to the company in the tax haven where as long as the money is held there is also not subject to taxes. If they did that the percentage mark-up they need to charge you would be less.