DIRECT PRODUCT
PROFITABILITY
GROUP 3
A K A N K S H A A , A P O O R VA , B H AV N A , N E H A ,
R O H I T, S A N D E E P
POINTS OF DISCUSSION
The concept
Logistics parameters determining the DPP and how they
work
How DPP could be used for merchandising decisions
Demonstration examples
THE CONCEPT
INDUSTRY: RETAIL
Retailing includes all the activities involved in selling goods or
services directly to final consumers for personal, non-business use.
WHAT IS DIRECT PRODUCT
PROFITABILITY?
• DPP involves the attribution of both the purchase price, and indirect costs to each product
line
• The cost attribution process utilizes a variety of measure to reflect resource consumption
• Net profit versus gross profit – Accounts for Distribution, Warehousing (space and transport
time), Retailing
Gross Margin = Sales – COGS
Adjusted Gross Margin = Gross Margin + Adjustments
DPP = Adjusted Gross Margin – Direct Product Costs
WHY DPP – ORIGIN OF THE CONCEPT
• Seeks to calculate the profits being made from the sale of a particular product line
(excluding profits from associated product line)
• The concept was originated by consumer good manufacturers to help them assess
the profits enjoyed by the retailers stocking their products
• To use during price bargaining sessions with buyers
• To understand how to increase the retailers willingness to stock a product
DIRECT PRODUCT PROFITABILITY:
DETERMINANTS
• The DPP influencers:
• The size of the product: Transport, Storage, Display
• Uncertainty about demand: Holding stock on a ‘Just in case’ basis
• Delivery cycle: Weekly, fortnightly, monthly
• Ordering Method: Manual, expensive – cost regardless of volume
• Improving DPP:
• Increase the final sales price of the product
• Increase the sales volume
• Reduce the cost of stocking
• Incentives to retailers to stock the products
THE LOGISTICS PARAMETERS
DETERMINING THE DPP AND HOW THEY
WORK
THE LOGISTICS PARAMETERS
DETERMINING THE DPP
Warehouse costs
Transportation costs
Store costs
WAREHOUSE COSTS
Receiving the product
Putting the product in the picking slot
Selecting the order
Loading the truck
Warehouse occupancy costs
Warehouse inventory costs
TRANSPORTATION COSTS
Movement of the product from warehouse to store
Breakage and Wastage cost
Transportation Cycle
STORE COSTS
Placing an order
Receiving the product
Moving the product to the aisle
Positioning and opening cases
Placing the product on the shelf
Checkout and Bagging
Proportional cost of the bag
Store occupancy and Inventory costs
ALLOCATING TOTAL DPC
• DPC = Warehouse costs + Transportation costs +
Store Costs
Allocation of DPC = Function of (cubic volume of the unit and case, case
weight, delivery schedule, cost of the product, inventory turn over)
HOW DPP COULD BE USED FOR
MERCHANDIZING DECISIONS
HOW DPP COULD BE USED FOR
MERCHANDIZING DECISIONS
• Add/Drop Decision
• Pricing Decision
• Space Decision
• Physical Handling and Distribution Decision
• Promotion Decision
ADD/DROP?
Made only once for an SKU (unless it is a seasonal product)
Laymen’s Judgment
Other Factors
Gross Profit
Traffic
• For Example:
• SKU – Selling well – earning low DPP
• Decision: Raise Price Improved DPP
• Result: Stable sales Add Product
• If sales fall, low DPP Drop product
• Note: For Add/Drop decisions,
• DPP is secondary, movement is
primary
PRICING
DPP
Gross Profit
Traffic
• If price is increased, DPP increases but your traffic will fall
and may eventually lead to losses
• Example: Glucose (low DPP, huge traffic)
• Optimum DPP
PHYSICAL HANDLING AND
DISTRIBUTION DECISIONS
• DPP information is also used to make physical handling and
distribution decisions that can affect item profitability.
• For example, profit can be increased on some items by
switching from warehouse delivery to direct store delivery,
and vice versa for other items.
• The difference in profit is determined by calculating DPP both
for warehouse delivery and for direct store delivery.
PROMOTIONS
• Discounts and Promotional Schemes
• Road shows, electronic media, print media
• DTC Campaigns
• Seasonal Festive Offers
• Shelf Life
• For Example: Distributer to Retailer in bulk to increase DPP
and yet impose discounts and increase sales
SPACE ALLOCATION
Stock Allocation
DPP of A > DPP of B
Volumes of A < Volumes of B
DEMONSTRATION EXAMPLE
DPP Example
THANK YOU
