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Gross Margin Management

Transaction Valuation

Assign specific cost to specific products sold

Conceptually, yes, of course; let's do this. Practically it's very difficult, especially for channel-driven companies. Let's say you ship a pallet of microcontrollers to Avnet at a purchase price of $9.37/unit. Two weeks later you ship another pallet of the same SKU to Avnet at a purchase price of $8.94/unit. Two weeks after that, Avnet sells 1000 units of the microcontroller to an ODM. How do you recognize the cost of that transaction? $9370? $8940? Average?

Truth be told, there are many different ways to report cost of product sold. Some companies just use partner "reported cost" for simplicity—taking what the partner reports as the cost of product for a given transaction. However, there is no standard definition of reported cost. Is it the first price the partner paid for a set quantity of product, the last price, or perhaps the average price among several shipments and orders?

 

What was the cost of that product that just sold? Should I use FIFO, Reported Cost, Price Book, Reported Price, Serial Number Matching, or some other method? Incorrect valuation can erroneously inflate revenues or commissions and make it nearly impossible to get an accurate channel inventory picture.

 

For companies using a cost basis for commissions—especially those who recognize revenue or pay commissions on a sell-through basis— incorrect POS and inventory valuation may end up erroneously inflating revenues or commissions if the reported cost is not validated. In some cases, the partner’s resale price is actually reported in the cost field of the POS. Using that price would completely skew revenues and commissions.

Transaction valuation is also a necessary first step for accurate channel inventory tracking and management. Properly-valued transactions flow directly into SISO Inventory Reconciliation.

VALIDATING REPORTED COST

  • POS transactions are verified and valued
  • FIFO, price book, reported cost or other costing method
  • Analyze and manage distributor and reseller margin
  • Avoid revenue and commission miscalculations
  • Necessary for accurate inventory tracking

Product Cost Valuation Methodologies Supported by Entomo

The following methodologies are supported and available to value inventory and POS transactions:

  • FIFO – First-In-First-Out valuation. Cost of the first unit sold in is used as the cost of the first unit sold by the partner
  • Price Book – The company’s price book on the date of the transaction
  • Serial Number Matching – Serial numbers are matched between the POS and/or inventory and the sell-in transactions to determine the actual cost at which the goods were sold to the partner
  • Reported Cost – Product cost as self-reported by the partner
  • Reported Price – Reported (resale) price less the the distributor margin

 

Valuation, Net of POS Credits – Regardless of the valuation method chosen, companies should value transactions and inventory net of back-end credits in order to ensure proper valuation for revenue and commissions. This is supported through Entomo's Special Pricing and Channel Incentives modules.

Importantly, Entomo's SmartHub provides the flexibility and can be configured to support different methodologies for each individual partner. Further, POS valuation and inventory valuation can utilize different methodologies. For example, you can value POS transactions using FIFO, but revalue ending channel inventory based on the current price book value.

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